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Date: July 29, 2009
Bulletin Number: 914
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Subject

Change in Taxation of Military Stipends

Purpose

To inform agencies of new procedures regarding withholding of Social Security and Medicare taxes for employees receiving a military stipend.

Affected Employees

Employees paid a military stipend after December 31, 2008.

Effective Date(s)

Administration paychecks dated August 19, 2009 and Institution paychecks dated August 27, 2009.

Background
 

The IRS has issued new regulations addressing the taxation of wages paid as a military stipend.  Prior IRS regulations specified that income paid as a military stipend is exempt from Social Security and Medicare taxes and must be reported on a Form 1099.  The regulation was silent regarding the tax treatment of a military stipend paid as wages.

Because the IRS’s prior regulation addressed only income, not wages, and required reporting on a Form 1099, it was the opinion of OSC Legal Services that the IRS regulation was applicable only in non-employee situations.  Since no specific guidance was provided on the tax treatment of a military stipend paid as wages to employees, it was concluded that OSC must withhold these taxes as usual.

IRS has recently issued new regulations on the taxation of military stipends stating that military stipend payments made to employees in active duty for more than 30 days are to be treated as wages, subject to income tax withholdings but not Social Security or Medicare taxes.  This regulation impacts wages paid after December 31, 2008 and has no impact on the taxation of wages paid prior to that date. For additional information, please refer to IRS Publication 15 (Circular E), Employer’s Tax Guide for 2009.

Application of the IRS Regulation

Military stipends paid after December 31, 2008 to employees who have military orders extending for 30 days or more are exempt from Social Security and Medicare taxes.

OSC will apply this regulation as follows:

  • Beginning in Pay Period 9L (Administration) and 10L (Institution), all regular military stipend earnings will be exempt from Social Security and Medicare taxes.
  • Beginning in Pay Period 9L (Administration) and 10L (Institution), any retroactive military stipend earnings (regardless of when these earnings were originally earned) will be exempt from Social Security and Medicare tax, even if the employee is no longer receiving the military stipend.
  • Any retroactive earnings, such as a retroactive raise earned in an employee’s regular position, are subject to Social Security and Medicare tax, even if the employee is currently in a military stipend position.
  • Social Security and Medicare taxes were withheld for military stipend earnings paid between January 1, 2009 and Pay Period 9L (Administration) and 10L (Institution).  Refunds of these taxes will be processed at a later date.  A payroll bulletin will be issued to inform agencies of the procedures for these refunds.

OSC Actions

For employees currently being paid a military stipend in Pay Period 9L (Administration) and 10L (Institution):

  • OSC will identify all employees with an Action of Paid Leave of Absence and a Reason of Military Stipend and Pay Basis Code of BIW.
  • OSC will insert a new row on Job Data, with an Action/Reason code of Data Chg/CFI (Change FICA status) with an effective date of July 23, 2009 (Administration) or July 30, 2009 (Institution), changing the FICA status on the Payroll tab to EXEMPT.

Beginning in Pay Period 9L (Administration) and 10L (Institution) for employees eligible to receive a paid military stipend, OSC will update the FICA status to EXEMPT when inserting the Pay Rate Change row with the biweekly stipend amount on Job Data.

Earn Codes

MSP (Military Stipend Payment) – Earnings paid using this existing earn code are no longer subject to Social Security or Medicare taxes.


AMS (Adjust Military Stipend) - Adjustments paid using this earn code will not be subject to Social Security or Medicare taxes. This code will replace ADJ for adjustments to military stipend payments.

Agency Actions

When returning an employee from a military leave where the employee was receiving a biweekly stipend, the agency must change the FICA status from EXEMPT “E” to SUBJECT “N” on the Payroll tab on the Rein Leave row on Job Data.

Questions

Questions regarding tax regulations may be directed to the Tax Administration and Compliance mailbox.

Questions regarding processing job transactions related to starting or stopping a military leave may be directed to the Military Stipends mailbox.