4.2     Basis of Tax

This section discusses the aspects of the law that specifically apply to the basis of tax.

4.2.1     Employment

The tax is based on wages paid for employment. Although an employer pays wages for services performed for him, no tax is payable on those wages unless the services constitute "employment".

4.2.2     Payments Included as Wages Paid 4.2.2.1     Wages - Section 201.081

Wages means all remuneration for personal services, including:

  1. the cash value of remuneration paid in any medium other than cash (See Chapter 4 - Wages Paid in A Medium Other Than Cash); and
  2. a gratuity received by an employee in the course of employment to the extent that the gratuity is considered wages in the computation of taxes under the Federal Unemployment Tax Act (26 U.S.C. Section 3301 et seq).
  3. gifts, including cash, to an individual who is under contract of hire.

    Comment: Employers may give a “gift” to an employee because the employee is working for the company. Because the “gift” is not being made available to others outside of the company, gifts can be considered additional compensation for services performed. This is similar to a bonus given to an employee in appreciation for their services.
4.2.2.2     Discussion

This discussion of wages relates only to wages for personal services in employment, as the term is defined in the Act. Wages, as used in this section, may be:

  1. Wages paid in cash.
  2. Wages constructively paid in cash.
  3. Wages paid in a medium other than cash.
  4. Wages paid by or through the employer in the form of a gratuity.
4.2.2.3     Payments Actually Received

Wages paid are payments actually received by an individual. This means the payment has been delivered into the hands of the individual. The general rule is that wages shall be reported for the period in which they were actually paid unless they were constructively paid.

4.2.2.4     Wages Constructively Paid

Wages constructively paid are wages which have not yet been delivered into the hands of the employee but are available to him. Such constructive payments are treated the same as wages paid as of the date they are credited, set apart or are otherwise available to the employee.

EXAMPLE 1: Employer A customarily pays the employees monthly on the last working day of the month. On December 31, 2000, all employees were handed their paychecks except Mrs. Z who was absent from work due to illness. Mrs. Z was handed her December paycheck when she returned to work on January 2, 2001; however, it was available to her on December 31, 2000. Since her 'wages' were available to her on December 31, 2000, they are considered paid on that date.

EXAMPLE 2: Employer B customarily pays the employees monthly on the last working day of the month. On December 31, 2000, employees in the headquarters office were handed their paychecks, and Employer B mailed paychecks to employees working in the branch offices. Since the employer has done everything within the employer's power to pay all wages on that date, all wages are considered to be paid on that date.

EXAMPLE 3: Employee Smith's sales commissions vary considerably from month to month due to the seasonal product he is selling. Although Smith can receive payment on his commissions at the time they are credited to his account, he customarily withdraws approximately $2,000.00 per month from his account for living expenses and "leaves the rest on the books." During the first quarter of 2000, commissions were credited to his account in the amount of $12,000.00. His withdrawals during the quarter amounted to $6,000. Since Smith's commissions may be withdrawn on the date they are credited to his account, they are deemed to be paid on those dates. His wages for the first quarter of 2000 amount to $12,000.00.

4.2.2.5     Wages Paid In A Medium Other Than Cash

Wages paid in a medium other than cash include living quarters, meals, or anything else received by an individual in a medium other than cash. Commission Rule 815.104 titled Remuneration Other than Cash states:

  1. If an individual receives any part of his wages in any medium other than cash, the reasonable cash value of such remuneration other than cash shall be deemed for all purposes of the Act to be either:
  1. the amount which is agreed upon between the employing unit and such individual if:
  1. the terms of such agreement are reported to the commission; and
  2. the commission determines that such agreed value or amount is reasonable; or
  1. the cash value as shown to the satisfaction of the commission.
  1. If the commission determines that the amount agreed upon is unreasonable, or if the employing unit and such individual fail to agree upon an amount, or if the employing unit fails to report the terms of an agreement to the commission and if the employing unit fails to show the cash value of such noncash remuneration prior to the due date of contributions with respect to such wages, the commission shall fix an amount or value after considering all available information and evidence; and such amount fixed by the commission shall be deemed for all purposes of the Act to be the cash value of such wages received in any medium other than cash.

