Monster Media 1996 #14/Monster Media No. 14 (April 1996) (Monster Media, Inc.).ISO/business/sba961.zip/F258.SBE

Text File | 1996-01-01 | 4KB | 77 lines

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

FICA (or "Social Security") taxes apply to the wages of
virtually all employees.  For 1996, the 15.3% FICA tax (im-
posed at the rate of 7.65% each on the employee and the em-
ployer on each employee's wages) applies to wages up to a
maximum of $62,700 per covered employee.  In addition, on
wages above $62,700, there is a 2.9% tax (also split equal-
ly between employer and employee, at 1.45% each).

The amount subject to the full 15.3% tax rate was $61,200
in 1995 and, as in 1996, there is 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 de-
pository.  Quarterly returns must be filed (Form 941) re-
porting 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 wor-
kers 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, using the "INDX" or "KEY" menu selections
in this program (MAIN Menu), or else use the "INDEP" selec-
tion on the CHECKLISTS Menu.

Until January 1, 1988 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" was eliminated by the Revenue
Act of 1987.  However, a sole proprietor may still hire his
or her children under age 18 to work in the family business
without such 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.

As heavy a tax burden as the FICA tax is, at least the em-
ployer's half of the tax is deductible as a business ex-
pense.  Before 1990, this was more advantageous than the
situation for self-employed persons, who paid a somewhat
lower total tax rate, but were unable to deduct any of the
Self-Employment tax they paid.  In 1990 and thereafter,
this difference no longer exists, since the self-employment
tax rate is now the same as the total FICA rate (15.3%),
and half of it is deductible for income tax purposes.

One possible, but somewhat controversial, approach to re-
ducing one's FICA or self-employment tax on earnings is to
set up an S corporation and pay yourself wages less than
the $62,700 amount that would ordinarily be subject to the
full 15.3% FICA or self-employment taxes.  This will in-
crease 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 strategem.