1.45% Medicare tax - wages vs special expense


In this topic on stock options, distinction was made between wages and taxable special income, with respect to the FICA Medicare part A tax. That brought a question to mind. I didn't want to hijack the thread, so I opened this new one.

To get (what I think is) correct tax treatment of payroll deductions, I record my earnings as gross, enter the payroll deductions as excludable special expenses and, in the case of flexible spending account deductions, record those deductions again as non-taxable special income.

I'm under the impression I could record my salary as net but prefer to minimize use of crib sheets outside ESP. I'd rather have everything recorded explicitly so I don't stump myself later.

With that in mind, does my treatment of payroll deductions meet the assumptions of ESP's payroll tax logic?



Payroll deductions for Medicare Part A and Social Security taxes on employee wages are handled automatically by ESPlanner. You don't need to enter the 1.45% Medicare Part A tax as a special expense. The 6.20% Social Security tax is also handled automatically if you copy/enter wages into the Social Security future covered earnings.
So, just enter gross wages.

Mike, the intent in my question was not to enter the taxes as special expense, but whether recording the excludable payroll deductions as special expenses resulted in correct treatment for payroll tax reasons. From your answer I gather that is correct.


No, your method does not handle non-taxable payroll deductions properly.
As I said above, both Medicare Part A and Social Security are based on the employee wages that you enter. So, deductions that are not subject to payroll taxes, like flexible spending accounts, health insurance, etc., should be excluded from employee wages.
All of the tax related categories of special expenses and special receipts only refer to income taxes, not payroll taxes.
Entering your flexible spending account as a non-taxable special receipt is correct.


2/14: "So, just enter gross wages."

2/15: "So, deductions that are not subject to payroll taxes, like flexible spending accounts, health insurance, etc., should be excluded from employee wages."

So which should I enter, gross or net?

On 2/14 I thought you were referring to FICA and Medicare Part A taxes and sayng that your were using special expenses for the 1.45% Mediacre Part A taxes, not non-taxable cafeteria items.
On 2/15 you clarified that non-taxable cafeteria items were your issue.

So enter only taxable earnings!

dan royer's picture

In sum, you just enter gross wages from your paycheck. If your are making contributions to a 401K you do not try to exclude those from your salary earnings that you enter. Instead, when you enter those amounts as contributions to retirement, ESPlanner handles the tax deduction there. If you have parking or other dues taken from your check, you enter those as non-tax related special expenditures if you want to have them removed from the discretionary spending amount. For that matter, you could also enter car payments as non-tax related special expenditures, but I don't since I view them as part of my discretionary spending and not really "special."

But your situation may be more complicated. HSA accounts create a kind of complication. Or the Flexible Spending accounts, earnings you can instruct your employer to set aside on a tax-free basis to pay for specific eligible expenses such as healthcare and child chare. To deal with them in ESPlanner just enter your earnings net of the amount you are contributing to your flexible spending accounts and do NOT enter as a special expenditure the amount that will be covered by (paid for from) these accounts.

For the benefit of other users, I'm posting here a summary from Mike:

Subject: RE: tax exclusion not affecting social security wages
Date: Tue, 24 Feb 2015 11:49:01 -0600
From: Michael O'Connor

This is to summarize and close out this thread.

Payroll taxes, i.e. Social Security and Medicare Part A, are applied to the earnings you enter on the earnings screen.

This means that inputting gross income, including cafeteria items like health insurances and flexible spending accounts that are not subject to payroll taxes, and then backing them out with special expenses will fix the income tax, but not the payroll tax.

If you enter gross earnings, these pre-tax items will be subject to Social Security payroll taxes, and hence incorrectly inflate your Social Security benefits.

You should only enter earnings net of pre-tax items as earnings.

Addendum: "net of pre-tax items" refers only to benefit deductions like health insurance and flexible spending deductions, not to voluntary retirement contributions. The latter should be included in net wages. Taxes on retirement contributions are addressed by way of the retirement contributions folder/tab.

Flexible spending deductions can be added into your economy as non-taxable special receipts. The result of the combination of these approaches is correct calculation of FIT and payroll taxes, and your flexible spending deductions are available to your economy without being taxed inappropriately.

(a user)

This really needs to be fixed in the UI.

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