Chapter 8
Special Rules for Paying Taxes

Common Paymaster

If two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster, which is one of the corporations, the corporations are considered a single employer. They have to pay, in total, no more in social security and Medicare taxes than a single employer would.

Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions will not be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information.

Reporting Agents

Agents must submit an application for authorization to act as an agent to the IRS service center where they will be filing returns. A Form 2678, Employer Appointment of Agent, properly completed by each employer, must be submitted with this application. See Rev. Proc. 70-6, 1970-1 C.B. 420, Rev. Proc. 84-33, 1984-1 C.B. 502, and the separate Instructions for Form W-2 for procedures and reporting requirements. Form 2678 does not apply to FUTA taxes reportable on Form 940.

Magnetic tape filing of Forms 940 and 941. Reporting agents filing Forms 940 and 941 for a large number of employers may file them on magnetic tape. For authorization to file using this method, reporting agents must submit a Form 8655, Reporting Agent Authorization for Magnetic Tape/Electronic Filers, completed by each employer. See Rev. Proc. 96-18, 1996-1 C.B. 637, for the procedures for filing Forms 940 and 941 on magnetic tape. Also, see Pub. 1314 ( Form 940) and Pub. 1264 (Form 941) for the tape specifications.

Electronic filing of Form 941. The 941e-file program accepts and processes Form 941 electronically in the Electronic Data Interchange (EDI) format. The program allows a reporting agent taxpayer to electronically file Form 941 using a personal computer, modem, and commercial tax preparation software. See Rev. Proc. 96-17, 1996-1 C.B. 633 and Rev. Proc. 99-39, 1999-43 IRB 532 for procedural information. Also see Pub. 1855 for technical specifications.

Payment of Employment Taxes by Disregarded Entities

Employment taxes for employees of a qualified subchapter S subsidiary or other entity disregarded as an entity separate from its owner may be reported and paid under one of the following methods:

• By its owner (as if the employees of the disregarded entity are employed directly by the owner) using the owner's name and taxpayer identification number or
• By each entity recognized as a separate entity under state law using the entity's own name and taxpayer identification number.

If the second method is chosen, the owner retains responsibility for the employment tax obligations of the disregarded entity. For more information, see Notice 99-6, 1999-3 C.B. 321.

Lender, Surety, or Other Third-Party Payers

Any lender, surety, or other person who pays wages, or supplies funds specifically to pay wages directly to the employees of an employer, or to the employee's agent, is responsible for any required withholding on those wages. The third party is also liable for any interest and penalties accruing on these accounts. This includes the withholding of income, social security, Medicare, and railroad retirement taxes.

Note: These rules do not apply to a person acting only as an agent, or to third-party payers of sick pay, discussed in section 7.

If a third party supplies funds to an employer so that the employer can pay the employees' wages, and if the third party knows that the employer will not pay or deposit the taxes that are required to be withheld when due, then the third party must pay the taxes withheld from the employees' wages but not paid by the employer. However, the third party does not have to pay more than 25% of the amount that is specifically supplied for paying wages. The third-party supplier must also pay interest on the taxes if they are paid after the due date of the employer's return.

Third parties are liable only for payment of the employees' parts of payroll taxes. They are not liable for the employer's part. The employer must file an employment tax return for wages that he or she or a third party pays and must furnish Forms W-2 to employees for the wages paid and taxes withheld. The employer also remains liable for any withholding taxes not paid by the third party.

Liability of trustee in bankruptcy. A trustee in bankruptcy must withhold, report, and pay income, social security, and Medicare taxes from the payment of priority claims for employees' wages earned prior to, but unpaid at the time of, an employer's bankruptcy.

How to pay withheld tax. Third parties who pay employment taxes must file two copies of Form 4219, Statement of Liability of Lender, Surety, or Other Person for Withholding Taxes. A separate set of forms must be filed for each employer and calendar quarter.

Form 4219 must be filed with the IRS service center where the employer for whom wages were paid, or funds were supplied, files Federal employment tax returns.

Each Form 4219 must be accompanied by a check or money order made payable to the "United States Treasury." To avoid interest, full payment should be made on or before the due date of the employer's Federal employment tax return.

Employee's Portion of Taxes Paid by Employer

If you pay your employee's social security and Medicare taxes without deducting them from the employee's pay, you must include the amount of the payments in the employee's wages for income tax withholding and social security, Medicare, and FUTA taxes. This increase in the employee's wage payment for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. This again increases the amount of the additional taxes you must pay.

