by Roger A. Smith, CPP, Payroll Management Consultant
Constructive Receipt
Employees’ paychecks are mailed from the corporate office on Tuesday for a Thursday payday. Because of a disaster in the area no mail will be delivered until Saturday, when the employees are not at work. So the employees can get paid during this week, the employer wires cash wages to the employees which they receive on Friday. The checks arrive at the office on Saturday. The checks are shredded and the stubs given to the employees on Monday. When are the wages considered paid?¹
- Thursday
- Friday
- Saturday
- Monday
It always amazes me that as many as 40% of the candidates fail to get the correct answer to questions similar to this one on the CPP exam. Did you get the correct answer (b)?
What is constructive receipt? The term “constructive receipt” simply means the time when the employee first has access to the money. Or, as the IRS says, “Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it... Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.”² In the above example, it doesn’t matter when the employees should have been paid, or when they received their check stubs; the fact is they received the money on Friday, therefore they constructively received their wages on Friday. If the money had been direct deposited into the employees’ bank accounts on Thursday, they would have constructively received the money on Thursday, whether or not they actually withdrew any of the funds.
Why does it matter? The time when this becomes most critical is when the dates in question cover separate years. I received a check from a client on January 3, 2008. The check was dated December 21, 2007 and postmarked December 31, 2007. I constructively received the check in 2008, so, assuming I use the cash accounting method, the check represents 2008, not 2007, income to me.
It’s not only important to understand this concept if you’re studying for certification, but in some situations there is also an impact on employee and employer taxes. Here’s an example from The Payroll Source:
Employee Maureen is scheduled to receive her last paycheck of 2007 on Friday, December 28. Her biweekly wages are $4,000, and she has been paid $100,000, which exceeds the social security wage base for 2007 ($97,500). Because of system problems, Maureen’s employer is unable to issue paychecks until January 2, 2008, although they are dated December 28, 2007. Maureen is not constructively paid her wages for withholding tax purposes until 2008, when her previous earnings for the year are zero.
Therefore, the entire $4,000 wage payment is subject to social security tax at the 2008 rate of 6.2% ($4,000 x .062 = $248), an amount her employer must match... If Maureen had received her paycheck on December 28, her wages would not have been subject to social security tax withholding or matching by the employer. The entire payment is also subject to Medicare tax regardless of when it is received since there is no Medicare wage base in 2007 or 2008.³
It’s a fairly simple concept, but one that payroll professionals need to keep in mind.
American Payroll Association's Best Practices Conference. Attention Payroll directors and managers, accounting managers, compliance officers, controllers, CFOs, corporate treasurers, and HR directors and managers. The APA’s Best Practices conference is coming up on August 13-15, 2008. The agenda includes outstanding general session and workshop speakers, results of APA’s Best Practices survey, and the annual PRISM awards presented to payroll departments leading the payroll industry in technology, management, processes, and overall best practices. The conference will be held at the brand new, beautiful Gaylord National Resort and Convention Center which covers 41.7 acres along the banks of the Potomac River in Prince George's County, Maryland. Conference information and online registration are available at http://www.americanpayroll.org/course-conf/conferences/. WorkForce Software will be there, and so will I. Hope to see you there, too!
As always, if you have any questions or comments, my email address is Roger.Smith@PayrollProf.com.
