Impact of Medicare tax on deferred compensation.

• Author: Dunn, Bill
• Position: Brief Article

Before 1994, wages up to certain levels (indexed annually for inflation; $135,000 in 1993) were subject to a health insurance payroll tax at a rate of 1.45% each for the employer and the employec. Effective Jan. 1, 1994, the new law removed the cap on wages subject to the Medicare surtax. This means that all wages and selfemployment income are subject to the tax.

In the case of deferred compensation, Sec. 312(v)(2) provides that such compensation is generally subject to FICA tax in the year in which services are performed; the only exception is when the promise is subject to a substantial risk of forfeiture. In contrast, wages are subject to income tax when the employee receives payment or is in constructive receipt of payment.

As a result, employees who are participants in a deferred compensation plan are generally subject to FICA tax on the deferred wages prior to being subject to income tax; that is, FICA tax is imposed in the year of...