Questions and answers on combat zone tax provisions
Internal Revenue Service
Internal Revenue Service
These items offer guidance on the tax relief provided for U.S. military and support personnel involved in military operations in a combat zone.
Civilian taxpayers covered by the relief provisions described here should put the words "COMBAT ZONE" and their deployment date in red at the top of their tax returns. Members of the military do not need to write "COMBAT ZONE" and their deployment date on the tops of their tax returns because the U.S. Department of Defense informs the IRS about members in the combat zone.
Covered civilian taxpayers who receive a notice from the IRS regarding a collection or examination matter should return the notice to the IRS with the words "COMBAT ZONE" and the deployment date in red at the top of the notice and put "COMBAT ZONE" on the envelope so the IRS can suspend the action. Taxpayers may prevent issuance of such notices by notifying the IRS that they are working in a combat zone.
Q-1: What geographic areas are considered combat zones?
A-1: Combat zones are designated by an Executive Order from the President as areas in which the U.S. Armed Forces are engaging or have engaged in combat. There are currently three such combat zones (including the airspace above each):
Arabian Peninsula Areas, beginning Jan. 17, 1991 -- the Persian Gulf, Red Sea, Gulf of Oman, the part of the Arabian Sea north of 10° North latitude and west of 68° East longitude, the Gulf of Aden, and the countries of Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
Kosovo area, beginning Mar. 24, 1999 -- Federal Republic of Yugoslavia (Serbia and Montenegro), Albania, the Adriatic Sea and the Ionian Sea north of the 39th Parallel.
- Afghanistan, beginning Sept. 19, 2001.
Public Law 104-117 designates three parts of the former Yugoslavia as a Qualified Hazardous Duty Area, to be treated as if it were a combat zone, beginning Nov. 21, 1995 -- Bosnia and Herzegovina, Croatia, and Macedonia.
In addition, the Department of Defense has certified these locations for combat zone tax benefits due to their direct support of military operations, beginning on the listed dates:
In support of Operation Enduring Freedom (Afghanistan combat zone):
- Pakistan, Tajikistan and Jordan - Sept. 19, 2001
- Incirlik Air Base, Turkey - Sept. 21, 2001 through Dec. 31, 2005
- Kyrgyzstan and Uzbekistan - Oct. 1, 2001
- Philippines (only troops with orders referencing Operation Enduring Freedom) - Jan. 9, 2002
- Yemen - Apr. 10, 2002
- Djibouti - July 1, 2002
- Israel - Jan. 1 through July 31, 2003
- Somalia - Jan. 1, 2004
In support of Operation Iraqi Freedom (Arabian Peninsula Areas combat zone):
- Turkey - Jan. 1, 2003 through Dec. 31, 2005
- the Mediterranean Sea east of 30° East longitude - Mar. 19 through July 31, 2003
- Jordan - Mar. 19, 2003
- Egypt - Mar. 19 through Apr. 20, 2003
Section last reviewed or updated: 01-Aug-2012
Q-2: I am a member of the U.S. Armed Forces performing services in a combat zone. Is any part of my military pay for serving in this area excluded from gross income?
A-2: Yes, if you serve in a combat zone as an enlisted person or as a warrant officer (including commissioned warrant officers) for any part of a month, all your military pay received for military service that month is excluded from gross income. For commissioned officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.
For 2002, the most an officer could earn tax-free each month was $5,532.90 ($5,382.90, the highest monthly enlisted pay, plus $150 hostile fire or imminent danger pay). The Emergency Wartime Supplemental Appropriations Act of 2003 (P.L. 108-11) raised the imminent danger pay to $225 per month through September 2003. The 2004 National Defense Authorization Act extended this higher rate through December 2004. For 2003, the monthly combat pay exclusion for officers totals $5,957.70. For 2004, it totals $6,315.90. Amounts excluded from gross income are not subject to federal income tax.
Q-3: My husband and I are both enlisted personnel serving in the U.S. Armed Forces in the combat zone. Are we each entitled to the income tax exclusion for military pay?
A-3: Yes, each of you qualifies for the income tax exclusion for your respective military pay.
Q-4: I am a member of the U.S. Armed Forces stationed on a ship outside any combat zone. I fly missions over a combat zone as part of the military operations in that combat zone. Is any part of my military pay excluded from gross income?
A-4: Yes. The combat zone includes the airspace over it, so you are serving in the combat zone. See Q&A-2 above for a discussion of the amount of your military pay that is excluded.
