Publication 80
Circular SS
(Revised: 1/2003)

Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands

4. Taxable Wages

Generally, all wages are subject to social security and Medicare tax (and FUTA tax for U.S. Virgin Islands employers). However, wages subject to social security tax and FUTA tax are limited by a wage base amount you pay to each employee for the year. After you pay $87,000 to an employee in 2003, including tips, do not withhold social security tax on any amount you later pay the employee for the year. The wage base for FUTA tax is $7,000 for 2003. All wages are subject to Medicare tax. The wages may be in cash or in other forms, such as an automobile for personal use. Wages include salaries, vacation allowances, bonuses, commissions, and fringe benefits. It does not matter how payments are measured or paid.

See the table on pages 15 through 19 for exceptions to taxes on wages. See sections 5 and 6 for a discussion of how the rules apply to tips and farmworkers.

Social security and Medicare taxes apply to most payments of sick pay, including payments by third parties such as insurance companies. Special rules apply to the reporting of third-party sick pay. For details, see Pub. 15-A.

Determine the value of noncash pay (such as goods, lodging, and meals) by its fair market value. However, see Fringe Benefits later. Except for farmworkers and household employees, this kind of pay may be subject to social security, Medicare, and FUTA taxes.

Back pay, including retroactive wage increases (but not amounts paid as liquidated damages), is taxed as ordinary wages in the year paid. For information on reporting back pay to the Social Security Administration, see Pub. 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration.

Travel and business expenses.   Payments to your employee for travel and other necessary expenses of your business generally are included in taxable wages if (1) your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation or (2) you advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses.

Sick pay.   In general, sick pay is any amount you pay, under a plan you take part in, to an employee because of sickness or injury. These amounts are sometimes paid by a third party, such as an insurance company. In either case, these payments are subject to social security, Medicare, and FUTA taxes (U.S. Virgin Islands only). Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. Pub. 15-A explains the employment tax rules that apply to sick pay, disability benefits, and similar payments to employees.

Fringe Benefits

Unless the law provides otherwise, fringe benefits are includible in the gross income of the employee and are subject to employment taxes. Examples of fringe benefits include automobiles or aircraft flights you provide, free or discounted commercial airline flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. In general, the amount included in the employee's income is the excess of the fair market value of the benefit over the sum of any amount paid for it by the employee plus any amount excludable by law. For details on fringe benefits, see Pub. 15-B, Employer's Tax Guide to Fringe Benefits.

When fringe benefits are treated as paid.   You can elect to treat taxable noncash fringe benefits (including personal use of an automobile provided by you) as paid by the pay period, quarter, or on any other basis you choose, but they must be treated as paid at least annually. You do not have to make a formal election of payment dates or notify the IRS. You do not have to make this election for all employees, and the election can be changed as often as desired, as long as all benefits provided in a calendar year are treated as paid no later than December 31 of the calendar year. However, see Special accounting rule for fringe benefits provided during November and December on page 6.

You can treat the value of a single taxable noncash fringe benefit as paid on one or more dates in the same calendar year, even if the employee gets the entire benefit at one time. However, once you elect the payment dates, you must report the taxes on your return in the same tax period in which you treated them as paid. This election does not apply to a fringe benefit where real property or investment personal property is transferred.

Withholding social security and Medicare taxes on fringe benefits.   You add the value of fringe benefits to regular wages for a payroll period and figure social security and Medicare taxes on the total.

If you withhold less than the required amount of social security and Medicare taxes from the employee in a calendar year but report the proper amount, you may recover the taxes from the employee.

Depositing taxes on fringe benefits.   Once payment dates for taxable noncash fringe benefits are elected, taxes are deposited under the general deposit rules (discussed in section 8), including those for timeliness of deposit. You may make a reasonable estimate of the value of the fringe benefits deemed to be paid on the date(s) elected, for purposes of meeting the timely deposit requirements. In general, the value of taxable noncash fringe benefits provided in a calendar year must be determined by January 31 of the following year.

You may claim a refund of overpayments or elect to have any overpayment applied to the next employment tax return. If deposits are underpaid, see Deposit Penalties in section 8.

