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Military Differential Pay

Posted by Kathy Davey on Apr. 28, 2015  /  Subscribe 0

I am looking for any insight anyone may have on this subject. We have an employee that will be leaving for Kuwait at the end of May for 6-9 months. He works out of one of our Illinois offices. I’ve searched the Payroll Source, Illinois and IRS websites to make sure we handle this pay correctly, tax-wise, etc. This is what I am finding about how to handle differential pay from a payroll/tax standpoint: •Private employers may voluntarily offer differential pay for employees on active duty for more than 30 days. •Differential pay can represent all or a portion of the wages that an individual would have received if they were performing services for the employer •Public employers ARE required to offer differential pay (Military Leave of Absence Act) •Beginning in 2009 differential pay is subject to federal income tax withholding, but not subject to FICA or FUTA (IRS Bulletin 2009-18)- for "extended" leave. •Illinois State income tax and unemployment tax withholding: I could not find anything on the Illinois website to indicate differential pay was excluded from state taxes. We will be paying the employee a portion of the difference between his normal base salary with our company and his military base pay for 6 months of his duty. Currently we have paid him his normal salary when he goes for his two-week annual training and we have taxed it as we would his normal pay. From what I have found this is the correct way to handle his temporary absences. If anyone from our chapter has had experience with this topic, I'd love to hear how you handle it. Thanks! Kathy D

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