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Military Differential Pay

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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Earn free RCH Credits

Ascentis offers free Payroll Webinars that you will earn RCH credits for by attending. Most of them are taught by Vicki Lambert, CPP. I have found most of them to be quite helpful and informative. You can also watch old webinars On Demand at no charge, but those do not qualify for RCH credits. Here is the link:

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I didn't know this!!!

I was looking at the Circular E and found this little paragraph. From the Circular E: No federal income tax withholding on disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States. Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its al-lies) are not included in income. Because federal income tax withholding is only required when a payment is includable in income, no federal income tax should be withheld from these payments.

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