Valuation of vehicles provided to employees.   If you provide a vehicle to your employees, you may either determine the actual value of the benefit for the entire calendar year, taking into account the business use of the vehicle, or consider the entire use for the calendar year as personal and include 100% of the value of the vehicle in the employee's income. For reporting information to employees, see section 10.

Special accounting rule for fringe benefits provided during November and December.   You may choose to treat the value of taxable noncash fringe benefits provided during November and December as paid in the next year. However, this applies only to those benefits you actually provided during November and December, not to those you merely treated as paid during those months.

If you use this rule, you must notify each affected employee between the time of the employee's last paycheck of the calendar year and at or near the time you give the employee Form W-2VI, W-2GU, W-2AS, or W-2CM. If you use the special accounting rule, your employee must also use it for the same period that you use it. You cannot use this rule for a fringe benefit of real property or tangible or intangible real property of a kind normally held for investment that is a transfer to your employee.

5. Taxable Tips

Tips your employee receives are generally subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid to the employee from charge receipts. Also include tips the employee received directly from customers and other employees, and indirectly (e.g., tip splitting). The report should not include tips the employee paid out to other employees. No report is required for months when tips are less than $20. Your employees report tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. They may also use Form 4070A, Employee's Daily Record of Tips, to keep a record of their tips. Both forms are printed in Pub. 1244, Employee's Daily Record of Tips and Report to Employer, available from the IRS.

The statement must be signed by the employee and must show the following:  

• The employee's name, address, and SSN.
• The employer's name and address.
• The month or period the report covers.
• The total tips.

You must collect the employee social security and Medicare taxes on the employee's tips. You can collect these taxes from the employee's wages or from other funds he or she makes available. Stop collecting the employee social security tax when his or her total wages and tips for 2003 reach $87,000. Collect the employee Medicare tax for the whole year on all wages and tips.

You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the wage base limit. You are responsible for the employer Medicare tax for the whole year on all wages and tips. File Form 941-SS to report withholding on tips.

If, by the 10th of the month after the month you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. Show these tips and any uncollected social security and Medicare taxes on Forms W-2VI, W-2GU, W-2AS, or W-2CM and on lines 6c, 6d, 7a, and 7b of Form 941-SS. Report an adjustment on line 9 of Form 941-SS for the uncollected social security and Medicare taxes.

Note:   You are permitted to establish a system for electronic tip reporting by employees. See Regulations section 31.6053-1.

The table on page 19 shows how tips are treated for FUTA tax purposes.

6. Social Security and Medicare Taxes for Farmworkers

The tests described below apply only to services that are defined as agricultural labor (farmwork). Farmworkers are your employees if they:

• Raise or harvest agricultural or horticultural products on your farm.
• Work in connection with the operation, management, conservation, improvement, or maintenance of your farm and its tools and equipment.
• Handle, process, or package any agricultural or horticultural commodity if you produced over half of the commodity (for an unincorporated group of up to 20 operators, all of the commodity).
• Do work for you related to cotton ginning, turpentine, or gum resin products.
• Do housework in your private home if it is on a farm that is operated for profit.

A share farmer working for you is not your employee. However, the share farmer may be subject to self-employment tax. In general, share farming is an arrangement in which certain commodity products are shared between the farmer and the owner (or tenant) of the land. For details, see Regulations section 31.3121(b)(16)-1.

The $150 Test or the $2,500 Test

All cash wages you pay for farmwork are subject to social security and Medicare taxes if either of the two tests below is met:

• You pay cash wages to the employee of $150 or more in a year (count all cash wages paid on a time, piecework, or other basis) for farmwork. The $150 test applies separately to each farmworker you employ. If you employ a family of workers, each member is treated separately. Do not count wages paid by other employers.
• The total you pay for farmwork (cash and noncash) to all of your employees is $2,500 or more.

Exceptions.   The $150 and $2,500 tests do not apply to the following:

1. Wages you pay to a farmworker who receives less than $150 in annual cash wages are not subject to social security or Medicare taxes even if you pay $2,500 or more in that year to all your farmworkers if the farmworker:
   1. Is employed in agriculture as a hand-harvest laborer,
   2. Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment,
   3. Commutes daily from his or her home to the farm, and
   4. Was employed in agriculture less than 13 weeks in the preceding calendar year.

   Amounts you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages you pay to other farmworkers are subject to social security and Medicare taxes.

