Deferred Comp Payroll Tax Scenario Clarified

February 15, 2007 ( - Changing its prior holdings, the Internal Revenue Service (IRS) on Thursday said that an accrual basis taxpayer-employer may treat its payroll tax liability as incurred in the first tax year - even if the related compensation is deferred under §404 that is deductible in the second year.

IRS officials said the new holding would be true if a n accrual method taxpayer met the all-events test and recurring item exception of §461, according to Revenue Ruling 2007-12 .

According to the new ruling, the deferred compensation scenario would be allowed if the employer pays the payroll taxes either in Year One or before the earlier of September 15 of Year Two or the date the company files a timely federal income tax return for Year One, which would mean that the payroll taxes generally would be treated as incurred by the employer in Year One.

However, the compensation to which the payroll taxes relate is deferred compensation that is properly deductible under §404 in Year Two, the IRS said.

The IRS said Thursday’s holding amplifies Revenue Ruling 96-51 and revokes Revenue Ruling 69-587.

Tax officials said that because of the rule change, a taxpayer that wants to change its treatment of payroll taxes associated with deferred compensation has to get IRS permission.