acc170 payroll tax accounting welcome. (see syllabus word document)syllabus acc 170 – payroll tax...

ACC170

Payroll Tax Accounting

WELCOME

(see Syllabus Word document)

Syllabus

ACC 170 – Payroll Tax Accounting

Experience ARENS CONTROLS COMPANY, L.L.C. A CURTISS-WRIGHT COMPANY Manufacturer Arlington Heights, IL Sales of $55+ million Vice President Finance Controller November 1999 to Present ROHM AND HAAS COMPANY Chemical Manufacturer Chicago Heights, IL Sales of $6 billion Senior Financial Analyst/Plant Controller February 1995 to November 1999 Regional Credit Manager August 1988 to February 1995 BUSINESS COMMUNICATIONS OF ILLINOIS, INC. Office Machine Dealership Burr Ridge, IL Sales of $5.5 million Vice President of Finance/Controller June 1987 to August 1988 SHARP ELECTRONICS CORPORATION Electronics Manufacturer Romeoville, IL Sales of $8 billion Assistant Operations Manager February 1985 to June 1987 Regional Credit Supervisor July 1983 to February 1985

Education MBA, University of Chicago June 1999 CPA (Certified Public Accountant) November 1987 MBA, Northern Illinois University May 1986 BS, Finance, Northern Illinois University May 1981

In-House Payroll

1. ADP2. Corp.

Office

1. ADP2. Paychex3. ADP

Bob Bruebach – Resume

Weekly

UNDERSTANDING PAY PERIODS

• Annual Salary of $52,000 – what is the weekly amount?

• $1,000.00 per Week ($52,000 / 52)

Bi-Weekly

• Annual Salary of $52,000 – what is the bi-weekly amount?

• $2,000 every 2 Weeks ($52,000 / 26)

Example:

Example:

Semi-Monthly

• Annual Salary of $52,000 – what is the semi-monthly amount?

• $2,166.66 paid on the 15th and last day of month ($52,000 / 24)

Example:

= 52 Pay Periods per Year



6.2% =

UNDERSTANDING PERCENTAGES

• What is 6.2% of $100.00?

• Answer: $100.00 * 6.2% =

Example:

• What is 0.6% of $500.00?

Example:

0.062

= 0.006

$100.00 * 0.062 = $6.20

0.6% =

• Answer: $500.00 * 0.6% =

$500.00 * 0.006 = $3.00

SOCIAL SECURITY TAXES

FICA

Two Programs

• OASDI – Social Security

“Old Age, Survivors and Disability Insurance”

• HI – Medicare “Health Insurance”

FICA

FICA

(Federal Insurance Contributions Act)

(see Soc. Sec. Benefit Stmt. pdf document)

(Ratio of Taxpayers to Beneficiaries)

Program: OASDI – Social Security

Tax: 6.2% (0.062) of Wages up to $118,500.

Wage amount has increased every year since 1972… except for 2010 and 2011.

Calculation of Taxes - Employee

FICA

If EE changes ER during year, new ER required to start at $0. (EE can get

refund of overpaid OASDI on Form 1040.)

FYI…

2015 - $118,500

2014 - $117,000

2013 - $113,700

2012 - $110,100

2011 - $106,800

2010 - $106,800

2009 - $106,800

2008 - $102,000

2007 - $97,500

2006 - $94,200

<SS Wage history>

FYI…

There was a 4.2% rate for 2012 and 2011. The rate reverted back to 6.2% for 2013.

Calculation of Taxes – Employee(OASDI – Excess Deducted from Employee)

Example

Employer #1

Employee works From January 1st to June 30th and earns $125,000:

FICA

FICA-OASDI deducted from Paychecks during that Time:

$118,500 (maximum) * 0.062 = $7,347.00

Employer #2

Employee works from July 1st to December 31st and earns another $125,000:

FICA-OASDI deducted from Paychecks during that Time:

$118,500 (maximum) * 0.062 = $7,347.00

Calculation of Taxes – Employee(OASDI – Excess Deducted from Employee)

Example

Below is the portion of the Form 1040 where excess FICA-OASDI is recorded as “additional withholding” toward federal income tax:

FICA


Tax: 6.2% (0.062) of Wages up to $118,500.

Wage amount has increased every year since 1972… except for 2010 and 2011.

Program: HI – Medicare

Tax: 1.45% (0.0145) of Wages – no Maximum.

Calculation of Taxes - Employee

FICA

If EE changes ER during year, new ER required to start at $0. (EE can get

refund of overpaid OASDI on Form 1040.)

