Understanding Territories, Excess Social Security Tax, and Your Returns
Welcome to our comprehensive FAQ guide, aimed to help you understand U.S. tax law specifically relating to territories and excess Social Security tax. We aim to clarify these complex tax concepts in an easy-to-understand manner, making tax time a little less daunting for you. This guide is based on the Internal Revenue Manual (IRM) 220.127.116.11.6 (10-01-2020).
Q1: Who pays the Social Security tax and Medicare tax in U.S. Territories such as Puerto Rico and the U.S. Virgin Islands?
Employers in Puerto Rico, the U.S. Virgin Islands, and other U.S. Territories are responsible for paying their social security tax and Medicare tax to the U.S. Government. They do this using Form 941-SS, or Form 941-PR.
Q2: What happens if I work for multiple employers and the total Social Security tax withheld exceeds the maximum amount for the year?
If the total Social Security tax withheld is greater than the maximum amount for the year, you can claim a refund of the excess Social Security tax. This can be done through Form 1040-PR or Form 1040-SS. It’s recommended for employees to file these returns when excess Social Security tax is withheld from two or more employers.
Q3: Can I claim the excess Social Security tax if I don’t need to file Form 1040?
Yes, If an individual taxpayer does not have a Form 1040 filing requirement, they can file a Form 843 claim to claim excess social security tax. However, the IRS encourages taxpayers to file a return using Form 1040-SS or Form 1040-PR instead of Form 843, which includes a provision to enter excess social security tax withheld.
Q4: What documents should be attached to a Form 843 claim or Form 1040-SS or 1040-PR when claiming excess Social Security tax?
When claiming excess Social Security tax, your Form 843 claim or Form 1040-SS or 1040-PR should have a withholding statement attached, such as:
- Form W-2
- Form W-2 AS
- Form W-2 CM
- Form W-2 VI
- Form W-2 GU
- Form 499R-2/W-2 PR or
- A letter to substantiate all credits attached.
Q5: How can I calculate the correct amount of excess Social Security tax withheld?
You can refer to IRM 18.104.22.168.2.4, Excess Social Security and RRTA Tier I Tax Credits, and IRM 22.214.171.124.18, Additional Medicare Tax, to calculate the correct amount of excess Social Security tax withheld.
Q6: How are excess Social Security tax claims processed?
Excess social security tax claims are processed as “Territory” claims when the taxpayer is not required to file a U.S. tax return and as “Domestic” claims when required to file a U.S. tax return.
Q7: What is a Territory Claim?
Most taxpayers filing excess Social Security tax claims are not required to file a U.S. tax return. However, they can use Form 1040-SS or 1040-PR as there is now a provision to report excess Social Security tax in Part 1, Line 8 on these returns.
Q8: What is a Domestic Claim?
Excess Social Security claims are processed as Domestic claims when the taxpayer is liable to file a U.S. tax return.
Example for clarity:
Let’s say John, a resident of the U.S. Virgin Islands, worked for two different employers in 2023. The total social security tax withheld from his income by both employers exceeded the maximum limit for that year. In this case, John can claim a refund of the excess social security tax withheld. He can do this by filing Form 1040-SS or Form 1040-PR.
If John is not required to file a U.S. tax return, his claim will be processed as a “Territory” claim. If he is required to file a U.S. tax return, his claim will be processed as a “Domestic” claim. This distinction is crucial because it influences the processing of John’s claim.
Understanding U.S. tax laws, specifically those related to social security tax in U.S. territories, can be a daunting task. However, this comprehensive FAQ guide aims to break down the complexities and provide clear, relatable explanations. If you find yourself in a situation where you’re dealing with excess social security tax, the information presented here can help you navigate the process more effectively. Remember, when in doubt, always consult with a local tax professional to ensure you’re making the most informed decisions.
***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**