Real Estate Tax Abatements under State Senior Citizen Program Were Wages Subject to FICA

In Date 1, state S began work-off program P, under which cities and towns in S are permitted to establish property tax write-off programs in which participating taxpayers (who must be over a certain age) "volunteer" services to municipalities in exchange for a reduction in their property tax obligations. S law permits seniors to earn up to a specified maximum dollar amount in property tax reductions per fiscal year; S's minimum-wage law caps the maximum amount of credit per hour that the taxpayers are entitled to receive for their services.

The property tax reductions are abatements. The abatements under P are in addition to any other property tax exemptions that may be available under S law. Under S law, the property tax abatements that seniors earned for services under P are not income for purposes of state taxation--withholding, unemployment insurance or workers' compensation. However, persons providing service under P are public employees for purposes of municipal tort liability.

Analysis

Income tax. Sec. 61(a) defines gross income as all income from whatever source derived, including compensation for services. Under Regs. Sec. 1.61-1(a), gross income includes income realized in any form--whether in money, property or services. Taxpayers may realize income, therefore, in the form of services, meals, accommodations, stock or other property, as well as in cash.

Employer payments of the income taxes assessable against an employee are additional income for employee tax purposes. An employer's payment of an employee's FICA tax liability under Sec. 3101, without deducting the payment from the employee's pay or otherwise receiving reimbursement from the employee, is additional employee income for Federal income tax purposes.

Under Regs. Sec. 31.3401(a)-1(b)(6), the term "wages," for purposes of income tax withholding, includes any amount an employer pays to satisfy an employee's FICA tax liability under Sec. 3101, without deduction from the remuneration of, or other reimbursement from, the employee.

Employment tax. Taxes under FICA comprise an old-age, survivors' and disability insurance portion and a hospital insurance (Medicare) portion. An employer computes FICA taxes as a percentage of "wages" it pays to the employee with respect to "employment." In general, employers' remuneration payments paid to an employee for services performed are subject to FICA taxes, unless the payments are specifically excepted from the term "wages" or the services are specifically excepted from the term "employment."

Sec. 3121(b)(7) generally excludes from "employment" services performed in the employ of any state, or any political subdivision thereof, or any wholly-owned instrumentality of any one or more of the foregoing, unless an agreement under Section 218 of the Social Security Act (section 218 agreement) is in effect. Sec. 3121(b)(7)(F) limits the exclusion in Sec. 3121(b)(7), to include within the definition of employment, services performed while in the employ of any state or any political subdivision thereof, or any wholly owned instrumentality of any one or more of the foregoing, by an individual who is not a member of a retirement system of such state, political subdivision or instrumentality.

The term "wages" is defined in Sec. 3121(a) as "remuneration from employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash," with certain exceptions. Under Regs. Sec. 31.3121(a)-1(c), the name by which the remuneration for employment is designated is immaterial. Thus, salaries, fees, bonuses and commissions on sales or on insurance premiums are wages if paid as compensation for employment. Under Regs. Sec. 31.3121(a)-1(d), the basis on which an employer pays remuneration generally is immaterial in determining whether the remuneration constitutes wages. It may be paid on the basis of piecework or as a percentage of profits; and it may be paid hourly, daily, weekly, monthly or annually. Under Regs. Sec. 31.3121(a)-1(e), the medium in which an employer pays remuneration is also generally immaterial. It may be paid in cash, or something other than cash (e.g., goods, lodging, food or clothing). Remuneration other than cash is computed on the basis of the fair market value of the form of payment at the time of payment.

Under Sec. 3121(a)(6), the term "wages" does not include the employer's payment of the employee portion of FICA under Sec. 3101 in the case of domestic services provided in the employer's private home or for agricultural labor. However, subject to that exception, if an employer pays the employee portion of the FICA tax on behalf of an employee, that amount is additional wages for FICA purposes.

Sec. 6015(a) requires information reporting from every person who is required to deduct and withhold the employee portion of the FICA tax from an employee. The requirement applies to all payments subject to FICA tax, regardless of the amount. The employer reports the information on Form W-2.

Under Sec. 3306(c)(7), taxes under FUTA do not apply to compensation for services in the employ of a state, any political subdivision thereof or any instrumentality of any one or more of the foregoing owned by one or more states or political subdivisions.

Although under S law abatements are not considered "income" for tax purposes, S's treatment of the amounts in question is not determinative of the Federal tax treatment. While state law governs the nature of legal interests and rights created under state law, the Federal tax consequences pertaining to such interests and rights are solely a matter of Federal law. Similarly, the fact that the workers are called "volunteers" is not determinative, as the tax forgiven is provided in consideration for work done.

The abatements in property tax described in exchange for services constitute income under Sec. 61. The amount of income equals the amount of the property tax abatement. If the municipality pays an employee's FICA tax obligation imposed under Sec. 3101 without receiving reimbursement from the employee, the amount of that payment will constitute additional employee income under Sec. 61. Although Sec. 3402(a) requires employers to deduct and withhold income tax, the maximum amount of remuneration permitted under the program is less than one withholding exemption. Accordingly, in most circumstances, the municipalities will not be required to withhold income tax from participants in the program. The municipalities, however, should require the employees to complete Forms W-4. The municipalities are also required to file Forms W-2, reporting all wages.

The services performed by the taxpayers for a municipality under the work-off program constitute "employment" as defined in Sec. 3121(b), unless the taxpayers are participants in a state-sponsored retirement plan (as defined in Sec. 3121(b)(7)(F)). The property tax abatements constitute wages under Sec. 3121(a). If the employer pays the taxpayer's portion of FICA taxes imposed under Sec. 3101 without reimbursement, the taxpayer will receive additional wages in the amount of that payment.

Conclusion

Based on the foregoing, the employment tax consequences of receiving property tax abatements in exchange for services under P are as follows: Because the workers in question are most likely employees, the amounts that they earn under the program are subject to FICA tax. The amount of wages equals the value of the property tax liability forgiven. Because the workers receive no cash remuneration, the employer must pay both portions of the FICA tax. If the employer does not seek reimbursement from the employee for the employee's portion of FICA tax, that portion will be wages for FICA tax purposes, subject to additional FICA tax. An information-reporting requirement applies to all wages subject to FICA. FUTA taxes are not applicable.

IRS Letter Ruling (FSA) 200132035 (7/10/01)