Accounting Paper on Federal Tax Accounting

Federal Tax Accounting

Facts:  Spartan Hospitality Corporation gave their employees two Visa vouchers for their outstanding performance. The vouchers were worth $100, which they were required to spend more than $50 for reimbursement. The employees used 97 % of the vouchers. The vouchers given are a bonus for the outstanding performance, and the amounts paid were in excess of $200,000. The employer did not withhold taxes for the bonuses, and therefore IRS is charging them due to this.

Issue:  Are bonuses subject to income tax and Federal Insurance Contributions Act (FICA) tax? According to 26 U.S. Code § 34019 (c), bonuses are part of taxable income because they are treated as wages. In the form W-4, the employer must indicate the withheld tax showing the exemptions, and include the bonus amounts in the wages, tips, and other compensation box in form W-2. In addition, the FICA act requires that the social security and Medicare taxes be withheld for employer and employee. The rates are 12.4 % for social security and 2.9% for Medicare, where the employer and employee contribute half of each percentage, and is calculated from gross pay of individuals. The social security is capped at $117,000(IRS Pub 23). Will the IRS prevail in court?  

Answer:  Income tax, Social security, and Medicare are included for withholding in 26 U.S. Code § 3401(c) and FICA act; therefore, IRS has a solid case against Spartan Hospitality Corporation.

Rationale: The idea of FICA was to assist the retired and unemployed, and even their beneficiaries of the deceased who had no source of income. The Act followed the Great Depression of 1930s, following the World War and financial crisis that led to loss of jobs and even many casualties. The FICA act requires, as outlined in 26 U.S.C. 21, that all employers and their employees should be contributing towards a social security fund for the retired. In addition, in a national healthcare program, Medicare was to be contributed to fund for those who could not afford hospital insurance. The funds are obtained through Social Security and Medicare Taxes from employer and employee, which IRS require the employer to withhold on payday. The amounts are calculated from gross salary with some exemptions for some wages. The status of social security fund has been defined by the judiciary in the following ways: In Flemming vs. Nestor case 363 U.S. 603 (1960), social security fund was not considered be an automatic benefit after retire, since it is a tax tied to a benefit. In the Amish religion and Social Security payments case, the Amish religion followers’ exemption from the tax was on ground that the contribution is an insurance premium.

Authority: 26 U.S.C. 21, Federal Insurance Contributions Act (FICA) of 1935, 26 U.S. Code § 3401(c), Internal Revenue Service (IRS). “Employer’s Tax Guide for 2014” Publication 15 Cat. No. 10000W (Circular E).