What if your client's award is
reduced for FICA tax withholding and you don't warn the client? What happens if
an employer fails to withhold FICA taxes from an award of front pay? Barry L.
Salkin of Olshan Frome Wolosky LLP addresses these and the other issues.
What is FICA? FICA, or Social Security tax, is owed on all
remuneration paid by an employer to employees. One-half of the applicable FICA
taxes is imposed against the employee, and the remaining one-half is imposed
against the employer. The employer is required to withhold from an employee's
pay the employee's portion of the FICA taxes.
FICA tax is composed of two parts: an Old Age Survivor and Disability Insurance
portion ("OASDI" or Social Security) and a Hospital Insurance
("HI") portion. For tax years after December 31, 2012, there is an
additional HI tax of .9% on taxpayers' (other than corporations, estates, and
trusts) wages in excess of $250,000 for joint returns, $125,000 for married
couples filing separately, and $200,000 for other taxpayers. (Unlike the
existing FICA, this tax is imposed only upon the employee.) Thus, for tax years
beginning after December 31, 2012, the HI tax would be 1.45% on the first
$200,000 of wages ($125,000 on a separate return, $250,000 on a joint return)
and 2.35% on wages in excess of $200,000 ($125,000 on a separate return, $250,000
on a joint return). These three threshold amounts are not indexed for
inflation, thus, over time an increasing number of taxpayers will become
subject to the higher rate (there will also be a new 3.8% Medicare contribution
imposed after 2012 on net investment income, but the characterization of a
payment as wages has no bearing upon that tax).
How FICA is related to resolution of employment-related litigation. In
the context of the resolution of employment-related litigation, whether by
settlement or judgment, it will not only be high wage earners who will be
affected by the higher FICA tax rates. It is the position of the IRS and some
courts, although there is authority to the contrary (see FSA 200029001),
that wages are taxed in the year in which they are received, rather than the
year to which the earnings relate. Therefore, if an award of back pay, front
pay, or both, constitutes wages (as discussed below) and the period
covers several years, the settlement could easily be subject to the additional
0.9% tax on FICA wages, even if the recipient's annual wages are well below the
applicable threshold amount.
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