Rev. Rul. 69-587

Advice has been requested with respect to the proper year of accrual of taxes imposed on an employer by the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) on vested bonuses and vacation pay under the circumstances described below.

A taxpayer, using the accrual method of accounting, maintains a vested, but unfunded, bonus and vacation pay plan for its employees. The taxpayer accrues and deducts FICA and FUTA taxes that it believes would be due as a result of the plan in the year in which it becomes irrevocably liable to its employees for the underlying bonuses and vacation pay. The taxpayer makes the bonus payments and the employees take their vacations during the following year.

Section 461 of the Internal Revenue Code of 1954 provides, in general that, for Federal income tax purposes, the amount of any allowable deduction or credit shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.

Section 1.461-1(a)(2) of the Income Tax Regulations provides that, under an accrual method of accounting, an expense is deductible for the taxable year in which all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy.

In the instant case, the bonuses and vacation pay are wages for FICA and FUTA purposes. Sections 3121 and 3306 of the Code and sections 31.3121(a)-1 and 31.3306(b)-1 of the Employment Tax Regulations. The FICA employer tax attaches at the time wages are paid or constructively paid by the employer. Section 3111 of the Code and sections 31.3111-3 and 31.3121(a)-2 of the Employment Tax Regulations. The FUTA tax is imposed on every "employer" and is measured by the amount of wages paid by the employer during the calendar year. Section 3301 of the Code and sections 31.3301-1 and 31.3301-2 of the Employment Tax Regulations. Thus, it is not until the following year when the bonus and vacation payments are made that the fact of liability is established for FICA and FUTA taxes with respect to such bonuses and vacation pay.

Accordingly, in the instant case, the FICA and FUTA taxes attributable to the accrued bonuses and vacation pay are deductible only for the taxable year in which such bonuses and vacation amounts are actually paid. However, any change in the taxpayer's present method of accounting for FICA and FUTA taxes is a change in method of accounting under section 446 of the Code and the regulations thereunder.