Signing bonus

Discussion in 'Tax' started by Dan Bock, Feb 18, 2006.

  1. Dan  Bock

    Dan Bock Guest

    I am a graduate student who will finish school in May of
    2006. In late 2005 I received a $1000 signing bonus from a
    company where I will begin working after graduation. The
    check did not have any taxes withheld from it. The company
    did not send me a 1099 or a W-2. Is this taxable on my 2005
    tax return?
     
    Last edited by a moderator: Jan 23, 2018
    Dan Bock, Feb 18, 2006
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  2. Dan  Bock

    bbs Guest

    Last edited by a moderator: Jan 23, 2018
    bbs, Feb 20, 2006
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  3. Dan  Bock

    cpabakem01 Guest

    Rev. Rul. 2004-109
    Rev. Rul. 2004-109, 2004-50 I.R.B. 958
    Internal Revenue Service (I.R.S.)
    Revenue Ruling
    SIGNING OR RATIFYING BONUSES
    Released: November 23, 2004
    Published: December 13, 2004

    Section 3121.--Definitions, 26 CFR 31.3121(a)-1: Wages.

    (Also: ss 3306, 3401, 31.3306(b)-1, 31.3401(a)-1.)

    Signing or ratifying bonuses. This ruling holds that
    certain amounts paid to an employee as a signing bonus for a
    baseball contract or as a ratifying bonus pursuant to a
    collective bargaining agreement are wages for purposes of
    the Federal Insurance Contributions Act (FICA), the Federal
    Unemployment Tax Act (FUTA), and the Collection of Income
    Tax at Source on Wages (federal income tax withholding).
    Rev. Ruls. 58-145 and 74-108 revoked. Rev. Ruls. 69-424 and
    71-532 obsoleted.

    ISSUE

    Whether certain amounts an employer pays as bonuses for
    signing or ratifying a contract are wages for purposes of
    the Federal Insurance Contributions Act (FICA), the Federal
    Unemployment Tax Act (FUTA), and the Collection of Income
    Tax at Source (Federal income tax withholding)?

    FACTS

    Situation 1. Baseball Club negotiates an employment contract
    with an individual player. It is the first contract between
    the Club and the player. The contract provides that the
    player receives a signing bonus if he reports for spring
    training at the time and place directed by the Club. The
    contract provides that the signing bonus is not contingent
    on the player's future performance of services.

    Situation 2. An employer negotiates a collective bargaining
    agreement (CBA) with a union representing a group of its
    employees. The CBA will take effect on the "ratification
    date," which is the date it is ratified by a majority of the
    union members covered by the agreement. The CBA provides
    that each employee covered by the terms of the agreement who
    is employed by the employer as of the ratification date
    receives a bonus. Each such employee is paid the same amount
    regardless of compensation, seniority, position and whether
    or not the employee voted for ratification. In addition,
    each eligible employee receives the payment even if the
    employee had not performed services for the employer before
    the ratification date. Finally, the CBA provides that the
    payment is not contingent on the employee's future
    performance of services.

    LAW

    Sections 3101 and 3111 of the Internal Revenue Code (Code)
    impose FICA taxes on "wages," as that term is defined in
    section 3121(a), with respect to "employment," as that term
    is defined in section 3121(b). FICA taxes consist of the
    Old-Age, Survivors and Disability Insurance tax (social
    security tax) and the Hospital Insurance tax (Medicare tax).
    These taxes are imposed on both the employer and employee.
    Sections 3101(a) and 3101(b) impose the employee portions of
    the social security tax and the Medicare tax, respectively.
    Sections 3111(a) and 3111(b) impose the employer portions of
    the social security tax and the Medicare tax, respectively.

    The term "wages" is defined in section 3121(a) for FICA
    purposes as all remuneration for employment, with certain
    specific exceptions. Section 3121(b) defines the term
    "employment" as any service, of whatever nature, performed
    by an employee for the person employing him, with certain
    specific exceptions.

    Section 31.3121(a)-1(b) of the Employment Tax Regulations
    provides that the term "wages" means all remuneration for
    employment unless specifically excepted under section
    3121(a). Section 31.3121(a)-1(c) provides that the name by
    which the remuneration for employment is designated is
    immaterial. Salaries, fees, and bonuses are wages, if paid
    as compensation for employment. Section 31.3121(a)-1(d)
    provides that generally the basis upon which the
    remuneration is paid is immaterial in determining whether
    the remuneration is wages. Section 31.3121(b)-3(b) defines
    employment as services performed by an employee for an
    employer, unless specifically excepted under section
    3121(b).

