CHAPTER 3 CHAPTER 3 SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES

Payroll Accounting 2012 Payroll Accounting 2012 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 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 Form 941

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 employee or an independent contractor? Is service rendered considered employment? Is compensation considered taxable wages?

http://www.ssa.gov/employer LO-1

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 If employer misclassifies employees, there is a penalty

(generally equal to employer’s share of FICA plus income taxes/FICA that were not withheld from employees’ earnings) LO-1

More Specific Situations

Government employees – certain exemptions from OASDI/HI depending upon date of hire

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

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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

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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 payments 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)

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What are Taxable Wages? Tips greater than $20 or more per month

Employee can report tips to employer using Form 4070 Employer calculates FICA on tips and withholds from

regular paycheck on these reported tips Must withhold on first paycheck after tips are reported Employer 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 and employer

files Form 8027 at year-end with IRS showing food/beverage receipts and reported tips

Employer can claim a credit for SS/Medicare taxes paid on certain employees’ tips on Form 8846LO-2

Specifically Exempt 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 LO-2

FICA Taxable Wage Base

OASDI wages cap at $110,100 for 2012 HI wages never cap – since there is not ceiling, employers

compute HI tax on full amount of wages 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

Interesting note: In 1950 there were 16 workers paying into Social Security for every one person

collecting benefits.

By 2042, that ratio is projected to be 2 to 1.

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Calculating FICAFacts: Tamara earns $132,000/year and is

paid semimonthly on the15th and 30th; determine FICA for October 30th payroll

First must find prior payroll year-to-date gross $138,000/24 =$ 5,750.00

Hint: how many payrolls were run before the 10/30 payroll? Multiply that by the gross per payroll $5,750.00 x 19 payrolls (before today)= $109,250.00

How much will be taxed for OASDI? $110,100.00 – $109,250.00 = $850.00 OASDI tax is $850.00 x 6.2% = $52.70

How much will be taxed for HI? HI tax is $5,750.00 x 1.45% =$ 83.38

How much is total FICA? Total FICA is $52.70 + $83.38 =$136.08 LO-3

Another Example - Calculating FICAFacts: Ahmed earns $175,000/year and is

paid the first of every month; determine FICA for August 1 payroll

What do we calculate first? $175,000/12 = $14,583.33 per paycheck Year to date gross prior to current payroll =$14,583.33 x 7 =

$102,083.31 $110,100.00 – $102,083.31 = $8,016.69 taxed for OASDI $8,016.69 x 6.2% = $497.03 OASDI tax $14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!) Total FICA = $497.43 + $211.46 =$ 708.49

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SECA and Independent Contractors Employee and employer portion of FICA is paid 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 $110,100 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

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Calculating FICA with W-2 and Self-Employed Earnings

Facts: Celia’s W-2 = $117,768 and her self-employment income = $14,500; how much is her FICA on $14,500?

No OASDI is due because she capped on W-2

HI = $14,500 x 2.9% = $420.50Total FICA = $420.50

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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 ($110,100 - $78,000) = $32,100 taxable OASDI wages x 12.4% = $3,980.40

HI = $36,000 taxable HI wages x 2.9% = $1,044.00

Total FICA due on self-employment = $3,980.40 + 1,044.00 = $5,024.40

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How to Get Set Up with SSA

One employer identification number (EIN) per employer obtained by completing a Form SS-4 (see Figure 3-5 on page 3-15) 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 completed for aliens who must file a tax return, but are

ineligible for social security # Required for children age one or over who are claimed as

dependents on federal income tax return Employer can verify SS numbers by internet or telephone

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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 – pay within 3 business days; however, if any of the 3 days is a nonbusiness day, add one business day to the required deposit date

However, there is an exception: One-day rule states that if

$100,000 or more of federal payroll tax liability is due,

taxpayer has until close of next banking day

Different requirements for agricultural and household employees

New employers are monthly depositors unless $100,000+ of liability triggers one-day rule and converts them to semiweekly

Amount deposited may be affected by

safe harbor rule (see p. 3-19)

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Credit Against the Required 941 Deposits

Consolidated Omnibus Budget Reconciliation Act (COBRA) gives employees involuntarily terminated between 9/1/08 – 3/31/10 the option to continue coverage under company’s group health insurance

Can continue coverage up to 15 months

Government subsidizes 65% of premium cost

Company is ‘reimbursed’ its 65% by taking a deduction on Form 941

Employee pays 35% of premiumLO-4

How to Deposit FITand FICA Electronically

Employers must use EFTPS (Electronic Federal Tax Payment System) Most employers must use EFTPS – only exception

is for businesses owing $2,500 or loss in quarterly tax liabilities

Enroll in EFTPS Online at http://www.eftps.gov All new employers automatically pre-enrolled Two methods

EFTPS (direct) – withdraw funds from employer’s bank account and route to Treasury

EFTPS (through financial institution) – employer instructs his/her bank to send payment directly to Treasury

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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 Form 941 if 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

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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

and IRS will respond with notification letter 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

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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!! LO-5