Employers and employees are affected by 3 types of employment taxes:
- wage withholding taxes;
- social security taxes; and
- unemployment taxes.
The obligation to provide worker’s compensation insurance is also an issue.
Other employer Concerns:
- INS – I-9 (immigration form to be completed on initiation of employment, including obtaining proof of identity)
- Reporting new employees for child support
- Minimum wage & overtime
- Employee benefits
- COBRA (mandatory continuation of medical insurance coverage for former employees, their spouses and dependents at the employee’s election and cost)
- HIPAA (which increased job mobility ensuring employee can participate in a new employer’s group health plan)
Compensation subject to FICA nd FUTA
Generally, any service performed by a “common law employee“ within the United States is subject to FICA and FUTA, irrespective of the citizenship or residence of either the employee or the employer, unless exempt under some other provision of § 3121or § 3306. (includes the District of Columbia, Commonwealth of Puerto Rico and Virgin Islands (and Guam and American Samoa for purposes of FICA)).
Service performed outside the United States is subject to tax if performed:
- on or in connection with an American vessel or aircraft, irrespective of the citizenship or residence of the employee:
- when performed under a contract entered into within the United States; or
- on a vessel or aircraft that touches a port within the United States if the employee is employed on such vessel or aircraft when outside the United States;
- by citizens (or residents for purposes of FICA) of the United States as employees of an American employer.
Collection and Liability
Employers collect the employee portion of the tax by deducting from wages. An employer is required to collect and pay the tax in cash, even though the employee receives remuneration for services in a form other than cash.
The amount of wages and the frequency of the payments are immaterial in determining the employer’s liability to collect the tax.
Death or other separation from service does not relieve the employer of its liability to collect the tax on any wages subsequently paid.
An employer is liable for the employee portion of the tax (in addition to the employer portion of the tax) whether or not the tax is collected from the employee. If employer withholds less than the correct amount or fails to withhold any part of the tax, the employer is nevertheless liable for the correct amount. (In addition to the employer, authorized agents described in § 3504 and third-party payors described in § 3505 are also liable for collection and payment of social security taxes.)
The employer’s liability for the employee portion of the social security tax is generally determined under § 3102(b).
If the failure to withhold is due to treatment as an independent contractor, § 3509 limits the employer’s liability for collecting and paying the employee portion of the tax to 20% of the applicable employee tax (i.e., 1.53% of the payment), provided the employer has filed all information returns required of the employer in a consistent manner, or if the employer has not filed all required information returns, the employer is liable for 40%. § 3509 does not apply if: (1) employer intentionally disregards its obligation to pay employment taxes; (2) employer withheld but failed to pay; or (3) the individual qualifies as a statutory employee.
An employee is exempt from FICA withholding if remuneration/calendar year is less than:
- $1,000 for domestic service;
- $100 not in the course of the employer’s trade or business;
- $100 for certain nondomestic service in employee’s home;
- $150 in a calendar year for agricultural labor; or
- $20 in a calendar month with respect to tips to employee.
The employee also is liable for the employee portion of the tax until it is collected from him. Regs. § 31.3102-1(c) (not affected by the employer’s liability under § 3509. Rev. Rul. 86-111, 1986-2 C.B.)
In collecting the employee portion, the employer is indemnified against the claims and demands of any person for the amount deducted and paid over to the government. (Missouri, § 143.241.1)
Employee private right of action
An employee has a private right of action against a former employer alleging wrongful classification as an independent contractor insofar as the claim relates to failure to withhold FICA and FUTA taxes, but not for failure to withhold income taxes) Ford v. Troyer, Civil Action No. 98-246 (E.D. La. 8/5/98).
Employment taxes withheld with respect to one employee may not be used as a credit toward the tax obligations of either the employer or any other employee. See Consolidated Flooring Services v. U.S., 2000-2 USTC ¶50,553