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18.15 Payments to Employees: Assignment of Income and Constructive Receipt

Note: This policy is intended for the purpose of informing University of Illinois System employees and other system-related individuals about relevant tax issues. This policy does not constitute legal or tax advice. Individuals should consult with their attorneys or tax professionals for advice on personal issues.

Policy Statement

In general, the University of Illinois System treats compensation for services and other income available to system employees as employee wages.

Overview

Compensation or other income may be available in forms other than cash or be available at times other than regularly scheduled pay dates.

The Internal Revenue Service (IRS) definition of "wages" includes wages, salaries, and other remuneration (including benefits), whether available in cash or another form.

Other types of compensation and income, including but not limited to, income deferred to retirement plans (18.3 The University of Illinois Supplemental 403(b) Retirement Plan and 18.9 State of Illinois Employees' Deferred Compensation Plan under Internal Revenue Code §457), taxable and nontaxable fringe benefits (18.5 Fringe Benefits), and awards (or bonuses) (4 Payroll and 18.5 Fringe Benefits) are discussed in other sections of this manual.

Assignment of Income

Income earned is generally taxable to employees at the time payments are made available.

The assignment of income doctrine provides that an individual who assigns his or her right to receive income, rather than receiving the income directly, retains the tax liability associated with that income. Under this doctrine, an individual is not allowed to shift the taxation of income by making a gift or gratuitous transfer of income to another individual or organization, including the system. The assignment of income doctrine is summarized in Revenue Ruling 69-102.

Colleges or departments that offer programs with payment options or allow employees to assign income to the system, another entity, or an individual, must ensure compliance with assignment of income rules by:

1. determining how to structure the payment for programs and/or additional services, such as overloads, as this will affect the taxability of the payment; and
2. documenting in their procedures how programs and/or additional services will be treated, to ensure consistency and compliance.

In cases where employees opt to receive compensation, departments may need to budget for fringe benefits depending on the funding source.

See guidelines for benefit assessments by fund type and most current fringe benefit rates on Accounting & Financial Reporting webpage. For example, a $17,500 salary supplement may be assessed a 40% fringe benefit rate; therefore, $24,325 needs to be budgeted for to ensure sufficient funds to pay the full amount. Contact UAFR at uas@uillinois.edu or 217-333-4568 with questions.

College-level programs may impose restrictions on departments, or delegate authority to departments, with respect to payment options.

As these issues are facts and circumstances-specific, the tax treatment of each program must be determined individually. The following examples illustrate where the assignment of income doctrine may or may not be applicable:

Example 1. The compensation from a college or department program is made available to a faculty member for overload courses where all or a portion of the compensation for the course may be voluntarily directed by the employee to his or her department, another department, or a research account. Unless the payment is irrevocably rejected prior to services being performed without further control of such rejected payment, the payment is taxable income to the employee because the faculty member has the choice to receive the income. See Example 2 for additional clarification.

Example 2. A college or department offers a program where the employee is entitled to payment for additional services rendered. The employee rejects the payment prior to services being performed. The tax consequences depend on the employee's right to control, direct, or determine how or where the funds will be used.

The payment is taxable income to the employee if the employee retains the right to control, direct, or determine how or where the funds will be used.

However, the payment is not taxable income to the employee if the employee relinquishes all rights to control, direct, or determine how or where the funds will be used. An employee may recommend use of the rejected payment, but cannot require any restrictions on the use of the funds. In this situation, the system requires written documentation prior to services being performed, indicating the employee's irrevocable election to waive all rights to such payment. This documentation is retained by the department.

Example 3. A college or department offers or participates in a program or receives a grant. Payment is required to be made to the department or deposited into a research account with no option for the employee to directly receive the payment as salary. The payment to the department or a research account is not taxable income to the employee because the employee was never offered the choice to directly receive additional income.

Example 4. A college or department receives a grant, professorship, chair endowment, or an unrestricted industry-sponsored gift or award.

The management and recommendation for the use of the funds is determined by the principal investigator (PI) or the faculty member. However, college/departmental approval for the use of funds, in accordance with the system policy, is required. The award payment is not taxable income to the PI nor the faculty member because the system maintains control of the funds. 

Examples of departmental policies and an approval are as follows:

An example of an irrevocable election to reject the income is as follows:

Departmental Reporting Responsibilities

University Payroll and Benefits (UPB) has implemented Procedures for reporting any assigned income that must be included in an employee's pay record.

Vendor payments

Units that receive and manage the disposition of funds assigned to the system must inform University Payables (UPAY) of certain transactions involving those funds.

For example, if royalties payable to an employee are assigned to that employee's research funds, giving the employee direct control of the funds, the receiving unit must notify UPAY if those funds are transferred by budget transfer. Notification by email is acceptable.

However, if the unit pays the royalties directly to the employee, in the form of a vendor payment, it does not need to inform UPAY.

Constructive Receipt

Constructive receipt is a tax doctrine (see Federal Treasury Regulation Section 1.451-2) that assists in determining when income earned by an individual is taxable to that individual. Constructive receipt generally means the recipient had control of the receipt of the deferred amounts and that such control was not subject to substantial limitations or restrictions.

An employee who has the unconditional right to receive income is taxed on that income in the calendar year it is available, regardless of whether, or when, the employee chooses to receive it. When an employee has the right to compensation upon the performance of services, any delay in payment due only to the employee's own action results in constructive receipt of that income when it is earned.

An employee can avoid the constructive receipt doctrine by irrevocably electing, before the services are rendered, not to take the money at the time that it would otherwise have been available.

Contact

Office of Treasury Operations, Tax Compliance and Analysis
217-244-8359

University Payroll and Benefits (UPB)
Chicago 312-996-7200
Urbana-Champaign 217-265-6363
Springfield 217-206-7144

University Accounting and Financial Reporting (UAFR)
217-333-4568

First Published: November 2014 | Last Updated: April 2025 | Last Reviewed: February 3, 2023