Q-5: If I am injured and hospitalized while serving in the U.S. Armed Forces in a combat zone, is any of my military pay excluded from gross income?
A-5: Yes. Military pay received by enlisted personnel who are hospitalized as a result of injuries sustained while serving in a combat zone is excluded from gross income for the period of hospitalization, subject to the 2-year limitation provided below. Commissioned officers have a similar exclusion, limited to the maximum enlisted pay amount per month. (See Q&A-2 above.) These exclusions from gross income for hospitalized enlisted personnel and commissioned officers end 2 years after the date of termination of the combat zone.
Q-6: My wife is currently serving in the U.S. Armed Forces in a combat zone and will be eligible for discharge when she returns home. If she is discharged upon her return, will the payment for the annual leave that she accrued during her service in the combat zone be excluded from gross income?
A-6: Yes. Annual leave payments to enlisted members of the U.S. Armed Forces upon discharge from service are excluded from gross income to the extent the annual leave was accrued during any month in any part of which the member served in a combat zone. If your wife is a commissioned officer, a portion of the annual leave payment she receives for leave accrued during any month in any part of which she served in a combat zone may be excluded. The annual leave payment is not excludable to the extent it exceeds the maximum enlisted pay amount (see Q&A-2 above) for the month of service to which it relates less the amount of military pay already excluded for that month.
Q-7: I am an enlisted person serving in a combat zone. If I reenlist early while I am in the combat zone and receive my reenlistment bonus several months later when I am stationed outside the combat zone, is any part of my reenlistment bonus excluded from gross income?
A-7: Yes. The reenlistment bonus is excluded from gross income although received in a month that you were outside the combat zone, because you completed the necessary action for entitlement to the reenlistment bonus in a month during which you served in the combat zone.
Q-8: My brother, who is a civilian in the merchant marine, is on a ship that transports military supplies between the United States and the combat zone. Is he entitled to the combat zone military pay exclusion?
A-8: No. Those serving in the merchant marine are not members of the U.S. Armed Forces. The combat zone military pay exclusion applies only to members of the U.S. Armed Forces. Neither federal civilian employees nor civilian defense contractors deployed with U.S. forces qualify for an exclusion of income earned while working in a combat zone or qualified hazardous duty area. They may, however, qualify for an extension of deadlines to file and pay taxes.
The U.S. Armed Forces include all regular and reserve components of the uniformed services that are under the control of the Secretaries of Defense, Army, Navy, and Air Force, and the Secretary of Homeland Security with respect to the Coast Guard.
Q-9: My husband is serving in the Armed Forces outside a combat zone. Is any part of his military pay excluded from gross income?
A-9: Payment for service outside a designated combat zone is not excluded from income unless the pay is hostile fire/imminent danger pay for serving an area in direct support of military operations in the combat zone. The Department of Defense certifies areas that meet these requirements.
Hostile fire/imminent danger pay received for service in a non-certified area is taxable. Generally, hostile fire/imminent danger pay is included on Forms W-2 for persons who do not qualify for the exclusion and not included on Forms W-2 for persons who do qualify for the exclusion.
Q-10: How do I certify my entitlement to the military pay exclusion?
A-10: Your service branch must certify your entitlement on the Form W-2 it provides you. If you believe you are entitled to the exclusion, but it is not reflected on your Form W-2, ask your service branch to issue a corrected Form W-2.
For more details on the exclusion of military pay, see the Armed Forces Tax Guide.
Section last reviewed or updated: 01-Aug-2012
Q-11: I have been serving in a combat zone since last November. I understand that the deadline for performing certain actions required by the tax laws is extended as a result of my service. When did these deadline extensions begin for me?
A-11: The deadline extension provisions apply to most tax actions required to be performed on or after the beginning date for your combat zone, or the date you began serving in that combat zone, whichever is later. In your case, the deadline extensions began the day you started serving in the combat zone last November.
Q-12: My son is a member of the U.S. Armed Forces who has been serving in a combat zone since March 1. Is he entitled to an extension of time for filing and paying his federal income taxes? Are any assessment or collection deadlines extended?
A-12: For both questions, the answer is yes. In general, the deadlines for performing certain actions applicable to his taxes are extended for the period of his service in the combat zone, plus 180 days after his last day in the combat zone. This extension applies to the filing and paying of your son's income taxes that would have been due April 15. In addition to the 180 days, his extension period will include the 46 days that were left before the April 15th deadline when he entered the combat zone. During his 226-day extension period, assessment and collection deadlines will be extended, and he will not be charged interest or penalties attributable to the extension period.
