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Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions, and taxable fringe benefits. It doesn’t matter how you measure or make the payments. Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes.
Cash wages paid to farmworkers.
Cash wages that you pay to employees for farmwork are generally subject to social security tax and Medicare tax. You may also be required to withhold, deposit, and report Additional Medicare Tax. See section 9 for more information. If the wages are subject to social security and Medicare taxes, they’re also subject to federal income tax withholding. You’re liable for the payment of these taxes to the federal government whether or not you collect them from your employees. If, for example, you withhold less than the correct tax from an employee’s wages, you’re still liable for the full amount. You may also be liable for FUTA tax, which isn’t withheld by you or paid by the employee. FUTA tax is discussed in section 14 . Cash wages include checks, money orders, and any kind of money or cash.
More information.
See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. Also, see section 15 for exceptions to the general rules for wages. Pub. 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. Pub. 15-B provides information on other forms of compensation, including:
Accident and health benefits,
Achievement awards,
Adoption assistance,
Athletic facilities,
De minimis (minimal) benefits,
Dependent care assistance,
Educational assistance,
Employee discounts,
Employee stock options,
Employer-provided cell phones,
Group-term life insurance coverage,
Health savings accounts,
Lodging on your business premises,
Meals,
No-additional-cost services,
Retirement planning services,
Transportation (commuting) benefits,
Tuition reduction, and
Working condition benefits.
Noncash wages, including commodity wages, paid to farmworkers.
Noncash wages include food, lodging, clothing, transportation passes, farm products, or other goods or commodities. Noncash wages paid to farmworkers, including commodity wages, aren’t subject to social security tax, Medicare tax, or federal income tax withholding. However, you and your employee can agree to have federal income tax withheld on noncash wages.
Noncash wages, including commodity wages, are treated as cash wages if the substance of the transaction is a cash payment. Noncash wages treated as cash wages are subject to social security tax, Medicare tax, and federal income tax withholding.
Report the value of noncash wages in box 1 of Form W-2 (box 7 of Form 499R-2/W-2PR) together with cash wages. Noncash wages for farmwork are subject to federal income tax unless a specific exclusion applies. Don’t show noncash wages in box 3 or 5 of Form W-2 (box 20 or 22 of Form 499R-2/W-2PR), unless the substance of the transaction is a cash payment and they’re being treated as cash wages.
Share farmers.
You don’t have to withhold or pay social security and Medicare taxes on amounts paid to share farmers under share-farming arrangements.
A “share farmer” working for you isn’t your employee. However, the share farmer may be subject to self-employment tax. In general, share farming is an arrangement in which certain commodity products are shared between the farmer and the owner (or tenant) of the land. For details, see Regulations section 31.3121(b)(16)-1.
Compensation paid to H-2A visa holders.
Report compensation of $600 or more paid in 2025 ($2,000 or more paid in 2026) to foreign agricultural workers who entered the country on H-2A visas in box 1 of Form W-2 (box 7 of Form 499R-2/W-2PR) but don’t report it as social security wages (box 3 of Form W-2 or box 20 of Form 499R-2/W-2PR) or Medicare wages (box 5 of Form W-2 or box 22 of Form 499R-2/W-2PR) on Form W-2 because compensation paid to H-2A workers for agricultural labor performed in connection with this visa isn’t subject to social security and Medicare taxes. On Form W-2, don’t check box 13 (Statutory employee), as H-2A workers aren’t statutory employees.
An employer isn’t required to withhold federal income tax from compensation paid to an H-2A worker for agricultural labor performed in connection with this visa but may withhold if the worker asks for withholding and the employer agrees. In that case, the worker must give the employer a completed Form W-4. Federal income tax withheld should be reported in box 2 of Form W-2.
These reporting rules apply when the H-2A worker provides their TIN to the employer. If the H-2A worker doesn’t provide a TIN and the total annual wages to the H-2A worker are at least $600 in 2025 ($2,000 in 2026), the employer is required to backup withhold. See the Instructions for Forms 1099-MISC and 1099-NEC and the Instructions for Form 945.
For more information on foreign agricultural workers on H-2A visas, go to IRS.gov/H2A .
Employee business expense reimbursements.
A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees’ business expenses. How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement.
These rules apply to all allowable ordinary and necessary employee business expenses.
Accountable plan.
To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules.
They must have paid or incurred allowable expenses while performing services as your employees. The reimbursement or advance must be payment for the expenses and must not be an amount that would have otherwise been paid to the employee as wages.
They must substantiate these expenses to you within a reasonable period of time.
They must return any amounts in excess of substantiated expenses within a reasonable period of time.
