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CHAPTER 3

CHAPTER 3. SOCIAL SECURITY TAXES. Coverage under FICA. FICA (1935) Federal Insurance Contributions Act Paid by employees and employers 6.2% OASDI plus 1.45% HI SECA (1951) Self Employment Contributions Act Tax upon net earnings of self-employed

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CHAPTER 3

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  1. CHAPTER3 SOCIAL SECURITY TAXES

  2. Coverage under FICA • FICA (1935) • Federal Insurance Contributions Act • Paid 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 independent contractor? • Is service rendered considered employment? • Is compensation considered taxable wages? • http://www.ssa.gov/employer

  3. Determination of 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 • 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

  4. 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 $1600 or more per year • Must pay if employee, like a nanny is under your control • ER must match FICA • Certain ministers/religious practitioners are exempt • Additional exemptions for inmates, medical interns, student nurses and workers serving temporarily in case of emergency

  5. 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

  6. What are Taxable Wages? • Cash • Wages and salaries • Bonuses and commissions • Cash value of meals/lodging provided 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)

  7. Whatare Taxable Wages? (Continued) • Tips greater than $20 or more per month • EE must file Form 4070 with ER • 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 yea- end with IRS showing food/beverage receipts and reported tips

  8. SpecificallyExempt Wages • Meals/lodging for ER convenience • Sick pay • After 6 consecutive months off (personal injury) • Sick pay by 3rd party (insurance company/trustee) with specific stipulations for ER match • If paid directly to EE in lieu of health insurance payments is taxable • Pay for difference between employees’ salary and military pay (soldiers/reservists activated 30+ days) • ER contribution to pension plan • ER provided nondiscriminatory education assistance • Job-related educational expenses not subject to FICA • Payments for non-job related expenses up to $5,250

  9. FICATaxable Wage Base • OASDI wages cap at $106,500 for 2009 (estimated) • HI wages never cap FACTS: Tamara earn $132,000/year; paid semimonthly on the 15th and 30th; determine FICA for 10/30/09 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? • $106,500.00 – $104,500.00 = $2,000.00 • OASDI tax is $2,000.00 x 6.2% = $124.00 • HI tax is $5,500.00 x 1.45% =$ 79.75 • Total FICA is $124.00 + $79.75 =$ 203.75 • Is this EE withholding or ER payroll tax expense? Answer - both!!

  10. Example #2 to Calculate FICA FACTS: Ahmed earns $175,000/year; paid first of every month; determine FICA for 8/1/09 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 • $106,500.00 – %102,083.31 = $4,416.69 taxed for OASDI • $4,416.69 x 6.2% = $273.83 OASDI tax • $14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!) • Total FICA = $273.83 + $211.46 =$ 485.29 Remember - the ER has withheld $485.29 from the employee’s paycheck and must match this amount

  11. SECA and Independent Contractors • EE and ER portion of FICA if net earnings exceeds $400 • Net Earnings = Net income + distributive share of partnership income • Partnerships • Distributive share of partnership net income subject to FICA • 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 $106,500 • Report on Schedule C“Profit or Loss from Business” • Also file Schedule SE “Self-Employment Tax” • Must include SECA taxes in quarterly estimated payments

  12. Calculating FICA with W-2 and Self Employed Earnings FACTS: W-2 = $107,768 and 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 FACTS: W-2 = $78,000 and self employment income = $36,000; how much is FICA on $36,000? • OASDI ($106,500 - 78,000) = $28,500 taxable OASDI wages x 12.4% = $3,534.00 • HI = $36,000 taxable HI wages x 2.9% = $1044.00 • Total FICA $3,534.000 + 1,044.00 = $4,578.00

  13. Howto Get Set Up with SSA • One Federal 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 • When purchasing an existing business, the new owner needs a new EIN • SS-5 required for everyone one year old or older • To apply for social security number • Required under SSA • W-7 for ITIN (aliens who must file a tax return, but are ineligible for SS number) • Three ways available to verify social security numbers

  14. Deposit Requirements for FICA and FIT (always go together) • Each November, based upon a look back period, IRS notifies ER as to what ‘type ‘of depositor he/she is • Monthly - pay FICA and FIT by 15th of following month or • 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 $2500 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

  15. How to Deposit FIT/FICA Electronically • EFTPS (Electronic Federal Tax Payment System) • Must use if total deposits exceed $200,000 for a year • 10% penalty on every tax deposit not made through EFTPS if required to do so • 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

  16. How to Deposit FIT/FICA by Coupon • Federal Tax Deposit Coupons, Form 8109 • Take to Treasury Tax and Loan institution (federal depository) • Or mail to Financial Agent in St. Louis, MO • Timely deposits requires postmarking two days before due date • Federal depository stamps date on coupon and forwards to IRS • IRS reconciles deposits with payments claimed by employer on quarterly payroll return (Form 941) • Coupon has stub that ER keeps as payment record

  17. 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 • Payments made with 941 if taxes for quarter are less than $2500 or making monthly deposit • Attach 941-V • 941 e-file available for employers who meet requirements • File Form 4996 and then electronically submit 941

  18. Employer’s Annual Federal Tax Return • Employers who owe $1000 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 $4000 or less per year • IRS can require 941-M (monthly reporting) if employer doesn’t deposit 941 taxes on time • Can amend previously filed Form 941s by filing Form 941X (replaces 941C)

  19. 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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