As the Philadelphia Phillies turn around their season and the Eagles face a T.O. hold-out, thoughts turn naturally to the tax treatment of signing bonuses. The IRS ruled at the end of 2004 that signing bonus for a baseball contract are wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and for income tax treatment. The ruling specifically revoked older rulings that signing bonuses that were not contingent on performance of future services could be treated as "capital" taxed at lower capital gains rates and were not subject to FICA and FUTA. The new ruling also applies to bonuses paid to union members when CBAs are ratified, so at least there is equal treatment of sports stars and ordinary working people.
The rationale for the ruling was that a signing or ratification bonus is ordinary income because it is payable in connection with the establishment of an employment relationship. Under the now revoked ruling, bonuses that were not contingent on the performance of past or future services did not meet the definition of wages. That argument is no longer viable.
In T.O.'s case, he received a signing bonus of roughly $7.5 million early in 2004 when he signed with the Eagles. That signing bonus theoretically was contingent on T.O.'s playing for the Eagles, unless he was injured. So that bonus likely was considered as wages even under older IRS rulings. T.O.'s contract, however, also calls for a "roster bonus" of approximately $6 million if he is on the roster as of a date certain in 2006. Perhaps T.O. assumed that roster bonus would be treated as capital gains and taxed at the lower capital gains rate. Now it is clear that any bonus paid in connenction with employment meets the definition of wages. Perhaps it is no coincidence that T.O.'s hold out came after the IRS ruling.
