EMPLOYER AND EMPLOYEE TAXATION

Deductibility of Premiums
Employer contributions to the Social Security and Medicare programs are tax deductible for federal income tax purposes. Any employee contributions are paid with after-tax dollars. Self-employed persons can deduct one-half of their Social Security tax as a business expense. In addition, Part B premiums are treated the same as other premiums for individual medical expense insurance and may be deductible.

Taxation of Benefits
Benefits received in the form of monthly income under Social Security are partially subject to income taxation for some Social Security recipients. To determine the amount of Social Security benefits subject to taxation, it is necessary to calculate modified adjusted gross income, which is the sum of the following:

- The taxpayer's adjusted gross income (disregarding any foreign income and savings bond exclusions)

- The taxpayer's tax-exempt interest received or accrued during the year

- One-half of the Social Security benefits for the year

If the modified adjusted gross income is $25,000 or less for a single taxpayer ($32,000 or less for a married taxpayer filing jointly), Social Security benefits are not taxable. If the modified adjusted gross income is between the base amount and $34,000 ($44,000 for a married taxpayer filing jointly), up to 50 percent of the Social Security benefit is includable in taxable income. If the modified adjusted gross income exceeds $34,000 ($44,000 for a married taxpayer filing jointly), up to 85 percent of the Social Security benefit is includable in taxable income. The exact amount of the taxable Social Security benefit is determined by complex formulas that are beyond the scope of this discussion.

Medicare benefits and any lump-sum Social Security benefits are received tax free.