Employment Taxes


For employment tax purposes, what forms of compensation provided to employees are considered taxable?

Basically, taxable compensation for employment taxes is based on an employee’s taxable wages. While not everyone is familiar with the concept of wages for employment tax purposes, federal and state tax laws define wages in very broad terms. Under these laws, virtually every payment, benefit, or transfer of something of value to an employee as compensation for services is classified as taxable wages unless it is specifically excluded or exempted by law.

For example, the tax laws define wages subject to Federal FICA and FUTA taxes as all remuneration for employment, including the cash value of property paid in lieu of cash unless specifically exempt or excluded. Remuneration for employment basically means any form of compensation provided to an employee for any service of whatever nature, provided by an employee for the person employing him. The tax law defines wages subject to federal income tax withholding as all remuneration for services provided by an employee for his employer unless specifically exempted.

While these laws appear to have similar definitions for taxable wages, their definitions vary based on the specific exclusions and/or exemptions provided for in each law. Therefore, employers cannot assume that because a specific item is excluded from wages for the purposes of one tax that it means that the item is excluded for purposes of other taxes. For instance, there are fewer categories of wage payments excluded from FICA tax withholding than for federal and state income tax withholding.

In addition, the basis upon which a wage payment is calculated, for example, hours worked, piece rate, commission, etc., how it is labeled, the salary, bonus, fee, etc. and the form that it takes, cash, check, in kind, for example, goods, lodging, food, clothing, services, etc. are all immaterial under these laws. Therefore, whenever an employer provides something of value to an employee as compensation for services, it is necessary to evaluate whether the transfer constitutes a taxable wage payment.

Rick Gossett

Rick Gossett

Rick Gossett has been COO of Tarkenton Companies for more than 20 years and is an expert in business operations, responsible for business software development, unique partnerships, business educational content, consulting, and more. Rick was the originator of Tarkenton Companies’ consulting services and, initially, personally answered every question. Before joining Tarkenton Companies, Rick owned and operated a private practice as a CPA. Prior to that, he was a Senior Manager at Pannell Kerr Foster in tax and audit, as well as Principal in Ernst & Young’s small business advisory group.