Chapter 4
Social Security & Medicare Taxes

Generally, you must withhold social security and Medicare taxes on all cash wage payments you make to your employees.

The $150 Test or the $2,500 Test

All cash wages you pay to an employee during the year for farmwork are subject to social security and Medicare taxes and income tax withholding if either of the two tests below is met:

• You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash wages paid on a time, piecework, or other basis). The $150 test applies separately to each farmworker you employ. If you employ a family of workers, each member is treated separately. Do not count wages paid by other employers.
• The total you pay for farmwork (cash and noncash) to all your employees is $2,500 or more during the year.

Exceptions. The $150 and $2,500 tests do not apply to the following situations:

1. Wages you pay to a farmworker who receives less than $150 in annual cash wages are not subject to social security and Medicare taxes, or income tax withholding, even if you pay $2,500 or more in that year to all your farmworkers, if the farmworker:
1. Is employed in agriculture as a hand-harvest laborer,
2. Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment,
3. Commutes daily from his or her home to the farm, and
4. Had been employed in agriculture less than 13 weeks in the preceding calendar year.

Amounts you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages you pay to other farmworkers are subject to social security and Medicare taxes.

2. Cash wages you pay a household employee are counted in the $2,500 test, but are not subject to social security and Medicare taxes unless you have paid the worker $1,300 or more in cash wages in 2002. See the table, How Do Employment Taxes Apply to Farmwork?, on page 19.

Social Security and Medicare Tax Rates

For wages paid in 2002, the social security tax rate is 6.2% for both the employee and employer, on the first $84,900 paid to each employee. You must withhold at this rate from each employee and pay a matching amount. The Medicare tax rate is 1.45% each for the employer and the employee on all wages. Multiply each wage payment by this percentage to figure the amount you must withhold.

Employee share paid by employer. If you would rather pay the employee's share of the social security and Medicare taxes without deducting them from his or her wages, you may do so. If you do not deduct the taxes, you must still pay them. Any employee social security and Medicare taxes you pay is additional income to the employee. Include it in the employee's Form W-2, box 1, but do not count it for social security and Medicare wages, boxes 3 and 5. Do not count the additional income as wages for FUTA tax purposes.

Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such as insurance companies. For details, get Pub. 15-A.

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