Two recent circuit court decisions have further refined the definition of “wages” for purposes of Federal Insurance Contributions Act employment taxes. In Watson v. Commissioner, 668 F. 3d 1008 (8th Cir. 2012), the U.S. Court of Appeals for the Eighth Circuit affirmed a federal district court’s decision recharacterizing a substantial portion of dividend distributions made by an S-corporation to its sole shareholder as wages for FICA purposes. In United States v. Quality Stores, 110 AFTR 2d ¶2012-5253 (CA6 9/7/12), the Sixth Circuit affirmed the decision of the U.S. Bankruptcy Court for the Western District of Michigan in holding that severance payments made to the terminated employees of a bankrupt employer were not wages for FICA purposes.
Pursuant to FICA, every employee and self-employed individual must pay taxes on his or her wages or self-employment income to fund Social Security and Medicare. The taxes on employees, contained in Sections 3111(a) and (b) of the Internal Revenue Code of 1986, are imposed “on every employer … with respect to individuals in [its] employ,” and are calculated as a certain percentage of wages the employer pays “with respect to employment.” The total tax rate paid by both employees and employers is 7.65 percent. This is made up of a 6.2 percent contribution to the Old-Age, Survivors and Disability Insurance (OASDI) program and a 1.45 percent contribution to Medicare’s hospital insurance program. The OASDI portion is only imposed upon the first $110,000 of “wages” paid (i.e., the “taxable wage base”), and for 2012, the OASDI tax rate of 6.2 percent for employees is temporarily reduced to 4.2 percent pursuant to relief originally effective in 2011. Section 3121(a) defines “wages” for FICA purposes (with certain exceptions) as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.”
