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CHAPTER 3

CHAPTER 3. SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS. Social Security Taxes. FICA (1935) Federal Insurance Contribution Act for employees 6.2% OASDI plus 1.45% HI SECA (1951) Self Employed Contribution Act for self employed folks

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CHAPTER 3

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  1. CHAPTER 3 SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

  2. Social Security Taxes • FICA (1935) • Federal Insurance Contribution Act • for employees • 6.2% OASDI plus 1.45% HI • SECA (1951) • Self Employed Contribution Act • for self employed folks • 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 the service considered employment? • Is compensation considered taxable wages?

  3. Determination of Independent Contractor (SECA) vs. Employee (FICA) • 20-point list to determine “common law relationship” • 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.ustreas.gov/prod/forms-pubs/pubs/p15a02.htm

  4. Specifically Covered (in addition to common law) • Life insurance salespeople • 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) • State/local EE (begin 1991 covered even if in PERS) • 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 $1000+/year • ER must pay FICA – reports on 1040 • Unless already files 941 - then put on there • Doesn’t apply to under 18 unless that’s their occupation • Must pay if they’re under your control (gardener/nanny/cook) • ER has to send W-2 even if earn under $1000/year • Corporation • Officer are EE • Board of director members are not EE • Partnership • Partners are not EE

  6. Employment Specifically Exempt from FICA • Kids under 18 working for folk’s sole proprietorship or partnership • Farm workers if all workers annual compensation < $2500 • Employees covered under RRTA (Railroad Retirement Tax Act) • Ambassadors/diplomats • Newspaper carrier less than 18 years old

  7. 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 > $50,000 group life

  8. Taxable Wages (Continued) • Tips greater than $20/month • EE must file form 4070 by 10th of following month with ER • 50% penalties for not reporting • ER calculates FICA on tips and withholds from regular paycheck on these reported tips • ER must match but they receive a business tax credit equal to the ER paid FICA on tips • “Large employers” (11+ EE) must allocate • [(Gross receipts x .08) – reported tips] • But 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% • Employer must file form 8027 at year end with IRS

  9. Specifically Exempt Wages • Meals/lodging for ER convenience (for example, paramedic) • Sick pay after 6 consecutive months off (personal injury – not permanent disability – payments) • Sick pay by 3rd party (insurance company/trustee) • ER SEP* (up to 15% of first $170,000) • SEP contributions through salary reduction must have FICA withheld • ER-provided nondiscriminatory education assistance (must have written plan) • Education must maintain/improve skills required by employment

  10. FICA Taxable Wage Base • OASDI caps at $79,800 for 2001 (estimated) • HI never caps • Facts: Earn $85,000/year - paid semimonthly beginning on 1/15 - running 12/15 payroll • First must find prior payroll YTD gross $85,000/24 = 3541.67 • 3541.67 x 22 = 77,916.74 • How much will be taxed for OASDI? • 79,800.00 - 77,916.74 = 1883.26 • OASDI tax is 1883.26 x 6.2% = 116.77 • HI tax is 3541.67 x 1.45% = 51.35 • Total FICA is 116.77 + 51.35 = $168.12 • Is this EE withholding or ER payroll tax expense? • Answer - both!!

  11. Example #2 to Calculate FICA • Earns $178,000/year; paid first of every month; running 6/1/00 payroll - determine FICA • What do we calculate first? • 178,000/12 = $14,833.33 per paycheck • YTD gross prior to current payroll = 14,833.33 x 5 = 74,166.65 • 79,800 - 74166.65 = 5633.35 taxed for OASDI • 5633.35 x 6.2% = 349.27 OASDI tax • 14,833.33 x 1.45% = 215.08 HI tax (remember - no cap!) • Total FICA = 349.27 + 215.08 = 564.35 Remember - the ER has withheld $564.35 from the employee’s paycheck and must match this amount

  12. SECA - Independent Contractor is both EE & ER • 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 • Can have W-2 and self employment income • Example: W-2 = $83,000 and self employment income = $14,500; how much FICA on $14,500? • Answer: No OASDI because capped on W-2 and HI = 2.9% x 14,500 = $420.50 • Example: W-2 = $68,000 and self employment income = $21,000; how much is FICA on $21,000? • Answer: (79,800 - 68,000) = 11,800 OASDI wages x 12.4% = $1463.20 + 21,000 x 2.9%=$609.00 Total FICA = ($1463.20 + 609.00 = $2072.20)

  13. How to Get Set Up with SSA • One EIN per employer • File SS-4 with IRS office where tax returns will be filed • TELE-TIN to obtain Federal Employer Identification Number immediately • 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) • EBES (Earnings Benefit Estimate Statement) • To see projection of benefits and ensure correct amounts posted as earnings (call 1-800-772-1213 for SSA-7004)

  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 • 1. Monthly depositor - pay FICA and FIT by 15th of following month • 2. 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 business day • If really small (quarterly owe less than $1000), wait and pay when 941 report is filed

  15. How to Deposit FIT/FICA • Fill out an 8109 coupon • These are sent to you when apply for FEIN • Take to Federal Reserve Bank (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 • If mailing, must postmark 2 days before due date • Penalties for late deposits

  16. How to Report FIT/FICA • File form 941 (Employer’s Quarterly Federal Tax Return • Due on last day of month following close of quarter: 1/31 4/30 7/30 10/31 • 941E-file for Reporting Agents who file 10+ returns per quarter • 941 TELEFILE - for monthly depositors sent TeleFile kits

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