English Paper on Federal Tax Accounting

Federal Tax Accounting

Facts:  Spartan Hospitality Corporation had a very good year.  Sadly, for rival Triton Hotels, the year was not good on account of a seven-week long strike.  During the strike business at Spartan ran at a very high rate and employees were asked to go above and beyond their normal workload.  Spartan employees rose to the occasion and the company prospered mightily.  Rather than attempt to hold a giant “thank you” dinner, Spartan arranged to give each of its line employees (all 15,000) two Visa vouchers for up to $50 to be used for a “dinner out to say thank you for a job well done”.  The vouchers were for “up to $50 and anything under $50 would not be refunded”.   Had the company attempted to hold giant “thank you” dinners for employees and their guests the cost would have been an ordinary and necessary business expense.  The employees used 97 % of the vouchers. The vouchers given are a bonus for the outstanding performance, and the amounts paid are in excess of $200,000 (IRS 36).

Issue:  Are bonuses subject to income tax and Federal Insurance Contributions Act (FICA) tax?  IRS has assessed withholding tax against Spartan and asserts that the $ 100 was actually wages subject to income tax and Federal Insurance Contributions Act (FICA) tax.  According to 26 U.S. Code § 3401, bonuses are part of taxable income because they are treated as wages (Cornell University n. p) . 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 employer and employee contribute half of each percentage, and calculated from gross pay of individuals. The social security is capped at $117,000(IRS 23). Will the IRS prevail in court?  

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

Rationale: The tax collected is as required by the Federal Insurance Contributions Act (FICA) of 1935 was meant to cater for hospital insurance through Medicare and social security of the retired, disabled and survivors social security fund. 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 law followed the Great Depression of 1930s following the World War and financial crisis that led to loss of jobs and even many casualties. The enactment of this law required that every employer and their employees to be contributing towards a social security fund for the retired. In addition, 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 the Flemming vs. Nestor, the social security fund was not considered not to be an automatic benefit after retire, since it is a tax tied to a benefit. In the Amish religion and Social Security payments, the followers’ exemption from the tax was on ground that the contribution is an insurance premium (SHRM n. p).

Works Cited

Cornell University Law school.“26 U.S. Code § 3401 – Definitions.” N. d. Web. 14 Sep. 2014,< http://www.law.cornell.edu/uscode/text/26/340>

Department of the Treasury, Internal Revenue Service (IRS). “Employer’s Tax Guide” Publication 15 Cat. No. 10000W (Circular E), (2014).Web. 14 Sep. 2014, < http://www.irs.gov/pub/irs-pdf/p15.pdf>

Society for Human Resource Management (SHRM). “Federal Insurance Contributions Act (FICA) of 1935” (2014). Web. 14 Sep. 2014, http://www.shrm.org/legalissues/federalresources/federalstatutesregulationsandguidanc/pages/federalinsurancecontributionsact (fica)of1935.aspx