Social Security and Medicare Taxation

Purpose

This document describes Social Security (SS) and Medicare taxation and associated requirements and responsibilities and provides links to the Social Security and Medicare tax rates, wage bases, and maximum taxes that can be withheld for the current year.

Background

SS and Medicare amounts withheld are remitted to the federal government each pay period. The Research Foundation must also remit a matching amount as a corporate expense each pay period. The SS and Medicare wages and taxes withheld are reported at year-end on an employee's W-2 Wage and Tax Statement.

Title II of the Social Security Act of 1935 created the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund to provide a federal program of old-age, survivors, and disability benefits. This program is known as the Social Security program, or OASDI (Old-Age, Survivors, and Disability Insurance), and is supported by taxes levied on employers, employees, and self-employed individuals.

In 1965, the Medicare program was established to provide health insurance for people 65 years of age or older. Medicare is a two-part program: Part A, the basic hospital insurance plan, is supported by taxes; Part B, the supplementary medical insurance plan, is financed by monthly premiums and federal matching funds.

The Federal Insurance Contributions Act (SS and Medicare), codified as Title 26 of the United States Code (Chapter 21 of the Internal Revenue Code), requires OASDI and Medicare taxes to be withheld from wages paid to employees. In accordance with Section 230 of the Social Security Act, the amount of SS and Medicare taxes to be withheld is determined by the employee’s wage base.

SS and Medicare Taxation

Wages (minus any pretax deductions such as pretax health or parking) paid to Research Foundation (RF) employees are subject to SS and Medicare taxation, except for wages paid to some non-U.S. citizens and to SUNY students who meet certain requirements. SS and Medicare taxation is based upon the current calendar-year tax rates and wage bases.

SS and Medicare Tax Rates and Wage Bases are on the Rates area of the RF Web site. Descriptions of exemptions from SS and Medicare taxation are provided in the sections that follow.

SS and Medicare Tax Rates and Wage Bases

SS and Medicare taxes are withheld from an employee’s wages until the employee’s earnings (gross wage minus any pretax deductions) exceed the calendar-year wage base that is established by the Social Security Act.

Current federal rates and wage bases for SS and Medicare taxation are provided as Vertex updates to the Oracle business system. Vertex is a third party tax compliance vendor that provides monthly updates to our Oracle system. The Oracle system uses the rates and wage bases in the payroll process to calculate SS and Medicare withholding for employees based on the status entered on the system "Federal Tax Rules" form exemption region. Current SS and Medicare Tax Rates and Wage Bases are on the Rates area of the RF Web site.

SS and Medicare Withholding Exemption

Tax exemptions may apply to the following:

Non-U.S. Citizen J-1 or F-1 Visa Holders

In accordance with the Mutual Education and Cultural Exchange Act, non-U.S. citizens holding visa types J-1 or F-1 are generally exempt from SS and Medicare tax withholding when they are employed in positions related to the purpose for which they were admitted to the U.S. This general exemption has limitations which are actually associated with the SPT.

Resident Aliens for Tax Purposes

Non-U.S. citizens who hold green cards (Permanent Resident) or who meet the requirements of the substantial presence test for the applicable calendar year are resident aliens for tax purposes and are subject to the same withholding rules that are applied to U.S. citizens. The substantial presence test residency change date may not occur until later in the calendar year but the IRS expects SS and Medicare withholdings retroactive for the entire calendar year. Advance planning in this situation will assist in compliance. For more information, refer to the "Effects of Changes in Status" section of Classification of Aliens as Residents or Nonresidents for Tax Purposes.

Nonresident Aliens

The earnings of non-U.S. citizens holding visa types other than J-1 or F-1 are subject to SS and Medicare tax withholding unless the employee is a SUNY student who meets certain requirements, as described under Requirements for Students in this document. The IRS expects SS and Medicare withholdings retroactive for the entire calendar year. Advance planning in this situation will assist in compliance.

Requirements for Students

To qualify for SS and Medicare exemption, the student's employment at the school must be "incidental" to and for the purpose of pursuing his or her course of study. IRS guidance is that the student is in noncareer employment, which generally means that the individual is not eligible to participate in a qualified retirement benefit plan. The earnings of a student who is employed by the Research Foundation are exempt from SS and Medicare taxation if he or she meets four specific requirements. To be exempt, the student must be

Students Regularly Attending Class

The earnings of students who are regularly attending class are exempt from SS and Medicare taxation if all other requirements for exemption are met.

Graduate students enrolled half-time in the regular course of study necessary to receive the desired degree may be required to complete a thesis or dissertation, in accordance with the requirements of the educational institution. While working on a thesis or dissertation, graduate students may need to do a certain amount of non-classroom study to obtain their degree. The Internal Revenue Service (IRS) recognizes that this situation may occur. Therefore, if all other requirements for student exemption are met, the earnings of graduate students who are working on a thesis or dissertation may be exempt from SS and Medicare taxation.