Q-13: Assuming the same facts as in question 12, does the extension for filing and paying his individual income taxes apply to unearned income from my son’s investments?
A-13: Yes. The extensions apply without regard to the source of your son's income.
Q-14: Assuming the same facts as in question 12, will the deadline extension provisions continue to apply if my son is hospitalized as a result of an injury sustained in the combat zone?
A-14: Yes. The deadline extension provisions will apply for the period that your son is continuously hospitalized outside of the United States as a result of injuries sustained while serving in a combat zone, including 180 days thereafter. For hospitalization inside the United States, the extension period cannot be more than 5 years.
Q-15: My son is a member of a unit of the U.S. Armed Forces and most members of the unit have been serving in a combat zone since April 1. My son has been overseas since February 1, but he did not enter the combat zone until May 1. Is he entitled to an extension of time for filing and paying his federal income taxes that were due April 15?
A-15: No. The extension applies only to a deadline arising on or after the date your son entered the combat zone on May 1.
Q-16: Do the deadline extension provisions apply only to members of the U.S. Armed Forces serving in the combat zone?
A-16: No. Unlike the combat zone military pay exclusion, the deadline extensions also apply to individuals serving in the combat zone in support of the U.S. Armed Forces, such as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces.
Q-17: Do the deadline extensions apply only to those within a combat zone?
A-17: No. Members of the U.S. Armed Forces who perform military service in an area outside a combat zone qualify for the suspension of time provisions if their service is in direct support of military operations in the combat zone, and they receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense. Q&A-1 lists various combat zones and the support areas certified by the Department of Defense. The Military Family Tax Relief Act of 2003 further applied the deadline extension provisions to those serving in a Contingency Operation, as designated by the Secretary of Defense.
Q-18: My son is a civilian explosive specialist who is in a combat zone training U.S. Armed Forces personnel serving in a combat zone. Do the deadline extension provisions apply to my son?
A-18: Yes. The deadline extension provisions apply to your son because he is serving in a combat zone in support of the U.S. Armed Forces.
Q-19: My husband is a private businessman working in a combat zone on nonmilitary projects. Do the deadline extension provisions apply to my husband?
A-19: No. Other than military personnel, the only individuals working in a combat zone that are entitled to the deadline extension provisions are those serving in support of the U.S. Armed Forces.
Q-20: I am a member of the U.S. Armed Forces serving in a combat zone. Do the deadline extension provisions apply to my husband who is in the United States?
A-20: Yes. The deadline extension provisions apply not only to members serving in the U.S. Armed Forces (or individuals serving in support thereof) in the combat zone, but to their spouses as well, with two exceptions. First, if you are hospitalized in the United States as a result of injuries received while serving in a combat zone, the deadline extension provisions would not apply to your husband. Second, the deadline extension provisions for your husband do not apply for any tax year beginning more than 2 years after the date of the termination of the combat zone designation.
Q-21: Assuming the same facts as in question 20, will my husband have to file a joint tax return in order to benefit from the deadline extension provisions?
A-21: No. The deadline extension provisions apply to both spouses whether joint or separate returns are filed. If your husband chooses to file a separate return, he will have the same extension of time to file and pay his taxes that you have.
Q-22: My husband is serving in the U.S. Armed Forces in a combat zone. Last year, our son, who is 12 years old, received interest income on which he owes tax because the amount exceeded his standard deduction. Our daughter, who is 17 years old, received both investment income and earned income from a part-time job. She is entitled to a refund of part of the tax withheld from her pay. We claim both children as dependents on our federal individual income tax return. Must I file individual income tax returns for our children while my husband is in the combat zone?
A-22: No. Filing individual income tax returns for your dependent children is not required while your husband is in the combat zone. Instead, these returns will be timely if filed on or before the deadline for filing your joint income tax return under the applicable deadline extensions. When filing your children’s individual income tax returns, put "COMBAT ZONE" in red at the top of those returns. Because your older child is entitled to a refund, she may want to file her income tax return and obtain her refund without regard to the extension.
Q-23: I am a member of the U.S. Armed Forces serving in a combat zone. My spouse and our three children live in our home in the United States. During the year, a child care provider took care of our children in our home. We are required to file a Schedule H, Household Employment Taxes, as an attachment to our joint income tax return to report the employment taxes on wages we paid to our child care provider. Does the deadline extension apply to the filing of Schedule H as an attachment to our income tax return?
