7. Special Rules for Paying Taxes(p20)

If two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster that is one of the corporations, the corporations are considered to be a single employer. They have to pay, in total, no more in social security tax than a single employer would pay.

Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions will not be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information. The common paymaster is responsible for filing information and tax returns and issuing Forms W-2 with respect to wages it is considered to have paid as a common paymaster.

Employers and payers must use Form 2678, Employer/Payer Appointment of Agent to request approval for an agent to file returns and make deposits or payments of their employment or other withholding taxes. See Revenue Procedure 70-6, 1970-1 C.B. 420, Revenue Procedure 84-33, 1984-1 C.B. 502, and the separate Instructions for Forms W-2 and W-3 for procedures and reporting requirements. Form 2678 does not apply to FUTA taxes reportable on Form 940 unless the employer is a home care service recipient receiving home care services through a program administered by a federal, state, or local government agency. Beginning for 2010 tax periods, agents must file Schedule R (Form 941) and, in the case of home care service recipients, Schedule R (Form 940).

Reporting agents may file Forms 940, 941, and 944 electronically. For details, see Publication 3112, IRS e-file Application and Participation. File Form 8633, Application to Participate in the IRS e-file Program, and Form 8655, Reporting Agent Authorization. See Revenue Procedure 2007-40 for information on electronic filing of Forms 940, 941, and 944. Revenue Procedure 2007-40, 2007-26 I.R.B. 1488 is available at www.irs.gov/irb/2007-26_IRB/ar13.html. See Revenue Procedure 2007-38 for the requirements for completing and submitting Form 8655. Revenue Procedure 2007-38, 2007-25 I.R.B. 1442 is available at  
www.irs.gov/irb/2007-25_IRB/ar15.html. For more information on electronic filing, visit the IRS website at  
www.irs.gov/efile or call 1-866-255-0654.

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 federal income tax withholding and social security, Medicare, and FUTA taxes. This increase in the employee's wages 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.

To figure the employee's increased wages in this situation, divide the stated pay (the amount that you pay without taking into account your payment of employee social security and Medicare taxes) by a factor for that year. This factor is determined by subtracting from 1 the combined employee social security and Medicare tax rate for the year that the wages are paid. For 2011, the factor is .9435 (1 − .0565). If the stated pay is more than $100,765.80 (2011 wage base $106,800 × .9435), follow the procedure described under Stated pay of more than $100,765.80 in 2011 below.

For an employee with stated pay of $100,765.80 or less in 2011, figure the correct wages (wages plus employer-paid employee taxes) to report by dividing the stated pay by .9435. This will give you the wages to report in box 1 and the social security and Medicare wages to report in boxes 3 and 5 of Form W-2.

To figure the correct social security tax to enter in box 4 and Medicare tax to enter in box 6, multiply the amounts in boxes 3 and 5 by the withholding rates (4.2% and 1.45%) for those taxes, and enter the results in boxes 4 and 6.

Donald Devon hires Lydia Lone for only one week during 2011. He pays her $300 for that week. Donald agrees to pay Lydia's part of the social security and Medicare taxes. To figure her reportable wages, he divides $300 by .9435. The result, $317.97, is the amount that he reports as wages in boxes 1, 3, and 5 of Form W-2. To figure the amount to report as social security tax, Donald multiplies $317.97 by the social security tax rate of 4.2% (.042). The result, $13.35, is entered in box 4 of Form W-2. To figure the amount to report as Medicare tax, Donald multiplies $317.97 by the Medicare tax rate of 1.45% (.0145). The result, $4.61, is entered in box 6 of Form W-2. Although he did not actually withhold the amounts from Lydia, he will report these amounts as taxes withheld on Form 941 or Form 944 and is responsible for the employer share of these taxes.

For FUTA tax and federal income tax withholding, Lydia's weekly wages are $317.97.

For an employee with stated pay of more than $100,765.80 in 2011, the portion of stated wages subject to social security tax is $100,765.80 (the first $106,800 of wages × .9435). The stated pay in excess of $100,765.80 is not subject to social security tax because the tax only applies to the first $106,800 of wages (stated pay plus employer-paid employee taxes). Enter $106,800 in box 3 of Form W-2. The social security tax to enter in box 4 is $4,485.60 ($106,800 x .042).

To figure the correct Medicare wages to enter in box 5 of Form W-2, subtract $100,765.80 from the stated pay. Divide the result by .9855 (1 − .0145) and add $106,800.

For example, if stated pay is $104,500, the correct Medicare wages are figured as follows.

• $104,500 – $100,765.80 = $3,734.20
• $3,734.20 ÷ .9855 = $3,789.14
• $3,789.14 + $106,800 = $110,589.14

The Medicare wages are $110,589.14. Enter this amount in box 5 of Form W-2. The Medicare tax to enter in box 6 is $1,603.54 ($110,589.14 × .0145).

Although these employment tax amounts are not actually withheld from the employee's pay, report them as withheld on Form 941, and pay this amount as the employer's share of the social security and Medicare taxes. If the wages for federal income tax withholding purposes in the preceding example are the same as for social security and Medicare purposes, the correct wage amount for federal income tax withholding is $110,589.14 ($104,500 + $4,485.60 + $1,603.54), which is included in box 1 of Form W-2.

This discussion above 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 made for the employee is not subject to social security or Medicare taxes as discussed in this section.

If you pay your employee's portion of his or her social security and Medicare taxes rather than deducting them from his or her pay, you are liable for timely depositing or paying the increased taxes associated with the wage increase. Also, report the increased wages on the appropriate lines of Form 941 for the quarter during which the wages were paid or on Form 944 for the year during which the wages were paid.

The United States has social security agreements with many countries to eliminate dual taxation and coverage under two social security systems. Under these agreements, sometimes known as totalization agreements, employees generally must pay social security taxes only to the country where they work. Employees and employers who are subject to foreign social security taxes under these agreements are exempt from U.S. social security taxes, including the Medicare portion.

The United States has social security agreements with the following countries: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Additional agreements are expected in the future. For more information, visit the SSA website at  
www.socialsecurity.gov/international, or see Publication 519, U.S. Tax Guide for Aliens.