New Rules for Differential Pay

If you are not familiar with differential pay, which many people are not, it mainly deals with members of the military and employers who have employees who are in the military. 

Differential pay is the pay an employer gives to an employee who has is away due to their military obligations.  The pay is normally the difference between the employee’s military pay and the employee’s normal pay had they not been in the military and were just working for their employer. 

Revenue Ruling 2009-11 expands the tax treatment governed by Revenue Ruling 69-136 and further states that differential pay payments to an active member of the military who is on active duty for more than 30 days are subject to income tax withholdings even though the payments are not subject to the taxes imposed by FICA and FUTA. 

Internal Revenue Code 6051(a) provides that any person required to deduct and withhold from employees the tax under Internal Revenue Code 3402 must furnish each employee with a written statement showing the amount of wages paid and amounts withheld for income tax purposes.  Internal Revenue Code Section 31.6051-1(a) states that employers must use Form W-2 to fulfill this requirement.

Because differential payments are treated as wages subject to income tax withholding, an empoyer must report the payments on each employee’s Form W-2.

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