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CHAPTER 3

CHAPTER 3. Payroll Accounting 2011 Bernard J. Bieg and Judith A. Toland. SOCIAL SECURITY TAXES. Developed by Lisa Swallow, CPA CMA MS. Learning Objectives. Identify which persons are covered under social security law Identify types of compensation that are defined as wages

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CHAPTER 3

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  1. CHAPTER 3 Payroll Accounting 2011 Bernard J. Bieg and Judith A. Toland SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

  2. Learning Objectives • Identify which persons are covered under social security law • Identify types of compensation that are defined as wages • Apply current tax rates and wage base for FICA/SECA purposes • Describe different requirements/procedures for depositing FICA/FIT taxes • Complete Forms 941 and 8109

  3. Coverage under FICA • FICA (1935) • Federal Insurance Contributions Act • Tax paid both by employees and employers • 6.2% OASDI plus 1.45% HI • SECA (1951) • Self-Employment Contributions Act • Tax upon net earnings of self-employed • (6.2% + 6.2%) = 12.4% OASDI plus (1.45% + 1.45%) = 2.9% HI • 3 issues • Are you an EE or an independent contractor? • Is service rendered considered employment? • Is compensation considered taxable wages? http://www.ssa.gov/employer

  4. Independent Contractor (SECA) vs. Employee (FICA) • Employer “employs one or more individuals for performance of services in U.S.” • IRS uses common-law test to determine status • See Figure 3-2 on p. 3-5 to determine status • Certain occupations specifically covered • Agent- and commission-drivers of food/beverages or dry cleaning • Full-time life insurance salespersons • Full-time traveling salespersons • Individual working at home on products that employer supplies and are returned to furnished specifications

  5. More Specific Situations • Government employees – certain exemptions from OASDI/HI depending upon date of hire • Military personnel - certain types of pay exempt from FICA • In-patriates - may be exempt from FICA (20 countries) • Family employees – in certain situations, children may be exempt from FICA • Household employees • If they make cash wages of $1,700 or more per year • Must pay if domestic employee, like a nanny, is under your control • Additional exemptions - inmates, medical interns, student nurses and workers serving temporarily in case of emergency

  6. Independent Contractor • Persons may be classified as independent contractors if they conduct an independent trade or business • See Figure 3-2 (page 3-5) for characteristics of independent contractors • Hiring agent does not pay/withhold FICA on worker classified as independent • Independent contractor liable for his/her own social security taxes on net earnings • If ER misclassifies EE, penalties will accrue to the ER • If EE did report the earnings on his/her federal tax return, the penalty is voided

  7. What are Taxable Wages? • Cash • Wages and salaries • Bonuses and commissions • Cash value of meals/lodging provided (but only if for employee’s convenience) • Fair market value of noncash compensation, examples include: • Gifts (over certain amounts) • Stock options • Fringe benefits like personal use of corporate car • Prizes • Premiums on group term life insurance > $50,000 • Other types of taxable wages found in Figure 3-3 (page 3-6)

  8. Whatare Taxable Wages? • Tips greater than $20 or more per month • EE can report tips to ER using Form 4070 • ER calculates FICA on tips and withholds from regular paycheck on these reported tips • Must withhold on first paycheck after tips are reported • ER must match FICA on reported tips • “Large employers” (11+ employees) must allocate • [(Gross receipts x .08) – reported tips] • Don’t have to withhold FICA on allocated tips, only reported tips • Have to show allocated tip income on W-2 • ER files Form 8027 at year-end with IRS showing food/beverage receipts and reported tips • ER can claim a credit for SS/Medicare taxes paid on employees’ tips on Form 8846

  9. SpecificallyExempt Wages • Meals/lodging for employer’s convenience • Sick pay • After 6 consecutive months off (personal injury) • Sick pay by 3rd party (insurance company/trustee) with specific stipulations for ER match • Pay for difference between employees’ salary and military pay for soldiers/reservists activated more than 30 days • Employer contribution to pension plan • Employer-provided nondiscriminatory education assistance • Job-related educational expenses not subject to FICA • Payments for non-job related expenses up to $5,250

  10. FICATaxable Wage Base • OASDI wages cap at $106,800 for 2010 • HI wages never cap • The Patient Protection & Affordable Care Act of 2010 created additional .9% HI tax on taxpayers receiving wages in excess of $200,000 ($250,000 if married filing jointly) beginning in 2013. Facts: Tamara earn $132,000/year; paid semimonthly on the 15th and 30th; determine FICA for October 30th payroll • First must find prior payroll YTD gross $132,000/24 =$ 5,500.00 • $5,500.00 x 19 payrolls (before today)= $104,500.00 • How much will be taxed for OASDI? • $106,800.00 – $104,500.00 = $2,300.00 • OASDI tax is $2,300.00 x 6.2% = $142.60 • HI tax is $5,500.00 x 1.45% =$ 79.75 • Total FICA is $142.60 + $79.75 =$ 222.35

  11. Another Example - Calculating FICA Facts: Ahmed earns $175,000/year; paid first of every month; determine FICA for August 1 payroll • What do we calculate first? • $175,000/12 = $14,583.33 per paycheck • YTD gross prior to current payroll =$14,583.33 x 7 = $102,083.31 • $106,800.00 – $102,083.31 = $4,716.69 taxed for OASDI • $4,716.69 x 6.2% = $292.43 OASDI tax • $14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!) • Total FICA = $292.43 + $211.46 =$ 503.89

