Payments by employers to employees made in connection with employment contracts
must be treated as wages for purposes of FICA, FUTA, and Federal income tax
withholding, according to two rulings published by the Treasury Department and
The first ruling, Revenue
Ruling 2004-109, clarifies that employment taxes must be paid--and income
taxes withheld--on bonuses paid for signing of an employment contract. The ruling
addresses situations such as signing bonuses paid in connection with the first
contract between a baseball club and a baseball player and payments made upon
ratification of a collective bargaining agreement.
The second ruling, Revenue
Ruling 2004-110, concerns payments made in connection with the cancellation
of an employment contract. The ruling clarifies that, if an employment contract
is cancelled before its agreed-upon end and a payment is made in lieu of the
remaining period of employment, the payment is treated as wages for purposes
of employment taxes and income tax withholding.
Because these rulings revoke or modify prior rulings, the new rulings will
not apply to certain payments made before January 12, 2005, such as signing
bonuses, sign-on fees or other amounts paid in connection with an employee's
initial employment or payments made or agreed to on the cancellation of an employment
contract. This relief applies only where the facts and circumstances relating
to the payments are substantially the same as the revoked or modified rulings,
according to the IRS.