Rev. Rul. 72-268

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in Mim. 6028, C.B. 1946-2, 130; S.S.T. 393, C.B. 1940-1, 213; and I.T. 3742, C.B. 1945, 320.

The questions presented are whether amounts paid pursuant to the Fair Labor Standards Act of 1938, as amended, 29 U.S.C. 201-216, 217-219, and the Walsh-Healy Government Contracts Act, as amended, 41 U.S.C. 35-45, under the circumstances described below are "wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, subtitle C, Internal Revenue Code of 1954).

Situation 1. In compliance with section 16(b) of the Fair Labor Standards Act of 1938 (codified as 29 U.S.C. 216(b)) a company restored to its employees certain amounts of unpaid minimum wages and unpaid overtime compensation. Subsequent to such restoration the employees of the company filed claims for liquidated damages as provided for in section 16(b), supra, and various additional amounts were paid to the employees in satisfaction of such claims.

Sections 3121(a) and 3306(b) of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, respectively, define the term "wages", with certain exceptions not material here, as "all remuneration for employment". Section 3401(a) of the Code, relating to the withholding of income tax, contains a similar definition.

Accordingly, since the payments of unpaid minimum wages and unpaid overtime compensation were "remuneration for employment", it is held that the payments are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages, whether the amounts are paid as a result of a judgment of a court or in accordance with a stipulation or settlement reached by the parties involved. Since payments representing liquidated damages made by an employer to his employees pursuant to 29 U.S.C. 216(b) are not remuneration for employment, it is further held that they are not "wages" for Federal employment tax purposes, including income tax withholding. However, such amounts are income to the employees and must be included in their Federal income tax returns.

Situation 2. An employer makes payments of liquidated damages to the Treasurer of the United States for violation of the Walsh-Healy Government Contracts Act, supra, on account of unpaid minimum wages or unpaid overtime compensation. Such amounts are placed in a special deposit account at the United States Treasury for later distribution among the employees concerned. It is held, for the same reasons as set forth in Situation 1, above, that the payments representing liquidated damages made by the employer to the Treasurer of the United States are not "wages" for Federal employment tax purposes, including income tax withholding. If an amount in the special deposit account subsequently is paid to an individual by the Treasurer of the United States, such amount is income to him and must be included in his Federal income tax return. In addition, it is held that should the employer make payments of back pay directly to employees on account of unpaid minimum wages or unpaid overtime compensation as determined under the Walsh-Healy Act, supra, the payments are "wages" for Federal employment tax purposes, for the same reasons as set forth in Situation 1, above.

Mim. 6028, S.S.T. 393, and I.T. 3742, are hereby superseded, since the positions set forth therein are restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.