EXPAND EMPLOYER SHARE OF FICA TAX TO INCLUDE
ALL CASH TIPS
Present Law
The FICA taxes imposed on the employee and the employer
generally are equal. The employer is responsible for
withholding the employee's share of the tax from the
employee's wages and remitting the tax, together with the
employer's share of the tax, to the Internal Revenue Service.
Special rules apply to tips, however. For purposes of the
employee FICA tax, all tips received by employees are
considered remuneration for services and are subject to the
tax. The tips are generally deemed to be received at the
time the employee files a written statement with the employer
reporting the receipt of the tips.
The full amount of tips received by an employee is not,
however, usually subject to the FICA tax imposed on the
employer. The employee is deemed to receive wages for
purposes of the employer's share of FICA taxes only to the
extent of the excess of the Federal minimum wage rate over
the actual wage rate paid by the employer. Any tips received
in excess of the difference between the minimum wage rate and
the wages paid are not subject to the employer's portion of
the tax.
Explanation of Provision
All cash tips would be included within the definition of
wages for purposes of the employer's share of FICA taxes.
Thus, employers would be required to pay FICA taxes on the
total amount of cash tips up to the social security wage
base.
Effective Date
This provision would be effective for remuneration
received on or after January 1, 1988.
Extend FICA tax to inactive duty earnings,
family members ( agricultural workers^
and group-term life insurance included in income
Present Law
Under present law, certain forms of earnings paid to
employees are exempt from FICA taxes. These earnings
include: (1) inactive duty earnings of Armed Forces in any
reservists, (2) cash remuneration paid to an employee
taxable year for agricultural labor unless the employee or the
receives more than $150 during the year for such labor g the
employee works for the employer more than 20 days durins
year, (3) earnings for services performed by individual
under age 21, who are employed by their parents, even if ngs
employed in the parent's trade or business, and (4) earni the
for services performed by an individual in the employ of
individual's spouse.
In addition, under present law, the cost of group-term
is
life insurance provided by an employer to an employee the
excluded from the definition of wages for purposes of
FICA tax. For income tax purposes, the cost of
in
employer-provided group-term life insurance is includible
an employee's gross income to the extent that the coverage
exceeds $50,000 or the coverage is provided on a
discriminatory basis.
Possible Proposals
The proposal would extend coverage under social security
to (1) services performed by reservists in "inactive duty
training", (2) services performed by individuals age 18-21 to
working for their parents in a trade or business, and (3) or
services performed by an individual in the employ of his
her spouse's trade or business.
The proposal would require that, with respect to
agricultural labor, (1) any remuneration for agricultural if
labor paid by an employer to an employee constitutes wages
the employer pays more than $2,500 to all employees for such
labor during the taxable year, (2) the $150 annual cash pay
test is applied if the $2,500 annual payroll test is not met,
and (2) the 20-day test is repealed.
The proposal would include the cost of employer-provided
group-term life insurance in wages for FICA tax purposes if
such insurance is includible in income for income tax
purposes.
Effective Date
The proposals would be effective January 1, 1988.
Deny child care credit for overnight camp expenses
Present Lav
An income tax credit is available for up to 30 percent
of a limited dollar amount of employment-related child and
dependent care expenses for a child or other dependent who is
under the age of 15, or a physically or mentally
incapacitated dependent or spouse.
Expenses eligible for the credit include costs incurred
by the taxpayer for day care, nursery school, home care, and
summer camps, including overnight camps.
Possible Proposal
Expenses of overnight camps could be made ineligible for
the child and dependent care credit.
Effective Date
The proposal would be effective for expenses paid in
taxable years beginning after December 31, 1987.
Repeal cash Method of accounting for farms with gross
receipts over $25 million.
Present Law
Entities engaged in the trade or business of farming may
or
generally use the cash method of accounting for such trade
ion
business. A corporation or a partnership with a C corporat
as a partner that has gross receipts in excess of $1 million
for any taxable year beginning after 1975 must use the
accrual method of accounting, unless it is a "family a
corporation." In general, a "family corporation" is d by
corporation 50 percent or more of whose stock is owne
members of the same family. Certain closely held
on
corporations substantially owned by two or three families
October 4, 1976, and at all times thereafter, also qualify as
a "family corporation."
Explanation of Provision
The use of the cash method of accounting would be deniofed
to any "family corporation" with gross receipts in excess
$100 million for any taxable year beginning after 1985.
Effective Date
The provision would be effective for taxable years
beginning after December 31, 1987. The amount of any in
adjustment required by the provision would be included
income over a period not to exceed 10 taxable years.
Treatment of Past Service Pension Costs
Present Law
Under the present-law uniform capitalization rules,
contributions to a pension, profit-sharing, or stock bonus
plan and other employee benefits expenses incurred by an
employer are considered indirect costs that must be
capitalized to the same extent as other indirect costs.
However, expenses relating to past services are expressly
excepted from the capitalization requirement, and (subject to
other limitations in the Code) may be deducted currently.
Explanation of Provision
All pension costs, including expenses relating to both
past and present services, would be required to be
capitalized under the uniform capitalization rules.
Effective Date
The provision would apply to taxable years beginning
after December 31, 1987.