    The Commission has established that the value shall be the amount agreed upon between the employing unit and the employee. This agreement may be made either at the time of hiring or at a later time, which could even be at the time the question of value is raised by the Commission. The agreement may be written or oral; however, the Commission must have evidence of the agreement. This evidence can be more satisfactorily furnished through a written statement signed by the employer and the employee. It would appear difficult for the Commission to claim taxes on a value arising through such an agreement unless it is able to prove existence of an agreement. In the absence of something in the hands of the Commission field representative to prove the agreement, the Commission could support its claim in court only on the basis that the value for wages used is reasonable as determined by its own investigation.

    In the absence of an agreement between the employer and the employee, a claim for taxes will be made by use of a value determined through investigation and found to be reasonable by the Commission. The burden of finding the facts on which a reasonable value can be based rests with the Commission until such time as it may become necessary for the Commission to make the finding through a coverage hearing. The representative's decision as to the value will have full Commission support provided there are facts to show that the determined value is reasonable.

    In general, the Commission will be guided and will often rely on federal unemployment tax rulings and regulations when ruling on what constitutes wages paid in a medium other than cash.

    Noncash wages in domestic employment are taxable under Section 201.081 of the TUCA even though only cash wages determine tax liability under Section 201.027.

    COMMENTS: The U.S. Supreme Court in the case of Rowan Companies, Incorporated vs. U.S.S.Ct., Number 80-780, decided on June 8, 1981, that the value of meals and lodging provided employees for the convenience of the employer were not taxable for F.I.C.A. and F.U.T.A. No changes were made to the T.U.C.A. as a result of the Rowan case.

    Employers who have employees that are furnished meals and/or lodging in connection with their work should report the value of these items as wages to the Texas Workforce Commission. (See Tax Supplement 16-81).
4.2.2.6     Tips

All tip income, including charged tips reported by an employee to his or her employer, are wages.

EXAMPLE 1: The customer arranges with hotel for banquet and makes lump-sum payment to waiter in charge of banquet with instructions to distribute amount among employees serving banquet, leaving amount each employee gets solely to discretion of head waiter. The employer has no knowledge of the amount of their tips, and the amount is not a factor in fixing the pay of the employee. In this situation, tips to the headwaiter are not wages for FUTA purposes.

Tips voluntarily given directly to a waiter or waitress (or left on a table as a gratuity by a patron), which are accounted for in writing by an employee to the employer and are taken into account by the employer to the extent permitted in determining the employee's compensation under the state or federal minimum wage laws, are interpreted as 'Wages.' Tips accounted for and determined as 'Wages' should be reported and combined with any other wages paid. This figure is entered as a single item on the Wages List part of the quarterly report.

A charge for services (commonly called a gratuity) added to a patron's bill for later distribution to the waiters, waitresses, busboys, etc., by the employer constitutes 'Wages.' Accordingly, these charged 'Wages' should be entered on the Form C-3 and Wages List.

EXAMPLE 2: A restaurant prohibited tipping but added a 10 percent service charge to customers checks which was distributed to employees along with salary. In this situation the 10 percent added is an arbitrary charge fixed by the restaurant that the customer must pay and is clearly not a gratuity. Moreover, it isn't paid by the patron directly to the employee, but to the restaurant and becomes part of the restaurant's funds. Therefore, this service charge is taxable wages subject to both employer and employee taxes under Social Security, FUTA, and income tax withholding, as well as Texas Unemployment Compensation Taxes.

ADDITIONAL INFORMATION

The Texas Unemployment Compensation Act defines wages in part as gratuities considered wages in the computation of taxes under the Federal Unemployment Tax. Accordingly, tips taxable under F.U.T.A. will also be taxable under T.U.C.A. The effective date of this change was January 1, 1986.

