Schedule H tribulations

[FEDUKE404]

Client has established EIN for household employee, has previously filed Schedule H, and so far has not been subject to FUTA/SUTA payments.

Question is about the $1,700/year floor for Part I, namely payment of FICA/medicare via Schedule H.

How do you handle scenarios when the employee is right on the edge of the annual dollar (floor) amount??

Scenario 1: Employee was not expected to make $1700, therefore FICA/med was not withheld from wages. In final quarter, something changed, and wages will exceed $1700. Do you take out excess (something other than 6.2%/1.45%) amounts to make up the difference?? And then file a "correct" Schedule H at tax time?

Scenario 2: Employee was expected to make more than $1700, and FICA/med was withheld from all wages earned during the year. In final quarter, earnings halted and total for calendar year will be less than $1700. I assume there is no Schedule H to file? Does employee get a return of previously paid FICA/medicare? How??

The few Schedule H events I have previously encounted were mostly for higher income employees, including the FUTA/SUTA issues, but this possible "borderline" scenario is new and has me a bit perplexed.

(NOTE: For simplicity reasons, assume there is only one employee.)

Thanks for any input!

FE

[BHoffman]

See Pub 926

From Pub 926 for Scenario 1:

"Not withholding the employee's share. If you prefer to pay your employee's social security and Medicare taxes from your own funds, do not withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your employee's share must be included in the employee's wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.

Example.

You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,700 or more for the year. You decide to pay your employee's share of social security and Medicare taxes from your own funds. You pay your employee $100 every Friday without withholding any social security or Medicare taxes.

For social security and Medicare tax purposes, your employee's wages each payday are $100. For each wage payment, you will pay $15.30 when you pay the taxes. This is $7.65 ($6.20 for social security tax + $1.45 for Medicare tax) to cover your employee's share plus a matching $7.65 for your share. For income tax purposes, your employee's wages each payday are $107.65 ($100 + the $7.65 you will pay to cover your employee's share of social security and Medicare taxes). "

From Pub 926 for Scenario 2:

"You can withhold the employee's share of the taxes even if you are not sure your employee's cash wages will be $1,700 or more in 2010. If you withhold the taxes but then actually pay the employee less than $1,700 in cash wages for the year, you should repay the employee. "

[JG EA]

Most of the Sch H clients I've seen alway pay the employees SS, Med amount themselves either way.

[FEDUKE404]

Employer pays all, then....

Most of the Sch H clients I've seen alway pay the employees SS, Med amount themselves either way.

But doing so then increases the amount of taxable income shown on the Form W2 by the amount of FICA/Medicare the employee did not "pay"...correct?

I guess the bottom line is so long as the correct amounts are eventually remitted by the employer via Schedule H it does not really matter whether the FICA/Medicare amounts were withheld from the wages or whether the employer chose instead to pay everything.

And likewise that the "correct" amounts were shown in the three (federal) wage locations on the Form W2.

FE

[JG EA]

But doing so then increases the amount of taxable income shown on the Form W2 by the amount of FICA/Medicare the employee did not "pay"...correct?

I guess the bottom line is so long as the correct amounts are eventually remitted by the employer via Schedule H it does not really matter whether the FICA/Medicare amounts were withheld from the wages or whether the employer chose instead to pay everything.

And likewise that the "correct" amounts were shown in the three (federal) wage locations on the Form W2.

FE

There are quite a few threads on this here, but it increases box 1 but SS and Med wages are the official wage on which SS and Med are figured and Box 1 has wages + The employer paid share added.
This puts it better:

Employers may pay the employee’s
share of tax themselves rather than withhold tax. Any amount
paid by the employer is added to the employee’s taxable wages
on Form W-2. (Employer payments are not added to Social Security
and Medicare wages and are not subject to FUTA).

TTB 14

[Kram BergGold]

My answers

Scenario 1- taxes not withheld but then you go over $1700. Either the employee kicks in his half by extra withholding or a payment back to the employer (good luck with this concept) or the employer pays both halves.

Scenario #2- taxes withheld but then you discover they should not have been. Employer writes a check refunding taxes to the employee.

[FEDUKE404]

Solutions accepted

Scenario 1- taxes not withheld but then you go over $1700. Either the employee kicks in his half by extra withholding or a payment back to the employer (good luck with this concept) or the employer pays both halves.

Scenario #2- taxes withheld but then you discover they should not have been. Employer writes a check refunding taxes to the employee.

These seem like reasonable approaches to either scenario.

I was more concerned with the "how" versus the "what" aspect.

The information and TTB 14 reference cited by JG EA is a good summary of what is (was?) hopefully taught in any beginning Block tax course. The trick is for the client (employer) to understand the ramifications of the altered numbers, and also to be ready to make peace with the client (employee) who is adamant about the "wrong" number on the W2.....frequently supported by "But I did not make that much money!!"

FE