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Frequently Asked Questions Pay & Leave

What are the obligations of an agency that requires employees to pay the agency an amount equal to employment tax withholding before the agency repays a student loan?

An agency is obligated to pay amounts required to be withheld from an employee's wages even if those amounts are not actually withheld. Federal tax law requires agencies, like other employers, to withhold employment taxes from employees' wages. The repayment of student loans, however, may be subject to such terms, limitations, or conditions as the agency and the employee may mutually agree. Consequently, an agency's repayment of the student loan may be made contingent on an employee's payment of employment taxes (including income taxes and the employee's portion of social security and Medicare taxes) to the agency. In this case, to fulfill its tax obligations, the agency must–

  1. Determine the correct amount of employment tax withholding on the loan repayment using either the regular method described in Question 6 or the flat rate method described in Question 7;
  2. Obtain a check or other payment from the employee for the amount determined above;
  3. Make the loan repayment and deposit and report on Form 941 an amount equal to the payment received from the employee in accordance with normal deposit and reporting procedures; and
  4. Report the income, social security, and Medicare tax components paid by the employee in the appropriate boxes of Form W-2. These amounts are not included as income or wages in Boxes 1 , 3, and 5 of Form W-2.

This answer was provided by the Internal Revenue Service (IRS). For further guidance/clarification on this issue, agency representatives may contact IRS (Federal, State and Local Governments) at (202) 283-9665.

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