A-23: Yes. The deadline extension applies to all schedules and forms that are filed as attachments to an income tax return.
Q-24: Almost two years ago, the IRS contacted me to collect tax on a joint income tax return I had filed with my now former spouse. I believe only my former spouse should be held liable for the tax. I understand that I may file Form 8857, Request for Innocent Spouse Relief, within 2 years of the first collection activity against me by the IRS. I have just entered a combat zone. Do the deadline extensions apply to the filing of Form 8857?
A-24: Yes. In addition to deadlines for filing and paying taxes, there are various time-sensitive acts for which performance may be postponed because of combat zone service. The 2-year period after the first collection activity for requesting innocent spouse relief is one of these. Other examples are the 90-day limit for filing a Tax Court petition, the 30-day limit for requesting a Collection Due Process hearing, the 60-day period for rolling over a distribution from a qualified tuition plan or Coverdell Education Savings Account into another such plan or ESA, respectively, and the annual distribution from a retirement plan of substantially equal amounts to avoid an excise tax for premature distributions.
Q-25: I served in the U.S. Armed Forces in Afghanistan from April 1, 2002, until August 31, 2002. I was reassigned to the Arabian Peninsula Areas on March 5, 2003. I understand that I was entitled to an extension of time for filing and paying my 2001 income taxes of 195 days (180 days plus the 15-day period that was left before the April 15, 2002 deadline). This extension period would have expired on March 14, 2003 -- 195 days from September 1, 2002 (my first day out of the combat zone in Afghanistan). What effect does my reentry into a combat zone have on my extension for filing and paying my 2001 income taxes?
A-25: Because the extension period had not expired for your 2001 individual income tax return before you reentered a combat zone, a new 180-day period will begin after you leave a combat zone for the second time. In addition, any time that remained in the 15-day period when you entered the Arabian Peninsula Areas adds to the new 180-day period when you leave the Arabian Peninsula Areas. In determining how much of the 15-day period is unused, treat the 180-day period as being used first. In your case, on March 5, 2003, 10 of the 15 days remained. After you leave the Arabian Peninsula Areas, you will have a 190-day extension period for filing and paying your 2001 income taxes. You will have a 222-day period (180 days plus the 42 days that remained before April 15, 2003) to file and pay your 2002 taxes.
Q-26: My wife is a member of the U.S. Armed Forces serving in a combat zone. Can she make a timely qualified retirement contribution for last year to her individual retirement account (IRA) after April 15 this year but on or before the due date of her individual income tax return after applying the deadline extension provisions?
A-26: Yes. Your wife can make a timely qualified retirement contribution for the year to her IRA on or before the extended deadline for filing her income tax return for that year under the extension provisions.
Q-27: My brother, who began serving in the U.S. Armed Forces in a combat zone in early January, did not make his fourth estimated tax payment for the year, due January 15. Will he be liable for estimated tax penalties?
A-27: No. Your brother is covered by the deadline extension rules and will not be liable for any penalties if he files and pays any tax due by his extended filing due date.
Q-28: My son, who is a member of the U.S. Armed Forces, was on an installment payment plan with the IRS for back income taxes before he was assigned to a combat zone. What should be done now that he is in the combat zone?
A-28: The IRS office where your son was making payments should be contacted. Because your son is serving in a combat zone, he will not have to make payments on his past due taxes for his period of service in the combat zone plus 180 days. No additional penalties or interest will be charged during this deadline extension period.
Q-29: My son, who is a member of the U.S. Armed Forces serving in a combat zone, will file his individual income tax return for last year after the regular April 15 due date, but on or before the end of the deadline extension for filing that return. He expects to receive a refund. Will the IRS pay interest on the refund?
A-29: Yes. The IRS will pay interest from the April 15 due date on a refund issued to your son if he files his individual income tax return on or before the due date of that return after applying the deadline extension provisions. If his return is not timely filed on or before the extended due date, no interest will be paid on the refund except as provided under the normal refund rules. Even though the deadline is extended, your son may file a return earlier to receive any refund due.
Q-30: Do the deadline extension provisions apply to tax returns other than the individual income tax return?
A-30: Yes. The deadline postponement provision also applies to estate, gift, employment, and excise tax returns. However, the provision only applies to employment and excise tax returns of individual, sole-proprietors (generally Schedule C filers) in a combat zone. The provision does not apply to other tax and information returns, such as those for corporate income taxes, or to employment or excise taxes of an entity, such as an S Corporation or Limited Liability Company (LLC) where the owner or main person is in the combat zone.
