16. Employment Taxes
Important Change
for 2003
Wage limit for social security tax. The wage limit on wages subject
to the social security tax for 2003 will be published in Publication 51, Circular A,
Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare
tax.
Important Reminder
Electronic deposits of taxes. You
must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of
all depository tax liabilities you incur in 2003 and thereafter if you deposited
more than $200,000 in federal depository taxes in 2001 or you had to use EFTPS in 2002.
See Electronic Federal Tax Payment System (EFTPS) under Reporting and
Paying Social Security, Medicare, and Withheld Income Taxes.
Introduction
You are generally required to withhold federal income tax from the wages of your
employees. You may also be subject to social security and Medicare taxes under the Federal
Insurance Contributions Act (FICA) and federal unemployment tax under the Federal
Unemployment Tax Act (FUTA). This chapter includes information about these taxes.
You must also pay self-employment tax on your earnings from farming. See chapter 15 for
information on self-employment tax.
Topics
This chapter discusses:
- Farm employment
- Family employees
- Crew leaders
- Social security and Medicare taxes
- Income tax withholding
- Advance payment of the earned income credit
- Reporting and paying social security, Medicare, and withheld income taxes
- Federal unemployment (FUTA) tax
Useful Items
You may want to see:
Publication
- 15 Circular E, Employer's Tax Guide
- 15-A Employer's Supplemental Tax Guide
- 15-B Employer's Tax Guide to Fringe Benefits
- 51 Circular A, Agricultural Employer's Tax Guide
Form (and Instructions)
- W-2 Wage and Tax Statement
- W-4 Employee's Withholding Allowance Certificate
- W-5 Earned Income Credit Advance Payment Certificate
- W-9 Request for Taxpayer Identification Number and Certification
- 940 (or 940-EZ) Employer's Annual Federal Unemployment (FUTA) Tax Return
- 943 Employer's Annual Tax Return for Agricultural Employees
- 8109 Federal Tax Deposit Coupon
See chapter 21 for information about getting publications and forms.
Farm Employment
In general, you are an employer of farm workers if your employees do any of the
following types of work.
- Raising or harvesting agricultural or horticultural products on a farm.
- Operating, managing, conserving, improving, or maintaining your farm and its tools and
equipment.
- Handling, processing, or packaging any agricultural or horticultural commodity if you
produced more than half of the commodity.
- Work related to cotton ginning, turpentine, or gum resin products.
- Housework in your private home on a farm operated for profit. (You may report the taxes
for household employees separately. See Publication 926, Household Employer's Tax
Guide.)
For more information, see Publication 51.
Workers are generally your employees if they perform services subject to your control.
You are not required to withhold or pay employment taxes for independent contractors who
are not your employees. For more information, see Publication 15-A, Employer's
Supplemental Tax Guide.
If you employ a family of workers, each worker subject to your control (not just the
head of the family) is an employee.
Special rules apply to crew leaders. See Crew Leaders, later.
Employer identification number (EIN). If you have employees, you must have an EIN. If you do not have an EIN,
request one on Form SS-4, Application for Employer Identification Number.
The instructions for Form SS-4 provide information on how to apply for an EIN by
telephone, fax, or mail. Form SS-4 is available from either the IRS or the Social Security
Administration (SSA). See chapter 21 for information about ordering this form.
Employee's social security number (SSN). An employee who does not
have an SSN should submit Form SS-5, Application for a Social Security Card, to
the SSA. Form SS-5 is available from any SSA office or by calling 1-800- 772-1213. It
is also available from the SSA's Internet web site at www.ssa.gov.
The employee must furnish evidence of age, identity, and U.S. citizenship with the Form
SS-5. An employee who is 18 or older must appear in person with this evidence at an SSA
office.
INS Form I-9. You must verify
that each new employee is legally eligible to work in the United States. This
includes completing the Immigration and Naturalization Service (INS) Form I-9, Employment
Eligibility Verification. Form I-9 is available from INS offices or by calling 1-800-870-3676.
It is also available from the INS' Internet web site at www.ins.gov. You can
contact the INS at 1-800-375-5283 or 1-800-357-2099 for more information.
New hire reporting. You are
required to report any new employee to a designated state new hire registry. Many
states accept a copy of Form W-4 with employer information added. Call the Office
of Child Support Enforcement at 202-401-9267 or visit its web site at www.acf.dhhs.gov/programs/cse/newhire
for more information.
Family Employees
Generally, the wages you pay to family members who are your employees
are subject to employment taxes. However, certain exemptions may apply to wages
paid to your child, spouse, or parent.