FUTA Definition of Tips in section 3306 (s) Tips Treated as Wages

For purposes of this chapter, the term wages includes tips which are: (1) received while performing services which constitute employment, and (2) included in a written statement furnished to the employer.

4.2.2.7     Back Payments Under FLSA

Payments of unpaid minimum wages and unpaid overtime compensation pursuant to the Federal Fair Labor Standards Act constitute wages because such payments are back payments for personal services performed. Although back pay awards are wages and taxable when paid, amounts paid as 'liquidated damages' are not wages. Liquidated damages are not remuneration for personal services.

Liquidated damages is defined as: the sum which the party to the contract agrees to pay if he breaks some promise and, which having been arrived at by good faith effort to estimate actual damage that will probably ensue from breach is recoverable as agree damages if breach occurs.

4.2.2.8     NLRB Back Payment Awards

A payment made by an employer to an employee who has been reinstated and granted back pay for time lost, pursuant to an order issued by the National Labor Relations Board, constitutes wages for federal employment tax purposes. A payment to an employee under an order of the Board which makes the employer and a labor organization jointly and severally liable will be treated as wages paid by the employer regardless of whether the actual payment is made by the employer or the labor organization. However, where the order of the Board is directed exclusively to a labor organization, the payment of the back pay award will not be treated as wages. The commission adopted the principles stated above in a Legal Department opinion dated April 15, 1966.

When back pay is awarded by the National Labor Relations Board, the payments constitute wages for the quarter in which they should have been paid rather than the quarter(s) in which they are received.

Comment: Prior to September 1, 1985, when a back pay award was reduced due to the receipt, by the claimant, of unemployment compensation benefits, the resulting overpayment was the responsibility of the claimant. Subsequent to September 1, 1985, that overpayment is due from the employer. The employer is required to notify the Commission of the award and reimburse the Trust Fund for the amount of benefits paid equaling the amount of the reduction in the back pay award.

4.2.2.9     Guaranteed Annual Wages

The Commission agrees with a federal ruling that amounts paid to an employee under a collective bargaining agreement in which employees are guaranteed an annual minimum wage constitutes taxable wages. (Reference: Tax Supplement 144-74 quoting Revenue Ruling 73-22; Revenue Ruling 61-68; and Attorney General' opinion H-404.)

4.2.2.10     Dismissal Payment

A dismissal payment, which is any payment made by an employer on account of involuntary separation of the employee from the service of the employer, will constitute wages irrespective of whether the employer is, or is not, legally required to make such payment.

4.2.2.11    Payrolling or Common Paymaster

The Internal Revenue Service permits employers to file consolidated payroll reports for related or subsidiary corporations under a Reporting Agent Agreement.

Under this arrangement, one entity (usually a corporation) reports all wages paid to its employees as well as the employees of related entities under one Federal Identification Number. Often, the "payrolling" corporation processes the payroll information and issues paychecks to all employees. However, it is customarily reimbursed by the related or subsidiary corporations not only for the wages, but also for the employer share of federal and state payroll tax expenses. The payrolling corporation may also receive a processing fee.

A related term, Common Paymaster, describes an arrangement in which individuals are employed, at the same time, by two or more related corporations, but receive their combined wages from only one of those employers, i.e. the Common Paymaster.

In 1977 the Federal Social Security and Unemployment Tax Acts were amended to provide that beginning January 1, 1979 a related group of corporations, employing an individual jointly, would not be required to pay dual FICA and FUTA taxes if the individual in question is compensated through a Common Paymaster which is one of the corporations. Under federal law prior to January 1, 1979 and under present state law and practice, in such a situation, both corporations would be liable for taxes on the individual's wages up to the statutory limit. Although some of the states have indicated that they will follow the federal law, the majority, some thirty-three, have indicated that they will not.

The issue of payrolling is not precisely addressed in the TUCA, however, the Commission does not allow one employer to report another employer's employees. The Commission requires each separate legal entity to report its employees under its own account number. Employers often believe that payrolling by related corporations is acceptable for state reporting since the IRS permits it for federal tax reporting.

Reference: Status Manual, Chapter 6 – Payrolling for additional information.

4.2.3     Payments Excluded From Wages
[ 4.2.3.1 - Excess Wages ][ 4.2.3.2 - Exempt Employer Payment Plan ][ 4.2.3.3 - Retirement Payments ][ 4.2.3.4 - Sick Pay ][ 4.2.3.5 - Certain Exempt Funds ][ 4.2.3.6 - Employer Paid Taxes ][ 4.2.3.7 - Non-cash Payments Not for Business ][ 4.2.3.8 - Payment W/o Work Performed - Over 65 ][ 4.2.3.9 - Excess Wages for Multi-State Employee ][ 4.2.3.10 - Supplemental Unemployment Benefits ]

If there is any doubt whether payments should be excluded under Section 201.082, a complete description of such payments should be submitted to the State Office Status Section for a determination.

4.2.3.1     Excess Wages

Under Section 201.082(1):

Wages does not include--that part of the remuneration paid by an employer to an individual for employment during a calendar year that exceeds remuneration to the individual, excluding remuneration under another subdivision of this section, by the employer of... $9,000 for a calendar year after calendar year 1988;...

Comment: The limitation is applicable individually to each employer from whom wages are received and not to the aggregated amount paid to an employee by all of his employers.

Example: In 2000, an employee is paid $7,500 by Employer A and $9,000 by Employer B. Both Employer A and Employer B must pay tax on $9,000. Wages of $7,500 must be reported for the employee by Employer A and wages of $9,000 must be reported for the employee by Employer B.

An approved successor employer may take into consideration wages paid to an employee during a calendar year by the predecessor employer in arriving at the $9,000 annual taxable wage limit, provided a transfer of compensation experience is made.

4.2.3.2     Exempt Employer Payment Plan
[ 4.2.3.2.1 - Non-Subscriber/ERISA Plan ]

Under Section 201.082(2):

"Wages" does not include: a payment, including an amount the employer pays for insurance or an annuity or pays into a fund for the payment of insurance or an annuity, that is made to or for an employee or the employee's dependent under a plan the employer established for employees generally, or a class of employees, including or excluding the employee's dependents, for:

  1. Retirement;
  2. Sickness or accident disability; except as indicated in attachment A below.
  3. Medical or hospitalization expenses in connection with sickness or accident disability; or
  4. expenses related to death.

Comment 1: This exclusion is similar to the exclusion from the definition of "wages" in Subsection 3306(b)(2) of the Internal Revenue Code of 1986. It should be noted that Subsection 3306(b)(2) of the Code does not exclude payments on account of retirement from wages. Also, payments for sickness or accident disability under this section "excludes from the term "wages" only payments which are received under a workmen's compensation law".

Comment 2: Effective January 1, 1982, Public Law 97-123 eliminated the exclusion from F.I.C.A. of sick pay, made under a plan or system, including third-party payments, for the first six months of illness. No changes were made to the T.U.C.A. as a result of this Law change affecting F.I.C.A. reporting. Sick pay is still an exclusion from the definition of wages for T.W.C. under 201.082.

From a Tax Department memo of December 21, 1995 (by Steve Riley):

We frequently receive inquiries regarding the reportability of sick pay. As a general rule, we use the same guidelines as the Internal Revenue Service in determining the reportability of sick pay.

Employer payments, under a sick pay plan described in attachment A, are exempt, and should not be reported. However, employer payment, in the absence of a sick pay plan, are taxable through the first full six months following the beginning of the sickness. Thereafter, the payment are not considered wages and should not be reported.

Employer payments, under a "paid sick time" plan described in attachment A, are taxable.

