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Tax Reporting

Tax Reporting. Business taxes must be collected and paid to the IRS; this requires:. Income tax withholding Social Security/Medicare withholding Federal unemployment tax withholding Reporting of income, Social Security/Medicare and unemployment taxes.

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Tax Reporting

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  1. Tax Reporting

  2. Business taxes must be collected and paid to the IRS; this requires: • Income tax withholding • Social Security/Medicare withholding • Federal unemployment tax withholding • Reporting of income, Social Security/Medicare and unemployment taxes IRS publications 17 and 334 are required reading

  3. To report taxes a taxpayer must have an employer identification number. To obtain an employer identification number, form SS-4 must be filed with the IRS. It is also possible to order an employer identification number on line by accessing the IRS web site, www.irs.gov.

  4. A Federal Tax Deposit Coupon book containing preprinted form 8109 is mailed to new taxpayers who receive an Employee Identification Number. This Federal Tax Deposit Coupon must be used when payroll tax deposits are made at an authorized financial institution or Federal Reserve Bank. The IRS automatically sends replacement Federal Tax Deposit Coupon books periodically. There is a blank coupon, Form 8109-B, that can be used if necessary before the preprinted ones have been received.

  5. Income Taxes

  6. Employers are required by law to withhold income taxes from the wages of employees. For federal income tax, the employer must: • determine the amount to be withheld • deduct it from wages each payroll period • deposit it in a federal reserve bank, and • submit it quarterly to the federal government.

  7. To determine the amount that must be withheld, the employee fills out a W-4 form, Employee's Withholding Allowance Certificate. The W-4 form should be completed by the employee on (or before) the first day of employment. On the W-4, the employee claims withholding allowances that are equal to the number of exemptions the employee is entitled to; the number of allowances affects the amount of taxes to be withheld.

  8. The number of withholding allowances on the W-4 form should be changed by the employee if: • the employee has to pay a sizable amount of taxes at the end of the tax year; • the employee receives a sizable tax refund; • the employee's marital status changes

  9. To determine the amount of federal income taxes to be deducted for each employee, Circular E (Publication 15) must be used. Withholding is based on gross wages, and may be calculated by using any of several methods; the percentage and wage bracket methods are the most common.

  10. Wage bracket tables for the calculation of Social Security and Medicare taxes may be found in Circular E, or the employee's gross wages can be multiplied by the current tax rate.

  11. Employers are liable for payment of these income taxes to the federal government, even if they are not collected from employees or are collected incorrectly.Payments to the IRS must be made quarterly, not at the end of the tax year (it’s a “pay as you go” system!).A similar method is used for the collection and payment of state income taxes.

  12. Social Security/Medicare Taxes for Employees

  13. The Federal Insurance Contributions Act (FICA) provides for a federal system of old age, disability, survivors, and hospital insurance. The old age, survivors, and disability insurance is financed by the Social Security tax; the hospital insurance is financed by the Medicare tax.Social Security and Medicare taxes are levied on both employers and employees; employers must collect and pay the employees' part of the taxes to the federal government.

  14. Employees contribute a total of 7.65% of wages to the Social Security/Medicare tax.For 2009, the Social Security tax rate for employees is 6.2%, to a maximum of $106,800. The 2009 Medicare tax rate for employees is 1.45%, regardless of wages (there is no ceiling).For each employee, the employer also contributes 6.2% of gross wages to Social Security and 1.45% to Medicare (7.65%)!

  15. Social Security Withholding--Employer Contributions Amount Subject to Maximum YearSocial Security TaxTax RateContribution 2005 $90,000 6.20% $5,580 (Social Security) no ceiling 1.45% no limit (Medicare) 2006 $94,200 6.20% $5,840 (Social Security) no ceiling 1.45% no limit (Medicare) 2007 $97,500 6.20% $6,045 (Social Security) no ceiling 1.45% no limit (Medicare) 2008 $102,000 6.20% $6,328 (Social Security) no ceiling 1.45% no limit (Medicare) 2009 $106,800 6.20% $6,621 (Social Security) no ceiling 1.45% no limit (Medicare) Example: You pay an employee $60,000 in 2009. The amount that you must pay for Social Security and Medicare is: $60,000 x 6.20%=$3,720 and $60,000 x 1.45%= $870 or $4,590 total The employee also has this amount withheld from wages.

  16. The money collected for income taxes and for Social Security/Medicare taxes must be deposited periodically in a federal reserve bank. The employer is required by law to withhold these taxes, and a failure to do so on the part of the employer will result in the employer's personal liability for payment. The deposit period for employers who collect less than $50,000 annually is monthly; for those who collect more than $50,000 it is semi-weekly (twice a week). Each deposit must be accompanied by a federal tax deposit (FTD) coupon, Form 8109.Penalties are applied to late deposits, ranging from 2% of the amount (up to 5 days late) to 10% (more than 15 days late). The Electronic FederalTax Payment System can be used to deposit and pay taxes on line.

  17. Tax Reporting for Income and Social Security/Medicare Taxes

  18. The federal income, Social Security, and Medicare taxes for employees are reported together and sent to the IRS on Form 941, Employer's Quarterly Federal Tax Return. This form (and the payment, for which there is a voucher) must be submitted within a month of the end of each calendar quarter, which is: April 30, July 31, October 31, and January 31. Penalties are applied for late payments, and interest is charged on the overdue amount.

