As we turn the calendar to 2022, now is a good time for contractors to review their payroll procedures and ensure that they are properly calculating payroll for union employees under the applicable collective bargaining agreement (“CBA”). Provided below is a summary of the typical income tax treatment for many of the common payroll elements for FCA contractors, including: fringe benefits, union dues and vacation funds.
Of course, you will need to consult your CBA and relevant plan documents to ensure that you are handling these payments properly and, what’s more, it is advisable to consult with experienced labor counsel and your tax professional to ensure that you are handling your union payroll properly. There are some different rules applicable to certain payroll taxes like FICA that are not discussed in this article. For example, an employee’s non-Roth voluntary salary deferral under a 401(k) plan is still subject to FICA tax but is not subject to income tax.
Pre-Tax vs. Post-Tax Deductions
Before analyzing the typical payroll for a union contractor, it is important to remember the income tax difference between “pre-tax deductions” and “post-tax deductions.”
- Pre-tax deductions are taken from an employee’s paycheck before any income taxes are withheld. That is, the amounts are not included in the employee’s “gross wages.” Common pre-tax deductions include: payments for health insurance premiums, (non-Roth) retirement contributions, and any employee contributions to multiemployer employee benefit plans (e.g., health & welfare plan, pension plan, etc.).
- Post-tax deductions are taken from an employee’s paycheck after all required income and payroll taxes have been withheld. Post-tax deductions reduce “net pay,” rather than “gross wages.” Common examples include union dues, contributions to Roth IRA retirement plans, donations to charity and wage garnishments.
Typical Signatory Contractor Payroll
For signatory contractors, payroll for union employees is typically divided into two main categories: (1) hourly wages and (2) fringe benefit contributions.
Fringe benefit contributions include payments to third-party funds that are jointly managed by representatives from labor and management. These include: health and welfare funds, pension funds, apprenticeship funds, industry funds, etc. Because these fund contributions are made with “pre-tax” dollars, income taxes and withholdings are not applied to fringe benefit contributions. Instead, the contractor calculates these amounts based on the number of hours worked and then remits payments to the individual funds.
Hourly wages are those amounts paid to employees for all hours worked under the CBA. Unlike fringe benefits, these amounts are subject to employment taxes and withholdings (like wages paid to a contractor’s non-union employees). Before taxes and withholdings are calculated, contractors need to determine the employee’s “gross wages” for the given pay period. This may include overtime, premium pay, on-call time, and other pay under the CBA.
Gross wages also typically includes amounts paid to a “vacation fund” established by a CBA. Vacation funds are typically funded with “post-tax” dollars, so that when they are paid to members, no taxes are withheld. The amount paid to a vacation fund is typically based on hours worked (e.g., $.60 per hour). After calculating the employee’s “gross wages,” including any payment to the vacation fund, the contractor then applies the appropriate taxes and withholdings to calculate the employee’s “net pay.”
The employee’s “net pay” is then reduced by any “post-tax” deductions, including union dues, donations to charity, wage garnishments, etc. For example, if the CBA provides that union dues are calculated based on 3.5% of the employee’s “gross wages,” then the contractor should multiply 3.5% by the employee’s “gross wages” and then subtract that amount from the employee’s “net pay.”
With respect to union dues, in accordance with Section 302 of the Labor Management Relations Act, the contractor must ensure that it has a signed dues deduction authorization from each employee before reducing the employee’s pay and remitting the amount to the union.
Proper treatment of payroll for union employees is critical to ensuring compliance with your CBA, federal and state tax authorities and federal labor law. Be sure to review your CBA(s) and plan documents. When in doubt, be sure to consult with experienced labor counsel and your tax professional to ensure that you are handling your union payroll properly.