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 that you pay to each employee for the year. The wage base for social security tax is $106,800 for 2010. After you pay $106,800 to an employee in 2010, including tips, do not withhold social security tax on any amount that you later pay to the employee for the year. The wage base for FUTA tax is $7,000 for 2010. 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 in section 12 for exceptions to social security, Medicare, and FUTA 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 Publication 15-A.
Determine the value of noncash pay (such as goods, lodging, and meals) by its fair market value. However, see Fringe Benefits below. 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 taxmap/pubs/p80-004.htm#en_us_publink1000233940
Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration.
Payments to your employee for travel and other necessary expenses of your business generally are included in taxable wages if taxmap/pubs/p80-004.htm#en_us_publink1000233941
(a) your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, or (b) you advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount that he or she does not substantiate.
In general, sick pay is any amount that you pay, under a plan that 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. Publication 15-A explains the employment tax rules that apply to sick pay, disability benefits, and similar payments to employees.taxmap/pubs/p80-004.htm#en_us_publink1000233942
Generally, fringe benefits are includible in the gross income of an employee and are subject to employment taxes. Examples of fringe benefits include the use of an automobile, aircraft flights that 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 and any amount excluded by law. For more information, see Publication 15-B, Employer's Tax Guide to Fringe Benefits.taxmap/pubs/p80-004.htm#en_us_publink1000233943
You can choose 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 that you choose, but they must be treated as paid at least annually. You do not have to make a formal choice of payment dates or notify the IRS. You do not have to use the same basis for all employees. You may change methods as often as you like, 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 below.
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.taxmap/pubs/p80-004.htm#en_us_publink1000233944
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 and pay the proper amount, you may recover the taxes from the employee.taxmap/pubs/p80-004.htm#en_us_publink1000233945
Once you choose payment dates for taxable noncash fringe benefits, you must deposit taxes in the same deposit period that you treat the fringe benefits as paid. You may make a reasonable estimate of the value of the fringe benefits. 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.taxmap/pubs/p80-004.htm#en_us_publink1000233946
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 the box 14 instructions under Specific Instructions for Forms W-2AS, W-2GU, and W-2VI in the separate Instructions for Forms W-2AS, W-2GU, W-2VI, and Form W-3SS.taxmap/pubs/p80-004.htm#en_us_publink1000233947
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 that 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 that you give the employee Form W-2AS, W-2CM, W-2GU, or Form W-2VI. 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 transferred to your employee.