Withholding Tax on Wages: Central Illinois Public Service Co. v. United States

Section 3402 of the Internal Revenue Code of 1954 requires every employer to deduct and withhold a tax upon wages paid to its employees. The term "wages" is defined in section 3401(a) as all remuneration for services performed by an employee for his employer. Despite apparent simplicity, the process of defining "wages" has generated conflicting interpretations. In Central Illinois Public Service Co. v. United States, the Seventh Circuit confronted the issue of whether meal reimbursements constitute wages for withholding purposes. The meaning of "wages" in section 3401(a) depends upon an assessment of the policy objectives underlying income tax withholding. In the Central Illinois litigation, the district court and the Seventh Circuit adopted two very different functional models for defining the term wages. This Note examines each of the wage withholding models applied in Central Illinois, as well as two other models, in light of the policies income tax withholding was designed to serve. The Note concludes that the preferable, but universally rejected, model equates employee income from the employer with wages.