Military Leave and Differential Pay

We are a private company in Illinois that had an employee go out on military leave. Our policy is to pay the difference between what he receives from the military and what we would pay. I do not know what counts towards his earnings. On his military pay stub there are 3 items (bi-weekly):

Basic Pay 1400.00
Subsistence ALWS - 162.51
BAH - 783.00

Do all of the above count towards his earnings that should be offset by what we would have paid him? I have searched online but found only information for individuals working for the government.

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Differential Pay Accounting and Taxation
by: Best Business Payroll

Differential pay for Military Leave is addressed under the Family and Medical Leave Act (FMLA).

According to the FMLA, not all companies are required to provide pay to their employees who are deployed. The law states that public agencies, including state, local and federal employers, local educational agencies (schools), and private sector employers that employ 50 or more employees are required to provide pay for their employees.

In addition, to be eligible to take FMLA leave for any qualifying reason, an employee of a covered employer must have worked for the employer for a total of 12 months, have worked at least 1,250 hours over the previous 12 months, and work at a location where at least 50 employees are employed by the employer within 75 miles.

According to the IRS, although employers are not required to pay employees who are on military leave, those companies that do provide for continuing an employee's pay during periods of military service quite often pay only the difference between the employee's regular salary and military pay. In computing military pay, food and other allowances given to officers are usually excluded.

You stated, however, that it is your company's policy to provide differential pay. To do so you must do the following:

First, in order to calculate what part of your employee's pay is to be included, you must establish what the codes you mention on the pay stub refer to. Clearly the "Basic Pay" counts toward the total, but you will need to ascertain whether "Subsistence ALWS" refers to food, and what "BAH" stands for. If these are "food and other allowances" they would NOT count toward the total.

Second, You should consult Revenue Ruling 2009-11 to determine the proper way to apply taxes to your employee's differential pay.

The IRS has addressed the issue of the taxability of differential military pay in several revenue rulings. The various rulings addressed the application of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and income tax on employees and employers for wages paid with respect to employment.

Employers managing leave issues for employees in the military now have more definitive guidance from the Internal Revenue Service (IRS) on how to handle taxation of differential military pay. IRS Revenue Ruling 2009-11, issued in the early part of 2009, addresses tax credits and the tax treatment of differential pay for various types of military service.

Since we are not the IRS, we are hesitant to provide hard numbers for you here, but we hope this helps point you in the right direction to compute the appropriate tax and to provide the proper amount for the differential pay. Best of luck!

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