FSLG
2008-12-28

The Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act) made significant changes to the treatment of military differential pay and combat zone bonus pay. This will change the way employers report these payments beginning in 2009.

Military Differential Pay

Differential pay is defined as any payment made by an employer to an individual during the period during which the individual is called to active duty in the uniformed services for a period of more than 30 days, and represents part or all of the wages the individual would have received from the employer if the individual were performing service for the employer. Prior to the Heroes Act, military differential pay was not treated as wages and qualified plans were not required to treat differential pay as compensation for purposes of the limitations on benefits and contributions. Employers previously reported military differential payments in box 3 of Form 1099-MISC. However, the Heroes Act redefines military differential pay as wages for all payments made after December 31, 2008.

Changes in Information Return Reporting and Withholding

The Heroes Act includes changes in reporting requirements for military differential pay and tax treatment of bonuses paid the military personnel in a combat zone. Section 105 of the Heroes Act amends section 3401of the Code to make military differential payments subject to income tax withholding. Section 3401(h)(2) has been added to include the definition of differential wage payments.

Military differential pay is subject to Federal income tax withholding for all amounts paid after December 31, 2008. These payments should be reported in Box 1 of Form W-2. However, these payments will not be subject to social security or Medicare withholding, and are not entered in box 3 or box 5. These payments are also defined as compensation for retirement plan purposes.

Combat Zone Bonus Pay

Under the Heroes Act any bonus payments paid by a state or local government to active or former military personnel for service in a combat zone payments made before, on, or after June 17, 2008. will be excluded from the recipient’s gross income. Bonus payments are distinguished from military differential payments and are not included in income reported on Forms W-2. The bonus payments are defined in Section 112 of the Heroes Act as payments made "by a State or political subdivision to any member or former member of the uniformed services of the United States or any dependent of such member only by reason of such member's service in a combat zone."

Visit the FSLG website at www.irs.gov or contact your local FSLG Specialist if you have questions about these provisions.

Sign Up for our monthly Newsletter to receive more Military Family News. View our archived newsletters to see examples.