Paying an Employee Who Is Social Security-Exempt

A newspaper carrier is generally considered an independent contractor.

In most cases, participation in the Social Security program is mandatory. Limited exceptions apply, such as in the case of an ordained or commissioned member of the clergy or when an employee surpasses the Social Security tax cut-off figure for the year. Additionally, if you employ a gardener, housekeeper or cook for your household and the worker is 18 years of age or older, and that person earns less than $1,700, you do not have to withhold Social Security or Medicare taxes from their paycheck.

Exempt Employee

If your employee claimed exemption from payment of Social Security taxes, you should verify the claim before assuming the exemption applies under Internal Revenue Service rules. Your tax professional or a representative of the IRS can assist with your query. If you determine the exemption is legitimate, issue the employee’s payroll check in the same manner as you do others in your employ, the only difference being the lack of payment of Social Security taxes, which for the 2011 tax year amount to a reduction of withholding of 4.2 percent of your employee’s gross wages. Additionally, the 6.2 percent portion you must pay as an employer is no longer applicable.

Social Security Cut-Off Figure

As of the date of publication, the cut-off figure, or amount of wages earned when Social Security payments are no longer required, stands at $106,800. When your employee reaches that figure, neither the employee, nor you as an employer, are required to contribute to the Social Security system. If a person enters your employ and has already paid the maximum Social Security tax required for the year based on his income, you must still deduct Social Security taxes from his gross wages. The employee can claim a refund of the Social Security taxes he overpaid when he files his federal income tax return. There is no cut-off figure for Medicare. As of the date of publication, you and your employee must pay 1.45 percent each for all income your employee earns.

Form 941

When preparing Form 941, Employer’s Quarterly Tax Return, which details income paid to employees, you must make adjustments to the figures entered relevant to your Social Security-exempt employee. On the 2011 form, enter all compensation paid on line 2 and all wages and tips subject to the Social Security tax on lines 5a and 5b, respectively. If no income paid to any employee is subject to the tax, check the box associated with line 4 of Form 941. If you employ a person in your household, you normally do not file Form 941. Instead, you should follow the instructions for Schedule H, Household Employment Taxes, and include the document with Form 1040 when you file your annual federal income tax return.

Independent Contractor

Under IRS rules, you do not have to withhold Social Security taxes from the pay of an independent contractor. The independent contractor assumes responsibility for the payment of his own Social Security and Medicare taxes, as well as local, state and federal income tax obligations. Have the independent contractor fill out IRS Form W-9 when you establish a relationship with him. Use Form W-9 to certify the contracted person’s income-reporting information. At the end of the tax year, you should present your independent contractor with a Form 1099, which details payments made to him during the tax year. As with a W-2, Form 1099 is due by the end of January in the year following taxable year.

References

• Social Security Online: Participating in the Social Security Program
• Social Security Online: 2011 Social Security Tax Rate and Maximum Taxable Earnings
• Social Security Online: Paying the Maximum Social Security Tax
• Internal Revenue Service: 941 for 2011: Employer’s Quarterly Federal Tax Return
• Internal Revenue Service: 2010 Instructions for Schedule H Household Employment Taxes
• Internal Revenue Service: Form W-9 Request for Taxpayer Identification Number and Certification
• Internal Revenue Service: General Instructions for Certain Information Forms

Resources

• Social Security Online: Opting out of Social Security
• Social Security Online: Instructions for Form 941
• Internal Revenue Service: Publication 15 Employer’s Tax Guide
• Internal Revenue Service: Publication 15-A Employer’s Supplemental Tax Guide
• Social Security Online: Self-Employment and Social Security Tax