Slipping Through the “Donut Hole”: Obscure Election Can Avoid Potential Executive Payroll Tax Hike

Companies have a unique opportunity to consider minimizing the adverse impact of potential payroll tax increases affecting executives and employers under the Obama administration by taking advantage of various payroll elections available to employers on behalf of executives.

Executives and employers pay FICA taxes on wages, including wages attributable to nonqualified deferred compensation plans such as supplemental executive retirement plans (SERPs). FICA taxes have two components: OASDI (Social Security) and HI (Medicare) taxes. Executives and employers currently each pay Social Security taxes at a rate of 6.2% and Medicare taxes at a rate of 1.45%. Social Security taxes are currently imposed on the first $102,000 of wages paid to an executive, but not on any wages above that base wage. Medicare taxes are imposed on all wages paid to an executive regardless of the dollar amount.

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