Amounts paid under an accountable plan aren’t wages and aren’t subject to income, social security, Medicare, and FUTA taxes.
If the expenses covered by this arrangement aren’t substantiated (or amounts in excess of substantiated expenses aren’t returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time.
A reasonable period of time depends on the facts and circumstances. Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they pay or incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. Alternatively, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days.
Nonaccountable plan.
Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. Your payments are treated as paid under a nonaccountable plan if:
Your employee isn’t required to or doesn’t substantiate timely those expenses to you with receipts or other documentation,
You advance an amount to your employee for business expenses and your employee isn’t required to or doesn’t return timely any amount they don’t use for business expenses,
You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or
You pay an amount as a reimbursement you would have otherwise paid as wages.
See section 7 for more information on supplemental wages.
Per diem or other fixed allowance.
You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. In these cases, your employee is considered to have accounted to you if your reimbursement doesn’t exceed rates established by the federal government. The standard mileage rate for auto expenses is provided in Pub. 15-B.
The government per diem rates for meals and lodging in the continental United States can be found by going to the U.S. General Services Administration website at GSA.gov/PerDiemRates . Other than the amount of these expenses, your employees’ business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). For information on substantiation methods, see Pub. 463, Travel, Gift, and Car Expenses.
If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Show the amount equal to the substantiated amount (that is, the nontaxable portion) in box 12 of Form W-2 using code “L.” Employers in Puerto Rico report the amount in box 12 (no code needed).
Wages not paid in money.
If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you’re said to pay them “in kind.” Payments in kind may be in the form of goods, lodging, food, clothing, or services. Generally, the FMV of such payments at the time they’re provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes.
However, noncash payments for household work, agricultural labor, and service not in the employer’s trade or business are exempt from social security, Medicare, and FUTA taxes. Withhold income tax on these payments only if you and the employee agree to do so. Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. See Noncash wages, including commodity wages, paid to farmworkers , earlier in this section, for more information.
Meals and lodging.
The value of meals isn’t taxable income and isn’t subject to federal income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer’s convenience and on the employer’s premises. The value of lodging isn’t subject to federal income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer’s convenience, on the employer’s premises, and as a condition of employment.
“For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. For example, meals you provide at the place of work so that an employee is available for emergencies during their lunch period are generally considered to be for your convenience. You must be able to show these emergency calls have occurred or can reasonably be expected to occur, and that the calls have resulted, or will result, in you calling on your employees to perform their jobs during their meal period.
Whether meals or lodging is provided for the convenience of the employer depends on all of the facts and circumstances. A written statement that the meals or lodging is for your convenience isn’t sufficient.
50% test.
If over 50% of the employees who are provided meals on an employer’s business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. If this 50% test is met, the value of the meals is excludable from income for all employees and isn’t subject to federal income tax withholding or employment taxes. For more information, see Pub. 15-B.
Health insurance plans.
If you pay the cost of an accident or health insurance plan for your employees, including an employee’s spouse and dependents, your payments aren’t wages and aren’t subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. Generally, this exclusion also applies to qualified long-term-care insurance contracts. However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the 2% shareholder’s wages. See Announcement 92-16 for more information. You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5.
Health savings accounts (HSAs) and medical savings accounts (MSAs).
Your contributions to an employee’s HSA or Archer MSA aren’t subject to social security, Medicare, or FUTA tax, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they’ll be excludable from the income of the employee. To the extent it isn’t reasonable to believe they’ll be excludable, your contributions are subject to these taxes. Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes, and federal income tax withholding. However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan aren’t wages and aren’t subject to employment taxes or withholding. For more information, see the Instructions for Form 8889.
Medical care reimbursements.
Generally, medical care reimbursements paid for an employee under an employer’s self-insured medical reimbursement plan aren’t wages and aren’t subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. See Pub. 15-B for a rule regarding inclusion of certain reimbursements in the gross income of highly compensated individuals.
Differential wage payments.
Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer.
Differential wage payments are wages for income tax withholding, but aren’t subject to social security, Medicare, or FUTA tax. Employers should report differential wage payments in box 1 of Form W-2 (box 7 of Form 499R-2/W-2PR). For more information about the tax treatment of differential wage payments, see Revenue Ruling 2009-11, 2009-18 I.R.B. 896, available at IRS.gov/irb/2009-18_IRB#RR-2009-11 .
Fringe benefits.
You must generally include fringe benefits in an employee’s wages (but see Nontaxable fringe benefits next). The benefits are subject to income tax withholding and employment taxes. Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. In general, the amount you must include is the amount by which the FMV of the benefit is more than the sum of what the employee paid for it plus any amount the law excludes. There are other special rules you and your employees may use to value certain fringe benefits. See Pub. 15-B for more information.