Payment, on account of sickness from a third party, e.g., an insurance carrier, to the employee are not considered wages and should not be reported.

Attachment A:

Characteristics of a Sick Pay Plan:

The following characteristics are typical of a legitimate sick pay plan:

  • The employer or third-party insurance provider bears an ‘insurance risk’.
  • The plan is in writing or otherwise made know to employees.
  • Reference is made to the plan in the employment contract.
  • The employer contributes to the cost of the plan.
  • There is a special fund from which sickness or disability payments are made.
  • Definite standards exist for determining eligibility, such as length of service, occupation or job classification.
  • An established formula is used to determine the minimum and maximum amounts that are payable to an eligible employee.

Paid Sick Time

Paid sick time is the practice of allowing employees to accrue a limited number of hours or days of paid time off for illness. Payments for these periods are made directly from the payroll account and are not provided for under an insurance plan. Employees are paid their regular rate of pay for each hour or day of sick leave. TEC and other state agencies utilize a ‘paid sick time’ plan. These payments are treated as regular wage payment and are taxable.

Comment 3: When the employer expends his funds to provide benefits under a cafeteria plan, the payments would not be taxable as long as they are used to fund the four categories listed above which are exempt from unemployment taxation under Section 201.082. However, if such funds were used to purchase benefits not exempted by Subdivisions A, B, C, or D, (for example: day care, profit sharing, or deferred compensation) they would be taxable. The Internal Revenue Code defines a ‘cafeteria plan’ as a written plan under which all participants are employees, and the participants may choose among two or more benefits consisting of cash and statutory nontaxable benefits.

Comment 4: Benefits funded by salary reduction or deduction from the employees' base pay would be taxable, regardless of what they are used to purchase or provide.

4.2.3.2.1     Non-Subscriber/ERISA Plan

Non-subscription programs are an alternative solution to workers' compensation insurance. Texas Employers who elect not to purchase workers' compensation insurance are referred to as non-subscribers.

You can become a responsible non-subscriber by providing a comprehensive injury benefit plan to cover occupational injuries and illnesses and provide for legal liability defense and damage payments.

If all the contributions to this plan are from the employer and none are from the workers and if those payments are for sickness, injuries, medical and/or death then the payments would be exempt for TUCA purposes under 201.082.

4.2.3.3     Retirement Payments

Under Section 201.082(3):

Wages does not include: a payment made to an individual employee for retirement, including an amount an employer pays for insurance or an annuity or pays into a fund for the payment of insurance or an annuity;

4.2.3.4     Sick Pay

Sickness or accident payments after six months

Under Section 201.082(4):

‘Wages’ does not include: a payment for sickness or accident disability, or medical or hospitalization expenses for sickness or accident disability, an employer makes to or for an individual employee after the expiration of six calendar months after the last calendar month the employee worked for the employer;

Comment: This exclusion is the same as the exclusion from the definition of ‘wages’ in Subsection 3306(b)(4) of the 1986 IRS Code.

4.2.3.5     Certain Exempt Funds

Exempt funds, annuity plans and bond purchases

Under Section 201.082(5):

‘Wages’ does not include:

a payment made to or for an employee or the employee's beneficiary:

  1. from or to a trust fund described in Section 401(a), Internal Revenue Code of 1986 (26 U.S.C. Section 401(a)), that is exempt from tax under Section 501(a), Internal Revenue Code of 1986 (26 U.S.C. Section 501(a)), at the time of payment, unless the payment is made to an employee of the trust as remuneration for service as an employee and not as a beneficiary of the trust;
     
  2. under or to an annuity plan that, at the time of the payment, is a plan described by Section 403(a), Internal Revenue Code of 1986 (26 U.S.C. Section 403(a)); or

COMMENT: Previously wages paid under or to a bond purchase plan that, at the time of the payment, was a qualified bond purchase plan under section 405(a), Internal Revenue Code (26 U.S.C. Section 405(a). This exclusion is similar to the exclusion from the definition of 'wages' in Subsection 3306(b) (5) of the Internal Revenue Code of 1954. It should be noted that in addition to (A), (B) and (C) above, Subsection 3306(b)(5) of the Code also excludes payments under or to an annuity contract described in Section 403(b), under or to an exempt governmental deferred compensation plan or to supplement pension benefits.

