Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-41

1966-1 C.B. 233

Sec. 61

IRS Headnote

An amount equal to an employment agency fee previously paid by an employee which is reimbursed by the employer to the employee after he has completed a specified period of satisfactory service is additional wages to the employee subject to the Federal employment taxes and is includible in gross income for Federal income tax purposes.

Full Text

Rev. Rul. 66-41

Advice has been requested whether an amount equal to an employment agency fee previously paid by an employee which is reimbursed by the employer to the employee after he has completed a specified period of satisfactory service is wages subject to the taxes imposed by the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954), and whether the amount of the reimbursement is includible in the employee's gross income for Federal income tax purposes.

An employer recruits employees through an employment agency which charges the prospective employee a fee. The agency, on behalf of the employer, advises the prospective employee that if he satisfactorily completes a specified period of employment, the employer will reimburse him for the employment agency fee. The employee in the instant case satisfactorily completed the required period of employment and was reimbursed by his employer for the fee he had paid the agency.

The contention is made that the amount paid by the employer to the employee is reimbursement for an expense of the employer incurred by the employee in carrying on the employer's business and, therefore, excluded from wages and not subject to the Federal employment taxes.

Sections 31.3121(a)-1(h) (Federal Insurance Contributions Act), 31.3306(b)-1(h) (Federal Unemployment Tax Act), and 31.3401(a)-1(b)(2) (Collection of Income Tax at Source on Wages) of the Employment Tax Regulations provide that amounts paid specifically-either as advances or reimbursements-for traveling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages. Reimbursement for the employment fee in the instant case, however, cannot be considered a reimbursement within the purview of these sections. The employee incurred the expense represented by the fee before he entered upon any duties of his employment. The fee was never itself a business expense of the employer, who incurred an expense only when he reimbursed the employee.

The offer of reimbursement made by the employer through the employment agency was an offer of a special payment to be made to the employee conditioned on and in consideration for the employee continuing in employment and performing satisfactory services for a specified period of time. Reimbursing the employee for the employment agency fee was in the nature of giving him a special bonus which he earned by fulfilling those conditions. The reimbursement offer was a part of the wage structure of the contract of employment.

Accordingly, under the above circumstances, the amount equal to an employment agency fee previously paid by an employee which is reimbursed by the employer to the employee is wages subject to the taxes imposed by the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, and to the Collection of Income Tax at Source on Wages. Since this amount was paid in consideration for services rendered, it is includible in the employee's gross income as compensation for Federal income tax purposes.

The employee's liability for payment of the fee arises from a contract between the employee and the employment agency, and is independent of the conditions of employment. The fee is deductible for Federal income tax purposes by the employee from his adjusted gross income provided he itemizes his deductions. See Revenue Ruling 60-223, C.B. 1960-1, 57.