Note: This discussion does not apply to household and agricultural employers. If you pay a household or agricultural employee's social security and Medicare taxes, these payments must be included in the employee's wages. However, this wage increase due to the tax payments made for the employee is not subject to social security or Medicare taxes as discussed in this section.

To figure the employee's increased wages in this situation, divide the stated pay (the amount you pay without taking into account your payment of employee social security and Medicare taxes) by a factor for that year. This factor is determined by subtracting from 1 the combined employee social security and Medicare tax rate for the year the wages are paid. For 2001, the factor is .9235 (1 - .0765). If the stated pay is more than $74,249.40 (2001 wage base $80,400 x .9235), follow the procedure described under Stated pay of more than $74,249.40 in 2001 below.

Stated pay of $74,249.40 or less in 2001. For an employee with stated pay of $74,249.40 or less in 2001, figure the correct wages (wages plus employer-paid employee taxes) and withholding to report by dividing the stated pay by .9235. This will give you the wages to report in box 1 and the social security and Medicare wages to report in boxes 3 and 5 of Form W-2.

To figure the correct social security tax to enter in box 4 and Medicare tax to enter in box 6, multiply the amounts in boxes 3 and 5 by the withholding rates (6.2% and 1.45%) for those taxes, and enter the results in boxes 4 and 6.

Example. Donald Devon hires Lydia Lone for only 1 week during 2001. He pays her $300 for that week. Donald agrees to pay Lydia's part of the social security and Medicare taxes. To figure her reportable wages, he divides $300 by .9235. The result, $324.85, is the amount he reports as wages in boxes 1, 3, and 5 of Form W-2. To figure the amount to report as social security tax, Donald multiplies $324.85 by the social security tax rate of 6.2% (.062). The result, $20.14, is entered in box 4 of Form W-2. To figure the amount to report as Medicare tax, Donald multiplies $324.85 by the Medicare tax rate of 1.45% (.0145). The result, $4.71, is entered in box 6 of Form W-2. Although he did not actually withhold these amounts from Lydia, he will report these amounts as taxes withheld on Form 941 and is responsible for matching these amounts with the employer share of these taxes.

For FUTA tax and income tax withholding, Lydia's weekly wages are $324.85.

Stated pay of more than $74,249.40 in 2001. For an employee with stated pay of more than $74,249.40 in 2001, the correct social security wage amount is $80,400 (the first $74,249.40 of wages x .9235). The stated pay in excess of $74,249.40 is not subject to social security tax because the tax only applies to the first $80,400 of wages (stated pay plus employer-paid employee taxes). Enter $80,400 in box 3 of Form W-2. The social security tax to enter in box 4 is $4,984.80 x .062).

To figure the correct Medicare wages to enter in box 5 of Form W-2, subtract $74,249.40 from the stated pay. Divide this amount by .9855 (1 - .0145) and add $80,400. For example, if stated pay is $100,000, the correct Medicare wages are figured as follows:

• $100,000 - $74,249.40 = $25,750.60
• $25,750.60 x .9855 = $26,129.48
• $26,129.48 + $80,400 = $106,529.48

The Medicare wages are $106,529.48. Enter this amount in box 5 of Form W-2. The Medicare tax to enter in box 6 is $1,544.68 ($106,529.48 x .0145).

Although these employment tax amounts are not actually withheld, report them as withheld on Form 941, and pay equal amounts as the employer's share of the social security and Medicare taxes. If the wages for income tax purposes in the preceding example are the same as for social security and Medicare purposes, the correct wage amount for income tax withholding is $106,529.48 ($100,000 + $4,984.80 + $1,544.68), which is included in box 1 of Form W-2.

International Social Security Agreements

The United States has social security agreements with many countries to eliminate dual taxation and coverage under two social security systems. Under these agreements, sometimes known as totalization agreements, you generally must pay social security taxes only to the country where you work. Employees and employers who are subject only to foreign social security taxes under these agreements are exempt from U.S. social security taxes, including the Medicare portion.

The United States has social security agreements with the following countries: Austria, Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Additional agreements are expected in the future. For more information, see Pub. 519, U.S. Tax Guide for Aliens, or contact:

Social Security Administration
Office of International Programs
P.O. Box 17741
Baltimore, MD 21235-7741

If you have access to the Internet, you can get more information from the SSA at www.ssa.gov/international.

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