For years now, Section 203 of the California Labor Code has required employers to pay a penalty for willful failure to provide a departing employee with their final wages on their last day of employment (or within 72 hours for employee who suddenly quit). The amount of this penalty, often referred to as “waiting time penalty,” equals one day of pay for each day the employee is made to wait for the final paycheck, up to a limit of 30 days.
There was some ambiguity and disagreement over the years regarding whether these waiting time penalties should be considered wages and subject to applicable tax withholdings. However, on May 29, 2015, the IRS Chief Counsel’s Office issued interpretative guidance (CCA 201522004) to clarify the tax treatment of such late payment penalties, concluding that they are not wages for the purposes of FICA, FUTA, or federal income tax withholding.