As part of ThinkAdvisor's Special Report, 21 Days of Tax Planning Advice for 2014, throughout the month of March, we are partnering with our Summit Professional Networks sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format.
Is the cost of employer-provided group term life insurance subject to Social Security tax?
Yes. The cost of group term life insurance that is includable in the gross income of the employee is considered wages subject to Social Security tax.
The general rule is that an employee may exclude the cost of the first $50,000 of employer-provided group term life insurance from income. Therefore, only the cost of coverage in excess of $50,000 generally will be subject to the Social Security tax.
An employer is required to report amounts includable in the wages of current employees for purposes of the Social Security tax on employees' W-2 forms. An employer generally may treat wages as though paid on any basis so long as they are treated as paid at least once each year.
Social Security tax must be paid by an employee if a payment for group term life insurance is considered wages and is for periods during which there is no longer an employment relationship between the employer and the employee. An employer is required to separately state the portion of an employee's wages that consist of payments for group term life insurance and the amount of Social Security tax.
Is employer-provided sick pay subject to Social Security and federal unemployment tax?
Preretirement wage continuation payments by an employer or an insurance company to an employee because of his or her sickness or disability are subject to Social Security tax (FICA) and federal unemployment tax (FUTA) for the first six calendar months after the last month in which the employee worked for the employer.
After six months, they are exempt from Social Security and federal unemployment tax.
Payments or parts of payments attributable to employee contributions made to a sick pay plan with after tax dollars are not subject to Social Security or FUTA taxes.
Are amounts received under a cafeteria plan subject to Social Security and federal unemployment taxes?
Amounts received by participants, or their beneficiaries, under a cafeteria plan are not treated as wages. Thus, these amounts are not subject to tax under the Federal Insurance Contributions Act (FICA) or under the Federal Unemployment Tax Act (FUTA) if such payments would not be treated as wages without regard to the plan, and if it is reasonable to believe that IRC Section 125 would not treat any wages as constructively received.
Are amounts contributed to a Health Savings Account (HSA) subject to Social Security or federal unemployment taxes and federal income tax withholding?
The definition of wages for purposes of the federal unemployment tax (FUTA) does not include any payment made to or for the benefit of an employee if it is reasonable to believe that the employee will be able to exclude the payment from income under IRC Section 106(d), which deals with contributions to HSAs.
Unfortunately, a similar change was not made to IRC Section 3121(a) with respect to FICA. The IRS has stated, however, that employer contributions to an HSA are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. A similar statement has been made by the Joint Committee on Taxation.
How is a reduction in salary for a tax sheltered annuity treated for Social Security tax and income tax withholding purposes?
Excludable amounts paid into a tax sheltered annuity are not wages subject to income tax withholding, even if the amounts are derived from a salary reduction agreement.
The amount of salary reduction contributions to the plan is subject to Social Security taxes even though it is excludable from the employee's gross income. Employer non-salary reduction contributions are not includable in wages for Social Security purposes.
Under the final regulations, salary reduction agreement means a plan or arrangement under which payment will be made by an employer on behalf of an employee or his or her beneficiary under or to an annuity contract if the employee:
