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CHAPTER 3

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  1. CHAPTER 3 Payroll Accounting 2006 Bernard J. Bieg SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

  2. Social Security Taxes • FICA (1935) • Federal Insurance Contribution Act • Paid by employees and employers • 6.2% OASDI plus 1.45% HI • SECA (1951) • Self Employed Contribution 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 compensation considered taxable wages? • Calculating FICA and SECA under varying situations http://www.ssa.gov/employer

  3. Determination of Independent Contractor (SECA) vs. Employee (FICA) • IRS historically used 20-point test to determine “common law relationship” - examples from list include • How many companies does person work for • Control work/schedule/where performed • Who provides tools • Can person incur profit or loss • 3 Categories of evidence • Behavioral Control • Financial Control • Type of Relationship Can file SS-8 with IRS if uncertain what to do!! Access http://www.irs.gov/formspubs/

  4. Specifically Covered (in addition to common law) • Full time life insurance salespeople • Full time traveling salespeople • Agent- and commission-drivers of food/beverages • Not-for-profit EE (except ministers) • minister can irrevocably elect FICA coverage • Federal employees (only HI if hired prior to 1984) • In-patriates • Military on basic pay • no FICA on excess pay

  5. More Specific Situations • Temporary employees – considered EE of temporary agency • Household employees • If they make $1400+/year • ER must pay FICA – reports on 1040 (still paid by both) • Unless already files 941 - then report on this form • Doesn’t apply to minor unless that’s his or her occupation • Must pay if he/she under your control (gardener/nanny/cook) • Corporation • Officers are EE • Board of director members are not EE • Partnership • Partners are not EE

  6. What are Taxable Wages? • Cash • Wages and salaries • Bonuses and commissions • FMV of noncash compensation • Gifts (over certain amounts) • Stock options • Fringe benefits like personal use of corporate car • Prizes • Premiums on group term life insurance > $50,000

  7. What are Taxable Wages? (Continued) • Tips greater than $20 or more per month • EE must file form 4070 by 10th of following month with ER • ER calculates FICA on tips and withholds from regular paycheck on these reported tips • ER must match but they receive a business tax credit roughly equivalent to the ER paid FICA on tips • “Large employers” (11+ EE) 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 can petition IRS to reduce tip allocation to as low as 2% • ER files Form 8027 at year end with IRS

  8. Specifically Exempt Wages • Meals/lodging for ER convenience (for example, paramedic) • Sick pay • After 6 consecutive months off (personal injury) • Sick pay by 3rd party (insurance company/trustee) • ER contribution to pension plan • SEP contributions through salary reduction must have FICA withheld • ER-provided nondiscriminatory education assistance • Job-related educational expenses not subject to FICA • Payments for non-job related expenses up to $5,250

  9. FICA Taxable Wage Base • OASDI wages cap at $93,000 for 2006 (estimated) • HI wages never cap FACTS: Tamara earn $95,000/year; paid semimonthly on the 15th and 30th; determine FICA for 12/30/06 payroll • First must find prior payroll YTD gross $95,000/24 = 3,958.33 • 3,958.33 x 23 = 91,041.59 • How much will be taxed for OASDI? • 93,000.00 – 91,041.59 = 1958.41 • OASDI tax is 1958.41 x 6.2% = 121.42 • HI tax is 3,958.33 x 1.45% = 57.40 • Total FICA is 121.42 + 57.40 = 178.82 • 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 7/1/06 payroll • What do we calculate first? • 175,000/12 = $14,583.33 per paycheck • YTD gross prior to current payroll = 14,583.33 x 6 = 87,499.98 • 93,000.00 - 87,499.98 = 5,500.02 taxed for OASDI • 5,500.02 x 6.2% = 341.00 OASDI tax • 14,583.33 x 1.45% = 211.46 HI tax (remember - no cap!) • Total FICA = 341.00 + 211.46 = 552.46 Remember - the ER has withheld $552.46 from the employee’s paycheck and must match this amount

  11. SECA and Independent Contractors • EE and ER portion of FICA if net income exceeds $400 • Net Income = Revenue – Expense • 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 • Report self employment income on Schedule C • Can have W-2 and self employment income

  12. Calculating FICA with W-2 and Self Employed Earnings FACTS: W-2 = $97,768 and self employment income = $14,500; how much FICA on $14,500? • No OASDI because capped on W-2 • HI = 2.9% x 14,500 = $420.50 • Total FICA $420.50 FACTS: W-2 = $78,000 and self employment income = $21,000; how much is FICA on $21,000? • OASDI (93,000 - 78,000) = 15,000 taxable OASDI wages x 12.4% = $1,860.00 • HI = 21,000 taxable HI wages x 2.9% = $609.00 • Total FICA $1,860.00 + 609.00 = $2,469.00

  13. How to Get Set Up with SSA • One Federal Employer Identification Number (EIN) per employer • File Form SS-4 with IRS office where tax returns will be filed • TELE-TIN to obtain (EIN) immediately • 1-800-829-4933 • When purchasing an existing business, the new owner needs a new EIN • SS-5 for everyone > one year old • 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)

  14. Deposit Requirements for FICA and FIT (always go together) • Each November, based upon a look back period, IRS tells ER what type of depositor he/she is • Monthly depositor - pay FICA and FIT by 15th of following month or • Semiweekly depositor • If payroll was W-F, deposit by next Wednesday • If payroll was S-T, deposit by next Friday • Exceptions • If really big ($100,000+ of federal payroll tax liability), taxpayer has until close of next banking day • If really small (quarterly owe less than $2500), wait and pay when 941 report is filed

  15. How to Deposit FIT/FICA • Fill out a Form 8109 coupon • These are sent to you when apply for EIN • Take to an authorized financial institution (depository for federal government) • Or can use EFTPS (Electronic Federal Tax Payment System) • Must use if total deposits exceed $200,000 for a year • Complete Form 9779, EFTPS Business Enrollment Form • To utilize online capabilities, enroll at www.eftps.gov • If mailing, postmark at least 2 days before due date • Penalties for late deposits

  16. How to Report FIT/FICA • File Form 941 (Employer’s Quarterly Federal Tax Return) • Download at www.irs.gov/formspubs/ • Due on last day of month following close of quarter • 1/31 4/30 7/30 10/31 • 941 e-file available for employers who meet requirements • File Form 4996 and then electronically submit 941

  17. Types of Penalties • Failure-to-comply penalties will be added to tax and interest charges; negligence can also result in fines/imprisonment • Imposed for following: • not filing employment tax returns on time • not paying taxes when due • not making timely deposits • not furnishing W-2s (information returns) • writing bad checks

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