Tax Treatment of Supplemental Military Pay in Question

As we’ve reported before, some employers supplement the military pay of reservists and members of the National Guard who are called to active duty.

Apparently there is a tax conflict for employers, because the Uniformed Services Employment and Reemployment Rights Act (USERRA) considers activated reservists employed (but on a leave of absence) while the IRS considers the employment relationship terminated.

According to IRS rules, payments made to those employees should be reported on a Form 1099-MISC, not a Form W-2. Income reported on a Form 1099 does not have tax withheld.

Employers are concerned that reporting supplemental military pay on a Form 1099 is an undue administrative burden, both on the employer and the employee - who might have to make arrangements to pay estimated taxes on the supplemental pay (to avoid an underpayment of taxes), because the tax would not be withheld by the employer.

The National Committee for Employer Support of the Guard and Reserve (ESGR) provides some guidance on this issue on their website, at www.esgr.net/employers2/news.asp?c=newsTaxlaw.html.

 
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