Rev. Rul. 89-35

1989-1 C.B. 280, 1989-10 I.R.B. 8.

                       Internal Revenue Service

                                 Revenue Ruling

                PAYMENT OF SOCIAL SECURITY TAXES FOR BACK WAGES

                            Published: March 6, 1989

Section 3102. - Deduction of Tax from Wages, 26 CFR 31.3102-1: Collection of, and liability for, employee tax; in general.

(Also Sections 3101, 3111, 3121; 31.3101-2, 31.3111-2, 31.3121(a)-2.)

  Payment of social security taxes for back wages. The Service will not follow Bowman v. United States, 824 F.2d 528 (6th Cir. 1987), which held that back wages paid to the taxpayer were subject to social security taxes for the years to which the back wages related and not for the year in which the back wages were received.

  In Bowman v. United States, 824 F.2d 528 (6th Cir. 1987), the court considered whether back wages paid to the taxpayer by his employer pursuant to the settlement of a discrimination suit were subject to the taxes imposed by section 3101 of the Internal Revenue Code (Federal Insurance Contributions Act (FICA) or social security taxes) for the year in which the award was received or for the years to which the back wages related. The court held that the back wages paid to the taxpayer were subject to social security taxes for the years to which the back wages related and not for the year in which the award was received.

  Section 3101 of the Code imposes social security taxes on an individual on wages received with respect to employment. Section 3101(a) and (b) provides that the rate of tax depends on the calendar year in which the wages are received by the individual. Section 3111 imposes social security taxes on an employer on wages paid with respect to employment. Section 3111(a) and (b) provides that the rate of tax depends on the calendar year in which the wages are paid by the employer.

  Section 3102 of the Code requires the employer to deduct the tax imposed by section 3101 from the employee's wages as and when paid.

  Section 31.3102-2(c) of the Employment Tax Regulations provides that the employee tax is computed by applying to the wages received by the employee the rate in effect at the time such wages are received. See the example set forth in section 31.3101-2(c) of the regulations. See also Rev. Rul. 55-203, 1955-1 C.B. 114, which holds that liability for social security taxes is computed on an 'as paid' basis when the taxpayer receives unpaid minimum wages or unpaid overtime compensation pursuant to the Fair Labor Standards Act; and Rev. Rul. 78-336, 1978-2 C.B. 255, which holds that a back pay award ordered by a court is wages in the year paid, not in the year or years earned, and is subject to a federal income tax withholding at the rates in effect at the time the award is paid.

  Based upon the Code provisions, regulations and revenue rulings discussed above, the Service will not follow the decision in Bowman. The employee portion of the taxes under section 3101 of the Code should be computed by applying the tax rate in effect at the time the back wages are received by the employee. The employer portion of the tax under section 3111 should be computed by applying the tax rate in effect at the time the back wages are paid.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Vernon S. Carter, of the Office of Assistant Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this revenue ruling contact Vernon S. Carter on (202) 566-3539 (not a toll-free call).