House Bill 567 deleted (C) from the TUCA effective September 1, 1997. On or after September 1, 1997, payments made under, or to, a bond purchase plan are wages and subject to unemployment tax. Since this bond provision applied to 'war bonds', it has not been applicable for many years.

4.2.3.6     Employer Paid Taxes

Under Section 201.082(6):

‘Wages’ does not include:

" a tax an employer pays, without deduction from the remuneration of the employee, that is imposed on the employee under Section 3101, Internal Revenue Code of 1986 (26 U.S.C. Section 3101);"

Comment: This section provides for exclusion from wages of payments made by an employer of tax imposed upon his employees under Section 3101 of the Internal Revenue Code of 1954. This means that if the employer does not deduct Social Security taxes from an employee's wages but pays the full tax himself, the amount of the employee's tax paid by the employer does not become wages subject to tax under the Texas Unemployment Compensation Act.

4.2.3.7     Non-cash Payments Not for Business

Under Section 201.082(7):

‘Wages’ does not include:

"noncash remuneration paid to an employee for service not in the course of the employer's business;"

Comment: Note that this exclusion is for non-cash payments. This subsections makes a distinction between cash and non-cash payments. A cash payment for service is taxable regardless of whether or not the service is in the employer's trade or business.

4.2.3.8     Payment Without Work Performed - Over 65

Under Section 201.082(8):

‘Wages’ does not include:

" a payment, except vacation or sick pay, made to an employee after the month the employee is 65 years of age, if the employee did not work for the employer in the period for which the payment is made;"

4.2.3.9     Excess Wages for Multi-State Employee

Under Section 201.082(9):

‘Wages’ does not include:

" the part of remuneration from a single employer for services in a calendar year that exceeds the amount applicable to the year under Subdivision (1) for which contributions have been paid under a state unemployment law;"

Comment: An employer may take into consideration wages paid to an employee for service in another state in determining the amount of taxable wages under the Texas law.

4.2.3.10     Supplemental Unemployment Benefits

The Commission agrees that payments made by an employer (or from a trust created by an employer) to a FORMER EMPLOYEE as a supplement to public agency unemployment benefits do not constitute taxable wages. (References: Tax Supplement 144-74, citing Revenue Ruling 73-22.

4.2.4     Requirements for Employer Payments
[ 4.2.4.1 - No Deduction from Employee's Wages ][ 4.2.4.2 - No Voluntary Waiver of Coverage ][ 4.2.4.3 - Employee Cannot Pay ][ 4.2.4.4 - Fines for Violations ]

This section discusses the aspects of the law that specifically apply to the requirements for employer payments.

4.2.4.1     No Deduction from Employee's Wages

Under Section 204.003:

An employer may not deduct any part of a contribution from the wages of an individual in the employer's employ.

4.2.4.2     No Voluntary Waiver of Coverage

Under Section 207.072:

An employer may not require or accept a waiver of a right of an individual employed by the employer under this subtitle.

4.2.4.3     Employee Cannot Pay

Under Section 207.073:

An employer may not, directly or indirectly, make require, or accept a deduction from wages to finance a contribution or reimbursement required to be paid by the employer under this subtitle.

4.2.4.4     Fines for Violations

Under Section 207.074:

An employer, or officer or agent of an employer, commits an offense if the person violates Section 207.072 or 207.073. An offense under this section is punishable by:

  1. a fine of not less than $100 and not more than $1,000;
  2. imprisonment for not more than six months; or
  3. both a fine and imprisonment.

Comment: Violation of these provisions of the Act should be reported immediately to the Director of Tax.

 

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