Understanding the Tax Considerations of Military Differential Pay


With today's Guardsman and reservists being called upon more often to serve longer tours, the issue of military differential pay is often raised.

The following information if provided by the IRS about the taxability of differential pay.

Q: What is military differential pay?

A: Some employers voluntarily agree to continue paying full wages to their employees who are called to active duty. This is commonly referred to as differential pay. Differential pay is any payment made by an employer to an employee when they are performing active duty for more than 30 days. It represents all or a portion of the wages the individual would have received from the employer if the individual were employed as normal.

Q: If an employer pays military differential pay to an employee called to active duty, are these payments considered wages?

A: Yes, for income tax purposes.

Q: What is the tax treatment of military differential pay?

A: Differential pay is considered wages and should be reported in box 1 of Form W-2 as wages for income tax purposes. While it is considered taxable wages for income tax purposes, differential pay does not have social security or Medicare taxes (FICA) withheld.

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