NE 29-05-6 Tax Incentives 2005-12-20

For the Nebraska Advantage Act, is an employee's 'rate of pay' figured on base pay or on total taxable compensation?

Short answer: Rate of pay is based on base pay for regular hours worked, not on taxable compensation. Revenue Ruling 29-05-6 explains that under the Nebraska Advantage Act, only employees paid at a rate of at least sixty percent of the Nebraska average weekly wage are counted as new employees (Neb. Rev. Stat. § 77-5714). Although 'compensation' is defined broadly to include wages and other payments subject to withholding (Neb. Rev. Stat. § 77-5707), the new-employee test refers only to wages, so the rate of pay is the employee's base pay for regular hours. Base pay is not reduced for deductions such as benefit-plan contributions, and it excludes overtime, bonuses or similar payments, and the value of employer-provided benefits. Only the hours of employees whose base pay exceeds the 60% threshold are counted, and if an employee's base pay changes during the year, only hours worked while above the threshold count. Base pay is a distinct figure from both the employee's compensation and the average wage of new employees -- all three must be computed to determine Advantage Act benefits.

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This page answers the general question as of 2005. Ezel answers yours, under current Nebraska tax law, with citations.

Disclaimer: This is an official Revenue Ruling of the Nebraska Department of Revenue, a guidance document stating the Department's interpretation of how Nebraska tax law applies. Each Nebraska guidance document carries the notice that it 'is advisory in nature but is binding on the Nebraska Department of Revenue until amended.' Unlike a private letter ruling, a Revenue Ruling is a general statement of Department policy rather than advice to a single taxpayer, but it can be amended, superseded, or made obsolete by a later ruling or a change in statute or regulation, many rulings in this series have been rescinded or superseded, so confirm it is still in effect before relying on it. Nebraska's local option sales and use taxes are administered by the Department, not self-collected by home-rule cities. This summary is informational only and is not legal or tax advice. Consult a licensed Nebraska tax professional about your situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

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Plain-English summary

The Nebraska Advantage Act only counts an employee toward the number of new employees if that person is paid at a high enough rate of pay — at least 60% of the Nebraska average weekly wage. This ruling answers a deceptively important question: is that "rate of pay" figured on the employee's base pay or on their total taxable compensation (which can include overtime, bonuses, and benefits)?

The answer: base pay for regular hours, not taxable compensation.

Why the distinction matters. The Act defines "compensation" broadly — wages and other payments subject to withholding for federal income tax (Neb. Rev. Stat. § 77-5707). But the "number of new employees" test (Neb. Rev. Stat. § 77-5714) refers only to wages paid at a rate of at least sixty percent of the Nebraska average weekly wage — it does not import the broader compensation definition. So the rate-of-pay determination uses base pay for regular hours worked.

What base pay includes and excludes:

It is not reduced for deductions such as participation in benefit plans.
It excludes payments for overtime, bonuses or similar payments, and the value of benefits provided by the employer.

Applying the threshold. Only the hours of employees whose base pay exceeds 60% of the Nebraska average weekly wage are counted toward the number of new employees. If an employee's base pay changes during the year, only the hours worked while the base pay is above the required level are counted.

Three separate numbers. Base pay is distinct from (1) the employee's compensation and (2) the average wage of new employees. All three must be calculated to determine benefits under the Act.

What this means for you

Businesses testing which employees qualify

Screen employees on base pay, not their W-2 taxable compensation. An employee whose total pay clears 60% of the Nebraska average weekly wage only because of overtime or bonuses does not qualify — the base hourly/salary rate itself must clear the bar. Don't shrink base pay by benefit-plan deductions when doing this test.

Payroll teams tracking mid-year pay changes

If someone gets a raise across the 60% threshold mid-year, count only the hours worked after their base pay rose above the line. Keep base pay, total compensation, and the average-wage figure as three separate running calculations.

Common questions

Q: Is rate of pay based on total taxable compensation?
A: No. It is based on base pay for regular hours worked. Overtime, bonuses, and the value of benefits are excluded.

Q: Do benefit-plan deductions lower an employee's base pay for this test?
A: No. Base pay is not reduced for deductions such as participation in benefit plans.

Q: What if an employee's base pay rises above the threshold partway through the year?
A: Only the hours worked while the base pay is above 60% of the Nebraska average weekly wage are counted.

Citations and references

Neb. Rev. Stat. § 77-5707 -- "compensation" means wages and other payments subject to withholding for federal income tax purposes.
Neb. Rev. Stat. § 77-5714 -- "number of new employees" counts only those paid wages at a rate of at least sixty percent of the Nebraska average weekly wage.

Source

Original ruling text

Revenue Ruling 29-05-6
Economic Development Tax Incentives
December 20, 2005
Economic Development Tax Incentives -- Rate of Pay. THE RATE OF PAY FOR DETERMINING
INCREASES IN EMPLOYMENT UNDER THE NEBRASKA ADVANTAGE ACT WILL BE BASED
ON BASE PAY FOR REGULAR HOURS WORKED AND NOT ON TAXABLE COMPENSATION.
Advice has been requested as to how to calculate the rate of pay for an employee for purposes of
determining the number of new employees under the Nebraska Advantage Act.
Section 77-5707, R.S.Supp. 2005, provides in part that:
Compensation means the wages and other payments subject to withholding for federal income tax
purposes.
Section 77-5714, R.S.Supp. 2005, provides in part that:
Number of new employees means the number of equivalent employees. . . not to exceed the number
of equivalent employees employed at the project during a year who are not base-year employees
and who are paid wages at a rate equal to at least sixty percent of the Nebraska average weekly
wage . . .
Under the Nebraska Advantage Act, only those employees who are paid wages at a rate above a certain
level are counted for determining the number of new employees. The determination of the rate of pay
must be completed for each employee at the project who is not a base-year employee.
While the definition of compensation includes both wages and other payments subject to withholding,
the calculation required in the definition of number of new employees only refers to wages and does
not include other payments or require that the wages are subject to withholding.
Therefore, the amount that will be included in the determination of wages for the number of new
employees will be base pay for regular hours worked. The base pay is not reduced for deductions, such
as participation in benefits plans, and will not include any payments for overtime, bonuses or similar
payments, or the value of benefits provided by the employer.
The hours worked by employees whose base pay is in excess of sixty percent of the Nebraska average
weekly wage are included in determining the number of new employees. For an employee who has a
change in his or her base pay during the year, the hours worked during the time the base pay is above
the required level will be counted.
The base pay is a separate amount from both the amount of compensation received by an employee
and the average wage of new employees. All three numbers are required to be calculated in order to
determine benefits under the Nebraska Advantage Act.
APPROVED:

Mary Jane Egr
State Tax Commissioner
December 20, 2005

Nebraska Department of Revenue, PO Box 94818, Lincoln, Nebraska 68509-4818

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