Form 943 for a farmer who did not withhold FICA

[Jack from Ohio]

I have a new personal client that has 3 W-2 employers. They did not withhold any SS or Medicare from the pay of the workers. They simply want me to calculate the full amount and they will pay both halves on the 943.

I responded that income on each W-2 would have to be bumped up for each worker in the amount the farmer paid for the half what was supposed to be deducted. "That was not the way we did it last year. We just paid the total amount on the 943 and did not change the W-2 amount.

They then asked about issuing 1099s instead, and I warned them of the possible problems with changing the workers, as they are definitely employees by several definitions. He then said he would call me back.

Now he wants me to create W-2s with $0 amounts in boxes 4 & 6 and let each employee take care of the unwithheld amounts on their personal tax returns, and to submit the 943 with only the employer's share of SS & Medicare shown.

I have never proceeded in this manner before. My gut is telling me that I will create more problems by filing the 943 as they wish than issuing 1099s. Are there regulations preventing the filing of the 943 as they are suggesting? I have to override the fields to accomplish this.

Anyone else ever dealt with this issue? I am open to suggestions.

[Lion EA]

Not sure if I'd do this again. The nursery school which was part of our church but acted as if they were not, cut their own paychecks and didn't update their FICA percentage when it changed. I discovered it in April when I was preparing quarterlies, but it was the W-2s that really confused me the following January. On the advice of our accountant when I was church treasurer, he had me apply the amounts that were withheld to FICA and Medicare first with any excess going to FIT (it might've been so long ago that CT did not have a state income tax yet). I don't remember how it all flowed. I do remember sending out a letter warning the few employees what had happened, that it had been corrected going forward, but that they would have less federal withholding than they had anticipated. Luckily, at that time, they were all very part-time wives married to high income husbands, so the issue had little impact on their tax returns. I never heard from any employees nor government entities.

I since lobbied hard for all our payroll to go through a payroll company. Now we use Paychex.

[Jack from Ohio]

I should add that there were NO Federal or State taxes withheld either. NO withholdings at all.

[Lion EA]

Then I don't think you have any choice but to gross up Box 1 to include the 4 and 6 amounts that the employer will pay on the employees behalf. (How badly do you want to keep this client?)

[Lee B]

I do payroll processing. Personally the only way I would touch this would be by grossing up the wages for the FICA that should have been withheld. and then run the calculated grossed up wages thru the 943 and their

W 2 s and pay both sides of the FICA. Otherwise walk away!

[Jack from Ohio]

Just spoke to them again. He now wants me to put codes M & N in box 12 with the non-withheld amounts there. Is this a viable option? I see these codes on W-2 from GM for taxable benefits, but the amounts are never more than $2-$3.

I am more and more considering sending this guy down the road.

My liability is what I am concerned with here. Preparer accuracy. Since I KNOW the situation, what do regs require me to do?

[jklcpa]

Just spoke to them again. He now wants me to put codes M & N in box 12 with the non-withheld amounts there. Is this a viable option? I see these codes on W-2 from GM for taxable benefits, but the amounts are never more than $2-$3.

I am more and more considering sending this guy down the road.

My liability is what I am concerned with here. Preparer accuracy. Since I KNOW the situation, what do regs require me to do?

I see codes M & N typically used for taxable compensation from the cost of life insurance over $50K or other benefits provided to retired union folks that still have some benes provided by the union but that aren't receiving any compensation that is actually paid to them. I agree with the others that say to gross it up.

[Lion EA]

Exactly. I see M & N for retired NY Bell employees receiving free telephone service. Those codes are used when non-cash taxable compensation is paid, so FICA and Medicare cannot be withheld. If he knows so much, he can do it himself! The right way or the highway...

[Jack from Ohio]

Seems that you are all correct. Here is what I found in Pub. 51:

Employee share paid by employer. If you would rather pay a household or agricultural employee's share of the social security and Medicare taxes without withholding them from his or her wages, you may do so. If you do not withhold the taxes, however, you must still pay them. Any employee social security and Medicare taxes that you pay is additional income to the employee. Include it in box 1 of the employee's Form W-2, but do not count it as social security and Medicare wages and do not include it in boxes 3 and 5. Also, do not count the additional income as wages for FUTA tax purposes. Different rules apply to employer payments of social security and Medicare taxes for non-household and non-agricultural employees. See section 7 of Publication 15-A.

I will pass this along to my new client. If he resists, I will give him the phone number for H&R.

[kcjenkins]

Doing it that way should still make him happy, since you do not count it as social security and Medicare wages and do not include it in boxes 3 and 5. So he's not paying double on the payroll taxes. And doing it right will not increase his audit risk.