AC122.01: Unit 4 Seminar June 29, 2011

School of Business and Management

Agenda

• Welcome

• Seminar Rules

• Chapter 3 Social Security Taxes

Questions

Seminar Rules by Greg Rose

1. If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one!

2. When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue.

3. Please do NOT start side conversations.

4. Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good!

5. Don`t worry about typos. Be clear as you can and refrain

from smileys and slang – use proper English.

• Assignments Grading

• Late Policy

• Seminar procedures and Polling

• Questions

CHAPTER 3 CHAPTER 3

SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES

Payroll Accounting 2011 Payroll Accounting 2011 Bernard J. Bieg and Judith A. TolandBernard J. Bieg and Judith A. Toland

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Coverage under FICA

FICA (1935) Federal Insurance Contributions Act Tax paid both 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 an independent contractor? Is service rendered considered employment? Is compensation considered taxable wages?

• http://www.ssa.gov/employer

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

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 $1,700 or more per year Must pay if domestic employee, like a nanny, is under your control

Additional exemptions - inmates, medical interns, student nurses and workers serving temporarily in case of emergency

Independent ContractorPersons may be classified as independent

contractors if they conduct an independent trade or business

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

If ER misclassifies EE, penalties will accrue to the ER If EE did report the earnings on his/her federal tax

return, the penalty is voided

What are Taxable Wages? Cash

Wages and salaries

Bonuses and commissions

Cash value of meals/lodging provided (but only if 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

What are Taxable Wages? Tips greater than $20 or more per month

EE can report tips to ER using Form 4070

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 year-end with IRS showing food/beverage

receipts and reported tips

ER can claim a credit for SS/Medicare taxes paid on employees’ tips on Form 8846

Specifically Exempt Wages Meals/lodging for employer’s convenience Sick pay

After 6 consecutive months off (personal injury) Sick pay by 3rd party (insurance company/trustee) with specific

stipulations for ER match Pay for difference between employees’ salary and military

pay for soldiers/reservists activated more than 30 days Employer contribution to pension plan Employer-provided nondiscriminatory education assistance

Job-related educational expenses not subject to FICAPayments for non-job related expenses up to $5,250

FICA Taxable Wage Base OASDI wages cap at $106,800 for 2010

HI wages never cap The Patient Protection & Affordable Care Act of 2010 created

additional .9% HI tax on taxpayers receiving wages in excess of $200,000 ($250,000 if married filing jointly) beginning in 2013.

Facts: Tamara earn $132,000/year; paid semimonthly on the 15th and 30th; determine FICA for October 30th 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?

$106,800.00 – $104,500.00 = $2,300.00 OASDI tax is $2,300.00 x 6.2% = $142.60

HI tax is $5,500.00 x 1.45% =$ 79.75 Total FICA is $142.60 + $79.75 =$ 222.35

Example 3-2BOASDI HI

a. 9th paycheck 322.40 75.40

106,800 – (8 x 5,200) = 65,200

a. 21st paycheck 173.60 75.40

106,800 – (20 x 5,200) = 2,800 Remaining taxable income for OASDI

a. 24th paycheck 0 75.40

119,600 (23 x 5,200) >106,800 This indicates that the worker has reached the cap on taxable income for OASDI

Another Example - Calculating FICA

Facts: Ahmed earns $175,000/year; paid first of every month; determine FICA for August 1 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 $106,800.00 – $102,083.31 = $4,716.69 taxed for OASDI $4,716.69 x 6.2% = $292.43 OASDI tax $14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!) Total FICA = $292.43 + $211.46 =$ 503.89

Remember - the ER has withheld $503.89 from the employee’s paycheck and must match this amount

Example 3-3B

Eric Sherm began working as a part time waiter on April 1, 2011 at Yardville Restaurant. The cash tips of $475 that he received during April were reported on Form 4070, which he submitted to his employer on May 1. During May, he was paid wages of $630 by the restaurant. Compute:

a.The amount of FICA taxes that the employer should withhold from Sherm’s wages during May.

Example 3-3B

b. The amount of the employer’s FICA taxes on Sherm’s wages and tips during May.

OASDI HI

a. $68.51 $16.02

b.$68.51 $16.02

( $475 tips + $630 paid wages = $1,105)

$1,105 X .062 = $68.51

$1,105 X .0145 = $16.02

Tax Holiday

Hiring Incentives to Restore Employment Act of 2010 provides relief for employer’s share of OASDI taxOn wages paid 3/19/10 - 12/31/10For qualified employees onlyFull-time or part-timeRetention credit also available if remain

employed for 52 consecutive weeks

Example 3-6B

Amanda Autry and Carley Wilson are partners in A & W Gift shop, which employs the individuals listed below. Paychecks are distributed every Friday to all employees. Based on the information given, compute the amounts listed below for a weekly payroll period.

