How will premium pay be taxed?

The Internal Revenue Service (“IRS”) released Frequently Asked Questions (“FAQ”) regarding the taxability and reporting of Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”).[1]

IRS guidance states that premium payments are considered wages and therefore workers “must include the [premium] payment in gross income as compensation for services.”[2] This is the case “whether an amount is paid to [a recipient] by [its] state/local government, or by [its] employer, a payment that is in the nature of compensation for services is not excludable as a qualified disaster relief payment under section 139 of the Code.”[3]

From an employer perspective, premium pay payments are considered wages and employers must generally withhold federal income tax as well as social security tax and Medicare tax from employees’ wages.[4] Employers may also have to pay federal unemployment tax on the wages.[5]

Last Revised: April 1, 2022