In the recently released Chief Counsel Advice (CCA) 200923029, the Internal Revenue Service ruled that discounts provided to an employer’s employees who purchase or lease property from a company that formerly owned the employer are taxable as fringe benefits based on the amount of the discount. Such discounts are also taxable for FICA purposes. FICA is also known as OASDI or social security and Medicare.
Qualified employee discounts are excludible from income under §132 of the Internal Revenue Code of 1986 (IRC). Since “the discounted property was not offered for sale to customers by the same employer for which the employees receiving the discount performed the services”, the discounts were not “qualified employee discounts” under IRC §132. These amounts are to be reported on Form W-2, even for former employees. They should not be reported on Form 1099.
Since the discount was offered as a percentage off the retail price, the discount may be valued for fringe benefits purposes at the amount of the discount.
Contact Vision Payroll if you have any questions on taxation of fringe benefits.
This week’s question comes from Brad, a sole proprietor. My 16-year-old daughter will be out of school soon and I’d like to hire her for the summer in my sole proprietorship. Does a sole proprietor have to pay payroll taxes on children’s wages? Answer: Sole proprietors who hire their own children under age 18 do not have to pay federal employment taxes on the children’s wages. The children are exempt from having to pay social security and Medicare taxes on their wages. These taxes are sometimes known as FICA (Federal Insurance Contributions Act) or OASDI (Old-Age, Survivors, and Disability Insurance). The employer is also exempt from paying the matching portion of these taxes. Additionally, the employer is not required to pay FUTA (Federal Unemployment Tax Act) tax on these wages. Most states also exempt such wages from state unemployment tax (SUTA). Depending on their expected income, children of sole proprietors may be subject to federal and state income tax withholding. Contact Vision Payroll if you have any questions on payroll taxes on children.
This week’s question comes from Will, a restaurant owner. We’ve hired several students to work for us this summer. Most of them don’t expect to owe any income tax this year. How do students claim exemption from income tax withholding? Answer: Students or others who expect to owe no tax for 2009 should review the conditions on line 7 of Form W-4, Employee’s Withholding Allowance Certificate or the Spanish W-4, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado. Employees who meet both conditions should write “Exempt” (or “Exento”) on line 7 and file the form with their employer. The employer should not withhold any federal income tax from these employees for the rest of 2009. Employees who wish to continue their exempt status in 2010 must a complete and provide to their employer a 2010 Form W-4 before February 16, 2010. These employees may also wish to file a state equivalent form to claim exemption from state withholding as well. The filing of Form W-4 claiming exempt status does not stop social security or Medicare withholding or the requirement that the employer match these withholdings. These taxes, sometimes known as FICA or OASDI, have their own rules for determining exemption which are much less likely to apply. Contact Vision Payroll if you have any questions on employees claiming exempt status.
This week’s question comes from Elizabeth, a small-business owner. We just hired a part-time employee who is seventy years old. He’s already collecting social security benefits so I’m not sure if I should still withhold it from his wages. At what age does social security withholding stop? Answer: There is no age beyond which employers are no longer required to withhold social security or Medicare taxes, which are also known as FICA or OASDI. Employers must continue to withhold social security and Medicare taxes and pay the employer’s portion even if the employee is collecting social security or is eligible for Medicare. The Social Security Administration will recalculate benefits and may increase them after retirement if the additional earnings result in a benefits increase. Contact Vision Payroll if you have any questions on social security and Medicare tax withholding.
This week’s question comes from Rachel, a business owner. I have been running payroll with almost the exact same hours every week for the last few months. In the last few weeks, the payroll cost was several thousand dollars more each week than a month ago. Why did my payroll cost increase? Answer: There are at least three employer taxes with wage caps that are often fully paid by the end of the calendar year for some or all employees. They are the social security portion of FICA or OASDI tax, federal unemployment tax (FUTA), and state unemployment tax (SUTA). Social security had a wage limit of $102,000 ($106,800 in 2009), FUTA has a $7,000 limit in each year, and the SUTA limit varies by state from a low of $7,000 to more than $35,000. At the start of a new calendar year those taxes must again be paid by the employer. With a combined tax rate of over 7% at a minimum, a $100,000 weekly payroll could easily have an increase of between $5,000 and $10,000 in employer payroll tax liability at the start of a new calendar year. Vision Payroll can work with you to find ways to legally minimize your employer tax liability. Contact Vision Payroll today for more information.
This week’s question comes from Janet, a sales rep: I read before that the wage base for 2008 was $102,000. I’ve made over $104,000, but FICA tax is still being withheld. Why didn’t my FICA tax deduction stop? Answer: Even though your gross wages are over $104,000, the FICA tax deduction doesn’t stop until FICA taxable wages reach $102,000 and FICA tax withheld reaches $6,324. Some wage deductions such as cafeteria or §125 plan deductions reduce the amount of FICA taxable wages. So, even though your gross earnings are over $102,000, FICA tax must be withheld until the maximum withholding is reached. Contact Vision Payroll if you have any questions on the Social Security wage base.
This week’s question comes from Becca, a sales rep: I read before that the wage base for 2008 was $102,000. I made over $90,000 at my first job and have earned more than $30,000 at my new job. Why didn’t my FICA tax deduction stop? Answer: The wage base generally must be applied on an employer-by employer basis. Regardless of how much you’ve earned at previous jobs, most employers must withhold the maximum tax again. There are some exceptions, including successor employers and common paymasters, but the general rule is you must reach the maximum again at your second job to stop the withholding. Even though the employer must pay the full tax and withhold it from the employee, amounts withheld above the maximum can be claimed as a credit on Form 1040. For tax year 2008, enter any excess FICA tax withheld by two or more employers on line 65 of Form 1040 and reduce your balance due or increase your overpayment by the amount of the excess. Contact Vision Payroll if you have any questions on the Social Security wage base.
This week’s question comes from Matt, a sales rep: Every week there’s a deduction for FICA on my paycheck. Two weeks ago, the deduction was lower than usual and last week there was no deduction at all. Why did my FICA tax deduction stop? Answer: The FICA (Federal Insurance Contributions Act) tax is related to Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) program, commonly called Social Security. Under this program, there is a cap on benefits based on a maximum earnings level, called the wage base. For 2008, the wage base is $102,000 and for 2009 it is scheduled to increase to $106,800. At retirement, using current law, benefit calculations are limited to earnings at or below the wage base. Therefore, no tax is withheld on earnings above the wage base, effectively limiting the maximum withholding to $6,324 in 2008. Contact Vision Payroll if you have any questions on the Social Security wage base.
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