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How to compute "taxable wages" for household employee? whatsupdoc205 01-21-2008
Posted by whatsupdoc205 on January 21, 2008, 6:23 am
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 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 $10,000, the example in
IRS Pub 926 (p.5) would result in taxable wages
of $10,765, whereas Example 1 in EDD DE 231Q
(p.1-2) would result in taxable wages of $10,851.81,
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.

2. 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?

3. 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.

4. 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.

--
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Posted by Mike20878 on January 21, 2008, 5:33 pm
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 On Jan 21, 6:23 am, whatsupdoc...@hotmail.com wrote:
> 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 $10,000, the example in
>     IRS Pub 926 (p.5) would result in taxable wages
>     of $10,765, whereas Example 1 in EDD DE 231Q
>     (p.1-2) would result in taxable wages of $10,851.81,
>     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.
>
> 2. 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?
>

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.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by whatsupdoc205 on January 21, 2008, 7:05 pm
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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.

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.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Phil Marti on January 21, 2008, 9:09 pm
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> Thanks for the response. My point was: why not compute
> the FICA as if it were withheld?

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.
--
Phil Marti
Clarksburg, MD

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Katie on January 22, 2008, 12:48 am
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> > Thanks for the response.  My point was:  why not compute
> > the FICA as if it were withheld?
>
> 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.
> --
> Phil Marti
> Clarksburg, MD
>


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

Katie in San Diego

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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