 Flexible
spending account not subject to FICA
|  Dear
Tax Talk,
My employer takes a child-care flexible spending
account deduction of $5,000 per year from my gross pay. Does this
deduction affect my Social Security earnings, or is this deduction
viewed the same as a 401(k) deduction? Will my gross
pay still be the amount of earnings for Social Security? -- Jerry
 Dear
Jerry,
Under an employer-sponsored flexible spending arrangement, your
employer is reducing your salary by the amount that you elect to
defer to pay for certain eligible fringe benefits. Provided you
use the funds as intended, they are permanently excluded from your
income.
One of the eligible fringe benefits is dependent-care
expenses, or amounts that you use to pay for the care of your children
(or other eligible dependents) while you work. The chart on page
4 of Publication 15B, Employer's Guide to Fringe Benefits, lists
various benefits and their treatment for payroll tax withholding.
Dependent-care assistance of up to $5,000 annually
would be exempt from all federal payroll taxes, hence your Social
Security wages will be that much lower than your gross pay for the
year.
Retirement contributions are treated differently because
they defer pay, whereas the dependent-care assistance benefit permanently
excludes the payment from income. Therefore your 401(k)
contributions are taxable for Social Security and Medicare. If you
do not use the full $5,000 for dependent-care assistance, you would
include the unused amount as additional compensation but would not
have to pay Social Security or Medicare taxes on that amount.
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