Employer pays both parts of FICA

[Kea]

Please forgive me if this is too basic of a payroll question. I've never had a client with an "employee" before -- only contract labor.

New client has been paying her part-time employee $600 per month and sending $91.80 in for FICA (15.3% of $600). The employer is contributing both the employer and employee portions because she likes to keep things simple. On the W-2 she is showing gross wages of $7200. Is that correct, or should the gross income be increased to reflect the employee 1/2 of the FICA?

She's giving this employee a raise to $700 per month and wants me to determine the FICA. Do I use the new 13.3% of $700 or do I have to back into it to achieve a net $700? Or, am I making this more difficult than it should be?

Here's what I did:

if X = the new salary

X - 5.65% X = 700 (net pay)

X = $741.92

New FICA = 13.3% X = 13.3% (741.92)

FICA = $98.68

Or, do I just take 13.3% of 700 = $93.10?

Almost 30 years ago I worked for a university that paid the 1st 5% of FICA for us. But I don't remember if it was included in box 1 of the W-2. This was before I did taxes professionally and was not paying that much attention.

Thanks & Happy New Year

[mlinder42]

W-2 should be grossed up to include Fica and Medicare paid by employer.

[Kea]

But then do I calculate the FICA / Medicare on the $700 or on the grossed up amount?

[JohnH]

Gross pay needs to be grossed up by the amount of the FICA/Med being paid by the employer, plus the FICA/Med withholding attributable to the gross up. You can use the reciprocal as a short cut to get this (100.00% minus 5.65% = 94.35%)

Divide the $700.00 by 94.35% to get gross pay ($ 741.91)

Multiply $741.35 by 5.65% to get FICA W/H ($ 41.91)

Net pay is back to the $700.00 target ($741.91 minus $41.91)

Fed Tax Due = $98.66 ($41.91 plus $56.75)

(The $56.75 is the product of $741.91 x 7.65%)

[Kea]

OK, so I was right the first time with the way I was doing it. Couldn't use the easy shortcut that my client has been doing. Withholding is still really coming from the employee.

Thanks

[JohnH]

Yes, you were correct at the outset. I just broke it down into steps to see how it comes together on the forms. I have a client who likes to see how we got to the end resullt with their Nanny. ( of course, after they say they want to cover the emplyees's withholding and all, when we get through they almost always ask "That's awfully high - isn't there something you can DO about those taxes?")

[Kea]

I used to aggravate my calculus teacher because she always wanted me to "show my work" -- but I usually did most of it in my head. I'd look at the problem and know the answer. It just took much time for me to write down the 3 or 4 steps that she would show when I could just manipulate the formulas in my head. (Obviously I'm not as good at making my writing as concise!)

[kcjenkins]

Everyone used to be able to pay the employee's share without grossing it up, until Prentiss Hall did a big marketing push on "Tips to save payroll taxes" or some such title, where they pointed out that paying the employee share could save the employer on his share, at which point {late 70's, early 80's?] Congress changed the law. Now only FARMERS can still do that.

[Kea]

Actually this is for a farm (OK, actually ranch) partnership. The employee is the guy who lives on the place and feeds the cattle, fixes fences & whatever else needs to be done.

My job at the University was in the early 80s right after they raised the SS / Medicare tax. When it was 5%, the University paid the employer & employee portions. When they added the extra 2%, the employee paid the increase. Even though I'm a pack rat, I don't have check stubs or W-2s back that far to see what they did.

[kcjenkins]

Well, ranch and farm have same rules, so in that case the employer CAN pay the employee share WITHOUT grossing up the salary FOR THE PAYROLL TAX. http://www.irs.gov/pub/irs-pdf/p51.pdf Page 10 Employee share paid by employer...... the part you pay IS income to the employee, but is NOT SUBJECT TO SS AND MEDI TAX, SO IS NOT INCLUDED IN BOX 3 AND 5.

[Kea]

Cool. Thanks so much for the reference. I had been worried about the 2010 W-2. This is great. Now the client only has to adjust the Box 1. I was afraid that if we added back the FICA she paid that would screw up the Boxes 3 & 5.

Thanks again & welcome back.

[kcjenkins]

Hey, glad to share that, it's something that is often missed, especially in the less rural states where many tax professionals and accountants seldom deal with such issues. On a large salary, it can make a nice little difference to the employer, frankly, while making the employee happy too, if it is explained to him that he's getting, in effect, that extra income with ONLY the INCOME TAX owed on it. I often prepared a letter for the client to give a copy of for each employee, explaining the benefit TO THE WORKER, of doing it that way. This not only reduces the problem of the worker later thinking his W2 is wrong, but also giving the employer credit for the benefit, which otherwise the worker might not even appreciate.