Example 1 in the Determining Exempt or Non-exempt from SS and Medicare Tax section of this document is an example that provides guidance in determining exempt or non-exempt from SS and Medicare taxation when a graduate student is working on a dissertation and not regularly attending class.

Pursuing a Course of Study

In addition to meeting all other requirements for exemption, a student must be primarily pursuing a course of study, and employment by the Research Foundation must be incidental to academic status in order for the SS and Medicare tax exemption to apply. Employment does not need to be directly related to the student's educational program in order for the exemption to apply. When a person is primarily an employee who also happens to enroll in a degree program or course of study, the employee's earnings are not exempt from SS and Medicare taxation. The number of hours a student is employed by the Research Foundation while pursuing a course of study will directly affect whether or not a student's earnings are exempt from SS and Medicare taxation. Refer to Examples 2 and 3 in the Determining Exempt or Non- exempt from SS and Medicare Tax section of this document for examples that provide guidance in determining if a student's earnings are exempt or nonexempt from SS and Medicare taxation when the student is enrolled in courses and employed.

Entering SS and Medicare Tax Information into Oracle

SS and Medicare tax withholding and exemption information for Research Foundation employees is entered into the RF business system upon initial setup of the employee into Oracle. Refer to the process help Enter an Employee Record (Federal Tax Rules window) for specific instructions on entering withholding and exemption information for an employee.

Changes to SS and Medicare Status

A person's SS and Medicare status may change for a number of reasons. The most common reason is when a student's exemption status changes at the beginning and end of the summer. Make appropriate changes to the exemption region of the system "Federal Tax Rules" form.

SS and Medicare withholdings process for the entire pay period. If the individual's exemption date (such as change in student status) occurs in the middle of a pay period, taxes are withheld for the entire pay period.

Monitoring SS and Medicare Status

The Research Foundation is solely responsible for processing the correct withholding or exemption of SS and Medicare taxes. Error where the RF has not withheld the taxes can result in significant risk of fines and penalties from the government. SS and Medicare status for all Research Foundation employees should be monitored periodically. The Discoverer query tool can be used to assist in reviewing this information. Appropriate action should be taken to discontinue SS and Medicare tax exemption for employees when it is notapplicable, and to change employees' status to exempt when it is appropriate.

Retroactive Payments

The exemption status for SS and Medicare that is in effect when a payroll is run determines whether SS and Medicare taxes will be withheld from the payment. If a retroactive payment is processed after the SS and Medicare exemption status has been changed, the retroactive amount may be taxed incorrectly for SS and Medicare.

Locations must manually calculate the gross amount of the retroactive payment and the amount of SS and Medicare tax that should or should not have been withheld. This information must be sent via e-mail to the central office corporate payroll unit with a request to enter a SS and Medicare element adjustment to process with the next payment.

Incorrect SS and Medicare Withholding

If SS and Medicare is Withheld in Error

The process for reimbursing a person for SS and Medicare taxation withheld in error depends on whether the adjustment is for the current calendar year or a previous calendar year. If the adjustment is for the

If SS and Medicare Was Not Withheld but Should Have Been

If SS and Medicare was not withheld from a person’s earnings, the location must attempt to recover withholding amounts dating back to the time when the person first became subject to taxation. If the collection of withholding amounts is for the

Determining Exempt or Non-exempt from SS and Medicare Tax

Example 1

A student was enrolled in a doctoral program and was completing the requisite course work. That student's dissertation had been approved and he was currently conducting the research needed for the dissertation. During the term, the student was registered at the university under the supervision of a committee of faculty members. The student was also employed 6 hours per week by the university. The IRS stated that it recognized that a certain amount of nonclassroom study may be necessary to obtain an academic degree. The IRS further stated that this student's pursuit of a regular course of study necessary to receive the desired degree, in accordance with the requirements of the school, satisfied the requirement of regularly attending classes. Thus, this person's services were exempted from employment under 3121(b)(10)(A) of the Internal Revenue Code and not subject to SS and Medicare tax.

Example 2

A student was registered for four courses, equivalent to 12 credit hours. The maximum number of credit hours that could be taken was 18. This student was employed 15 hours a week by the university. The IRS stated that in this situation, the services were incidental to, and for the purpose of, pursuing a course of study. Thus, the student's services were exempted from employment under 3121(b)(10)(A) of the Internal Revenue Code and not subject to SS and Medicare tax.

Example 3

A student was enrolled in two courses equivalent to six credit hours. This student was employed 40 hours a week by the university. The IRS stated that since this employee was employed on a full-time basis and only taking two courses, employment was not incidental to, and for the purpose of, pursuing a course of study as required by the regulations. Thus, this person's services were not exempted from employment under 3121(b)(10)(A) of the Internal Revenue Code and were subject to SS and Medicare tax.

Note: These examples were taken from Internal Revenue Service, Revenue Ruling 78-17, 1978-1 C. B. 306. Although the students referred to in these examples were employed by a university, the guidance provided in these examples would also apply to SUNY students employed by the Research Foundation.

Change History

 

 

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