Federal Withholding on Employee Fringe Benefits for Income and Social Security Taxes

The issue of employer withholding on fringe benefits was examined by the US Supreme Court in 2 recent cases: 1. Central Illinois Public Service Co. v. United States, which held that some taxable fringe benefits can be excluded from income tax withholding, and 2. Rowan Cos. v. United States, which held that some fringe benefits can be excluded from social security withholding. However, the Supreme Court has never pronounced an approach for determining which fringe benefits constitute wages in the many situations in which the convenience of the employer doctrine does not apply, so employers must often look to a large body of case law from the lower federal courts. The withholding statutes and the standards used by the Supreme Court and by the lower federal courts are analyzed as they relate to determining whether fringe benefits are subject to withholding. This analysis shows that the courts have not yet developed a workable standard in this area. In analyzing the Rowan decision and the legislative history of the Social Security Act, the Supreme Court misinterpreted legislative intent in reaching its conclusion that Congress intended for income tax doctrines such as the convenience of the employer rule to apply to social security withholding issues. An evaluation of the Court's decision in Central Illinois leads to a similar conclusion on the misinterpretation of legislative intent.