[ 2.2.1 - Excess Wages ] [ 2.2.2 - Exempt Employer Payment Plans ] [ 2.2.3 - Sick Pay Plan ] [ 2.2.4 - Paid Sick Time] [ 2.2.5 - Third Party Sick Pay ] [ 2.2.6 - Cafeteria Plan ] [ 2.2.7 - Exempt Funds - 201.082(5) ] [ 2.2.8 - Employer Paid Taxes - 201.082(6) ][ 2.2.9 - Non-cash Payments Not for Business - 201.082(7) ] [ 2.2.10 - Payment Without Work Performed -  Over 65 - 201.082(8) ] [ 2.2.11 - Excess Wages for Multi-State Employee - 201.082(9) ] [ 2.2.12 - Supplemental Unemployment Benefits ]

If there is a question regarding whether payments should be excluded from wages, a complete description of the payments and the services rendered should be submitted to the State Office Status Section for a determination.

Under Section 201.082(1) taxable wages for Texas unemployment reporting purposes is limited to the first $9000 paid by an employer to an individual in employment during a calendar year. All wage payments must be reported, but only the first $9000 is taxable. Payments during the calendar year that exceed the $9000 limit are referred to as excess wages.

The $9000 taxable wage limit applies to each employer who pays the employee and not to the combined amount paid to an employee by all of his employers.

EXAMPLE: In 2003, 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 wages paid to the employee up to the $9,000 limit. Wages of $7,500 must be reported by Employer A for the employee, and wages of $9,000 must be reported by Employer B for the employee.

In a situation where there are approved predecessor/successor employers, and a transfer of compensation experience has occurred, the successor employer may take into consideration those wages paid to an employee during a calendar year by the predecessor employer. This predecessor/successor situation applies only if a transfer of compensation experience has occurred.

Under Section 201.082(2) of the TUCA, wages do not include payments made by an employer to or for an employee, or an employee's dependent, under a plan established for employees generally, for:

A. Retirement - 201.082(3)

Wages do not include payments made to an employee, or on behalf of an employee, for retirement. This exemption also applies to payments by an employer for insurance, or for an annuity, or into a fund for retirement purposes.

B. Sick Pay or Accident Disability - 201-082(4)

Sickness or accident disability payments after six months:
Any payment for sickness or accident disability, or medical or hospitalization expenses for sickness or accident disability, that an employer makes to or for an individual employee six calendar months after the last calendar month the employee worked for the employer are not wages.

FROM A TAX DEPARTMENT MEMO OF DECEMBER 21, 1995:
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 as described below are exempt, and should not be reported. However, employer payments in the absence of a sick pay plan, are reportable through the first full six months following the beginning of the sickness. Thereafter, the payments are not considered wages and should not be reported.

C. Medical or Hospitalization Expenses

Medical or hospitalization expenses paid by an employer in connection with sickness or disability of an employee, are not wages.

D. Death Benefits

All payments related to the death of an employee or their dependents are not wages.

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 known 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.

Employer payments, under a paid sick time plan described below are taxable.

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. TWC and other state agencies utilize a 'paid sick time' plan. These payments are treated as regular wage payments and are taxable.

Payments from a third party for sickness are not wages.

COMMENT 1: When the employer expends 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, 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 2: 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.

Payment on account of sickness from a third party, e.g., an insurance carrier, state Workman's Compensation fund, a friend or acquaintance, an established charity, a church fund, etc., are not considered wages.

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: If an employer provides benefits under a cafeteria plan, the payments would not be taxable as long as they are used to fund items included in the four categories that are exempt from unemployment taxation as listed earlier in this section. However, if such funds were used to purchase benefits not exempted by the law (such as: child care, senior adult care, profit sharing, stock options, savings account, college tuition) they would be taxable.

COMMENT: Benefits funded by salary reduction or deduction from an employee's base pay would be taxable, regardless of what they are used to purchase or provide.

‘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 (26 U.S.C. Section 401(a)), that is exempt from tax under Section 501(a), Internal Revenue Code (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 (26 U.S.C. Section 403(a)); or

If an employer makes payments into a tax-exempt trust fund that has been defined by Section 401(a) of the Internal Revenue Code (referred to as a 401k plan), these payments are not wages. However if the employer makes the payment as remuneration for services rendered by an employee of the trust, the employer's payment becomes wages. Remember that a deduction from an employee's gross pay that goes into this type of trust fund is still a part of the employee's gross wages and must be reported. The exemption applies only to payments made by the employer.

A similar type payment and exclusion from wages exists for non-profit organizations. The non-profit organization may make payments on behalf of an employee or an employee's beneficiary into an annuity fund established under Section 403(a) of the Internal Revenue Code (referred to as a 403b plan), and these payments are also not wages. Any deduction from an employee's gross pay that is made into this type of fund is a part of the employee's gross wages and must be reported. The exemption applies only to payments made by the non-profit employer.

‘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)";

If an employer does not deduct Social Security taxes from an employee's wages, but then pays both the employee's portion and the employer's portion of the tax, the amount that represents the employee's portion, does not become wages subject to tax under the Texas Unemployment Compensation Act. The amount representing what the employer owes does not become wages either.

‘Wages’ does not include:

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

This exclusion is for non-cash payments made to an employee for reasons that are outside the course of the employer's business. This portion of the law makes a distinction between cash and non-cash payments. A cash payment to an employee for services is taxable regardless of whether or not the service is in the employer's trade or business.

‘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;”

A payment made by an employer to an employee after that employee reached 65 years of age, may be exempt. The payment must not relate to work performed by the employee during the period for which the payment is made, and the payment must not represent vacation or sick pay.

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;”

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

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.