Question: I am the elderly employer of a part-time housekeeper, for whom I remit Social Security tax payments. Since I itemize deductions on my income tax returns, I asked the IRS where I should show my portion of the FICA payments. The answer was that I could not claim credit in any form for these taxes - unless I formed a corporations! Is the IRS answer right? If so, what is the justification for the special treatment for corporations?

Answer: First, the answer you got from the IRS was right. An individual may not claim credit on his or her federal income tax return for Social Security payments made on behalf of a domestic employee.

There is an exception: If you claim credit for the cost of child or dependent care which permits you to work, then the employer portion of FICA tax may be considered a part of the employee wages when computing the expense deduction.

But - with the exception just noted - domestic help is considered a personal expense for individuals, in the same category as food, clothing, rent, or utilities. On the other hand, FICA tax paid on behalf of employees of corporations is a part of the cost of doing business and is therefore a legitimate and deductible expense.

Aside from the obvious complications, I suspect that a corporation formed for the sole purpose of running your household would not be recognized as valid by the IRS; and an attempt to deduct household expenses would not be allowed in any case.

Q: A few months ago you wrote about the advantages of borrowing on an insurance policy. Is it possibile you may have overlooked a factor which might change your calculations? As I understand it, if the cash value is not borrowed, the insurance company pays a nontaxable dividend of at least three percent on the cash value - so any advantage you showed would be wiped out. If this is true, an early correction would help a lot of people.

A: The quick answer is that the statement is not true - dividends are not affected by the cash value. But since your misunderstanding may be shared by others, I had better explain in detail.

In general, life insurance is sold by two kinds of insurance companies: "stock" and "mutual." Mutual companies sell "participating" policies; that is, policyholders share in the financial experience of the company on a year-by-year basis.

Premiums are set at a somewhat higher rate than needed to cover expected mortality losses, operating expenses, and the legally required reserve dund, less anticipated investment income.

At the end of the year, any excess of income over actual net costs (plus reserve) is returned to the policyholders in the form of dividends. This dividend is simply a return of excess premium originally paid, and is therefore nontaxable (unless the premium cost had previously been deducted as a business expense on your tax return).

The dividend relates only to the premium paid in the immediately preceding year, and is not affected by any borrowing of cash value. Further, the amount of the dividend cannot be calculated in advance, since it depends on the company's financial experience during the year.

Your mention of "three percent" leads me to believe that you are thinking not of the dividend itself but of the interest paid each year on dividends left on deposit with the company.

(Actually, many companies are now paying as much as five or six percent a year interest on accumulated dividends.)

This annual interest payment, however, is taxable income; it should be reported by the insurance company and included by you on your tax return each year.

In any case, what you do with the annual dividend - that is, whether or not you leave it on deposit with the company - has no effect on either cash value or future dividends. And the dividend itself is not affected by a policy loan against cash value.

For more information, you may be interested in a booklet called "Understanding Your Life Insurance." It is published by the American Council of Life Insurance and is offered free by some insurance companies and independent agents.