Social Security & Medicare Taxes

All cash wages you pay to an employee during the year for farm work are subject to social security and Medicare taxes if you meet either of the following tests.

• You pay the employee $150 or more in cash wages during the year for farm work (the $150 test).
• You pay cash and noncash wages of $2,500 or more during the year to all your employees for farm work (the $2,500 test).

If the $2,500 test for the group is not met, the $150 test for an individual still applies.

See Table 16-1.

Exceptions. The following wages are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farm workers. However, these wages count toward the $2,500 test for determining whether other farm workers' wages are subject to social security and Medicare taxes.

1. Annual cash wages of less than $150 paid to a seasonal farm worker. A seasonal farm worker is a worker who:
1. Works as a hand-harvest laborer,
2. Is paid piece rates in an operation usually paid on this basis in the region of employment,
3. Commutes daily from his or her permanent home to the farm, and
4. Worked in agriculture less than 13 weeks in the preceding calendar year.
2. Annual cash wages of less than $1,300 paid to your household employee.

See Circular A for more information on these exceptions. See Family Employees, earlier, for certain exemptions from social security and Medicare taxes that apply to your child, spouse, and parent.

Table 16 - 1. How Do Employment Taxes Apply to Farmwork?

Religious exemption. An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed to insurance. This exemption is available only if both the employee and the employer are members of the sect.

For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Cash wages. Only cash wages paid to farm workers are subject to social security and Medicare taxes. Cash wages include checks, money orders, and any kind of money or cash.

Only cash wages subject to social security and Medicare taxes are credited to your employees for social security benefit purposes. Payments not subject to these taxes, such as commodity wages, do not contribute to your employees' social security coverage. For information about social security benefits, contact the Social Security Administration. Internet users can go to www.ssa.gov for more information.

Noncash wages. Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Noncash wages paid to farm workers, including commodity wages, are not subject to social security and Medicare taxes. However, they are subject to these taxes if the substance of the transaction is a cash payment.

Report the value of noncash wages on Form W-2 in box 1, Wages, tips, other compensation, together with cash wages. Do not show noncash wages in box 3, Social security wages, or in box 5, Medicare wages and tips.

Tax rates and social security wage limit. For 2002, the employer and the employee will each pay both the following taxes.

• 6.2% of cash wages for social security tax (old-age, survivors, and disability insurance).
• 1.45% of cash wages for Medicare tax (hospital insurance).

Wage limit. The limit on 2002 wages subject to the social security tax will be published in Circular A. There is no limit on wages subject to the Medicare tax. All covered wages are subject to the Medicare tax.

Paying employee's share. If you would rather pay the employee's share of social security and Medicare taxes without deducting it from his or her wages, you may do so. If you do not deduct the employee's share, you must still pay it. It is additional income to the employee. You must include it on the employee's Form W-2 in box 1, but do not count it as social security and Medicare wages (boxes 3 and 5 on Form W-2) or as wages for federal unemployment (FUTA) tax purposes.

Example. Jane operates a small family fruit farm. She employs day laborers in the picking season to enable her to timely get her crop to market. She does not deduct the employees' share of social security and Medicare taxes from their pay; instead, she pays it on their behalf. When her accountant, Susan, prepares the employees' Forms W-2, she adds each employee's share of social security and Medicare taxes paid by Jane to the employee's wage income (box 1 of Form W-2), but does not include it in box 3 (social security wages) or box 5 (Medicare wages and tips).

Jane paid Mary $1,000 during the year. Susan enters $1,076.50 in box 1 of Mary's Form W-2 ($1,000 wages plus $76.50 social security and Medicare taxes paid for Mary). She enters $1,000 in boxes 3 and 5.

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