FYI… Social Security site http://www.ssa.gov/

Plus, 0.9% for Wages over $200,000.

http://www.ssa.gov/

FICA Taxes - EE ExamplesExample 1

If John has cumulative wages of $50,000 and his next paycheck was $5,000, calculate:

a) the SS (OASDI) part of FICA: ____________________

b) the Medicare (HI) part of FICA: ___________________

FICA

$5,000 * 0.062 = $310.00

$5,000 * 0.0145 = $72.50

FICA Taxes - EE Examples (cont.)Example 2

If Mary has $111,100 of cumulative earnings and her next paycheck was $8,000, calculate:

a) the SS (OASDI) part of FICA: ________________________

b) the Medicare (HI) part of FICA: _______________________

FICA

$7,400 * 0.062 = $458.80

$8,000 * 0.0145 = $116.00

First Check to see if maximum reached: $111,100 + $8,000 = $119,100, which exceeds $118,500 maximum.

Second Calculate the amount wages subject to the tax: $118,500 - $111,100 = $7,400 So, only $7,400 of the $8,000 paid is subject to the tax.

FICA Taxes - EE ExamplesExample 3

The Johnson Company pays their employees on a monthly basis. Sam is paid $20,000 per month. What are the amounts for FICA-SS and FICA-HI that are withheld for Sam’s June 30th paycheck:

First, what will be Sam’s cumulative earnings including the June 30th paycheck:• 6 * $20,000 = $120,000

So, need to calculate cumulative earnings PRIOR TO June 30th paycheck:• 5 * $20,000 = $100,000

Since the maximum wages for FICA-SS are $118,500, then only $18,500 of the $20,000 of the June 30th paycheck are subject to FICA-SS tax:

FICA-SS: $______________________ FICA-HI: ______________________

FICA

$18,500 * 0.062 = $1,147.00 $20,000 * 0.0145 = $290.00

exceeds $118,500


Tax: 6.2% (0.062) of Total “OASDI” Wages.

Program: HI – Medicare

Tax: 1.45% (0.0145) of Total “HI” Wages.

Calculation of Taxes – Employer Portion

Use wages only subject to OASDI Tax.

FICA

(Employer does not pay 0.9% additional tax for Wages over $200,000.)

FICA Taxes - ER ExamplesExample 4

Calculate Employees’ and Employer’s Share of FICA taxes:

FICA FICABi-Weekly OASDI HIEmployee Wages Tax TaxJoe $2,000Sue $3,000Doug $2,000

---------- Totals $7,000

FICA

$124.00 $29.00

$186.00 $43.50

$124.00 $29.00

----------- -----------$434.00

$101.50$7,000 * 0.062

Employer OASDI: $434.00

$7,000 * 0.0145

Employer HI: $101.50

FICA Taxes - ER Examples (cont.)Example 5

Calculate Employees’ and Employer’s Share of FICA taxes:

OASDI FICA HI FICACumulative Weekly Taxable OASDI Taxable HI

Employee Earnings Wages Wages Tax__ Wages_ Tax_Tom $62,000 $1,000Diane $116,100 $4,000Jenny $50,000 $3,000 ----------

Totals: $8,000

FICA

$1,000 $ 62.00 $1,000 $14.50

$2,400 $148.80 $4,000 $58.00

$3,000 $186.00 $3,000 $43.50

----------- ----------- ----------- -----------$6,400 $396.80 $8,000

$116.00$6,400 * 0.062

Employer OASDI: $396.80

$8,000 * 0.0145

Employer HI: $116.00

$2,400$1,000 $1,000$1,000 $ 62.00 $1,000

$14.50$2,400 $148.80 $4,000 $58.00

$4,000

History Review

FICA

History…

<SS Wage history>

<SS Rate history>

<SS Total history>

Total of FICA taxes and withheld FIT

• New Employers Monthly Depositor until lookback is established. (If $100,000 or more, then pay next business day and become a semi-weekly depositor.)

(Federal Income Taxes)

• (lookback period = 4 calendar quarters beginning July 1st of 2nd preceding year and ending June 30th of the previous year.)

Tax Deposit Requirements

941 Taxes

Deposit Status Qualification Deposit Due

NEXT BUSINESS DAY

$100,000 (accumulated) or more on any day.

By close of Next Business Day.

QUARTERLY Less than $2,500 at the end of the calendar quarter.

End of the following month (as a deposit or when filing Form 941).

SEMI-WEEKLY More than $50,000 in the “lookback” period.

If Payday:• W,R,F following W• Sa,Su,M,T following F

MONTHLY $50,000 or LESS in the “lookback” period.

