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CHAPTER 3

CHAPTER 3. Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland. SOCIAL SECURITY TAXES. Developed by Lisa Swallow, CPA CMA MS. Coverage under FICA. FICA (1935) Federal Insurance Contributions Act Paid by employees and employers 6.2% OASDI plus 1.45% HI SECA (1951)

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CHAPTER 3

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  1. CHAPTER3 Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

  2. Coverage under FICA • FICA (1935) • Federal Insurance Contributions Act • Paid 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 independent contractor? • Is service rendered considered employment? • Is compensation considered taxable wages? • http://www.ssa.gov/employer

  3. Determination of 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 • 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

  4. More 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 $1600 or more per year • Must pay if employee, like a nanny is under your control • ER must match FICA • Certain ministers/religious practitioners are exempt • Additional exemptions for inmates, medical interns, student nurses and workers serving temporarily in case of emergency

  5. 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

  6. What are Taxable Wages? • Cash • Wages and salaries • Bonuses and commissions • Cash value of meals/lodging provided 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)

  7. Whatare Taxable Wages? (Continued) • Tips greater than $20 or more per month • EE must file Form 4070 with ER • 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 yea- end with IRS showing food/beverage receipts and reported tips

  8. SpecificallyExempt Wages • Meals/lodging for ER convenience • Sick pay • After 6 consecutive months off (personal injury) • Sick pay by 3rd party (insurance company/trustee) with specific stipulations for ER match • If paid directly to EE in lieu of health insurance payments is taxable • Pay for difference between employees’ salary and military pay (soldiers/reservists activated 30+ days) • ER contribution to pension plan • ER provided nondiscriminatory education assistance • Job-related educational expenses not subject to FICA • Payments for non-job related expenses up to $5,250

  9. FICATaxable Wage Base • OASDI wages cap at $106,500 for 2009 (estimated) • HI wages never cap FACTS: Tamara earn $132,000/year; paid semimonthly on the 15th and 30th; determine FICA for 10/30/09 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? • $106,500.00 – $104,500.00 = $2,000.00 • OASDI tax is $2,000.00 x 6.2% = $124.00 • HI tax is $5,500.00 x 1.45% =$ 79.75 • Total FICA is $124.00 + $79.75 =$ 203.75 • 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 8/1/09 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 • $106,500.00 – %102,083.31 = $4,416.69 taxed for OASDI • $4,416.69 x 6.2% = $273.83 OASDI tax • $14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!) • Total FICA = $273.83 + $211.46 =$ 485.29 Remember - the ER has withheld $485.29 from the employee’s paycheck and must match this amount

  11. SECA and Independent Contractors • EE and ER portion of FICA if net earnings exceeds $400 • Net Earnings = Net income + distributive share of partnership income • 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 • Count both towards calculating cap of $106,500 • Report on Schedule C“Profit or Loss from Business” • Also file Schedule SE “Self-Employment Tax” • Must include SECA taxes in quarterly estimated payments

  12. Calculating FICA with W-2 and Self Employed Earnings FACTS: W-2 = $107,768 and self employment income = $14,500; how much is FICA on $14,500? • No OASDI because capped on W-2 • HI = $ 14,500 x 2.9% = $420.50 • Total FICA = $420.50 FACTS: W-2 = $78,000 and self employment income = $36,000; how much is FICA on $36,000? • OASDI ($106,500 - 78,000) = $28,500 taxable OASDI wages x 12.4% = $3,534.00 • HI = $36,000 taxable HI wages x 2.9% = $1044.00 • Total FICA $3,534.000 + 1,044.00 = $4,578.00

  13. Howto Get Set Up with SSA • One Federal 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 • When purchasing an existing business, the new owner needs a new EIN • SS-5 required for everyone one year old or older • 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) • Three ways available to verify social security numbers

  14. Deposit Requirements for FICA and FIT (always go together) • Each November, based upon a look back period, IRS notifies ER as to what ‘type ‘of depositor he/she is • Monthly - pay FICA and FIT by 15th of following month or • 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 $2500 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

  15. How to Deposit FIT/FICA Electronically • EFTPS (Electronic Federal Tax Payment System) • Must use if total deposits exceed $200,000 for a year • 10% penalty on every tax deposit not made through EFTPS if required to do so • 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

  16. How to Deposit FIT/FICA by Coupon • Federal Tax Deposit Coupons, Form 8109 • Take to Treasury Tax and Loan institution (federal depository) • Or mail to Financial Agent in St. Louis, MO • Timely deposits requires postmarking two days before due date • Federal depository stamps date on coupon and forwards to IRS • IRS reconciles deposits with payments claimed by employer on quarterly payroll return (Form 941) • Coupon has stub that ER keeps as payment record

  17. 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 • Payments made with 941 if taxes for quarter are less than $2500 or making monthly deposit • Attach 941-V • 941 e-file available for employers who meet requirements • File Form 4996 and then electronically submit 941

  18. Employer’s Annual Federal Tax Return • Employers who owe $1000 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 $4000 or less per year • IRS can require 941-M (monthly reporting) if employer doesn’t deposit 941 taxes on time • Can amend previously filed Form 941s by filing Form 941X (replaces 941C)

  19. 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!!*

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