Q-31: My husband and I are civilian employees of defense contractors. I work in the United States and my husband temporarily works in Germany. Our jobs involve the production of equipment used by the U.S. Armed Forces for a combat zone operation. Do the deadline extension provisions apply to either of us?
A-31: No. The deadline extension provisions do not apply to civilian employees of defense contractors unless they are serving in a combat zone in support of the U.S. Armed Forces.
For more details on deadline extensions related to military service, see the Armed Forces Tax Guide.
Section last reviewed or updated: 2012-08-01
Q-32: My daughter is a member of the U.S. Armed Forces and served in a combat zone in 2005. She made calls to me here in the United States. Were those calls exempt from the federal excise tax on toll telephone service?
A-32: Yes. Telephone calls that originated within a combat zone and that were made by members of the U.S. Armed Forces serving were exempt from the federal excise tax on toll telephone service, provided a properly executed certificate of exemption was furnished to the telephone service provider receiving payment for the call.
If you did not have a certificate of exemption, your daughter can request a refund on an amended 2006 federal income tax return. There is a line for claiming the telephone excise tax refund.
In May 2006, the IRS announced that it would no longer collect the federal excise tax on toll telephone service or bundled service. Further, the IRS announced that it would refund the federal excise tax paid on toll telephone service or bundled service to taxpayers who requested the refund on their 2006 income tax return. More information on the telephone excise tax refund is available.
Q-33: How will my military pay for active service in the U.S. Armed Forces in a combat zone appear on my Form W-2, Wage and Tax Statement?
A-33: Military pay attributable to your active service in the combat zone that is excluded from gross income will not appear on your Form W-2 in the box marked "Wages, tips, other compensation." However, military pay for such service is subject to social security and medicare taxes and will appear on your Form W-2 in the boxes marked "Social security wages" and "Medicare wages and tips." If you believe you are entitled to the military pay exclusion, but it is not reflected on your W-2, ask your service branch to issue a corrected Form W-2.
Q-34: I am serving in a combat zone, and all of my pay for the year is tax-free. Can I put money into an IRA?
A-34: Yes. A recent law change makes it possible for members of the military to count tax-free combat pay when figuring how much they can contribute to a Roth or traditional IRA. Before this change, members of the military whose earnings came from tax-free combat pay were often barred from putting money into an IRA, because taxpayers usually must have taxable earned income.
The IRA contribution limit for 2006 is $4,000 for those under age 50 and $5,000 for those 50 and over.
Taxpayers choosing to put money into a Roth IRA don’t need to report these contributions on their individual tax return. Roth contributions are not deductible, but distributions, usually after retirement, are normally tax-free. Income limits and other special rules apply.
On the other hand, contributions to a traditional IRA are often, though not always, deductible, and distributions are generally taxable. Deductible or not, contributions to a traditional IRA must be reported on the return for the year made. Deductible contributions are claimed on Form 1040, 1040A or 1040NR. Nondeductible contributions are reported on Form 8606, which is normally attached to one of these individual return Forms.
For more information about Roth and traditional IRAs, see Publication 590, Individual Retirement Arrangements.
Q-35: I have been serving in a combat zone, and all of my earnings have been tax-free. Can I go back and put money into an IRA for any earlier years?
A-35: Yes. Under a special rule, members of the military who received tax-free combat pay in 2004 and 2005 can go back and make IRA contributions for those years. Eligible military members will have extra time, until May 28, 2009, to make these special back-year contributions.
For those under the age of 50, the IRA contribution limit was $3,000 for 2004 and $4,000 for 2005. For those 50 and over, the limit was $3,500 for 2004 and $4,500 for 2005.
If a return has already been filed for a particular year, contributions should be reported on an amended return, Form 1040X. Depending upon the circumstances, military personnel who choose to put money into a traditional IRA for 2004 or 2005 may qualify for additional tax refunds.
For more details on tax issues related to military service, see the Armed Forces Tax Guide.
Section last reviewed or updated: 01-Aug-2012
Military Differential Pay
Note: Rules for reporting military differential pay changed Jan. 1, 2009. The answers below reflect the current information. For information on reporting military differential pay before 2009, see Publication 15 for the appropriate year.
Q-36: What is military differential pay?
A-36: Some employers voluntarily agree to continue paying full wages to their employees who are called to active duty. This is commonly referred to as differential pay. Differential pay is any payment made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represents all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer.
Q-37: If an employer pays military differential pay to an employee called to active duty, are these payments considered wages?