By the 15th of the following month.

Tax Deposit Requirements (cont.)

941 Taxes

FYI… Tax Deposit Requirements (cont.)

941 Taxes

Deposit Status

Qualification




NEXT BUSINESS DAY



941 Taxes

Deposit Status

Qualification Firm Size Firm Salaries, assuming total ER & EE FICA taxes (15.3%) and

FIT rate of 15%




NEXT BUSINESS DAY


FYI…

The 15.3% is based on:

FICA-SS-EE: 6.20%

FICA-SS-ER: 6.20%

FICA-HI-EE: 1.45%

FICA-HI-ER: 1.45%

15.30%


941 Taxes

Deposit Status


FIT rate of 15%


$8,250 per Quarter or $33,000 per Year



NEXT BUSINESS DAY



941 Taxes

Deposit Status


FIT rate of 15%




$165,000 per Year


NEXT BUSINESS DAY



941 Taxes

Deposit Status


FIT rate of 15%




$165,000 per Year


$330,000 per Payroll

NEXT BUSINESS DAY


941 Taxes

Tax Deposit Requirements (cont.)

If $200,000 or more in a calendar year – must FILE (deposit) ELECTRONICALLY.

The amount includes all taxes, not just P/R taxes.

You will be notified when you are required to file electronically.

Penalty of 10% if not followed.

Once EFT is required, then EFT every year.

Beginning in 2011 – Payroll Taxes (as well as ALL federal tax deposits) must be deposited electronically.

Form 8109 Coupon

941 Taxes

(see Form 8109 pdf document)

Beginning in 2011, Form 8109 cannot be used since all taxes are now deposited electronically!

Due date is the last day of following month - (10 additional days allowed if timely deposits have been made).

Quarterly report of Total FICA Taxes and Withheld FIT (aka “941” Taxes).

Form 941

941 Taxes

(see Form 941 pdf document)

Failure to Pay ½% for each month, to a maximum of 25%.

fyi… Penalties

941 Taxes

Failure to File 5% for each month, to a maximum of 25%.

Failure to Make Timely Deposits 2-15% of undeposited taxes, based on days late, or amount of days after IRS notice.

May include CRIMINAL CHARGES, as well.

FICA cover most employees.

Coverage

FICA

Examples of workers who are not covered include: Medical Interns & Student Nurses

Household Employees who receive less than $1,900 from one employer in one year.

Partners in a Partnership

Federal & State EE’s covered by a retirement system – HI only.

Independent Contractors

Ministers – may elect not to be covered.

Determination of Independent Contractor (SECA) vs. Employee (FICA)

IRS historically used 20-point test to determine “common law relationship” - examples from list include:

» 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.gov/formspubs/

FICA

http://www.irs.gov/formspubs/

http://www.irs.gov/formspubs/

Specifically Covered (in addition to common law)

• Full time life insurance salespeople

• Full time traveling salespeople

• Agent- and commission-drivers of food/beverages

FICA

Wages, Salaries, Vacation Pay, Bonuses, Commissions.

What are Taxable Wages?

FICA

Non-Cash Compensation (“fringe benefits”): Personal Use of a Company Car

Employer paid premiums for Group Term Life Insurance in excess of $50,000

Non-Cash Awards & Prizes

Moving Expense Reimbursement (non-qualified)

Cash Tips over $20 in a Calendar Month

Self Employed Contributions Act (SECA)

FICA

FICA-OASDI: 12.4%

The tax ultimately gets “located” on 1040 form (line 56). Deduction for 50% of the Self-Employment Tax (SECA)

is on the 1040 form (line 27).

FICA-HI: 2.9%

FICA taxes are due on Self-Employed Income (from Schedule C)

Same wage base for OASDI $118,500

Use Schedule SE to calculate/report FICA taxes

…plus, 0.9% for Wages over $200,000.

INCOME TAX ACT

• 1913 – 16th Amendment

HISTORY

On the eve of WWII, few Americans paid income taxes. Those that owed taxes paid them in one lump sum on March 15 (later changed to April 15). To pay for the war, the Revenue Act of 1942 lowered exemptions and raised income tax rates. The Current Tax Payment Act of 1943 required employers to collect the tax by deducting it from the employee's paycheck—just like the Social Security tax that began in 1935. Although the withholding tax was sold as a wartime emergency, like most expansions of government instituted during wartime, it has been a way of life for most Americans ever since.

• 1943 – Withholding Tax Act

In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income and resulted in a revenue law that taxed incomes of both individuals and corporations.

