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AC122 Payroll Accounting

AC122 Payroll Accounting. Unit 4 Seminar. Continuing Problem Check Figures. Totals from the Payroll Register Regular earnings = $4,397.83 O/T earnings = $234.57 Employees earning O/T pay: Wilson Fife Fay Hardy Total earnings = $4,632.40. Completing the Payroll Journal.

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AC122 Payroll Accounting

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  1. AC122 Payroll Accounting Unit 4 Seminar

  2. Continuing Problem Check Figures • Totals from the Payroll Register • Regular earnings = $4,397.83 • O/T earnings = $234.57 • Employees earning O/T pay: • Wilson • Fife • Fay • Hardy • Total earnings = $4,632.40

  3. Completing the Payroll Journal • Step 1: Calculate total earnings • Unit 3 • Step 2: Record deductions from earnings • Units 4-6 • Step 3: Calculate net earnings • Unit 7

  4. Reporting Deductions

  5. OASDI and HI Programs funded by social security and Medicare taxes imposed on employees and their employers: • OASDI: (Social Security) Old-age, survivors, and disability insurance benefits program • HI: (Medicare) Retiree’s health insurance program

  6. FICA Coverage FICA: • Imposes 2 taxes on employees - Social Security and Medicare • Imposes 2 taxes on employers - Social Security and Medicare (Employee pays ½ and employer pays ½)

  7. FICA Coverage • Every person is an employer if the person employs one or more individuals for the performances of services in the United States, unless such services or employment are specifically exempted by the law. • The term employment applies to any service performed by employees for their employer, regardless of citizenship or residence of either. • FICA covers most types of employment but there are specific exclusions. Some types of employment are wholly exempt from coverage, and others are exempt only if the cash wages received are less than a stipulated dollar amount.

  8. FICA Coverage FICA provides coverage for the following list of four occupations: • Agent-drivers and commission-drivers who distribute food and beverage products or handle laundry or dry cleaning • Full-time life insurance salespeople • Full-time traveling salesperson for one firm or person • Individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name if you also furnish specifications for the work to be done

  9. FICA Coverage Government Employees: • Federal - Hired after 1983 – full coverage - Hired prior to 1984 – only Medicare applies • State and local - Work done after 7/1/91, and not in public retirement plan – full coverage - Hired after 3/31/86, and covered by a public retirement plan – Medicare only • Military - Basic pay – full FICA taxes - Excess of basic pay – not subject to FICA tax - Temporary service with National Guard – difference in pay covered by civilian employer – subject to FICA tax

  10. FICA Coverage International Agreements • Totalization agreements with over 20 foreign countries have eliminated dual taxation and dual coverage. • In-patriates who are working in the US from one of these countries will not have social security taxes withheld on SC – sourced income. • If the worker is from a country that has no such agreement, social security tax must be withheld.

  11. Occupations Exempt from FICA • See chart on page 3-3 • Agricultural services • Domestic service • Services by civilians for U.S. government • Railroad workers • Services performed for foreign governments • Newspaper distributor – under 18 • Student nurses • Students working for college

  12. Taxable Wages • The amount of wages paid employers to their employees during the calendar year determines the amount of OASDI/HI taxes. • The basis of payment may be hourly, daily, weekly, biweekly, semimonthly, monthly, annually, piece rate, or a percentage of profits. • Wages include the following: - Actual money received by employees - Cash value of meals and lodging provided for the convenience of the employees - Bonuses and commissions paid by the employer with respect to employment

  13. Tips • FICA considers cash tips of $20 or more in a calendar month to be taxable wages. • Each employee must report their tips in writing to their employers by the 10th of the month following the month in which the tips were received. • Employees failing to report tips to their employers may be penalized 50% of the FICA tax due on the tips. • Employers must collect the employee’s FICA tax on the tips that each employee reports. • Employers are also liable for their share of the FICA tax on any tips subject to the employee’s FICA tax.

  14. Exempt Payments • Meals and Lodging – FICA exempts the value of meals or lodging furnished to employees for the convenience of the employer. The value of meals or lodging not meeting this test will be subject to FICA tax. • Sick pay – The first six months of sick pay an employee receives is considered wages and is subject to FICA tax. • Makeup pay for military duty – Wage supplements paid by employers to cover the difference between employee’s salaries and their military pay or payment of their full salary are exempt from FICA and Medicare taxes. • Contributions to deferred compensation plans – Employee pretax (federal income tax) contributions under a qualified cash or deferred compensation arrangement are subject to FICA tax. However, the employer’s matching contributions are tax-free. • Payments for educational assistance – Payments for job-related educational expenses are not subject to FICA taxes if the education maintains or improves skills required by the individual’s employment.

  15. FICA Tax Rates The Social Security Act imposes a separate tax on employers and employees for old-age, survivors, and disability insurance (OASDI) benefits and for hospital insurance (HI) benefits. The tax rate for both the employee and the employer portions of the tax are: • OASDI • Social Security • 6.2% of first $106,800 earned • HI • Medicare • 1.45% (all earnings)

  16. Taxable Wage Base • The employer must consider the taxable wage base when computing the OASDI portion of the FICA tax. The law exempts wages that exceed this base during the calendar year. Once the OASDI taxable wage has been reached, all payments made to the employee during the remainder of the year are not taxable. • The HI portion of the FICA tax does not have a ceiling, thus employers compute this tax on the total wages and salaries paid during the year. • If: - Cumulative wages + Current wage payment < OASDI wage base, then compute the OASDI tax on the entire wage payment - Cumulative wages + Current wage payment > OASDI wage base, then compute the OASDI taxable wage limit.

  17. Employee’s FICA Taxes and Withholdings • FICA requires employers to collect the OASDI/HI taxes from their employees and pay the taxes to the IRS at the same time they pay their own tax. • The employer deducts the tax from the wages at the time of payment.

  18. Example • Rachel Parkins is paid a semimonthly salary of $6,800. Compute the amount of FICA taxes that should be withheld from her: • 9th paycheck • 16th paycheck • 24th paycheck

  19. Example • Rachel Parkins is paid a semimonthly salary of $6,800. Compute the amount of FICA taxes that should be withheld from her: • 9th paycheck • 9*6800=$61,200 • Has not earned >106,800, so all earnings are taxable for both OASDI and HI • OASDI=61,200*6.2%=$3,794.40 • HI=61,200*1.45%=$887.40

  20. Example • Rachel Parkins is paid a semimonthly salary of $6,800. Compute the amount of FICA taxes that should be withheld from her: • 16th paycheck • 6800*16=$108,800 • Her earnings go over the max 106,800 during this pay period • Before this pay her earnings were $102,000 (15*6800) • Only $4,800 of her current earnings are taxable for OASDI • (106,800-102,000 = 4,800) • OASDI = 4800*6.2% = $297.60 • HI = 6800*1.45% = $887.40

  21. Example • Rachel Parkins is paid a semimonthly salary of $6,800. Compute the amount of FICA taxes that should be withheld from her: • 24th paycheck • She’s already earned > $106,800 • OASDI = $0 • HI = 6800*1.45% = $887.40

  22. Paying the FICA Taxes • 2 methods for depositing employment taxes • Electronic deposits • EFTPS • Employers who made more than $200,000 in aggregate deposits in 2007 or had to make electronic deposits in 2008 must use EFTPS for 2009. • Form 9779 – EFTPS Business Enrollment Form • FTD Coupons • Federal Tax Deposit Coupons, Form 8109 • Example, p. 3-22

  23. Quarterly Reporting • Form 941 – Employer’s Quarterly Federal Tax Return • Example, p. 3-24

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