    The FUTA taxation provisions are similar to the FICA
    provisions, except that only the employer pays the tax
    imposed under FUTA. See sections 3301 and 3306(b) and the
    regulations thereunder. Although there are differences in
    the statutory exceptions to what constitutes wages and
    employment, the general definitions of the terms "wages" and
    "employment" for FUTA purposes are similar to the
    definitions for FICA purposes. See sections 3306(b) and
    3306(c).

    Section 3402(a), relating to Federal income tax withholding,
    generally requires every employer making a payment of wages
    to deduct and withhold upon those wages a tax determined in
    accordance with prescribed tables or computational
    procedures. The term "wages" is defined in section 3401(a)
    for Federal income tax withholding purposes as all
    remuneration for services performed by an employee for his
    employer, with certain specific exceptions. Section
    31.3401(a)-1(a)(2) provides that the name by which
    remuneration for services is designated is immaterial. Thus,
    salaries, fees and bonuses are wages if paid as compensation
    for services performed by the employee for his employer.
    Section 31.3401(a)-1(a)(3) provides that generally the basis
    upon which the remuneration is paid is immaterial in
    determining whether the remuneration is wages. Unlike the
    FICA and the FUTA, the Federal income tax withholding
    provisions do not include a definition of employment.

    Revenue Ruling 58-145, 1958-1 C.B. 360, in answering four
    specific questions, holds that a bonus paid by a baseball
    club to an individual solely for signing the individual's
    first contract and not in any way contingent on the
    performance of subsequent services is not remuneration for
    services and, therefore, is not wages for purposes of
    Federal income tax withholding under section 3402. The
    ruling further holds that a bonus paid to a baseball player
    that is contingent upon the performance of subsequent
    services is wages subject to Federal income tax withholding.

    Revenue Ruling 69-424, 1969-2 C.B. 15, holds that amounts
    paid by a baseball club for educational expenses of a minor
    league baseball player attending college were not
    scholarships excluded from income under section 117 because
    the payments were "compensation for past, present or future
    employment services" within the meaning of section 1.117-4
    of the Income Tax Regulations. The contract provided that
    the club was not required to make the payments if the player
    failed to attend the college for two consecutive years
    without proper reason, did not report for spring training as
    directed by the club, or was placed on the voluntarily
    retired, disqualified or ineligible list. The ruling holds
    that the payments are wages for Federal income tax
    withholding and FICA purposes.

    Revenue Ruling 71-532, 1971-2 C.B. 356, holds that Rev. Rul.
    69-424 is to be applied without retroactive effect with
    respect to wages paid prior to January 1, 1970. The ruling
    makes clear that the amount paid for certain educational
    expenses under the employment contract described in Rev.
    Rul. 69-424 is distinguishable from the bonus paid solely as
    consideration for signing a contract described in Rev. Rul.
    58-145, but nonetheless limits the retroactive effect of
    Rev. Rul. 69-424.

    Rev. Rul. 74-108, 1974-1 C.B. 248, analyzes whether a
    sign-on fee paid by a domestic corporation that operates a
    professional soccer club to a non-resident alien player as
    an inducement not to negotiate with any other team is
    treated as income from sources within or without the United
    States. Rev. Rul. 74-108 cites Rev. Rul. 58-145 as authority
    for the conclusion that the sign-on fee is not compensation
    for labor or personal services and that, therefore, source
    is not determined under the rules in section 861(a)(3) or
    862(a)(3). Instead, Rev. Rul. 74-108 characterized the
    sign-on fee as a payment for a covenant not to compete both
    within and without the United States, with the result that
    the sign-on fee was attributable to sources both within and
    without the United States.

    ANALYSIS

    The Code and regulations provide that amounts an employer
    pays an employee as remuneration for employment are wages,
    unless a specific exception applies. Sections 3121(a),
    3306(b), and 3401(a) and sections 31.3121(a)-1(b),
    31.3306(b)-1(b), and 31.3401(a)-1(a)(1) of the regulations.
    The regulations also provide that the name by which the
    remuneration is designated is immaterial. Salaries, fees,
    and bonuses, for example, are all wages, if paid as
    compensation for employment. Sections 31.3121(a)-1(c),
    31.3306(b)- 1(c), and 31.3401(a)-1(a)(2).