FEDERAL INSURANCE CONTRIBUTION ACT (FICA)

• 1935

• OASDI

HISTORY

FDR – Franklin Delano Roosevelt Elected President in 1932

…in 1965• HI – Medicare added

SELF-EMPLOYED CONTRIBUTION ACT(SECA)

• 1951

HISTORY

• Tax upon the earnings of the Self- Employed

UNEMPLOYMENT TAX ACTS

• 1935

HISTORY

UNEMPLOYMENT TAX ACTS (cont.)

• 1935

• FUTA – Federal Unemployment Tax Act

• SUTA – State Unemployment Tax Act

HISTORY

FAIR LABOR STANDARDS ACT(FLSA)

• 1938

HISTORY

The Fair Labor Standards Act was passed by Congress on 25th June, 1938. The main objective of the act was to eliminate "labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency and well-being of workers". The act established maximum working hours of 44 a week for the first year, 42 for the second, and 40 thereafter. Minimum wages of 25 cents an hour were established for the first year, 30 cents for the second, and 40 cents over a period of the next six years. The Fair Labor Standards Act also prohibited child labor in all industries engaged in producing goods in inter-state commerce.

FAIR LABOR STANDARDS ACT (cont.)(FLSA)

• 1938

HISTORY

• Minimum Wages, Equal Pay, Overtime, Recordkeeping

• Enterprise Coverage / Employee Coverage Enterprise: (includes all employees if…)

$500K+ in sales Interstate commerce Many family establishments are exempted

Individual/Employee Employee whose company may not meet enterprise

coverage, but is involved in interstate commerce• Example: a driver for fleet that transports goods, but

enterprise annual revenues are $225,000

What the FLSA Does Not Cover

No requirement for employers to:

HISTORY

Pay extra for weekend/holiday work

Pay for holidays, vacation or sick time

Grant vacation time

FAIR EMPLOYMENT LAWS

• Civil Rights Act (1964)

HISTORY

• EEO (Equal Employment Opportunity) • Cannot discriminate – color, race, religion, gender,

national origin. • Exemptions exist – ex., private membership clubs.

(In 1974 the Western Open found an annual home at the Butler National Golf Club in Oak Brook, Illinois. It stayed this way until shortly after the 1990 tournament, when the PGA Tour adopted a policy of holding events only at clubs which allowed minorities and women to be members. This resulted in Butler National being replaced by the Cog Hill Golf & Country Club in Lemont, Illinois. The Dubsdread Course at Cog Hill played host to the Western Open from 1991 to 2006.)



HISTORY

• For those exemptions under Civil Rights Act, prevents discrimination in organizations that contract with the Federal Government.

• Requires written plan that shows how under-represented groups are recruited and hired.

• Major anti-discrimination regulation for government contractors with contracts > $10,000

• Executive Order 11246




• Age Discrimination in Employment Act (ADEA) (1967)

HISTORY

• Added age protection for all workers over 40.

• Applies to employers with 20+ employees.




• Age Discrimination in Employment Act (ADEA) (1967)

• Americans with Disabilities Act (ADA) (1990)

HISTORY

• Applies to employers with 15+ employees

• Reasonable accommodations must be provided (vague)

• Many companies needed to rewrite job descriptions to specify physical requirements for jobs

IMMIGRATION REFORM & CONTROL ACT(IRCA)

• 1986

• Proof of Citizenship• Requires employer to verify citizenship

• I-9 Form needs to be completed within 3 days of employment

• Penalties for noncompliance

HISTORY

Family Medical Leave Act(FMLA)

• 1993

• Covers companies with 50+ employees within 75 mile radius

• EE guaranteed 12 weeks unpaid leave for:• Birth, adoption, critical care• Can use for child, spouse or parent• Leave may be used all at once or at separate times – but must be

within 12 months of qualifying event

• ER continues health care coverage

• Right to return to same/comparable job and continue health coverage in absence

HISTORY

Employee Retirement Income Security Act (ERISA)

• Trustees must monitor pension plans• Vested 100% in 3-6 years

Example of a vesting plan:Years of % Vested in Service Pension Plan

2 50%

4 75%

5 100%

• Provides for PBGC

HISTORY

• Stringent recordkeeping requirements

Pension Benefit Guaranty Corporation - a federal agency which guarantees benefits to employees

Fiduciary Responsibility

FIDUCIARY

Amounts Withheld from Employees’ Wages for Income Taxes and Social Security to be Paid to the Government

You cannot use these funds for any other purpose

(see Fiduciary Liability from Scarinci & Hollenbeck “pdf” document)

(see IRS Cases “pdf” document)

(see more recent IRS Cases “docx” document)

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