2. Cash wages you pay a household employee are counted in the $2,500 test but are not subject to social security and Medicare taxes unless you have paid the worker $1,300 or more in cash wages in 2002 ($1,400 in 2003). See the table on page 17 showing liability for social security, Medicare, and FUTA taxes.

7. How To Figure Social Security and Medicare Taxes

For wages paid in 2003, the social security tax rate is 6.2% and the Medicare tax rate is 1.45% for both the employer and the employee. Multiply each wage payment by these percentages to figure the tax. For example, the social security tax on a wage payment of $355 would be $22.01 ($355 × .062) each. The Medicare tax would be $5.15 ($355 × .0145) each. (See section 5 for information on tips.)

Note:    Deduct the employee tax from each wage payment. If you are not sure that the wages you pay to a farmworker during the year will be taxable, you may either deduct the tax when you make the payments or wait until the $2,500 test or the $150 test explained in section 6 has been met.

Employee's portion of taxes paid by employer.   If you pay your employee's social security and Medicare taxes without deducting them from the employee's pay, you must include the amount of the payments in the employee's wages for social security and Medicare taxes. This increase in the employee's wage payment for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. This again increases the amount of the additional taxes you must pay.

Note:    This discussion does not apply to household and agricultural employers. If you pay a household or agricultural employee's social security and Medicare taxes, these payments must be included in the employee's wages. However, this wage increase due to the tax payments is not subject to social security or Medicare taxes as discussed in this section. See Publication 15-A for details.

Sick pay payments. Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such as insurance companies. For details on third-party payers of sick pay, see Pub. 15-A.

8. Deposit Requirements

You must deposit social security and Medicare taxes if your tax liability (line 10 of Form 941-SS or line 11 of Form 943) is $2,500 or more for the tax return period. You make the deposits either electronically or with paper coupons. These methods are discussed later.

Payment with Return

You may make a payment with Forms 941-SS or 943 instead of depositing if:

• You accumulate less than a $2,500 tax liability during the return period (line 10 of Form 941-SS or line 11 of Form 943) and you pay in full with a timely filed return. However, if you are unsure that you will accumulate less than $2,500, deposit under the rules explained in this section so that you will not be subject to failure to deposit penalties, or
• You are a monthly schedule depositor and make a payment in accordance with the Accuracy of Deposits Rule on page 10. This payment may be $2,500 or more.

Only monthly schedule depositors are allowed to make this payment with the return.

When To Deposit

Note:    Under the rules discussed below, the only difference between farm and nonfarm workers' employment tax deposit rules is the lookback period. Therefore, farm and nonfarm workers are discussed together except where noted.

Depending on your total taxes reported during a lookback period (discussed below), you are either a monthly schedule depositor or a semiweekly schedule depositor.

The terms monthly schedule depositor and semiweekly schedule depositor do not refer to how often you pay your employees or how often you are required to make deposits. The terms identify which set of rules you must follow when a tax liability arises (when you have a payday).

You will need to determine your deposit schedule for a calendar year based on the total employment taxes reported on line 10 of Form 941-SS, line 11 of Form 941, or line 9 of Form 943 for your lookback period (defined below). If you filed both Forms 941-SS and 941 during the lookback period, combine the tax liabilities for these returns for purposes of determining your deposit schedule. Determine your deposit schedule for Form 943 separately from Forms 941-SS and 941.

Lookback period for employers of nonfarm workers.   The lookback period for Form 941-SS (or Form 941) consists of 4 quarters beginning July 1 of the second preceding year and ending June 30 of the prior year. These 4 quarters are your lookback period even if you did not report any taxes for any of the quarters. For 2003, the lookback period is July 1, 2001, through June 30, 2002.

lookback

Lookback period for employers of farmworkers.   The lookback period for Form 943 is the second calendar year preceding the current calendar year. The lookback period for calendar year 2003 is calendar year 2001.

Adjustments to lookback period taxes.   To determine your taxes for the lookback period, use only the tax you reported on the original returns (Forms 941-SS, 941, or 943). Do not include adjustments made on a supplemental return filed after the due date of the return. However, if you make adjustments on Form 941-SS or 943, the adjustments are included in the total tax for the period in which the adjustments are reported.

