Untitled Document

The Tax Resource Group: Professional Tax Research Material, Resources, and Consulting

Category: Compensation & Employee Benefits
Subject: FICA Tax
Title: FICA Taxes in Connection with FLSA Award
IRC Sections: 3121
Filename: 1252.html
Date Produced: 07/95

Background
As a result of an action under the Federal Fair Labor Standards Act (FLSA), the taxpayer was awarded back pay, liquidated damages, interest, and attorneys fees.

Issue
Which, if any, portion of the award is subject to FICA?

Answer
Only the back pay portion of the award is subject to FICA tax.

Discussion
It has been the government's contention for many years that liquidated damages with respect to various employment discrimination claims are taxable to the recipient. Having consistently maintained that position, there is a well established body of administrative rulings dealing with the employment tax ramifications of such payments.

-Revenue Ruling 72-268, 1972-1 CB 313, specifies that while liquidated damages with respect to a FLSA award are taxable, such amounts are not subject to income tax and FICA withholding.
-Revenue Ruling 55-203, 1955-1 CB 114 addresses the mechanical aspects of such awards from the employer's perspective.
-Bowman v. U.S., (CA-6), No. 86-1595, 87-2 USTC ¶9544, 824 F2d 528, and Rev. Rul. 89-35, 1989-1 CB 280, address the issue of what FICA rate should be charged with respect to the back pay portion of an award (i.e., the FICA rate in effect when the wages were earned or the rate in effect when the wages were later paid pursuant to the award.) Bowman held that FICA should be charged at the rate in effect when the wages were earned, and the Revenue Ruling announces that the IRS disagrees and will not follow Bowman. Incidentally, I think the holding of Bowman is nonsensical and agree with the IRS position. Bowman is a Sixth Circuit review of a district court decision. As you may know, district courts are notorious for issuing unbelievably uninformed decisions in tax cases. I think this is such an instance.
-Rev. Rul. 80-364, 1980-2 CB 294, addresses the issue of attorneys fees and interest under several factual scenarios. The ruling holds that attorneys fees and interest specified in the judgment are not subject to FICA tax.

I have included the texts of these various rulings and cases by mail.