Not surprisingly, summer internships look a bit different this year. Some are cancelled outright, others cut short, and many are virtual. Amidst these changes, we know employers have more than a few questions . . .
Q. If my company is cancelling its planned summer internship, do we have to provide any cash compensation?
A. Not unless there is a contract in place to do so. Nonetheless, we’ve seen a number companies offer to pay a portion of the expected wages (and a few very generous employers have sought to pay the entire amount).
Q. And, if we want to pay our intern some amount for the lost opportunity, do we have to put them on the payroll?
A. Yes. The IRS takes the position that, from a tax perspective, paying any amount, in lieu of wages to a prospective employee who is never actually employed is nonetheless wage income subject to income tax withholding, social taxes, etc. Some employers are a little stumped by how they can set somebody up on the payroll just to make this one lonesome payment. But, it is doable. It requires some administrative tasks like getting the required federal and state withholding forms and setting the person up in the employer’s payroll system. For federal purposes, the required form is the Form W-4 that an employee fills out during onboarding for a new job, which form will require the employee to provide a social security number (or other taxpayer identification number) and other information needed for the payment to be properly reported on Form W-2 and withheld upon.