Name /Position

Salary OASDI Taxable Earnings

OASDI Tax

HI Taxable Earnings

HI Tax

Kelly Simon, Office

$650/wk $650.00 $40.30 $650.00 $9.43

Jim Tress, Sales

$3,450/Month

$796.15 $49.36 $796.15 $11.54

May Aha, Delivery

$520/ wk $520.00 $32.24 $520.00 $7.54

Amanda Autry, Partner

$1,900/wk

0.00 0.00 0.00 0.00

Carley Wilson Partner

$1,900/ wk

0.00 0.00 0.00 0.00

Totals $1,966.15

$121.90 $1,966.15 $28.51

Employers OASDI Tax

$121.90 Employer’s HI Tax

28.51

Amanda Autry and Carley Wilson are partners in A & W

Name /Position

Salary OASDI Taxable Earnings

OASDI Tax

HI Taxable Earnings

HI Tax

Kelly Simon, Office

$650/wk $650.00 $40.30 $650.00 $9.43

Jim Tress, Sales

$3,450/Month

$796.15 $49.36 $796.15 $11.54

May Aha, Delivery

$520/ wk $520.00 $32.24 $520.00 $7.54

Amanda Autry, Partner

$1,900/wk

0.00 0.00 0.00 0.00

Carley Wilson Partner

$1,900/ wk

0.00 0.00 0.00 0.00

Totals $1,966.15 $121.90 $1,966.15 $28.51

Employers OASDI Tax

$121.90 Employer’s HI Tax

28.51

SECA and Independent Contractors

EE and ER portion of FICA if net earnings exceed $400 Net Earnings = Net income + distributive share of

partnership income

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 $106,800 for OASDI

Report on Schedule C “Profit or Loss from Business”

Also file Schedule SE “Self-Employment Tax” Must include SECA taxes in quarterly estimated payments

Calculating FICA with W-2 and Self-Employed Earnings

Facts: Celia’s W-2 = $107,768 and her 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

Calculating FICA with W-2 and Self-Employed Earnings

Facts: Felipe’s W-2 = $78,000 and his self-employment income = $36,000; how much is FICA on $36,000?

OASDI ($106,800 - 78,000) = $28,800

taxable OASDI wages x 12.4% = $3,571.20

HI = $36,000 taxable HI wages x 2.9% = $1,044.00

Total FICA $3,571.20 + 1,044.00 = $4,615.20

Example 3-8B

George Parker was paid a salary of $74,700 during 2011 by Umberger Company. In addition, during the year, Parker started his own business as a public accountant and reported as net business income of $38,900 on his income tax return for 2011. Compute the following:

a. The amount of FICA taxes that was withheld from his earnings during 2011 by Umberger.

b. Parker’s self employment taxes on the income derived from the public accounting business for 2011

a. OASDI: $74,700 X .062 = $4,631.40

HI: $74,700 X .0145 = $1,083.15

b. OASDI $106,800 - $74,700 = $32,100 X .124 = $3,980.40

HI: $38,900 X .029 = $1,128.10

Depositing FIT & FICA FICA & FIT always deposited together

Each November, IRS notifies ER whether they will be a monthly or semiweekly depositor for next calendar year Monthly - pay FICA and FIT by 15th of following month 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 $2,500 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

Amount deposited may be affected by

safe harbor rule (see p. 3-19)

Credit Against Required 941 Deposits

Consolidated Omnibus Budget Reconciliation Act

(COBRA) gives involuntarily terminated employees

option to continued coverage under company’s group

health insurance

Can continue coverage up to 15 months

Government subsidizes 65% of this cost

Company is ‘reimbursed’ its 65% by taking a

deduction on Form 941

Employee pays 35%

How to Deposit FIT/FICA Electronically

EFTPS (Electronic Federal Tax Payment System) Most employers must use EFTPS – major exception is

for businesses owing $2500 or loss in quarterly tax liabilities

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

How to Deposit FIT/FICA by Coupon

The use of Federal Tax Deposit Coupons, Form 8109 ended 01/11/2011 All Federal tax deposits must be made

electronicallyTake to Treasury Tax & Loan institution or mail to

Financial Agent at Federal Tax Deposit Processing in St. Louis, MOTimely deposits requires postmarking two days

before due date but no Form 8109 coupons as of 2011

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 If that falls on weekend or legal holiday, file next business day

Payments made with 941if taxes for quarter are less than $2,500 or making monthly deposit (attach 941-V)

Electronic filing options available for employers who meet requirements Complete an e-file application & then electronically submit 941 or

apply for a PIN on IRS website and file electronically through third-party transmitter

Employer’s Annual Federal Tax Return

Employers who owe $1,000 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

$4,000 or less per year Employer should contact IRS and express interest Employer may chose to file Form 941 quarterly instead –

need to notify IRS

Can correct errors on previously filed Form 941 by filing Form 941-X

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!!

Seminar

We will have a seminar each week.

Day and time of Seminar

Wednesday at 8:00 – 9:00 PM EST

Polling may be used.

Questions

Thank you for attending this seminar.