  12. Tax Holiday • Hiring Incentives to Restore Employment Act of 2010 provides relief for employer’s share of OASDI tax • On wages paid 3/19/10 - 12/31/10 • For qualified employees only • Full-time or part-time • Retention credit also available if remain employed for 52 consecutive weeks

  13. SECA and Independent Contractors • EE and ER portion of FICA if net earnings exceed $400 • Net Earnings = Net income + distributive share of partnership income • If you own more than one business - offset losses and income and calculate FICA based on combined net income • Can have W-2 and self employment income • Count both towards calculating cap of $106,800 for OASDI • Report on Schedule C“Profit or Loss from Business” • Also file Schedule SE “Self-Employment Tax” • Must include SECA taxes in quarterly estimated payments

  14. Calculating FICA with W-2 and Self-Employed Earnings Facts: Celia’s W-2 = $107,768 and her self-employment income = $14,500; how much is FICA on $14,500? • No OASDI because capped on W-2 • HI = $14,500 x 2.9% = $420.50 • Total FICA = $420.50

  15. Calculating FICA with W-2 and Self-Employed Earnings Facts: Felipe’s W-2 = $78,000 and his self-employment income = $36,000; how much is FICA on $36,000? • OASDI ($106,800 - 78,000) = $28,800 taxable OASDI wages x 12.4% = $3,571.20 • HI = $36,000 taxable HI wages x 2.9% = $1,044.00 • Total FICA $3,571.20 + 1,044.00 = $4,615.20

  16. How to Get Set Up with SSA • One employer identification number (EIN) per employer • Obtain directly from http://www.irs.gov with no preregistration necessary • TELE-TIN to obtain (EIN) immediately at 1-800-829-4933 • Can still fax/mail Form SS-4 • If purchasing an existing business, new owner needs own EIN • SSN required for everyone that is employed or self-employed • To apply for social security number file SS-5 • W-7 for ITIN (aliens who must file a tax return, but are ineligible for SS #) • Required for children age one or over who are claimed as dependents on federal income tax return • Three ways available for employers to verify SSNs – via internet, telephone or paper request

  17. Depositing FIT & FICA • FICA & FIT always deposited together • Each November, IRS notifies ER whether they will be a monthly or semiweekly depositor for next calendar year • Monthly - pay FICA and FIT by 15th of following month • Semiweekly • If payroll was W-F, deposit by next Wednesday • If payroll was S-T, deposit by next Friday or • One day - $100,000 or more of federal payroll tax liability, taxpayer has until close of next banking day or • No deposit required - owe less than $2,500 in entire quarter, wait and pay when 941 report is filed • Different requirements for agricultural and household employees *New employers are monthly depositors unless $100,000+ of liability triggers one-day rule Amount deposited may be affected by safe harbor rule (see p. 3-19)

  18. Credit Against Required 941 Deposits • Consolidated Omnibus Budget Reconciliation Act (COBRA) gives involuntarily terminated employees option to continued coverage under company’s group health insurance • Can continue coverage up to 15 months • Government subsidizes 65% of this cost • Company is ‘reimbursed’ its 65% by taking a deduction on Form 941 • Employee pays 35%

  19. How to Deposit FIT/FICA Electronically • EFTPS (Electronic Federal Tax Payment System) • Most employers must use EFTPS – major exception is for businesses owing $2500 or loss in quarterly tax liabilities • Enroll in EFTPS Online at http://www.eftps.gov • All new employers automatically pre-enrolled • Two methods • ACH debit method – withdraw funds from employer’s bank account and route to Treasury • ACH credit method – employer instructs his/her bank to send payment directly to Treasury

  20. How to Deposit FIT/FICA by Coupon • Federal Tax Deposit Coupons, Form 8109 • Will most likely not be used beginning 1/1/11 • Take to Treasury Tax & Loan institution or mail to Financial Agent at Federal Tax Deposit Processing in St. Louis, MO • Timely deposits requires postmarking two days before due date • Federal depository stamps date on coupon and forwards to IRS • Coupon has stub that ER keeps as payment record

  21. How to Report and Reconcile FIT/FICA • File Form 941 (Employer’s Quarterly Federal Tax Return) • Download at www.irs.gov/formspubs/or call 1-800-829-3676 • Due on last day of month following close of quarter • January 31, April 30, July 30, October 31 • If that falls on weekend or legal holiday, file next business day • Payments made with 941if taxes for quarter are less than $2,500 or making monthly deposit (attach 941-V) • Electronic filing options available for employers who meet requirements • Complete an e-file application & then electronically submit 941 or apply for a PIN on IRS website and file electronically through third-party transmitter

  22. Employer’s Annual Federal Tax Return • Employers who owe $1,000 or less per year may file Form 944 • Employer must have made timely deposits for prior two years • Can also be used by new employers paying wages of $4,000 or less per year • Employer should contact IRS and express interest • Employer may chose to file Form 941 quarterly instead – need to notify IRS • Can correct errors on previously filed Form 941 by filing Form 941-X

  23. Types of Penalties • Failure-to-comply penalties will be added to tax and interest charges; negligence can also result in fines/imprisonment • Interest set quarterly, based on short-term Treasury bill rate • Penalties imposed for following: • Not filing employment tax returns on time • Not paying full taxes when due • Not making timely deposits • Not furnishing W-2s to employees on timely basis • Not filing information returns with IRS on time • Writing bad checks Note: IRS estimates a full 30% of all employers incur penalties for insufficient/late deposits of payroll taxes!!

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