chapter 3 social security taxes payroll accounting 2010 bernard j. bieg and judith a. toland...
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CHAPTER 3 CHAPTER 3
SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES
Payroll Accounting 2010
Bernard J. Bieg and Judith A. Toland
Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS
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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/employer2
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 statusSee Figure 3-2 on p. 3-5 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
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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
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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 contractorsHiring agent does not pay/withhold FICA on
worker classified as independent Independent contractor liable for his/her
own social security taxes on net earnings
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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
Other types of taxable wages found in Figure 3-3 (page 3-6) 6
What are Taxable Wages? (Continued)
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
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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 FICA Payments for non-job related expenses up to $5,250
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FICA Taxable Wage Base OASDI wages cap at $106,800 for 2009 HI wages never cap Successor employers can count wages paid by prior
employee if certain criteria met
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 Is this EE withholding or ER payroll tax expense? Answer -
both!!
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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
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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
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Calculating FICA with W-2 and Self-Employed Earnings
Facts: Celia’sW-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
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 12
How to Get Set Up with SSA One 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
If purchasing an existing business, new owner needs new EIN
SSN required for everyone that is employed or self-employed To apply for social security number file SS-5 W-7 for ITIN (aliens who must file a tax return, but are
ineligible for SS number) Required for children age one or over who are claimed as
dependents on federal income tax return Three ways available for employers to verify SSNs
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Deposit Requirements - 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-
20)
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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
Government subsidizes 65% of this cost;
Company is ‘reimbursed’ its 65% by taking a credit on Form 941
Employee pays 35%
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How to Deposit FIT/FICA Electronically
EFTPS (Electronic Federal Tax Payment System) Must use in 2010 if total deposits exceed $200,000
in 2008 or was required to use EFTPS in 2009 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
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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
Coupon has stub that ER keeps as payment record
IRS reconciles deposits with payments claimed by employer on quarterly payroll return (Form 941)
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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 941 if 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
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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
Can correct errors on previously filed Form 941 by filing Form 941-X
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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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