Washington Tax Alert March 12, 2008 (accrual of payroll taxes)

Washington Tax Alert from Don Barnes, [email protected]
March 12, 2008

The Service issued a revenue procedure yesterday that permits accrual method taxpayers using the recurring item exception to make an automatic change in accounting method to accrue payroll (FICA and FUTA) taxes with respect to compensation accrued at the end of the tax year. See Rev. Proc. 2008-25. Compensation accrued at the end of the year may include bonuses and vested vacation pay. The change in method of accounting for payroll taxes may be made on the taxpayer’s tax return for 2007 notwithstanding any scope limitations in Rev. Proc. 2002-9 that might otherwise preclude the taxpayer from making an automatic accounting method change.

Under the new revenue procedure, a taxpayer can accrue payroll taxes on compensation that is fixed and reasonably determinable as of the end of the year, even though the compensation may not be paid within 2-1/2 months after year end, and the taxpayer does not know as of the end of the year the amount of payroll taxes that will be actually incurred because of the application of payroll tax ceilings.