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CHAPTER 3 CHAPTER 3
SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES
Payroll Accounting 2011 Payroll Accounting 2011 Bernard J. Bieg and Judith A. TolandBernard J. Bieg and Judith A. Toland
Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS
Learning ObjectivesLearning ObjectivesIdentify which persons are covered
under social security lawIdentify types of compensation that
are defined as wagesApply current tax rates and wage base
for FICA/SECA purposesDescribe different
requirements/procedures for depositing FICA/FIT taxes
Complete Forms 941 and 8109
Coverage under FICACoverage 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
Independent Contractor Independent Contractor (SECA) (SECA) vs. Employee (FICA)vs. Employee (FICA) Employer “employs one or more individuals
for performance of services in U.S.” IRS uses common-law test to determine
statusSee 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
More Specific SituationsMore 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
Independent ContractorIndependent 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
What are Taxable What are Taxable Wages?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)
WhatWhat are Taxable Wages? are 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
SpecificallySpecifically Exempt Exempt WagesWages
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
FICAFICA Taxable Wage BaseTaxable 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
Another Example - Another Example - Calculating FICACalculating 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
Tax Holiday Tax Holiday
Hiring Incentives to Restore Employment Act of 2010 provides relief for employer’s share of OASDI taxOn wages paid 3/19/10 - 12/31/10For qualified employees onlyFull-time or part-timeRetention credit also available if remain
employed for 52 consecutive weeks
SECA and Independent SECA and Independent ContractorsContractors 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
Calculating FICA with W-2 Calculating FICA with W-2 and and Self-Employed EarningsSelf-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-2HI = $14,500 x 2.9% = $420.50Total FICA = $420.50
Calculating FICA with W-2 Calculating FICA with W-2 and and Self-Employed EarningsSelf-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
HowHow to Get Set Up with to Get Set Up with SSA 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
Depositing FIT & FICADepositing 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)
Credit Against Credit Against Required 941 DepositsRequired 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%
How to Deposit FIT/FICA How to Deposit FIT/FICA ElectronicallyElectronically 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
How to Deposit How to Deposit FIT/FICA by CouponFIT/FICA by Coupon
Federal Tax Deposit Coupons, Form 8109Will most likely not be used beginning 1/1/11Take to Treasury Tax & Loan institution or mail
to Financial Agent at Federal Tax Deposit Processing in St. Louis, MOTimely deposits requires postmarking two days
before due dateFederal depository stamps date on coupon and
forwards to IRSCoupon has stub that ER keeps as payment
record
How to Report and How to Report and Reconcile FIT/FICAReconcile 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
Employer’s Annual Employer’s Annual Federal Tax ReturnFederal 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
Types of PenaltiesTypes 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!!