Rev. Rul. 67-144

Advice has been requested whether, under the circumstances described below, payments made by a State welfare agency under its work relief program are includable in the gross income of the recipients for Federal income tax purposes and are `wages' subject to the withholding of income tax.

A State welfare agency adopted a work relief program whereby individuals on a welfare roll who are able to work are required to work on the public roads to repay the State for some of the allowance made to them for food, shelter, and sometimes clothing for themselves and their families. The services are performed under the immediate supervision of public road employees. However, the welfare agency makes the work assignments, determines the number of hours the individuals are to work, has full responsibility for them in case of injury, and makes the only payments they receive in connection with the work.

If an individual refuses an assignment, he must submit a medical report indicating he is unable to do the work. If the report is not submitted he receives no welfare payment for the scheduled time. The welfare agency schedules the maximum number of hours an individual can work each month and prescribes a fixed hourly rate. If, under prescribed standards, the welfare needs of the individual exceed payments to him for the maximum work hours scheduled, the welfare agency allows additional payments in cash or in kind, such as food and similar items, to make up the difference. A welfare recipient assigned to a work relief project receives no increase in the relief allowance he and his family are already receiving except in cases where he has transportation expenses to and from work. In those cases an increase in the number of hours is allowed in order to cover the cost of transportation. However, welfare payments continue if the recipient is unable to work, and they continue if no assignment is available.

Section 61(a)(1) of the Internal Revenue Code of 1954 provides that, except as otherwise provided, gross income means all income from whatever source derived, including compensation for services. However, disbursements from a general welfare fund in the interest of the general welfare which are not made for services rendered are not includable in gross income. See Rev. Rul. 63-136, C.B. 1963-2, 19, and rulings cited therein.

Accordingly, payments made to the welfare recipients in question by the State welfare agency under its work relief program equal to the number of hours actually worked times the applicable hourly rate are compensation for services rendered and are includable in gross income under section 61(a)(1) of the Code.

Furthermore, under section 3401(a) of the Code (ch. 24, subtitle C), the term `wages' means, with certain exceptions not here material, all remuneration for services performed by an employee for his employer. Since the payments equaling the number of hours worked times the applicable hourly rate represent remuneration for services performed by an employee for his employer, they are `wages' subject to the withholding of income tax under section 3402 of the Code.

However, payments in excess of the amount determined by reference to the hours worked times the hourly rate and payments to recipients who perform no work, including cash or the value of food or other items, are not includable in gross income and are not `wages' subject to the withholding of income tax since such payments are in the nature of welfare payments.