A. Taxable Income
With few exceptions, employee wages are subject to federal income tax withholding and social security/medicare taxes. Federal income taxes are calculated each pay period using tax tables provided by the Internal Revenue Services taking into account the marital status and number of exemptions reported on the employee’s W-4 (Employee Withholding Exemption Certificate). Social Security taxes are calculated at a rate of 6.2% of taxable wages up to the Social Security maximum. Medicare taxes are calculated at a rate of 1.45% of taxable wages with no yearly maximum.
Certain payroll deductions can reduce taxable wages. The following optional payroll deductions, if chosen as “pre-tax”, will result in a reduction of federal income tax withholding and Social Security/Medicare taxes:
- Health Insurance Premium (PPO, HMO, and POS)
- Medical Resident Health Insurance Premium
- Dental Insurance Premium
- Parking Deductions
- Flexible Benefits Plans
- Medical Reimbursement
- Dependent Care Reimbursement
In addition, Supplemental Retirement Annuity deductions are available to University employees. These deferred income plans (401(k), 403(b), and 457) allow employees to make pre-tax deductions to a savings plan. This defers the payment of income taxes until the employee received the funds, usually as a retirement benefit. Although deferred income deductions do reduce taxable wages for income tax purposes, they do not reduce Social Security/Medicare wages or tax deductions.
B. Federal Income Tax Withholding (W-4 Form)
Employees can adjust their income tax withholding amounts by changing the marital status or the number of exemptions on their W-4 form. The area on the W-4 designated “additional amount you want deducted from each pay” can be used to have additional taxes withheld each pay period. The amount indicated will be deducted in addition to the normal tax deduction calculated on monthly and biweekly payrolls. It will not be deducted on longevity or bonus payrolls. The IRIS transaction ZPTC is provided to help employees simulate the change in tax withholdings when the exemptions or marital status is adjusted.
C. Student FICA Exclusion
University of Tennessee student employees who are enrolled in classes at the University may be exempt from Social Security/Medicare taxes if they meet the following guidelines
Undergraduate students enrolled in 6 or more hours will be exempt from Social Security/Medicare taxes
Graduate students enrolled in at least 4 hours will be exempt from Social Security/Medicare taxes
Graduate students who receive an assistantship and are enrolled in at least 3 hours will be exempt from Social Security/Medicare taxes
These guidelines are in accordance with Internal Revenue Service Procedure 98-16. This procedure specifically excludes post-doctoral positions from the definition of a student. Therefore, students in a post-doctoral position will not be exempt from Social Security/Medicare taxes.
D. Re-Employed University Retirees
The State of Tennessee has a Section 218 agreement with the Social Security Administration governing Social Security coverage for all State employees, including University of Tennessee employees. Under this agreement, retired employees who are rehired with the University in a temporary position are exempt from the FICA portion of the Social Security tax if they participated in the University’s retirement plan during their full-time employment and are currently receiving a benefit from that plan. The Medicare portion (1.45%) of the social security tax will still be deducted.
If a retiree returns to work in other than a temporary position with the University, the full FICA and Medicare tax (7.65%) will be deducted from the retiree’s pay.