A-37: Yes, for income tax purposes.
Q-38: What is the tax treatment of military differential pay?
A-38: Beginning in 2009, military differential pay is wages and should be reported in box 1 of Form W-2 as wages for income tax purposes. Military differential pay is includible as wages for income tax purposes on Form W-2, but is excludable from social security and Medicare taxes (FICA).
Certain compensation paid by state or local government that is received for active service in a combat zone by members of the Armed Forces of the United States is excludable from gross income. Combat zone pay is not military differential pay.
Q-39: If an employee is called to active duty and receives military differential pay, how are these payments reported by the employer to the employee?
A-39: Employers should report military differential pay as wages in box 1 of Form W-2. These amounts are subject to withholding for income tax and should be reported on Form 941.
Q-40: How does a person who receives military differential pay report this on the federal income tax return?
A-40: These amounts are included in wages on Line 7 of Form 1040.
Social Security Taxes (FICA)
Q-41: Are there any benefit reductions due to FICA not being withheld by the employer?
A-41: Military personnel have FICA taken out of their military pay even when serving in a combat zone. Thus, they will get Social Security credit for their military earnings. However, Social Security retirement benefits are based on a worker’s total earnings history. Since the military differential pay is not subject to FICA, the person’s Social Security retirement benefits may be reduced.
Q-42: How does an employer correct the Form 941 (Quarterly Employment Tax Return) if FICA and income taxes have been erroneously withheld?
A-42: File a separate Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return, for each Form 941 that needs to be corrected. If you reported too much FICA or income tax, you can use this form to either make an interest-free adjustment or file a claim for refund or abatement. You must provide background information and certifications supporting any prior quarter adjustments. Form 941-X can also be used to correct underreported tax and, if done properly, is generally interest-free and penalty-free. See Form 941-X and its instructions for details.
Q-43: How does an employee recover FICA taxes that were erroneously withheld by the employer?
A-43: Employees are encouraged to contact their employers and request that they seek a refund of the erroneously withheld FICA on the employees' behalf. Because employers also pay a portion of FICA that is not withheld from payments to the employee, the employer will also be entitled to a refund. The employer may have other similarly situated employees who are entitled to refunds and the IRS can process a single refund claim filed by the employer more efficiently than it can process numerous refund claims filed by individual employees. If the employer refuses to seek a refund on the employee's behalf, the employee may file a refund claim using Form 843. Line 5 is where the employee explains the reaseon for the refund and efforts made to secure it. The employee's claim for refund must include a statement from the employer indicating whether the employer has reimbursed any of the erroneously withheld FICA to the employee or filed a refund claim for any of the erroneously withheld FICA.
Q-44: What is the tax treatment of health care benefits and coverage while the employee is on active military duty?
A-44: Generally, the gross income of an employee does not include employer-provided coverage under an accident or health plan or employer contributions to such plans. This exclusion from gross income extends to employees who are on military leave. The value of employer-provided coverage, or employer contributions to accident or health plans, are not reported on the Form 1099-MISC given to the employee.
Q-45: Is the cost of group term life insurance included in gross income while the employee is on military pay?
A-45: The tax treatment of group term life insurance coverage provided to employees on military leave is the same as coverage provided to current employees. Generally, the cost of $50,000 of group term life insurance coverage is not included in gross income while the employee is on military leave.
Q-46: If an employer pays an employee who is called to active duty his vacation pay is this pay subject to social security, Medicare and income taxes?
A-46: Yes, vacation pay that is earned or accrued prior to the worker being called for active duty or active service is subject to withholding as if it were a regular wage payment, even if paid to the worker after activation. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. Vacation pay that is earned or accrues after the employment relationship is terminated by activation is not a wage payment.
Q-47: If a co-worker wants to donate vacation time to an employee who is called to active duty to whom is such leave taxable?
A-47: The donated vacation time is taxable to the recipient of the vacation time. As a result, the employee on active duty receiving donated vacation pay is subject to withholding of social security, Medicare and income taxes as if it were a regular wage payment. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it.
Q-48: An employee received an award from the employer and wishes to donate it to a co-worker who has been called to active duty. To whom is the award taxable?
A-48: The award is taxable to the recipient. The recipient’s award is subject to withholding of social security, Medicare and income taxes as if it were a regular wage payment. When an award is in addition to regular wages, treat it as a supplemental wage payment.
Reference for questions 44-48: Publication 15, Employer’s Tax Guide (PDF 344K)