Nontaxable fringe benefits.
Some fringe benefits aren’t taxable (or are minimally taxable) if certain conditions are met. See Pub. 15-B for details. The following are some examples of nontaxable fringe benefits.
Services provided to your employees at no additional cost to you.
Qualified employee discounts.
Working condition fringes that are property or services that would be allowable as a business expense or depreciation expense deduction to the employee if they had paid for them. Examples include a company car for business use and subscriptions to business magazines.
Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals aren’t furnished at below cost).
Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking).
The use of on-premises athletic facilities operated by you if substantially all of the use is by employees, their spouses, and their dependent children.
Qualified tuition reduction an educational organization provides to its employees for education. For more information, see Pub. 970.
Employer-provided cell phones provided primarily for a noncompensatory business reason.
However, don’t exclude the following fringe benefits from the wages of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis.
No-additional-cost services.
Qualified employee discounts.
Meals provided at an employer-operated eating facility.
Reduced tuition for education.
When taxable fringe benefits are treated as paid.
You may choose to treat certain taxable noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose, as long as you treat the benefits as paid at least once a year. You don’t have to make a formal choice of payment dates or notify the IRS of the dates you choose. You don’t have to make this choice for all employees. You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. See section 4 of Pub. 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December.
Valuation of fringe benefits.
Generally, you must determine the value of fringe benefits no later than January 31 of the next year. Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time.
Withholding federal income tax on fringe benefits.
You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 22% supplemental wage rate. However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7.
You may choose not to withhold income tax on the value of an employee’s personal use of a vehicle you provide. You must, however, withhold social security and Medicare taxes on the use of the vehicle. See Pub. 15-B for more information on this election.
Withholding social security and Medicare taxes on fringe benefits.
You add the value of fringe benefits to regular wages for a payroll period and figure social security and Medicare taxes on the total.
If you withhold less than the required amount of social security and Medicare taxes from the employee in a calendar year but report and pay the proper amount, you may recover the taxes from the employee. See Pub. 15-B for more information.
Depositing taxes on fringe benefits.
Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period.
If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. See Valuation of fringe benefits , earlier in this section. If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit (FTD) penalty. See section 11 for information on deposit penalties.
If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income tax you deposited on their behalf and included in the employee’s Form W-2. However, you must recover the income tax before April 1 of the following year.
Back pay.
Back pay, including retroactive wage increases (but not amounts paid as liquidated damages), is taxed as ordinary wages in the year paid. For information on reporting back pay to the SSA, see Pub. 957.
Sick pay.
In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. These amounts are sometimes paid by a third party, such as an insurance company or an employees’ trust. In either case, these payments are subject to social security, Medicare, and FUTA taxes. These taxes don’t apply to sick pay paid more than 6 calendar months after the last calendar month in which the employee worked for the employer. The payments are always subject to federal income tax. See section 6 of Pub. 15-A for more information.
Overtime compensation.
The FLSA provides that employers must generally pay covered, nonexempt employees at least one-and-a-half times their regular rate of pay for hours worked over 40 hours per week. For more information about overtime compensation, go to dol.gov/agencies/whd/overtime .
Overtime compensation is subject to social security, Medicare, and FUTA taxes. Overtime is also subject to federal income tax withholding. However, for tax years beginning after 2024 and ending before 2029, P.L. 119-21 allows individuals (employees and other workers not treated as employees) to deduct up to $12,500 ($25,000 if married filing jointly) of qualified overtime compensation on their income tax returns. Qualified overtime is compensation that exceeds the regular rate of pay (such as the “half” portion of time-and-a-half compensation) that is required to be paid to an individual under section 7 of the FLSA of 1938. Employers must use an employee’s updated Form W-4, if one is submitted by the employee, and the federal income tax withholding procedures in Pub. 15-T to allow the employee to account for their expected deduction and receive more money in each paycheck instead of waiting until filing their income tax return to receive the full benefit of this deduction.
Identity protection services.
The value of identity protection services provided by an employer to an employee isn’t included in an employee’s gross income and doesn’t need to be reported on an information return (such as Form W-2) filed for an employee. This includes identity protection services provided before a data breach occurs. This exception doesn’t apply to cash received instead of identity protection services or to proceeds received under an identity theft insurance policy. For more information, see Announcement 2015-22, 2015-35 I.R.B. 288, available at IRS.gov/irb/2015-35_IRB#ANN-2015-22 ; and Announcement 2016-02, 2016-3 I.R.B. 283, available at IRS.gov/irb/2016-03_IRB#ANN-2016-02 .