Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 79-49

1979-1 C.B. 57

Section 61

IRS Headnote

Payment of employees' FICA tax. Amounts paid by a state under an agreement wit with H.E.W. or by a domestic corporation under an agreement with the Service extending social security coverage to state employees or to employees of a foreign subsidiary of the domestic corporation, which are equivalent to the FICA tax that would have been imposed on the employees under section 3101 of the Code, are includible in the employees' gross income and are wages subject to income tax withholding.

Full Text

Rev. Rul. 79-49

ISSUE

Whether any portion of the amounts paid by a state under an agreement with the Secretary of Health, Education, and Welfare or by a domestic corporation under an agreement with the Internal Revenue Service to extend social security coverage to state employees or to employees of a foreign subsidiary of the domestic corporation are includible in the gross incomes of the covered employees and are wages subject to income tax withholding.

FACTS

As permitted by section 218 of the Social Security Act, as amended, 42 U.S.C. 418 (1970), State A entered into an agreement with the Secretary of Health, Education, and Welfare by which certain employees of the state and its political subdivisions became covered by the social security system. Employees included in such an agreement ("218 agreement") have the same benefit rights as individuals with social security coverage in the private sector.

State A is obligated under the 218 agreement to make a payment with respect to the covered employees measured by the sum of the taxes that would be imposed by sections 3101 and 3111 of the Internal Revenue Code of 1954, relating to the payment by employees and employers of taxes under the Federal Insurance Contributions Act (FICA), if the remuneration for services of the employees is "wages" as defined in section 3121. Whether or not a state requires its employees to contribute toward the cost of social security coverage under a 218 agreement is left to the discretion of each state.

State A pays the entire amount required under its 218 agreement out of its own funds and does not collect any part of the payment from the employees.

Section 3121(l) of the Code provides for an agreement, similar to the 218 agreement, between the Secretary of the Treasury or his delegate and a domestic corporation whereby employees of a foreign subsidiary of the domestic corporation who are United States citizens performing services outside the United States may become covered by the social security system.

HOLDING

The amounts paid by State A that are equivalent to the FICA tax that would have been imposed on the employees by section 3101 of the Code are includible in the gross income of the employees covered by the 218 agreement and are wages subject to income tax withholding.

The conclusion of this Revenue Ruling also applies where agreements providing for social security coverage under section 3121(l) of the Code impose on the employer liability for all or part of the amount equivalent to the tax that would have been imposed on the employees by section 3101, and where the employer does not collect that amount from the employees.

See Rev. Rul. 74-75, 1974-1 C.B. 19, for treatment of cases in which an employee's liability under section 3101 of the Code is paid by an employer.