New rulings on employment tax

California CPA, Jan-Feb, 2005

The Treasury Department and IRS have published two revenue rulings clarifying that payments by employers to employees made in connection with employment contracts are to be treated as wages for purposes of FICA, FUTA and federal income tax withholding.

Revenue Ruling 2004-109 clarifies that employment taxes must be paid--and income taxes withheld--on bonuses paid for signing an employment contract. The ruling also clarifies that, if an employment contract is cancelled before its agreed-upon end and a payment is made in lieu of the remaining period of employment, the payment is treated as wages for purposes of employment taxes and income tax withholding.

The second ruling, Revenue Ruling 2004-110, concerns payments made in connection with the cancellation of an employment contract.

For more, visit www.treasury.gov/press/releases/js2114.htm.>

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