Example of adjustments.   An employer originally reported total taxes of $45,000 for the lookback period. The employer discovered during February 2003 that the tax during the lookback period was understated by $10,000 and corrected this error with an adjustment on the 2003 first quarter Form 941-SS. The employer is a monthly schedule depositor for 2003 because the lookback period tax liabilities are based on the amounts originally reported, and they were less than $50,000. The $10,000 adjustment is treated as part of the 2003 taxes.

Monthly Deposit Schedule

If the total tax reported for the lookback period is $50,000 or less, you are a monthly schedule depositor for the current year. You must deposit taxes on wage payments made during a calendar month by the 15th day of the following month.

New employers.   During the first calendar year of your business, your taxes for the lookback period are considered to be zero. Therefore, you are a monthly schedule depositor for the first calendar year of your business (but see the $100,000 Next-Day Deposit Rule on page 9).

Semiweekly Deposit Schedule

If the total tax reported for the lookback period is more than $50,000, you are a semiweekly schedule depositor for the current year. If you are a semiweekly schedule depositor, you must deposit on Wednesday and/or Friday, depending on what day of the week you make wage payments, as follows:

• Deposit taxes on wage payments made on Wednesday, Thursday, and/or Friday by the following Wednesday.
• Deposit taxes on wage payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.

Semiweekly deposit period spanning two quarters.    If you have more than one pay date during a semiweekly period and the pay dates fall in different calendar quarters, you will need to make separate deposits for the separate liabilities. For example, if you have a pay date on Saturday March 29, 2003 (first quarter), and another pay date on Tuesday, April 1, 2003 (second quarter), two separate deposits will be required even though the pay dates fall within the same semiweekly period. Both deposits will be due Friday, April 4, 2003 (three banking days from the end of the semiweekly deposit period).

Deposit Period

The term deposit period refers to the period during which tax liabilities are accumulated for each required deposit due date. For monthly schedule depositors, the deposit period is a calendar month. The deposit periods for semiweekly schedule depositors are Wednesday through Friday and Saturday through Tuesday.

Examples of Monthly and Semiweekly Schedules

Employers of nonfarm workers.   Rose Co. reported Form 941-SS taxes as follows:

2000 through the 2nd quarter of 2001) were not more than $50,000. However, for 2003, Rose Co. is a semiweekly schedule depositor because the total taxes for the 4 quarters in its lookback period ($51,000 for the 3rd quarter of 2001 through the 2nd quarter of 2002) exceeded $50,000.

Employers of farmworkers.   Red Co. reported taxes on its 2000 Form 943 of $48,000. On its 2001 Form 943, it reported taxes of $60,000.

Red Co. is a monthly schedule depositor for 2002 because its taxes for its lookback period ($48,000 for calendar year 2000) were not more than $50,000. However, for 2003, Red Co. is a semiweekly schedule depositor because the total taxes for its lookback period ($60,000 for calendar year 2001) exceeded $50,000.

Deposits on Banking Days Only

If a deposit due date falls on a day that is not a banking day, the deposit is considered timely if it is made by the close of the next banking day. In addition to Federal and state bank holidays, Saturdays and Sundays are treated as nonbanking days. For example, if a deposit is required to be made on Friday, but Friday is not a banking day, the deposit is considered timely if it is made by the following Monday (if Monday is a banking day).

Semiweekly schedule depositors will always have at least 3 banking days to make a deposit. That is, if any of the 3 weekdays after the end of a semiweekly period is a banking holiday, you will have one additional banking day to deposit. For example, if a semiweekly schedule depositor accumulated taxes for payments made on Friday and the following Monday is not a banking day, the deposit normally due on Wednesday may be made on Thursday (allowing 3 banking days to make the deposit).

Application of Monthly and Semiweekly Schedules

The examples below illustrate the procedure for determining the deposit date under the two different deposit schedules.

Monthly schedule example.   Green Inc. is a seasonal employer and a monthly schedule depositor. It pays wages each Friday. During January 2003, it paid wages but did not pay any wages during February. Green Inc. must deposit the combined tax liabilities for the January paydays by February 15. Green Inc. does not have a deposit requirement for February (due by March 15) because no wages were paid in February and, therefore, it did not have a tax liability for February.

