Opinion ID: 3025649
Heading Depth: 3
Heading Rank: 1

Heading: “Wages” Under FICA

Text: The purpose of FICA taxes, as distinct from income taxes, is to “fund a national system of social insurance that supports important and extensive social security and medicare health programs.” Temple Univ. v. United States, 769 F.2d 126, 130 (3d Cir. 1985). FICA taxes include a tax to fund old-age, survivors, and disability insurance, and a tax to fund hospital insurance. See 26 U.S.C. §§ 3101, 3111. In Temple we cited the Senate’s comments explaining the underlying purpose of FICA: “The social security program aims to replace the income of beneficiaries when that income is reduced on account of retirement and disability. Thus, the amount of ‘wages’ is the measure used both to define income which should be replaced and to compute FICA tax liability. Since the security system has objectives which are significantly different from the objective underlying the income tax withholding rules, the committee believes that amounts exempt from 3 The University does not appeal the determination that the payments to non-tenured librarians were subject to FICA taxes. 5 income tax withholding should not be exempt from FICA unless Congress provides an explicit FICA tax exclusion.” 769 F.2d at 130 (quoting S. Rep. No. 23, 98th Cong., 1st Sess. 41, reprinted in 1983 U.S.C.C.A.N. 143, 183). Under the Internal Revenue Code, employers and employees are liable for payment of FICA taxes on all “wages” that are received by an employee “with respect to employment.” See 26 U.S.C. §§ 3101(a)-(b). Section 3121(a) defines “wages” subject to FICA taxes as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.”4 Section 3121(b) defines “employment” as “any service, of whatever nature, performed . . . by an employee for the person employing him.”5 The Supreme Court has interpreted the term “employment”—a component of the definition of wages—broadly: “The very words any service . . . performed . . . for his employer, with the purpose of the Social Security Act in mind import breadth of coverage.” See Social Sec. Bd. v. Nierotko, 327 U.S. 358, 365 (1946) (internal quotation marks omitted) (emphasis added). Nierotko concluded, specifically, that “service” in the phrase “any service performed” means not only work actually performed, but also “the entire employer-employee relationship for which compensation is paid to the employee by the employer.” Id. at 365-66. Applying this interpretation, Nierotko held that “back pay” awarded under the National Labor Relations Act to a wrongfully discharged employee had to be taxed as wages under the Social Security Act.6 See id. at 364. 4 Section 3121(a) lists a number of exceptions to the “wages” category, none of which applies here. 5 Section 3121(b) also lists a number of exceptions to this definition, none of which applies here. 6 In FICA Congress retained the definition of wages contained in the Social Security Act of 1935, essentially 6 Treasury regulations further provide that “[t]he name by which . . . remuneration for employment is designated is immaterial.” 26 C.F.R. § 31.3121(a)-1(c). Thus, for example, “salaries, fees, bonuses, and commissions on sales or on insurance premiums, are wages if paid as compensation for employment.” Id. Likewise, “the basis upon which the remuneration is paid is immaterial in determining whether the remuneration constitutes wages.” Id. at § 31.3121(a)-1(d). For example, “it may be paid on the basis of piecework, or a percentage of profits; and it may be paid hourly, daily, weekly, monthly, or annually.” Id. Unless remuneration for employment is specifically excepted, it “constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them.” Id. at § 31.3121(a)-1(i).