    The Code and the regulations also provide that any service
    of whatever nature performed by an employee for the person
    employing him is employment, unless a specific exemption
    applies. Sections 3121(b) and 3306(c) and sections
    31.3121(b)-3(b) and 31.3306(c)-2(b).

    Employment encompasses the establishment, maintenance,
    furtherance, alteration, or cancellation of the
    employer-employee relationship or any of the terms and
    conditions thereof. If the employee provides clear,
    separate, and adequate consideration for the employer's
    payment that is not dependent upon the employer-employee
    relationship and its component terms and conditions, the
    payment is not wages for purposes of FICA, FUTA, or Federal
    income tax withholding.

    Under the facts presented in Situation 1, the individual
    receives the signing bonus in connection with establishing
    the employer-employee relationship. The individual does not
    provide clear, separate, and adequate consideration for the
    payment that is not dependent upon the employer-employee
    relationship and its component terms and conditions. Thus,
    the signing bonus is part of the compensation the Baseball
    Club pays as remuneration for employment, making it wages
    regardless of the fact that the contract provides that the
    bonus is not contingent on the performance of future
    services.

    Under the facts presented in Situation 2, the employees
    receive the ratification bonus payments as part of a bargain
    that establishes the terms and conditions of the employment
    relationship with all of the employees covered by the CBA.
    The employees do not provide clear, separate, and adequate
    consideration for the employer's payments that is not
    dependent upon the employer-employee relationship and its
    component terms and conditions. The payments are part of the
    compensation the employer pays as remuneration for
    employment. Thus, the ratification bonuses are wages
    regardless of the fact that they are uniform in amount, do
    not vary based on seniority or position or any other factor,
    and are not explicitly contingent on the performance of
    services.

    Revenue Ruling 58-145 considered whether Federal income tax
    withholding applied to a bonus paid to a baseball player at
    the time a first contract was signed with a baseball club.
    It erred in its analysis by failing to apply the Code and
    regulations appropriately to the question of whether the
    bonus was wages in each of the four questions presented.
    Specifically, it failed to apply the correct definition of
    wages and to consider whether the bonus was paid in
    connection with establishing the employer-employee
    relationship. Accordingly, Rev. Rul. 58-145 is revoked. In
    addition, Rev. Rul. 74-108 is revoked as its conclusion
    relies upon Rev. Rul. 58-145.

    HOLDING

    Amounts an employer pays as bonuses for signing or ratifying
    a contract in connection with the establishment of the
    employer-employee relationship are wages for purposes of
    FICA, FUTA, and Federal income tax withholding. Accordingly,
    the payments in Situations 1 and 2 are wages for purposes of
    FICA, FUTA, and Federal income tax withholding.

    EFFECT ON OTHER RULINGS

    Rev. Rul. 58-145 and Rev. Rul. 74-108 are revoked. Rev. Rul.
    69-424 and Rev. Rul. 71-532 are obsoleted in view of the
    amendment of section 117 by section 123(a) of the Tax Reform
    Act of 1986, 1986-3 (Vol.1) C.B. 1, 29. See section 117(c)
    and Notice 87-31, 1987-1 C.B. 475.

    APPLICATION

    Under the authority of section 7805(b), the Service will not
    apply the position adopted in this ruling to any signing
    bonus, sign-on fee, or similar amount paid to an employee in
    connection with the employee's initial employment with the
    employer pursuant to a sign-on agreement or other contract
    entered into before January 12, 2005, provided the amount is
    paid under facts and circumstances that are substantially
    the same as in Rev. Rul. 58-145 or Rev. Rul. 74-108.

    DRAFTING INFORMATION

    The principal authors of this revenue ruling are Marie
    Cashman and Stephen Suetterlein of the Office of Division
    Counsel/Associate Chief Counsel (Tax Exempt & Government
    Entities). For further information regarding this revenue
    ruling, contact Mr. Suetterlein at (202) 622-6040 (not a
    toll-free call).

    Rev. Rul. 2004-109, 2004-50 I.R.B. 958
     
    Last edited by a moderator: Jan 23, 2018
    cpabakem01, Feb 21, 2006
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