A little-known Social Security tax provision is being promoted by business management consultants as a "gimmick" to help employers cut their Social Security taxes, says the system's former chief actuary.
Robert J. Myers, now a professor of actuarial studies at Temple University, cited a brochure from the Management Corp. of America, a consultant in Durham, N.C. It is marketing a service called "FICA II" to show businesses how to use the provision and obtain "savings of up to $172.10 per employe in 1979" on employer Social Security tax outlays.
Another firm, William L. Walton & Associates of Los Angeles, advertised a seminar for businessmen at $75 a head on use of the provision. An article by Walton, cited by Myers, calls use of the tax provision "a new weapon in the war on compensation costs."
And the Social Security Administration says that some states and cities whose employes are enrolled in Social Security -- North Carolina, Arkansas, Florida, West Virginia, Pennsylvania and New York City are considering going over to the new method. Texas already has. New York City officials estimate they would save $26 million a year in taxes for city employes enrolled in Social Security.
Myers calls the use of the provision "unethical." While it does save money for the employer and may even result in slightly more take-home pay for the worker, it lowers future Social Security benefits for the workers involved and also cuts income to the Social Security system.
The provision, in the law since 1935 but barely used until recently, allows an employer to pay not only his own share of the Social Security tax for each worker, but also the employe's share. If he does, he needn't count the employe's share as added wages for Social Security purposes.
Myers says employers are persuading workers to take a slightly lower gross salary or to forgo raises so that they end up with the same gross as if they got a higher salary and paid the tax themselves.The employer then pays the whole tax, but only on the lower amount, so he saves money.
It's a complicated calculation, but here is an example of how it works in practice.
Suppose a worker normally earns $10,000. Under traditional payment procedures, he pays $613 (6.13 percent) in Social Security taxes and his boss also pays $613 for him. The worker's net pay is $9,387 after payment of the tax. The boss' total cost is $10,613.
If, however, the $9,387 were considered the worker's salary and the employer paid the whole tax for both, the worker would still end up with $9,387. But the employer gross cost would be less. He would be allowed to calculate the 6.13 percent tax on $9,387 instead of $10,000. So, even paying both halves of the Social Security tax, which would work out to $575 each, his outlay would total only $10,537 instead of $10,613.
This means a $76 a year saving per worker, which can add up to lots of money in firms with thousands of workers.
The employe might end up with a slightly higher take-home pay weekly than under the old system. Since his gross pay would be less, his federal income tax would be less -- even though the tax paid for him by the employer is added back into income for income tax purposes only.In the example cited, the worker's pay, for income tax purposes only, would be calculated at $9,387 plus $575 -- $9962 -- instead of $10,000.
However, Myers points out, he would eventually lose some Social Security benefits because his Social Security earnings total for the year would be credited at only $9387 instead of $10,000 -- and benefits are based on average lifetime earnings. Moreover, while the employer was pocketing the $76 saving on the tax, the hard-pressed Social Security system would be losing it.
Myers says the provision of law involved was introduced when Social Security started 44 years ago as a "favor" for "a few employers who made the public gesture of not having their employes' pay reduced by the new payroll tax." Now, he said, it is being converted to a tax-reduction loophole to "rip off" the trust funds.
One New York City official had a different view. Since the employe has a lower gross income for income-tax purposes, he may get a few dollars more a week in take-home pay. "It's a tradeoff: do you want more cash now, or more Social Security benefits in the future?"
The Social Security Advisory Council, however, isn't buying this argument. It agrees with Myers, who has made the issue a personal crusade for a number of months. It has endorsed his request for a change in the law to close the alleged loophole.