[Kea]

I'm in Texas, but in the city. And since I've never had to do anything with employees, I tend to only know a few of the basics. I love this board because with so many people there is (almost) always someone who has experience in each area that comes up.

[JohnH]

I learn something every day, much of it from this forum.

Thanks, KC.

[mcb39]

W-2 should be grossed up to include Fica and Medicare paid by employer.

NEW TWIST......

Employee, my client, calls and says that her part-time employer has not been withholding SS and MC from her check for 13 years and is now demanding employee pay her back and is deducting the amount she (the employer) thinks is correct. First of all, can she do this? I think not. Where would she justify what the additional withholding is for?

Long story, short.....accountant was having employer pay the entire .153; however W2's for my client show the correct amount of withholding for Ss and MC. Accountant was not withholding those amounts from the employees' checks, nor was he grossing up the pay. In comes new accountant and says this is wrong. Employer wants her money back. Who is liable? Accountant, Employer or Employee.

There is also some question in my mind as to whether SSA ever even received the payments. How do I advise my client? Employer's accountant was supposed to call me, but no call yet. It also appears that the accountant might have E and A insurance to cover this. Employer doesn't want to go that route. Does anyone else smell something odd here?

[JohnH]

The very first thing I'd do is obtain a statement of earnings from Social Security Admin. You want to know exactly what has been credited to the client's account. I don't think the employee can be held accountable for the employer & accountant's errors, but depending upon the amount involved and/or how badly the employee wants to keep working for this person, it could get sticky. If the emplyment ceases, my response would be that obtaining the SocSec statement would be a prerequisite for doing anything (assuming the emplyees is ultimately willing to do something in the way of reimbursement). Something does seem a little odd here, but until you have all the facts you really can't offer any advice or opinions.

[Terry D EA]

The only thing I can add to this is the IRS may and can require the employer to do backup withholdings if an error was made and they are aware of it. With that said, it is up the employer as to whether he chooses to pay the employees part which in my opinion, it is the least they can do to make up for their or their accountant's mistake. I agree with checking with SS admin as verification if the correct amounts were paid.

[kcjenkins]

I don't know about your state's laws dealing with employee protections, but I know in my state, the employer may NOT withhold money currently owed to 'offset' much of ANYTHING, certainly not 'advances', 'loans', or errors made in prior years. So I'd suggest a call to the Wage and Hours division for your state, to find out what the state says the employer can and can not do, before you advise anything else. My guess is that the employer will have to live with his mistake, not take it out of the employee's current wages.

After all, the employer was the one who controlled how much the worker was paid, and absent an agreement from the worker to "repay" underwithheld amounts, those W-2s would in most states be treated by the courts as valid TO THE WORKER, even if the IRS said that more tax was owed. Certainly, the worker did not agree to it being a "loan or advance" to be repaid. The boss can not unilaterally and retroactively create such an obligation.

[Catherine]

Well, ranch and farm have same rules, so in that case the employer CAN pay the employee share WITHOUT grossing up the salary FOR THE PAYROLL TAX. http://www.irs.gov/pub/irs-pdf/p51.pdf Page 10 Employee share paid by employer...... the part you pay IS income to the employee, but is NOT SUBJECT TO SS AND MEDI TAX, SO IS NOT INCLUDED IN BOX 3 AND 5.

Thank you for this reference, KC. I had a similar situation (household employee) and got myself tangled in knots in Pub 15A -- this link cleared up my confusion and now I can issue a correct W-2 for a household employee.

And if anyone has a situation like this in Mass, I also checked with an expert I know at MassDOR and he confirmed that you do indeed use the Federal taxable income as the Mass taxable income. It's somewhere in Chapter 62 of MGL, but the guidelines they have on their web site have no information on employer-paid OASDI.

[mcb39]

I don't know about your state's laws dealing with employee protections, but I know in my state, the employer may NOT withhold money currently owed to 'offset' much of ANYTHING, certainly not 'advances', 'loans', or errors made in prior years. So I'd suggest a call to the Wage and Hours division for your state, to find out what the state says the employer can and can not do, before you advise anything else. My guess is that the employer will have to live with his mistake, not take it out of the employee's current wages.

After all, the employer was the one who controlled how much the worker was paid, and absent an agreement from the worker to "repay" underwithheld amounts, those W-2s would in most states be treated by the courts as valid TO THE WORKER, even if the IRS said that more tax was owed. Certainly, the worker did not agree to it being a "loan or advance" to be repaid. The boss can not unilaterally and retroactively create such an obligation.

Thanks KC.....that is what I needed to hear.