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- @064 CHAP 5
-
- ┌───────────────────────────────────────────────┐
- │ 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
- (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 $62,700 per covered employee. In addition, on
- wages above $62,700, 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 $61,200
- in 1995 and, as in 1996, 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 $62,700 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 (800) 772-1213.
-
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