AGRICULTURAL PERSONNEL MANAGEMENT
NEWSLETTER

Social Security provides important income for many retired or disabled workers and their families. Programs include retirement or disability benefits paid to a worker, benefits for dependents of retired or disabled workers, benefits for surviving family members of a deceased worker, and lump-sum ($255) death payments.

Your social security number is used to keep your lifetime earnings record. Earnings credited to your account determine if you're "insured" under social security, and any benefits payable to you and/or your dependents or survivors. Penalties up to $25,000 and/or up to 5 years imprisonment await those using someone else's social security number, or buying, selling, or counterfeiting social security cards.

Employers must give Form W-2 to each employee for wages paid in a calendar year on or before January 31 of the next year, whether or not the employee's wages are subject to income tax withholding. If after reasonable effort the employer can't deliver Form W-2 to an employee, the employer must keep the employee and IRS copies for 4 years. Willful failure to furnish employees with Form W-2 will, for each failure, subject employers to a fine of up to $1,000 and/or imprisonment for up to 1 year. There is also a $50 civil penalty for each failure to furnish Form W-2.

Under Social Security, "covered" employment excludes work performed by a child under age 18 for his or her parent (unless parents are business partners or major stockholders). Wages paid to undocumented immigrants are subject to social security taxes.

Social Security benefits are primarily funded by taxes paid by employees, employers, and the self-employed. The combined social security and Medicare tax rate is 7.65%.

Social security and Medicare taxes imposed by the Federal Insurance Contributions Act (FICA) are paid at the same rate by both employer and employee. Taxes of the self-employed now equal the combined employer-employee rates.

There is an annual limit on earnings subject to FICA taxes. In 1997, earnings over $65,400 are excluded from taxable wages for purposes of the social security part of the FICA tax. The amount of earnings subject to the (1.45%) Medicare portion of the FICA tax is unlimited.

Employers collect employee taxes from employees by deducting taxes from their wages as and when paid. Severe penalties are provided for willful failure to pay, collect, or truthfully account for and pay over employee taxes.

Domestic workers ... Individuals who pay $1,000 or more in cash wages to domestic workers (maids, nannies) in a calendar year report and pay FICA taxes due at the end of the year with Schedule H attached to their Form 1040. Employers must still file Form W-2 for each domestic employee with the Social Security Administration by the end of February of the year following the year of employment.

An employer who expects to pay at least $1,000 to a domestic employee should withhold 7.65 percent from each payment made to the employee, even if the employer isn't sure the $1,000 cash-payment test will be met for the year. If too little is withheld from a payment, the employer should correct the error by deducting it from a later payment. If too much is deducted or it becomes obvious the $1,000 threshold won't be reached by year end, the employer should repay the amount withheld.

You must meet certain "insured status" requirements before Social Security benefits can be paid to you or your family. The measure of insured status is the number of calendar "quarters of coverage" acquired. The earnings requirement for a quarter of coverage is subject to automatic annual increases to account for increases in average annual wages. The amount needed for a quarter of coverage in 1997 (for both employees and the self-employed) is $670, up from $640 in 1996.

It is an eligibility condition for most benefits that a worker be "fully insured." Because 40 quarters of coverage fully insures any worker for life, anyone with 10 years (40 quarters) of Social Security coverage need not make a count Ñ unless applying for disability benefits.

Disability Benefit Eligibility ... If you become disabled, you will be eligible for monthly benefits if you've worked under Social Security long enough and recently enough. The amount of work needed depends on your age when you become disabled:

Before 24: You need credit for 1 1/2 years of work in the 3-year period ending when your disability begins.

24 through 30: You need credit for having worked half the time between 21 and the time you become disabled.

31 or older: All workers disabled at 31 or older (except the blind) need the amount of credit shown in Table 1.

Five years of this credit must have been earned in the 10 years ending when the worker became disabled. The years need not be continuous or in units of full years.

Except in cases involving blindness, disability is defined under the Social Security Act as "an inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months." Entitlement to disability benefits no longer includes cases where alcoholism or drug addiction are contributing factors material to the determination of disability.

Virtually all social security benefits are based on a worker's "primary insurance amount" (PIA). For example, the worker's own unreduced old-age benefit will equal his or her PIA and his or her spouse and child may each be entitled to an unreduced benefit equal to one-half of the PIA.

