Overview: Employers that have employees called to active military service have the option of paying them so-called military differential pay, which is the difference between the employees' regular pay and any military pay the employees' receive. If an employee is called to active military service for more than 30 days, the military differential pay is subject to federal income tax (FIT) withholding, but not to Social Security and Medicare (FICA) or federal unemployment (FUTA) taxes. For FIT withholding, military differential pay is treated as supplemental wages because the work performed for those wages is not services for the civilian employer in the current payroll period.
Military differential pay paid to employees who are temporarily absent from work (i.e., up to 30 days) while serving in a state National Guard is subject to FIT and FICA tax withholding and FUTA.
Under the federal Military Spouses Residency Relief Act of 2009 (MSRRA), if a military service member moves to another state under military orders, the spouse of the service member retains his or her residency in the home state for tax purposes even if he or she moves to the other state to live with the service member. Thus, the employer of a military spouse who has moved to the employer's state to live with his or her service member spouse would not withhold that state's income tax from the wages earned in the state by the employee/military spouse. The employee is only liable for income taxes in his or her home state as a resident of that state.
Trends: Since the enactment of the MSRRA, many states have either revised their employee withholding allowance certificates (i.e., the state version of federal Form W-4) or created new forms to be used by such military spouses to claim exemption from state income tax withholding. Thus, to avoid unnecessary withholding, employers that employ military spouses should check the forms of the states in which they pay such employees to ensure those entitled to this exemption receive, complete and submit the correct form.
Author: Rena Pirsos, JD, Legal Editor
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An explanation of the taxation of military differential pay and military spouses.
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