Semiweekly schedule example.   Blue Co., a semiweekly schedule depositor, pays wages on the last day of the month. Blue Co. will deposit only once a month because it pays wages only once a month, but the deposit will be made under the semiweekly deposit schedule as follows. Blue Co.'s tax liability for the April 30, 2003 (Wednesday) payday must be deposited by May 7, 2003 (Wednesday).

$100,000 Next-Day Deposit Rule

If you accumulate taxes of $100,000 or more on any day during a deposit period, you must deposit by the close of the next banking day, whether you are a monthly or a semiweekly schedule depositor. For monthly schedule depositors, the deposit period is a calendar month. For semiweekly schedule depositors, the deposit periods are Wednesday through Friday and Saturday through Tuesday.

For purposes of the $100,000 rule, do not continue accumulating taxes after the end of a deposit period. For example, if a semiweekly schedule depositor has accumulated taxes of $95,000 on Tuesday and $10,000 on Wednesday, the $100,000 next-day deposit rule does not apply because the $10,000 is accumulated in the next deposit period. Thus, $95,000 must be deposited by Friday and $10,000 must be deposited by the following Wednesday.

In addition, once you accumulate at least $100,000 in a deposit period, stop accumulating at the end of that day and begin to accumulate anew on the next day. For example, Fir Co. is a semiweekly schedule depositor. On Monday, Fir Co. accumulates taxes of $110,000 and must deposit on Tuesday, the next banking day. On Tuesday, Fir Co. accumulates additional taxes of $30,000. Because the $30,000 is not added to the previous $110,000 and is less than $100,000, Fir Co. must deposit the $30,000 by Friday using the normal semiweekly deposit schedule.

If you are a monthly schedule depositor and you accumulate a $100,000 tax liability on any day during a month, you become a semiweekly schedule depositor on the next day and remain so for the remainder of the calendar year and for the following calendar year.

Example of $100,000 next-day deposit rule. Elm Inc. started business on May 2, 2003. Because Elm Inc. is a new employer, the taxes for its lookback period are considered to be zero; therefore, Elm Inc. is a monthly schedule depositor. On May 9, Elm Inc. paid wages for the first time and accumulated taxes of $40,000. On May 16 (Friday), Elm Inc. paid wages and accumulated taxes of $60,000, for a total of $100,000. Because Elm Inc. accumulated $100,000 on May 16, it must deposit $100,000 by May 19 (Monday), the next banking day. Elm Inc. immediately becomes a semiweekly schedule depositor for the remainder of 2003 and for 2004 but may be subject to the $100,000 next-day deposit rule if it accumulates $100,000 again in any semiweekly deposit period.

Accuracy of Deposits Rule

You are required to deposit 100% of your tax liability on or before the deposit due date. However, penalties will not be applied for depositing less than 100% if both of the following conditions are met:

1. Any deposit shortfall does not exceed the greater of $100 or 2% of the amount of taxes otherwise required to be deposited and
2. The deposit shortfall is paid or deposited by the shortfall makeup date as described below.

Makeup date for deposit shortfall:

• Monthly schedule depositor. Deposit or pay the shortfall by the due date of the Form 941-SS (or 943) for the period in which the shortfall occurred. You may pay the shortfall with your return even if the amount is $2,500 or more.
• Semiweekly schedule depositor. Deposit by the earlier of the (1) first Wednesday or Friday (whichever comes first) that comes on or after the 15th of the month following the month in which the shortfall occurred or (2) the return due date for the period in which the shortfall occurred. For example, if a semiweekly schedule depositor has a deposit shortfall during February 2003, the shortfall makeup date is March 19, 2003 (Wednesday). However, if the shortfall occurred on the required April 2 (Wednesday) deposit date for a March 28 (Friday) pay date, the return due date for the March 28 tax liability (April 30) would come before the May 16 (Friday) shortfall makeup date. In this case, the shortfall must be deposited by April 30.

Employers of Both Farm and Nonfarm Workers

If you employ both farm and nonfarm workers, you must treat employment taxes for the farmworkers (Form 943 taxes) separately from employment taxes for the nonfarm workers (Form 941-SS taxes). Form 943 taxes and Form 941-SS taxes are not combined for purposes of applying any of the deposit rules.

If a deposit is due, deposit the Form 941-SS taxes and Form 943 taxes separately, as discussed below.

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