Revenue Ruling 71-43: Defining Payments as Taxable Wages
Understand how IRS Revenue Ruling 71-43 established key criteria for defining payments as wages based on the nature of the employer-employee relationship.
The Internal Revenue Service (IRS) issues Revenue Rulings to provide official interpretations of tax laws for specific factual situations, offering guidance to taxpayers and IRS personnel. While they do not have the same legal weight as Treasury Regulations or court decisions, they represent the official stance of the IRS. Revenue Ruling 71-43 is an interpretation addressing whether certain payments made within a professional sports context constitute taxable income.
The Factual Scenario of the Ruling
Revenue Ruling 71-43 involved a professional sports league where the commissioner established a special fund. The money for this fund was derived from the sale of broadcast rights for a championship game and was administered at the league level, not by an individual club. This arrangement created a layer of separation from the direct employer.
From this fund, payments were distributed to the players, coaches, and trainers of the clubs that participated in the championship. This structure raised questions about whether the payments were gifts, prizes, or compensation for services.
The IRS Conclusion and Rationale
The IRS concluded that the payments from the special fund were “wages.” This determination was based on the employer-employee relationship between the clubs and the players, coaches, and trainers, not the source of the funds.
The ruling reasoned that the payments were remuneration for services performed. The individuals received these amounts because of their employment and successful performance, which led to their participation in the championship. The league, in this context, was seen as a conduit for payments from the collective enterprise to the employees of the individual clubs.
Tax Implications of the Wage Classification
Classifying these payments as wages has tax consequences under the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and federal income tax withholding rules. The individual club, as the employer, must treat these distributions like regular salary payments. This means the club is responsible for withholding the employee’s share of FICA taxes, which fund Social Security and Medicare.
The club must also pay its employer portion of FICA taxes and is responsible for FUTA taxes on these amounts. FUTA is a federal tax that helps provide unemployment compensation. The club must also withhold federal income tax based on the employee’s Form W-4 information. For the employee, the full payment is included in their gross income and is subject to their applicable income tax rate.