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How to compute "taxable wages" for household employee?

Following the optional guidelines in IRS Pub 926 and Calif EDD Pubs DE 8829 and DE 231Q for household employers, we are not withholding income tax, and we are paying the employee's share of employment taxes instead of withholding them.

But the examples for determining "taxable wages" (my term for wages subject to income tax) are unclear. More to the point, the IRS and EDD examples seem contradictory; and in some ways, neither makes good sense mathematically.

Can someone in-the-know offer some clarification or explanation, or at least confirm the IRS and EDD instructions (i.e. my interpretation of them)?

  1. If actual paid wages are ,000, the example in IRS Pub 926 (p.5) would result in taxable wages of ,765, whereas Example 1 in EDD DE 231Q (p.1-2) would result in taxable wages of ,851.81, using the 2008 SDI rate of 0.8%.

Thus, the federal wages (box 1) and the state wages (box 16) would differ in Form W-2.

Of course, that is allowed. But is that really intended?

It seems unduly complicated for the household employee, who usually struggles enough with trying to understand the vagaries of US taxes.

  1. The computation in the Pub 926 example is not mathematically correct. It computes taxable wages by simply multiplying actual paid wages by the FICA tax rate and adding the result to the base. I would expect to gross up actual paid wages by dividing by 1 minus the FICA rate (1 - 7.65%).

Is the Pub 926 example correct?

  1. For the Pub 926 example, should the base amount (ostensibly actual paid wages) include state employment taxes (Calif SDI, in my case) that we choose to pay instead of withholding?

Under normal circumstances, the base amount would be gross wages, which usually does include state employment taxes to be withheld.

If that should be the case here, too, how should that amount (actual paid wages plus state employment taxes) be computed?

Should we follow the Pub 926 paradigm and simply multiply actual paid wages by the state employment tax rate and add the result to the base (10000 + 10000*0.8%)?

Or should we follow the paradigm for computing "total subject wages" according to Example 1 in EDD Pub DE 231Q? That grosses up actual paid wages by the SDI rate, as I would expect to.

  1. The computation of PIT wages in the DE 231Q Example 1is not mathematically correct; and it seems inconsistent with the mathematically correct method of computing "total subject wages" and Example 3.

The DE 231Q Example 1 paradigm seems unduly complex and mysterious, namely:

actualPaidWages * (1 + (FICArate + SDIrate) * totalSubjectWages / actualPaidWages)

I would expect to gross up "total subject wages" by dividing by 1 minus the FICA rate (1 - 7.65%). This is consistent with Example 3 in DE 231Q.

Reply to
whatsupdoc205
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I can't answer to the CA SDI calculation, but the FICA calculation is correct. It is simply adding what you the employer are paying on their behalf to taxable income. If it were a gross up you would be treating it as withholding when it is not. In this case, Box 1 is higher than boxes 3 and 5 for the FICA amount.

Reply to
Mike20878

8829 and DE 231Q for household employers, we are not withholding income tax, and we are paying the employee's share of employment taxes instead of withholding them.

subject to income tax) are unclear. More to the point, the IRS and EDD examples seem contradictory; and in some ways, neither makes good sense mathematically.

least confirm the IRS and EDD instructions (i.e. my interpretation of them)?

No. I get $10,828.37. The 10K, representing wages AFTER FICA, is 92.35% of gross (assuming NO other taxes). 10K / 0.9235 = 10,828.37. The example is wrong.

You expect the U.S. Government to recognize what each and every state and territory is going to do?

Factoring in for California effects, I get $10,922.99 (actual payment is

91.55%).

However, if CA assumes that IRS Pub 926 were correct by stating $10,765.00, then $10.858.51 is the result I get, which is only $6.70 different than what you listed above.

Reply to
D. Stussy

Thanks for the response. My point was: why not compute the FICA as if it were withheld?

(Calif does just that in Example 3 in EDD Pub DE 231Q.)

That's rhetorical. The answer is clearly stated in Pub 926 (p. 5): "The social security and Medicare taxes that you pay [...] are not counted as social security and Medicare wages".

In other words, it is what it is. I simply must accept it.

I realized that soon after submitting this. I tried to forestall the posting of this submission, to no avail (and understandably so; no reflection on the behavior of the moderators).

Discussion in this thread can end here, as far as I am concerned. I intend to start a new thread that will focus more on the surprises these facts create for me, just to be sure that I understand the facts correctly.

Reply to
whatsupdoc205

Because there's a specific exemption in the law that makes this payment nontaxable for FICA purposes. Thus, there's no need to gross up for the payment by the employer. The employee's share that's being paid by the employer is taxable for income tax, but not for FICA/Medicare.

Reply to
Phil Marti

Same thing for the CA SDI paid by the employer. Taxable for income tax purposes.

Katie in San Diego

Reply to
Katie

Correct so far as you stated. But SDI is handled differently insofar as computing the SDI tax. For SDI, the amount paid by the employer (in lieu of a payroll deduction) is added to the employee's wages and subject to SDI (and UI and ETT) tax [1]. In contrast, FICA is not added to the employee's wages and is not subject to FICA tax [2].

Consequently, when computing SDI, the amount paid to the employee is grossed up by the SDI tax rate, then SDI (and UI and ETT) is computed. Refer to Example 1 in EDD Pub DE 231Q.

In contrast, when computing FICA, the FICA tax rates are simply applied to the amount paid to the employee. Refer to the example in IRS Pub 926, p. 5.

End Notes:

[1] "When a household employer [...] pays SDI without deduction from the employee's wages, the additional amount is considered an increase to the employee's wages for payroll tax purposes and is subject to UI, ETT and SDI." EDD Pub DE 231Q, p. 1, parag. 3. [2] "If you prefer to pay your employee's social security and Medicare taxes from your own funds, do not withhold them from your employee's wages. The social security and Medicare taxes you pay to cover your employee's share [...] are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages." IRS Pub 926, p. 5, "Not withholding the employer's share".
Reply to
whatsupdoc205

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