@064 CHAP 5

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        ³      FICA (SOCIAL SECURITY TAX) ON WAGES      ³
        ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ

@Q       "Man is a thinking animal, a talking animal, a
@Q        tool-making animal, a building animal, a poli-
@Q        tical animal, a fantasizing animal. But in the
@Q        twilight of a civilization he is chiefly a
@Q        taxpaying animal."  -- Hugh MacLennan

FICA (or "Social Security") taxes apply to the wages of
virtually all employees.  For 1992, the 15.3% FICA tax (im-
posed at the rate of 7.65% each on the employee and the em-
ployer on each employee's wages) applied to wages up to a
maximum of $55,500 per covered employee.  In addition, on
wages above $55,500 but below $130,200, there was a 2.9% tax
(also split equally between employer and employee, at 1.45%
each).  Thus, the maximum total combined FICA taxes on an
employee's wages in 1992 were $10,658 (or $5,329 each, for
employer and employee).

These covered amounts increased to $57,600 at 15.3% and
$135,000 at 2.9% in 1993, for a maximum 1993 combined tax
of $11,057 on an employee with $135,000 or more in wages.

Employers are required to withhold the employee's share of
FICA tax from the wages paid to the employee, and deposit
both the employee and employer portions of the tax along
with withheld federal income taxes.  Such funds must be
deposited with an appropriately coded federal tax deposit
coupon in a bank that is designated as a federal tax de-
pository.  Quarterly returns must be filed (Form 941) re-
porting the wages of the employees with respect to whom
the taxes were withheld and paid.

There is no effective shelter from FICA tax, other than not
to pay or receive wages, which obviously is not much of a
solution.  Many employers attempt to avoid paying FICA (and
FUTA) tax on wages of their workers by treating those wor-
kers as "independent contractors."  The IRS, however, is
increasingly cracking down on those employers where such
tax treatment of workers is not justified.  For details,
see the discussion of "INDEPENDENT CONTRACTORS" under that
subject listing, using the "INDX" or "KEY" menu selections
in this program (MAIN Menu), or else use the "INDEP" selec-
tion on the CHECKLISTS Menu.

Until January 1, 1988 it was possible to pay wages to one's
spouse or to one's children under age 21 free of FICA
taxes, but this "loophole" was eliminated by the Revenue
Act of 1987.  However, a sole proprietor may still hire his
or her children under age 18 to work in the family business
without such wages being subject to FICA taxes.  Note that
even this limited exception does not apply to a corporate
business or to typical partnerships.

As heavy a tax burden as the FICA tax is, at least the em-
ployer's half of the tax is deductible as a business ex-
pense.  Before 1990, this was more advantageous than the
situation for self-employed persons, who paid a somewhat
lower total tax rate, but were unable to deduct any of the
Self-Employment tax they paid.  In 1990 and thereafter,
this difference no longer exists, since the self-employment
tax rate is now the same as the total FICA rate (15.3%),
and half of it is deductible for income tax purposes.

One possible, but somewhat controversial, approach to re-
ducing one's FICA or self-employment tax on earnings is to
set up an S corporation and pay yourself wages less than
the $57,600 amount that would ordinarily be subject to the
full 15.3% FICA or self-employment taxes.  This will in-
crease the S corporation's net income, which will still
pass through to you as the shareholder, but such income can
be distributed to you in full as dividends with no taxes
other than straight income tax applicable to it, unlike
wages or self-employment income, which are be subject to
BOTH income tax and FICA or self-employment tax.  Note that
if the wages you pay yourself from an S corporation are
unreasonably low, the IRS has the right to "impute" part of
the corporate income to you as additional wages, which
could defeat this neat strategem.

@CODE: LS
There is no Social Security Tax or Social Security in
@STATE.  Persons who live to age 65 in @STATE
tend to disappear into the back of unmarked vans.

@CODE:OF