IRS Ruling and Announcement of Importance

The IRS has ruled that differential wage payments that are paid to a person that is on active military duty are subject to income tax withholding (but they are not subject to FICA or FUTA tax), and that employers may use the aggregate procedure or the optional flat rate withholding to determine the amount of income taxes that must be withheld. Differential wage payments are those that are made by an employer with employees that have been either been called to or have volunteered for active duty in the military for periods exceeding 30 days. The payments are intended to supplement the military wages of the employees. In 1969, IRS said that such payments are not "wages" and, therefore, are not subject to FICA, FUTA or income tax withholding. But, legislation enacted in 2008 requires differential wage payments to be treated as wages paid by the employer to the employee for purposes of withholding. Thus, effective Jan. 1, 2009, employers that make such payments must withhold income taxes on them and report the payments on Form W-2. However, because such taxpayers are required to be on active military duty for an extended period of time (as opposed to being temporarily absent from work), IRS said that differential wage payments are not wages for FICA or FUTA tax purposes.

IRS also ruled that differential wage payments are supplemental wages because they are not payment for services for the employer in the current payroll period. On this point, IRS said the employer may utilize either the aggregate method or optional flat rate withholding to calculate the amount of income tax requried to be withheld on differential wage payments. Either method may be utilized for payments not exceeding $1 million when added to all other supplemental wages paid by the same employer to the individual during the calendar year. For excess amounts, the rate used in determining the amount of withholding on the excess is the highest applicable tax rate under I.R.C. Sec. 1. Rev. Rul. 2009-11, 2009-18,
IRB 1.

In a separate Announcement, (IR-2009-42) IRS said that the hybrid vehicle tax credit for passenger vehicles and light trucks manufactured by Ford Motor Co. has begun to phase out for purchases beginning after March 31, 2009. Ford sales of qualifed vehicles to retail dealers reached the 60,000-vehicle limit for the calendar quarter ending December 31, 2008. The credit begins to phase out during the second calendar quarter after the quarter in which the company sells its 60,000th hybrid vehicle. So, in this instance, the credit begins to phase out for sales begining April 1, 2009. That means the full credit is available for purchases made before April 1, 2009, it is 50 percent for purchases (or leases) from April 1- September 30, 2009, and is 25 percent for purchases (or leases) from October 1, 2009 - March 31, 2010. No credit is available for vehicles purchased or leased on or after April 1, 2010. Here's the rundown on the amount of the full credit for various Ford-manufactured vehicles:

     2005-2007 Ford Escape 2WD ($2,600)
     2008-2009 Ford Escape 2WD ($3,000)
     2005-2009 Ford Escape 4WD ($1,950)
     2008 Ford Escape 4WD ($2,200)
     2010 Ford Fusion ($3,400)
     2008-2009 Mercury Mariner 2WD ($3,000)
     2006-2009 Mercury Mariner 4WD ($1,950)
     2008 Mercury Mariner 4WD ($2,200)
     2010 Mercury Milan ($3,400)