  19. The employer must give W-2 forms reporting income, Social Security, and Medicare tax deductions to employees by January 31 following the end of the tax year.

  20. For independent contractors withholding is not required, and form 1099 is used by employers to report the income paid. A copy must be given to the independent contractor by Jan. 31.

  21. Social Security/Medicare Taxes for Employees

  22. Employers must also pay Social Security and Medicare taxes for themselves. For 2009, each employer must pay 12.4% of net earnings in excess of $400 for the Social Security tax, up to a ceiling of $106,800. An additional 2.9% of net earnings must be paid to the Medicare tax; there is no ceiling. Therefore, the employer pays 15.3% of net earnings for these taxes. The amount due is calculated on Schedule SE, which is submitted with Form 1040.

  23. Self-Employed Contributions Amount Subject to Maximum YearSocial Security TaxTax RateContributions 2005 $90,000 12.40% $11,160 (Social Security) no ceiling 2.90% no limit (Medicare) 2006 $94,200 12.40% $11,680 (Social Security) no ceiling 2.90% no limit (Medicare) 2007 $97,500 12.40% $12,090 (Social Security) no ceiling 2.90% no limit (Medicare) 2008 $102,000 12.40% $12,648 (Social Security) no ceiling 2.90% no limit (Medicare) 2009 $106,800 12.40% $13,243 (Social Security) no ceiling 2.90% no limit (Medicare) Example: You earn $102,000 in 2009. The amount that you must pay to Social Security and Medicare is: $102,000 x 12.40%=$12,648 and $102,000 x 2.90%=$2,958 or $15,606 total

  24. The net income calculated on Schedule C (for an individual proprietor) is entered on line 2 of Schedule SE, and after an adjustment is made on line 4, is multiplied times 15.3% to yield the self-employed Social Security/Medicare tax. If the net income exceeds the Social Security ceiling, then the excess must be multiplied times 2.9% to obtain the total Medicare payment (for which there is no ceiling). Example: $130,000 net income requires 2.9% x $130,000 = $3,770 + $13,243, which is the total Social Security/Medicare tax.

  25. Income and Social Security/Medicare taxes for self-employed taxpayers must be paid quarterly. Form 1040-ES contains a worksheet that can be used to estimate the quarterly payments. It also contains the vouchers that must accompany payment. If estimated payments do not equal 90% of the tax due at the end of the year, a penalty must be paid.

  26. Self-employed Social Security/Medicare taxes calculated on Schedule SE are entered on line 56, page 2 of form 1040.Income taxes withheld by an employer are entered on line 61, page 2. Quarterly income taxes paid by a self-employed taxpayer are entered on line 63.

  27. Unemployment Taxes

  28. The federal unemployment tax system--in conjunction with state systems--provides unemployment payments to workers who have lost their jobs.Most employers pay both a federal and a state unemployment tax; even if an employer is exempt from the state tax, however, the federal tax may still have to be paid.

  29. The federal unemployment tax (FUTA) is based on the first $7,000 of gross wages earned by an employee. The tax is imposed, however, on the employer. It is not deducted from the wages of employees but rather from the earnings of the employer.The federal unemployment tax rate is 6.2%. It is paid by the employer for the first $7,000 of wages earned by the employee (a maximum of $434 per employee). Because states also require payment of unemployment taxes, the employer may obtain a credit for the amount paid to the state system, up to a maximum of 5.4%. Therefore, the federal rate can be as low as .8% (6.2% - 5.4%).

  30. The unemployment tax rate varies from state-to-state. In Alabama the unemployment tax for a new business is 2.7% of the first $8,000 in wages. Example: An employee receives $15,000 in wages. If there is no state unemployment tax payment, the Federal Unemployment Tax paid by the employer is: $7,000 x 6.2%=$434 Example: If the Alabama unemployment tax is 2.7%, the state unemployment tax paid by the employer is: $8,000 x 2.7%=$216 The unemployment tax paid by the employer is: $216 to Alabama and $218 ($434 - $216) to the federal government

  31. The federal unemployment tax is applied to all employees during the tax year. If an employee quits, and another is hired, the tax must be paid on both employees. Example: Employee A has earned $7,000 in wages but quits. Employee B is hired as a replacement and also earns $7,000 in wages. What is the total tax? Employee A $7,000 x 6.2%=$434 Employee B $7,000 x 6.2%=$434 Total for both=$868

  32. The federal unemployment tax is paid annually (by Jan. 31st), but the employer may be required to deposit the tax quarterly. Deposits must be made if the employer owes more than $500 in federal unemployment tax at the end of any calendar quarter. In this event, the tax must be deposited in a federal reserve bank by the end of the month following the last day of the quarter. Each deposit must be accompanied by a federal tax deposit (FTD) coupon, Form 8109. Example: Two employees each paid $15,000 a year have $464 in unemployment tax due the first quarter and $404 the second; the deposit must be made after the second quarter (by July 31). A similar procedure must be followed for the payment and deposit of state unemployment taxes.

  33. Payment to the IRS of the federal unemployment tax is reported on Form 940, Employer's Annual Federal Unemployment Tax Return. It must be submitted by January 31, with the necessary payment (for which there is a voucher).

  34. Tax Reporting Summary

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