Included as part of the 2022/23 budget for New York State was a provision allowing for Healthcare Worker Bonuses of up to $3,000 per employee (see details here). The regulations and program portal were released on August 3, 2022. One of the crucial questions regarding these payments has to do with the taxation of said payments to the recipients, the employees.
The regulations for the program specifically state that these payments are not considered taxable income for New York State personal income tax purposes, which is a clear benefit as recipients will not bear the weight of any tax burdens related to these bonuses. Federal treatment by the IRS isn’t so generous though, since this is a New York State-specific program. This disparity leaves providers with several questions in regard to the taxation of these bonuses and payments to their employees.
Are these payments considered taxable income to the employees for federal income tax purposes?
While there is no specific “case-in-point” guidance currently available on this subject, IRS Revenue Ruling 75-246 provides the most comparable situation and guidance on this matter. In this Revenue Ruling (specifically “Situation 2”), a private employer receives funds from the government to provide training for employees and received services (emphasis added) from these employees. The ruling states that since the employees are providing services the payments to the employees are taxable income for federal tax purposes.
As such, absent any future specific guidance to the contrary, these payments ARE taxable income to the recipients.
Are these payments considered wages for federal tax purposes and therefore subject to withholding?
Like the above, there is no specific federal “case-in-point” guidance for this program; however, the same Revenue Ruling states that since the payments in that case were payments for services under a common-law employment (employee-employer) relationship, they were considered wages under Section 3402 (Income Tax Withholding), Section 3102 and 3111 (FICA), and Section 3301 (federal unemployment tax).
Again, absent any future specific guidance to the contrary, these payments ARE wages to the employees and are required to have withholdings made for federal and FICA taxes. Additionally, employers will be responsible for their shares of FICA taxes on these amounts.
How should these payments be made to employees?
As these payments are for wages, these payments should be made via traditional payroll processing. Providers will have to work with their processors in order to properly report these wages as exempt from New York State and New York City income taxes and withholdings, but still subject to federal income tax withholdings. To date, New York State has not yet provided guidance on how to report, but it’s probable that there will be a code in Box 14 of W-2s which is used to show these wages.
Taxation of Bonuses
Many employees feel as if they are taxed at higher rates than normal on their bonuses. This is untrue. Bonuses are a form of ordinary income and subject to tax in the same manner as wages. There are rules related to the withholding of bonuses which can make them seem to be taxed at higher rates. If, in fact, the rates are too high, then overpayments will be refunded as part of the annual tax return filings. Bonuses can be withheld in one of two ways pursuant to IRS Publication 15:
- Can be paid concurrently with regular wages and withheld as if one payment for the payroll period; or
- Treated as supplemental wages and withheld at a flat rate (currently 22%).
A best practice for this program will be to pay separately in order to comply with the program guidelines and have an easier evidence trail.
As these bonuses are considered wages, it is probable (depending on the plan document) that these payments will be 401(k)/403(b)-eligible wages. As such, plan administrators should review plan documents to see if these fall within the definition of compensation and that any employee deferrals related employer matches are properly calculated and paid.
Alternative Taxation Thoughts
While Revenue Ruling 75-246 is currently the closest to this program, there are other thoughts as to potential taxation of these payments.
Section 139 Qualified Disaster Payments
The COVID-19 pandemic was declared a federal disaster under the Stafford Act in March 2020 and that has been extended (most recently in March 2022) through at least July 1, 2022 for FEMA-related items. Section 139 allows taxpayers to exclude “qualified disaster relief payments” from income if used to pay or reimburse expenses related to a disaster or if such amount is paid by a federal, state, or local government in connection with a qualified disaster to promote general welfare.
As these are payments by employers and require both past and present services to be provided, they do not fall under the “general welfare” exception as these represent compensation for services. So while the intention may have been to provide payments to healthcare workers, by requiring services, these no longer fall under the Section 139 exclusion.
This is still a new program, and interpretations and clarifications on the rules and regulations are still forthcoming. As New York State and/or the IRS release additional information or guidance we will send updates accordingly. Stay connected to us.
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Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.