Category: Compensation & Employee Benefits
Subject: Deductions for Compensation and Employment Taxes
Title: Effects of Failure to Remit Employment Taxes on Employer's Deductions
IRC Sections: 162, 461
Filename: 1238.html
Date Produced: 06/95

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Background
Taxpayer (TP) operating a small construction company as sole proprietorship withheld but failed to pay over employee income tax withholding and employee share of FICA taxes. TP also failed to pay over the employer share of FICA taxes. TP reports taxable income on the cash method of accounting.

Issues
1. What is the timing of TP's deduction for wage expense? In other words can TP deduct the gross wage amount or the net wage amount?

2. What is the timing of TP's deduction for employer share of FICA tax?

Answers
1. TP can deduct the gross amount of wages in the year paid.

2. TP's deduction for employer share of FICA taxes is taken when the taxes are remitted.

Discussion: Issue One

Revenue Ruling 80-164, 1980-1 CB 164, is directly on point and holds that a cash basis employer may deduct the portion of wages attributable to employee income tax withholding and employee FICA taxes in the year in which the wage is paid to the employee. The ruling cites Regulation Section 31.3401(a)-1(b)(5) which provides that an amount deducted by an employer from the renumeration of an employee is considered to be a part of the employee's renumeration and is considered to be paid to the employee as renumeration at the time the deduction is made.

It seems to me that the ruling and the regulation on which it is based are entirely dispositive of this issue.

Discussion: Issue Two
With respect to the second issue, the answer is equally clear. Revenue Rulings 80-164, 1980-1 CB 164, discussed above, and 74-70, 1974-1 CB 116 are directly on point. In essence these rulings provide that FUTA and employer share of FICA are not subject to any special rules as to timing. In other words, the FUTA and employer FICA are deducted based on the taxpayer's general method of accounting (the cash method) and are therefore deductible when actually paid.