Rev. Rul. 2012-25: IRS addresses wage recharacterization arrangements 

September 14:   Rev. Rul. 2012-25—released in this week’s edition of the Internal Revenue Bulletin 2012-37—provides guidance for employers when an employment arrangement that recharacterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules under section 62(c).

Rev. Rul. 2012-25 [PDF 339 KB] considers four factual situations—three of which illustrate arrangements that impermissibly recharacterize wages so that the arrangements are not accountable plans concerning:


  • Employee cable technicians who provide their own tools and are provided with an hourly tool rate
  • Nurses who are assigned away to hospitals for short-term assignments, and for which the employer treats a portion of hourly compensation as a nontaxable per diem allowance for lodging, meals, and incidental expenses
  • Construction workers who incur deductible business expenses for operating their personal vehicles and are compensated by a flat amount that is treated as a nontaxable mileage reimbursement

The fourth situation—employees of a cleaning service who provide their own cleaning products and are reimbursed though a reimbursement plan— illustrates an arrangement that is identified by Rev. Rul. 2012-25 as not impermissibly recharacterizing wages because the employer prospectively alters its compensation structure to include a reimbursement arrangement.



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©2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

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