Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-99

1973-1 C.B. 412

IRS Headnote

Situations are given to demonstrate when actual or constructive payment of wages occurs if an employer prepares and mails employees' pay checks on the last day of each month; Mim. 5796 revoked.

Full Text

Rev. Rul. 73-99

Advice has been requested as to the application of Mim. 5796, 1945 C.B. 379, in the light of Revenue Ruling 68-126, 1968-1 C.B. 194, and Revenue Ruling 70-507, 1970-2 C.B. 104.

The question presented is when, under the situations described below, "wages" are paid for purposes of 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.)

A manufacturing company credits its employees' accounts with the compensation for personal services due to them each month at the termination of that period. However, the company's normal procedure is to make actual payment by mailing a salary check to each employee on the final day of the month so that the employees do not receive them in the mail until the following month. The checks cannot be mailed before that day because of the impossibility of preparing the entire monthly payroll prior to that time. In situation one, employees are not permitted to pick up their checks personally, but can only receive them through the mail. In situation two, employees are permitted to pick up their checks personally.

Sections 3121(a) and 3306(b) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively, define the term "wages," with certain exceptions not material here, as "all remuneration for employment." Section 3401(a) of the Code, relating to the withholding of income tax, contains a similar definition.

For Federal employment tax purposes, wages are paid by an employer at the time they are actually or constructively paid, with certain exceptions not material here. Wages are constructively paid when they are credited to the account or set apart for an employee so that they may be drawn upon by him at any time although not then actually reduced to possession. To constitute payment in such a case the wages must be credited to or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that they may be drawn upon at any time, and their payment brought within his own control and disposition. See sections 31.3121(a)-2, 31.3301-4, and 31.3402(a)-1(b) of the Employment Tax Regulations.

The general theme of the Federal Insurance Contributions Act requires that the same burden be placed upon both the employee and employer. This has been attested to by Congress in the Social Security Amendments of 1954, House Report No. 1698, Eighty-third Congress, at page 26, as follows:

* * * Congress * * * was of the belief that the old-age and survivors insurance program should be on a completely self-supporting basis from contributions of covered individuals and employers, with employees and employers sharing equally. * * *

Such a result requires that receipt and payment are deemed made at the same point in time, as the rates are determined upon receipt and payment. For this reason, payment cannot be deemed made until there is concurrent receipt by the employee.

Mim. 5796 holds that when checks in payment of wages are prepared and mailed on or before the last day of a tax-return period, and the employer thus has done all in his power to pay the wages, actual payment of such wages will be deemed to have been made on or before such last day. It further holds that in other cases in which an employer customarily pays, and is prepared to pay, his employees on a certain day, constructive payment of wages will be deemed to have been made to any employee who did not actually receive his wages on that day due to absence or other causes not within the employer's control.

Revenue Ruling 70-507 provides that liability for the tax imposed on every employer by section 3111 of the Federal Insurance Contributions Act with respect to having individuals in his employ attaches at the time wages are actually or constructively paid unless they are deemed to be subsequently paid. The Revenue Ruling further states that there is no liability until such payment is made.

Revenue Ruling 68-126 provides that,

* * * If a retirement check is placed in the mail before the year's end, but is not received by the taxpayer until the following year, the amount of the check is includible in gross income for the taxable year in which it is actually received, except where the taxpayer could have received the check in the year before it was actually delivered to him by appearing in person and claiming it. In such circumstances the income is constructively received in the year preceding the year of actual receipt.

In situation one, there is not actual or constructive payment until the month in which the checks are received. Actual payment requires a concurrent receipt by the employee. Therefore, there is no actual payment in the present situation. The impossibility of preparing the entire payroll in time for mailing the checks before the last day of the month, coupled with the company's inflexible practice of mailing the checks on that day, so that the employees do not receive them until the following month, impose a substantial limitation or restriction as to the time and manner of payment, and effectively nullify any chance that the compensation payments can be made available to the employees on demand by the end of the month. Therefore, there is no constructive payment upon the mailing of the checks on the last day of the month.

In situation two, the employee is in constructive receipt of the income on the final day of the month.

Accordingly, for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages, "wages" are considered paid as follows. In situation one, the company has not paid wages to the employees until the month following the date the checks were mailed. In situation two, wages are considered paid on the final day of the month.

Mim. 5796 is hereby revoked. However, it is held that, under the authority granted by section 7805(b) of the Code, to the extent that employers have followed that Mim. and included in wages paid during a month checks mailed on the last day of a month as in situation 1, such employers will not be required to include such wages (already reported on their appropriate Employment Tax Returns filed on or before February 20, 1973) on their next Employment Tax Returns.