Prior to the effective date of the tax bill recently signed by the President, Section 164 of the Internal Revenue Code permitted individuals who itemized deductions to deduct state and local income and other designated taxes (SALT) in calculating their Federal taxable income. Congress amended Section 164 for years beginning after 2017 and prior to 2026 to limit SALT deductions to $10,000 per year and, as a practical matter, to sharply reduce the number of taxpayers who will be itemizing deductions and thus able to take advantage of even this limited deduction. By contrast, the new tax legislation does not restrict the ability of employers to deduct payroll taxes to which they are subject.
As students and scholars’ status change from F-1, J-1 or other FICA exempt statuses to H-1B starting October 1, these employees will become subject to FICA taxes upon the effective date of their H-1B status.
Written by Erin C. Horton
I have to admit, when I read the news that the Supreme Court had ruled earlier this week that severance payments are “wages” subject to payroll taxes, I thought I was on crazy pills: Didn’t we already know that? But, apparently, the IRS had received a ton of refund claims specifically related to FICA taxes paid on severance, to the tune of more than $1 billion. So, while some of us thought that this ship had sailed, others seemed to be holding onto hope.
Written by Jessica Catlow
As all employers know, wages paid to employees are subject to required withholdings and deductions for income taxes and employee contributions to Social Security and Medicare (which is commonly referred to in shorthand as “FICA”). Employers must withhold 6.2% for Social Security on every dollar up to $113,700 (which tops out at about $7,000 a year), and 1.45% for Medicare (with no cap) from their employees’ wages. In addition, employers must pay an equal amount to the government out of their own pockets, which means that every $100 in wages paid to an employee, actually costs the employer $107.65 – a real cost for large employers.
Most employers have typically interpreted their FICA obligations to extend to severance pay based on guidance from the IRS treating severance pay as wages. But that may change.