Exemptions for your child. Payments for the services of your child
age 17 or younger who works for you in your trade or business (including a farm) are not
subject to social security and Medicare taxes. However, see Nonexempt services of a
child or spouse, later. Payments for the services of your child age 20 or younger
employed by you in other than a trade or business, such as payments for household services
in your home, are not subject to social security or Medicare taxes. Payments for the
services of your child age 20 or younger employed by you, whether or not in your trade or
business, are not subject to federal unemployment (FUTA) taxes. Although not subject to
social security, Medicare, or FUTA tax, the child's wages still may be subject to income
tax withholding.
Exemptions for your spouse. Payments for the services of your spouse
who works for you in your trade or business are subject to income tax withholding and
social security and Medicare taxes, but not FUTA tax. However, payments for the services
of your spouse employed by you in other than a trade or business, such as payments for
household services in your home, are not subject to social security, Medicare, or FUTA
taxes.
Nonexempt services of a child or spouse. Payments for the services
of your child or spouse are subject to income tax withholding as well as social security,
Medicare, and FUTA taxes if he or she works for any of the following entities.
- A corporation, even if it is controlled by you.
- A partnership, even if you are a partner. This does not apply to wages paid to your
child if each partner is a parent of the child.
- An estate, even if it is the estate of a deceased parent.
In these situations, the child or spouse is considered to work for the corporation,
partnership, or estate, not you.
Exemptions for your parent. Payments for the services of your parent
employed by you in your trade or business are subject to income tax withholding and social
security and Medicare taxes. Social security and Medicare taxes do not apply to wages paid
to your parent for services not in your trade or business, but they do apply to payments
for household services in your home if both the following conditions are satisfied.
- Your child lives in your home and is age 17 or younger or requires adult supervision for
at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.
- You are a widow or widower, divorced, or married to a person who, because of a physical
or mental condition, cannot care for the child during such period.
Wages you pay to your parent are not subject to FUTA tax, regardless of the type of
services provided.
Crew Leaders
If farm workers are provided by a crew leader, the crew leader may be
the employer of the workers.
Social security and Medicare taxes. For social security and Medicare
tax purposes, the crew leader is the employer of the workers if both the following
requirements are met.
- The crew leader pays (either on his or her own behalf or on behalf of the farmer) the
workers for their farm labor.
- The crew leader has not entered into a written agreement with the farmer under which the
crew leader is designated as an employee of the farmer.
Federal income tax withholding. If the crew leader is the employer for social security and Medicare tax
purposes, the crew leader is the employer for federal income tax withholding
purposes.
Federal unemployment (FUTA) tax. For FUTA tax purposes, the crew
leader is the employer of the workers if, in addition to the earlier requirements, either
of the following requirements are met.
- The crew leader is registered under the Migrant and Seasonal Agricultural Worker
Protection Act.
- Substantially all crew members operate or maintain mechanized equipment provided by the
crew leader as part of the service to the farmer.
The farmer is the employer of workers furnished by a crew leader in all other
situations. In addition, the farmer is the employer of workers furnished by a registered
crew leader if the workers are the employees of the farmer under the common-law test. For
example, some farmers employ individuals to recruit farm workers exclusively for them.
Although these individuals may be required to register under the Migrant and Seasonal
Agricultural Worker Protection Act, the workers are employed directly by the farmer. The
farmer is the employer in these cases. For information about common-law employees, see
section 1 of Publication 15-A.
Social Security
and Medicare Taxes
All cash wages you pay to an employee during the year for farm work
are subject to social security and Medicare taxes if you meet either of the
following tests.
- You pay the employee $150 or more in cash wages during the year for farm
work (the $150 test).
- You pay cash and noncash wages of $2,500 or more during the year to all your employees
for farm work (the $2,500 test).
If the $2,500 test for the group is not met, the $150 test for an individual still
applies.
Exceptions. The following wages are not subject to social security
and Medicare taxes, even if you pay $2,500 or more to all your farm workers. However,
these wages count toward the $2,500 test for determining whether other farm workers' wages
are subject to social security and Medicare taxes.
- Annual cash wages of less than $150 paid to a seasonal farm worker. A seasonal farm
worker is a worker who:
- Works as a hand-harvest laborer,
- Is paid piece rates in an operation usually paid on this basis in the region of
employment,
- Commutes daily from his or her permanent home to the farm, and
- Worked in agriculture less than 13 weeks in the preceding calendar year.
- Annual cash wages of less than $1,300 (for 2002) paid to your household employee. The
limit for wages paid to household employees in 2003 will be published in Circular A.