The detailed benefit (PIA) computation process would occupy far more pages than those in one Newsletter. Fortunately, the Social Security Administration, on request, now provides a "Personal Earnings and Benefit Estimate Statement" (English or Spanish) without charge. Form SSA-7004 must be completed by the person to whom the record pertains. Form SSA-7004 may be requested on 1-800-772-1213.

Check your social security account periodically on Form SSA-7004. There is a time limit for corrections (3 years, 3 months, and 15 days after the close of any taxable year). The Social Security Administration automatically provides earnings and estimated benefit statements to eligible individuals once they are age 60. Beginning in 1999, earnings statements will be provided to all insured individuals biennially.

Disability and Family Benefits ... Monthly disability benefits, generally equal to a person's PIA, are payable after a "waiting period" of 5 calendar months throughout which the individual has been disabled. The social security system also provides for the payment of benefits, equal to a certain part of the worker's PIA, to certain dependents of the disabled or retired worker, or to survivors in the event of death.

Retirement Benefits ... You are entitled to a monthly old-age benefit if you are fully insured, have reached age 62, and have made an application. Although you may become eligible for retirement benefits at age 62, such "early" retirement results in the reduction of your monthly benefits. The reduction is based on the number of months remaining before the worker reaches "retirement age" Ñ the age at which a fully-insured worker becomes eligible for a monthly old-age benefit. The old-age benefit upon "early" retirement at age 62 will equal about 80% of the PIA.

Age 65 is still the "full" retirement age. However, the retirement age is to be gradually increased to 67 as shown in Table 2. "Early" retirement age will stay at 62.

Early Retirement Reduction of Benefits ... The retirement benefit of a worker for any month before he or she attains "retirement age" will be reduced by 5/9 of 1% of the amount of the benefit, multiplied by the number of months in the individual's "reduction period." The reduction period is the number of months in the period beginning with the first month for which the individual is entitled to the benefit and ending with the month in which he or she would attain retirement age. For example, in the case of an individual who currently becomes entitled to any old-age benefit for the month in which he attains age 62 and based on a PIA of $950, the reduction will amount to $184.80 (about 20%).

For workers and/or their spouses who reach age 62 in years after 1999 and so will be affected by the increase in the retirement age, the usual amount of reduction for early retirement for will apply for the first 36 months of the reduction period, and a reduction factor of 5/12 of 1% will apply for any additional months in the reduction period.

Projected benefits ... Estimated initial retirement benefits for persons retiring in future years are shown in Table 3. The table projections, made by the Social Security Administration, are for illustration only.

Current formulas used to calculate benefits are expected to produce a benefit that, for workers becoming entitled at full retirement age, will eventually replace about 56 percent of pre-retirement income for the "low-income" worker, about 42 percent of pre-retirement income for the "average-income" worker, and about 28 percent of taxable pre-retirement income for the worker with "maximum earnings." For 1997, Social Security projections defined annual low-income (near minimum wage) as $11,554, "average" annual earnings as $25,676, and "maximum" earnings (for workers always paying on income amounts equal to the maximum taxable wage base for each year) as $62,700.

Cost-of-Living Increases ... "Escalator " provisions in current law trigger automatic cost of living benefit increases whenever the Consumer Price Index increases between certain base periods. Annual percentage increases averaged 3.3% for the period 1990-96. Benefit projections in Table 3 assume annual escalator increases of about 4% -- and annual wage increases between 4 and 5%.

Annual Earnings Test ... Recent legislation raised exempt earnings limits before any deductions are made from social security benefits payable to working beneficiaries (retirees) under age 70. Exempt earnings for persons aged 65 through 69 are gradually increased for a few years, then greatly expanded after the turn of the century. Annual exempt amounts prescribed by the new law are as follows: 1997 - $13,500; 1998 - $14,500; 1999 - $15,500; 2000 - $17,000; 2001 - $25,000; and 2002 - $30,000. Increases in exempt amounts are triggered by annual cost-of-living adjustments, and new exempt amounts are published in the Federal Register.

Reference: "Social Security Explained," Commerce Clearing House, Inc., Chicago, 1997.