Social Security Tax on SIMPLE Contributions

[Guest Lynne Dennis]

If I have an employee who makes $6,000 or less and elects to contribute 100% to his/her SIMPLE-IRA, as allowed by the plan, how in the world am I to make the Social Security/Medicare deductions for his/her share of those taxes? This does not seem possible, yet everything I read says those contributions are subject to Social Security/Medicare withholding.

[Guest Paul McDonald]

You can't defer 100%. Social Security comes off the top first and what is left over can be deferred up to $6,000. Last I knew you had to make at least $6,497 to be able to defer $6,000.

[Guest Lynne Dennis]

Thanks. Sounds so simple when you say it that way. Wouldn't it be nice if the literature, articles, etc. put out on the SIMPLE-IRA's would mention that little fact instead of just saying you can defer 100% up to $6,000. To us laymen 100% means 100%.

Thanks again.

L.

[Guest Paul McDonald]

In pension speak it is 100%. 100% of what is leftover after FICA and FUTA taxes!

[QDROphile]

Is FICA and FUTA off the top because of practical concerns or a legal requirement?

Would you allow a 100% deferral if the employee came up with other funds for the employer to forward for payment of the "withholding amount"? If not, could you identify the authority that requires FICA and FUTA to come off the top? 408(p)(6)(A)sends me to 6051(a)(3), which sends me to 3401(a). Nowhere do I find a subtraction for FICA or FUTA. If the authority is a literal reading of 3102 (thou shalt withhold from wages), what do you do with a nonqualified deferred compensation plan that creates a FICA liability in excess of a participant's compensation that arises because of deferred vesting? The literal reading of 3102 leaves one with no answer. The last question is my real question because when it comes to SIMPLEs I would stick with the literal reading of 3102 and the practical need to withhold from a convenient source (current pay), as your answer directs.

[Gary Lesser]

An individual can only defer 100 percent of what they would have received in cash; thus, an individual need to earn more than $6,000 to defer $6,000.

[Guest Paul McDonald]

My recollection would be to search the "withholding at source" rules somewhere in the code. Even 6051(a) begins with the statement "Every person required to deduct and withhold from an employee..." which to me implys that somewhere there is a list of requirements as to what comes first.