Rev. Proc. 81-48

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide a formula for determining the amount of wages under sections 3121(a), 3306(b), and 3401(a) of the Internal Revenue Code when an employer, under an arrangement with an employee, pays the employee FICA tax imposed by section 3101 after December 31, 1980, without deducting the amount of the tax from the employee's remuneration (pay). This revenue procedure and the formula do not apply when the pay is for domestic service in the employer's private home or for agricultural labor.

SEC. 2. BACKGROUND

.01 Section 3121(a) of the Code, relating to the Federal Insurance Contributions Act (FICA), and section 3306(b), relating to the Federal Unemployment Tax Act (FUTA), define "wages" as all pay for employment, with certain exceptions. Section 3401(a), relating to income tax withholding, contains a similar definition.

.02 Sections 3121(a)(6)(A) and 3306(b)(6)(A) of the Code except from wages an employer's payment (without deduction from the employee's pay) of the employee FICA tax imposed by section 3101 only in the case of pay for domestic service in the employer's private home or for agricultural labor. Those sections previously excepted from wages all payments of employee FICA tax by an employer without deduction from the employee's pay, but the exception has been limited to domestic service and agricultural labor by section 1141 of the Omnibus Reconciliation Act of 1980, Pub. L. 96-499, 1980-2 C.B. 509, effective for remuneration paid after December 31, 1980.

.03 Section 31.3401(a)-1(b)(6) of the Employment Tax Regulations states that "wages," for purposes of income tax withholding, includes amount paid by an employer on behalf of an employee (without deduction from the employee's pay) of the employee FICA tax imposed by section 3101 of the Code.

.04 The effect of section 1141 of the Omnibus Reconciliation Act of 1980 is that when an employer pays the employee FICA tax imposed by section 3101 of the Code without deducting it from the employee's pay, the amount of the employee's wages under section 3121(a) is increased by the amount of that tax. This increase in the wage payment is also subject to the employee FICA tax, which has the effect of again increasing the employee's wages under section 3121(a) by the amount of the additional tax under section 3101 paid by the employer. This continuing series of additional wages and additional taxes on such wages in diminishing amounts is known as "pyramiding."

.05 In addition, when an employer pays the employee FICA tax without deducting it from the employee's pay, the amount of wages under sections 3306(b) and 3401(a) of the Code is increased by the amount of employee FICA tax paid by the employer. In order to determine the increased wages under sections 3306(b) and 3401(a), it is first necessary to compute the amount of employee FICA tax under section 3101.

SEC. 3. DETERMINATION OF EMPLOYMENT TAX WAGES AND EMPLOYEE FICA TAX .01 The following formula may be used to calculate an employee's FICA wages when an employer, under an arrangement with the employee, pays the employee FICA tax after December 31, 1980, without deducting the amount of the tax from the employee's pay:

                              W = S

S = Stated pay (the pay before taking into account the increase in wages required by section 3121(a)(6)(A)), and

R = Rate of employee FICA tax.

.02 For example, in 1981 the employee FICA tax rate is 6.65 percent (.0665).

Using the formula set forth in paragraph 3.01,

     (a) W = S

.04 Once the FICA wages have been calculated, the employee FICA tax may be calculated in the ordinary manner on those wages; that is, the employee FICA tax is equal to 6.65 percent of the FICA wages.

.05 An employer who, under an arrangement with an employee, pays the employee FICA tax after December 31, 1980, without deducting it from the employee's pay should be careful to include the correct amounts on the employee's Form W-2, Wage and Tax Statement. On the Form W-2 for 1981, for example, box 11, FICA tax withheld, should include the amount calculated in paragraph 3.04. Box 13, FICA wages, should include the total amount calculated in paragraphs 3.02 and 3.03 and not just the employee's pay before taking into account the increase in wages required by section 3121(a)(6)(A) of the Code.

.06 In determining total wages under sections 3306(b) and 3401(a) of the Code, the employer must add the amount of the employee FICA tax determined in paragraph 3.04 to the wages under those sections as determined before the addition of that employee tax. On the Form W-2 for 1981, box 10, Wages, tips, other compensation, should include the total wages under section 3401(a) in that year.

.07 For example, during 1981, an employer pays an employee $200 weekly that is not excepted from wages under sections 3121(a), 3306(b), or 3401(a) of the Code, and arranges to pay the employee FICA tax imposed by section 3101 without deducting the amount of the tax from the $200. The total amount of FICA wages under section 3121(a) is $214.25 ($200 multiplied by 107.124 percent). The amount of employee FICA tax is $14.25 (6.65 percent of $214.25). The total amount of wages under sections 3306(b) and 3401(a) is $214.25 ($14.25 employee tax paid by the employer plus $200 wages before the addition of that tax).

SEC. 4. EFFECTIVE DATE

This revenue procedure is effective for remuneration paid after December 31, 1980. However, the percentage rate derived from the formula in paragraph 3.01 will change whenever the employee FICA tax rate changes.