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CHAPTER 3

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CHAPTER 3

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  1. CHAPTER 3 Payroll Accounting 2013 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 Form 941

  3. Coverage under FICA • FICA (1935) • Federal Insurance Contributions Act • Tax paid both by employees and employers • 6.2% employer OASDI plus 1.45% HI • 4.2% employee OASDI plus 1.45% HI for 2012 • 6.2% employee OASDI plus 1.45% HI for 2013 • SECA (1951) • Self-Employment Contributions Act • Tax upon net earnings of self-employed • (4.2% + 6.2%) = 10.4% OASDI plus (1.45% + 1.45%) = 2.9% HI for 2012 • (6.2% + 6.2%) = 12.4% OASDI Plus 2.9% HI for 2013 • 3 issues • Are you an employee or an independent contractor? • Is service rendered considered employment? • Is compensation considered taxable wages? http://www.socialsecurity.gov/employer LO-1

  4. Independent Contractor (SECA) vs. Employee (FICA) • Every person is an employer if “person employs one or more individuals for performance of services in U.S.” ***Person includes trusts, estates, individual, partnership or corporation*** • Certain occupations specifically covered by FICA • Full-time life insurance salespersons • Agent- and commission-drivers of food/beverages or dry cleaning • 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 • However, if employee reported earnings on 1040, penalty is voided • Penalty may be reduced if employer filed a 1099 LO-1

  5. 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 $1,800 or more per year • Must pay if domestic employee, like a nanny or cook, is under your control • Additional exemptions - inmates, medical interns, student nurses and workers serving temporarily in case of emergency LO-1

  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 • See http://www.irs.gov/pub/irs-pdf.p1779.pdf for criteria • 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 LO-1

  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 payments • Fringe benefits like personal use of corporate car • Prizes • Premiums on group term life insurance > $50,000 • Vacation pay • Other types of taxable wages found in Figure 3-3 (page 3-6) LO-2

  8. 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 pay 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 • Employer can claim a credit for SS/Medicare taxes paid on certain employees’ tips on Form 8846 Have to show allocated tip income on W-2; employer files Form 8027 at year-end with IRS showing food/beverage receipts and reported tips LO-2

  9. Specifically Exempt Wages • Meals/lodging for employer’s convenience • Sick pay • Only after 6 consecutive months off (personal injury) • Sick pay by 3rd party (insurance company/trustee) with specific stipulations • 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

  10. FICA Taxable Wage Base • OASDI wages cap (actual) at $110,100 for 2012 • OASDI wages cap (actual) at $113,700 for 2013 • HI wages never cap – since there is no ceiling, employers compute HI tax on full amount of wages • However, please be aware that tentative legislation for 2013 creates: • An additional .9% HI surtax on taxpayers receiving wages in excess of $200,000 ($250,000 if married filing jointly) • A surtax of 3.8% on modified AGI in excess of $200,000 ($250,000 if married filing join) • Employer doesn’t match these surtaxes for HI 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. LO-3

  11. Calculating FICA Facts: Tamara earns $138,000/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 • Tamara’s OASDI tax is $850.00 x 4.2% = $35.70 • Employer’s OASDI tax is $850.00 x 6.2% = $52.70 • How much will be taxed for HI? • Both Tamara’s and the employer’s HI tax is $5,750.00 x 1.45% =$ 83.38 • How much is total FICA? • Total FICA for Tamara is $35.70 + $83.38 = $119.08 • Total FICA for employer is $52.70 + $83.38 =$136.08 LO-3

  12. Another Example - Calculating FICA Facts: 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 • Then count number of payrolls before today’s payroll! • Year to date gross prior to current payroll is $14,583.33 x 7 = $102,083.31 • $110,100.00 – $102,083.31 = $8,016.69 taxed for OASDI for 2012 • 113,700 – 102,083.31 = 11,616.69 taxed for OASDI for 2013 • Ahmed’s OASDI tax is $8,016.69 x 4.2% = $336.70 • The employer’s OASDI tax is $8,016.69 x 6.2% = $497.03 • OASDI for both employee and employer at 6.2% for 2013 at $11,616.69 • Both Ahmed’s and the employer’s HI Tax is $14,583.33 x 1.45% = $211.46 (remember - no cap!) • Total FICA for Ahmed is $336.70 + $211.46 = $548.16 • Total FICA for the employer is $497.43 + $211.46 =$ 708.49 LO-3

  13. 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 • In 2013 self-employed taxes = 15.3% (6.2% + 1.45% and 6.2% + 1.45%) • Can have W-2 and self employment income • Count both towards calculating cap of $113,700 for OASDI in 2013 • Report on Schedule C(Form 1040) “Profit or Loss from Business” • Also file Schedule SE (Form 1040) “Self-Employment Tax” • Must include SECA taxes in quarterly estimated payments LO-3

  14. 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 Celia capped on W-2 • HI = $14,500 x 2.9% = $420.50 • Total FICA is therefore = $420.50 LO-3

  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 Felipe’s self-employment tax on $36,000? • OASDI ($110,100 - $78,000) = $32,100 taxable OASDI wages x 10.4%* = $3,338.40 for 2012 • (113,700 – 78,000)$35,700 x 12.4% = 4,426.80 for 2013 • HI = $36,000 taxable HI wages x 2.9%** = $1,044.00 • Total FICA due on self-employment = $3,338.40 + 1,044.00 = $4,382.40 for 2012 • 4,426.80 + 1,044 = 5470.80 for 2013 *4.2% + 6.2% = 10.4% **1.45% + 1.45% = 2.9% LO-3

  16. Problems • 3 – 3A, 3 – 4 A, 3 – 17 A

  17. Problems • 3 – 1 A, 3 – 2 A, 3 – 5 A, 3 – 7 A

  18. Problems • 3 – 8 A, 3 - 9 A, 3 – 10 A

  19. 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 • Required for children age one or over who are claimed as dependents on federal income tax return • W-7 completed for aliens who must file a tax return, but are ineligible for social security # • Employer can verify SS numbers by internet or telephone http://www.ssa.gov/employer/ssnv.htm LO-3

  20. 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 (“lookback period”) • Monthly - pay FICA and FIT by 15th of following month • Semiweekly – if payday is W, Th or F then due following W and if payday is S, S, M or T then due following F 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 • New employers are monthly depositors unless $100,000+ of liability triggers one-day rule and converts them to semiweekly • Different requirements for agricultural and household employees • Amount deposited may be affected by safe harbor rule ( p. 3-19) LO-4

  21. 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 premium LO-4

  22. How to Deposit FITand FICA Electronically • Old paper-based system has been replaced by an electronic depositing system • Most employers are now on EFTPS (Electronic Federal Tax Payment System) - only exception is for businesses owing $2,500 or less 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 LO-4

  23. Problem • 3 - 15A

  24. 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 • Make deposit with Form 941 if taxes for quarter are less than $2,500 • Use 941-V when making payment or can pay by credit card • 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 • Can correct errors on previously filed Form 941 by filing Form 941-X LO-5

  25. 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 LO-5

  26. 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 • Not supplying identification numbers • Writing bad checks Note: IRS reports that 100,000 businesses owe more than two years of payroll taxes (estimated at $58 billion)!! LO-5

  27. Problem • 3 – 11 A, 3 – 1 2A, 3 – 13 A, 3 – 14 A, 3 – 16 A