See Circular A for more information on these exceptions. See Family Employees, earlier,
for certain exemptions from social security and Medicare taxes that apply to your child,
spouse, and parent.
Religious exemption. An exemption from social security and
Medicare taxes is available to members of a recognized religious sect opposed to
insurance. This exemption is available only if both the employee and the employer are
members of the sect.
For more information, see Publication 517, Social Security and Other Information
for Members of the Clergy and Religious Workers.
Cash wages. Only cash wages paid to farm workers are subject to
social security and Medicare taxes. Cash wages include checks, money orders, and any kind
of money or cash.
Only cash wages subject to social security and Medicare taxes are credited to your
employees for social security benefit purposes. Payments not subject to these taxes, such
as commodity wages, do not contribute to your employees' social security coverage. For
information about social security benefits, contact the Social Security Administration.
Internet users can go to www.ssa.gov for more information.
Noncash wages. Noncash wages
include food, lodging, clothing, transportation passes, and other goods and services.
Noncash wages paid to farm workers, including commodity wages, are not subject to social
security and Medicare taxes. However, they are subject to these taxes if
the substance of the transaction is a cash payment.
Report the value of noncash wages on Form W-2 in
box 1, Wages, tips, other compensation, together with cash wages. Do not
show noncash wages in box 3, Social security wages, or in box 5, Medicare
wages and tips.
Tax rates and social security wage limit. For 2003, the employer and
the employee will each pay both the following taxes.
- 6.2% of cash wages for social security tax (old-age, survivors, and disability
insurance).
- 1.45% of cash wages for Medicare tax (hospital insurance).
Wage limit. The limit on 2003 wages subject to the social
security tax will be published in Circular A. There is no limit on wages subject to the
Medicare tax. All covered wages are subject to the Medicare tax.
Paying employee's share. If you would rather pay the employee's
share of social security and Medicare taxes without deducting it from his or her wages,
you may do so. It is additional income to the employee. You must include it on the
employee's Form W-2 in box 1, but do not count it as social security and Medicare wages
(boxes 3 and 5 on Form W-2) or as wages for federal unemployment (FUTA) tax purposes.
Example. Jane operates a small family fruit farm. She employs
day laborers in the picking season to enable her to timely get her crop to market. She
does not deduct the employees' share of social security and Medicare taxes from their pay;
instead, she pays it on their behalf. When her accountant, Susan, prepares the employees'
Forms W-2, she adds each employee's share of social security and Medicare taxes paid by
Jane to the employee's wage income (box 1 of Form W-2), but does not
include it in box 3 (social security wages) or box 5 (Medicare wages and tips).
Jane paid Mary $1,000 during the year. Susan enters $1,076.50 in box 1 of Mary's
Form W-2 ($1,000 wages plus $76.50 social security and Medicare taxes paid for Mary). She
enters $1,000 in boxes 3 and 5.
Income Tax Withholding
If the cash wages you pay farm workers are subject to social security
and Medicare taxes, they are also subject to income tax withholding. Although
noncash wages are subject to income tax, withhold income tax only if you and the employee
agree to do so. The amount to withhold is figured on gross wages without taking out social
security and Medicare taxes, union dues, insurance, etc.
Form W-4. Generally, the amount of income tax you withhold is based
on the employee's marital status and withholding allowances claimed on the employee's Form
W-4. In general, an employee can claim withholding allowances on Form W-4 equal to the
number of exemptions the employee will be entitled to claim on his or her tax return. An
employee may also be able to claim a special withholding allowance and allowances for
estimated deductions and credits.
Do not withhold income tax from the wages of an employee who, by filing Form W-4,
certifies that he or she had no income tax liability last year and anticipates no
liability for the current year.
You should give each new employee a Form W-4 as soon as you hire the employee. Have the
employee complete and return the form to you before the first payday. If the employee does
not return the completed form to you, you must withhold income tax as if the employee is
single and claims no withholding allowances.
New Form W-4 for 2003. You should make the 2003 Form W-4 available to your employees and encourage
them to check their income tax withholding for 2003. Those employees who owed a
large amount of tax or received a large refund for 2002 may want to file a new Form W-4.
How to figure withholding. You can use one of several methods to
determine the amount to withhold. The methods are described in Circular A, which contains
tables showing the correct amount of income tax you should withhold. Circular A also
contains additional information about income tax withholding.
Nonemployee compensation. Generally,
you are not required to withhold tax on payments for services to individuals who are not
your employees. However, you may be required to report these payments on Form
1099-MISC, Miscellaneous Income, and to withhold under the backup withholding
rules. See Information Returns in chapter 2 for information.
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