Over the decades Social Security and Medicare for state and local governments have evolved into a complex matrix of laws which significantly differ from those governing private employers. To determine appropriate coverage for public employees, five key questions need to be answered. Once these threshold questions have been resolved, correct coverage can be ascertained.
1. What is the worker’s employment status?
The first step in determining appropriate FICA coverage is to identify whether each worker is an employee or an independent contractor. Whether an individual is classified as an independent contractor or an employee has important tax consequences.
The courts have considered many facts in deciding whether a worker is an independent contractor or an employee. These facts fall into three main categories: behavioral control, financial control and relationship of the parties. The IRS and Social Security Administration compiled a list of 20 factors used in court decisions to help determine whether a worker is an employee or an independent contractor. These factors can indicate whether sufficient employer control is present to establish an employer-employee relationship. The importance of each factor varies depending on the occupation and the context in which the services are performed. The common law factors are designed only as a guide.
For more information about determining a worker's classification contact the IRS and Social Security.
2. Are the services excluded from FICA coverage?
Certain services cannot be covered by Social Security or Medicare. The following services are not covered by full Social Security coverage. Services performed:
- By individuals hired to be relieved from unemployment. (This does not include services performed by individuals under work-training or work-study programs. These programs are designed to provide work experience and training to increase the person’s employability.)
- In a hospital, home or other institution by a patient or inmate thereof as an employee of a state or local government employer.
- For a state or local government by workers hired on a temporary basis in emergencies such as a fire, storm, snow, earthquake, flood or similar emergencies.
- By election officials or workers who are paid less than the amount as stated in a modification or the Agreement.
- By a nonresident alien temporarily residing in the U.S. holding an F1, M1, or Q1 Visa. Typically, these services are performed to carry out the purpose for which the alien was admitted to the U.S.
3. Are the services covered under a Federal-State Agreement?
If the services the employee is performing are covered under a Federal-State Agreement, then coverage is straightforward—the employee must be covered for FICA. Prior to July 2, 1991, the only way a local government (city, village, county, etc.) could cover its employees under Social Security was for the state to include it under the state’s Federal-State Agreement (Section 218 Agreement) with the Social Security Administration (SSA). The agreement extended Social Security coverage to government employers at the state’s request.
Employees performing services covered by a Federal-State Agreement are required to pay FICA. Social Security coverage obtained through a Federal-State Agreement cannot be terminated. The employee may also be covered by a retirement plan but this must be in addition to the FICA coverage.
Find out if there is a Federal-State Agreement
4. Is Social Security coverage mandatory for this employee?
Employees not covered by a retirement plan must be covered by FICA unless mandatorily excluded. In general, an employee should be paying FICA if they are not paying into a public retirement system (e.g., Public Employees’ Retirement Association (PERA), Fire and Police Pension Association (FPPA) or a qualifying 401(k), 401(a), 403(b) or 457 plan).
If an employee is covered by Social Security and Medicare as a result of a Federal-State Agreement (Section 218 Agreement), the FICA coverage cannot be terminated. However, if the employee is paying into Social Security and Medicare as a result of mandatory Social Security, it may be possible for the employer to sponsor a qualified public retirement system instead of paying into Social Security.
5. When was the employee hired?
For employees not covered by Social Security, the date of hire may determine the employees’ Medicare-only obligation. There are three conditions which dictate Medicare obligations:
- All employees who were hired or rehired after March 31, 1986, are subject to mandatory Medicare-only coverage, unless specifically excluded by law.
- All employees who are covered for Social Security, either via a Federal-State Agreement or mandatory Social Security, must automatically pay Medicare.
- If the employee and/or employer are paying into a public retirement system the date the employee was hired is the determining factor whether or not the employee and employer pay Medicare. If the employee was hired or rehired by the state or local employer after March 31, 1986, they are subject to the Medicare tax.
The date an employee was hired is the key to determine appropriate Medicare coverage for employees not paying into Social Security. In order to be excluded from Medicare-only obligations, an employee must not be paying Social Security and must have been in continuous employment prior to April 1, 1986.
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