Software Club 210: Light Red/Club_Software_210_Light_Red_Micro_Star_1997.iso/sba/f258.sbe

Text File | 1997-01-01 | 4KB | 75 lines

@064 CHAP 5

        ┌───────────────────────────────────────────────┐
        │      FICA (SOCIAL SECURITY TAX) ON WAGES      │
        └───────────────────────────────────────────────┘

FICA (or "Social Security") taxes apply to the wages of
virtually all employees.  For 1997, the 15.3% FICA tax
(imposed at the rate of 7.65% each on the employee and the
employer on each employee's wages) applies to wages up to a
maximum of $65,400 per covered employee.  In addition, on
wages above $65,400, there is a 2.9% tax (also split equally
between employer and employee, at 1.45% each).

The amount subject to the full 15.3% tax rate was $62,700
in 1996 and, as in 1997, there was NO upper limit on the
amount to which the 2.9% Medicare portion of the tax applied.

Employers are required to withhold the employee's share of
FICA tax from the wages paid to the employee, and deposit
both the employee and employer portions of the tax along
with withheld federal income taxes.  Such funds must be
deposited with an appropriately coded federal tax deposit
coupon in a bank that is designated as a federal tax
depository.  Quarterly returns must be filed (Form 941)
reporting the wages of the employees with respect to whom
the taxes were withheld and paid.

There is no effective shelter from FICA tax, other than not
to pay or receive wages, which obviously is not much of a
solution.  Many employers attempt to avoid paying FICA (and
FUTA) tax on wages of their workers by treating those
workers as "independent contractors."  The IRS, however,
is increasingly cracking down on those employers where
such tax treatment of workers is not justified.  For details,
see the discussion of "INDEPENDENT CONTRACTORS" under that
subject listing in this program.

Previously, it was possible to pay wages to one's spouse
or to one's children under age 21 free of FICA taxes, but
this "loophole" has been eliminated.  However, a sole
proprietor may still hire his or her children under age 18
to work in the family business without their wages being
subject to FICA taxes.  Note that even this limited
exception does not apply to a corporate business or to
typical business partnerships or LLCs.

The employer's half of the tax is deductible as a business
expense, which lessens the heavy burden of this tax somewhat.

One possible, but somewhat controversial, approach to
reducing one's FICA or self-employment tax on earnings is
to set up an S corporation and pay yourself wages less than
the $65,400 amount that would ordinarily be subject to the
full 15.3% FICA or self-employment taxes.  This will
increase the S corporation's net income, which will still
pass through to you as the shareholder, but such income can
be distributed to you in full as dividends with no taxes
other than straight income tax applicable to it, unlike
wages or self-employment income, which are be subject to
BOTH income tax and FICA or self-employment tax.  Note that
if the wages you pay yourself from an S corporation are
unreasonably low, the IRS has the right to "impute" part of
the corporate income to you as additional wages, which
could defeat this neat stratagem.

If you want to know how much of a Social Security pension
your FICA tax (and self-employment tax, if any) will buy you
when you reach retirement age, you can obtain a free statement
of lifetime Social Security earnings and your projected
retirement benefits, by calling the Social Security
Administration at [phone].