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Payroll Taxes

“I want to find out who this FICA guy is and how come he’s taking so much of

my money.” -- Nick Kypreos

Chapter 10

LO # 1 Payroll and Form 1040

• Withholding taxes are imposed on taxpayers to help fund government operations using a “pay as you go” system

• At the end of the year, the employer is required to summarize an employee’s earnings and taxes withheld on a Form W-2

• Form 1040 compares tax liability with tax payments to determine whether a taxpayer will receive a refund or own more money.

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LO # 2 Federal Tax Calculations

• Withholding taxes are an approximation of the proportionate share of total tax liability the employee will owe to the federal government.

• Form W-4 is completed by the employee to claim withholding allowances.

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LO # 2 Federal Tax Calculations

• Two withholding methods:– Percentage Method

• Uses a range of percentages to calculate taxes

• Used in computerized systems– Wage Bracket Method

• Uses a table of wage brackets and allowances

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LO # 2 Federal Tax Calculations

• Federal Insurance Contributions Act (FICA)– Old age, survivors, and disability

insurance (OASDI or social security) = 6.2% up to a maximum of $113,700 for 2013

– Hospital insurance (Medicare) = 1.45% on all wages (no maximum)

• There is a matching tax for FICA (both OASDI and Medicare) on employers.

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LO # 2 Federal Tax Calculations

• Employees are required to report cash tips (in excess of $20) to their employer by the 10th of the month after the month in which the employee receives the tips using Form 4070.

• Employers must withhold income tax and FICA taxes on employee tips.

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LO # 2 Federal Tax Calculations

• Large food and beverage establishment may be required to “allocate” tips to employees.

• If tipped employees do not report tips in an amount of at least 8% of gross receipts, the employer must allocate the difference to the employees using Form 8027.

• Employers are not required to withhold federal taxes on allocated tips. They are reported on Form W-2.

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LO # 3 Reporting and Paying Payroll Taxes

• Employers must make payroll tax deposits of amounts withheld from employees’ wages

• A “lookback” period determines whether an employer is a monthly or semiweekly schedule depositor.– 4 quarters starting with July 1, 2011 – June 30,

2012 for wages paid in 2013.– Monthly - $50,000 or less in tax liability– Semiweekly – more than $50,000 in tax liability

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LO # 3 Reporting and Paying Payroll Taxes

• Semiweekly deposit schedule:– Taxes associated with payrolls paid on

a Wednesday, Thursday, or Friday are due the following Wednesday.

– Taxes associated with payrolls paid on a Saturday, Sunday, Monday, or Tuesday are due the following Friday.

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LO # 3 Reporting and Paying Payroll Taxes

• All employers are now required to use the Electronic Funds Transfer Payments System (EFTPS) to make deposits

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LO # 3 Reporting and Paying Payroll Taxes

• An employer who accumulates $100,000 or more in taxes on any day during a deposit period, must deposit the tax by the next banking day, regardless of the type of depositor.

• The employer becomes a semiweekly schedule depositor for the remainder of the calendar year and for the following year.

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LO # 3 Reporting and Paying Payroll Taxes

• Form 941 – is a reconciliation of the amount of payroll tax liability and the payments made by the employer to cover the liability. It is due by the end of the month following the close of the quarter.

• If there is a tax liability of less than $2,500 at the end of the quarter, this amount can be paid when the Form 941 is filed.

• Form 944 is for very small employers.

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LO # 4 Self-Employment Taxes

• Self-employment taxes are based on net earnings in excess of $400 generated by a sole proprietor taxpayer (remember Chapter 6)

• For 2013, refer to Schedule SE (Section A or B) to determine the for AGI deduction on Form 1040.

• The self-employed taxpayer is responsible for all parts of FICA (15.3%)

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LO # 4 Unemployment Taxes and Form 940

• Federal Unemployment Tax Act (FUTA) is 6.0% of wages up to $7,000. There is a maximum credit for state employment taxes (SUTA) of 5.4%, reducing the amount due to the IRS to 0.6%.

• Form 940 is filed annually by the employer to report and reconcile FUTA liabilities and payments.

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LO # 4 Household Workers and Schedule H

• Household workers are considered employees subject to federal income, FICA, and FUTA taxes if:– Paid wages of $1,800 or more in 2013– Federal withholding taxes were

withheld from these workers– Wages of at least $1,000 were paid to

all household workers combined in any calendar quarter in 2012 or 2013.

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LO # 4 Household Workers and Schedule H

• Schedule H is completed by the employer/taxpayer and submitted with Form 1040.– Taxes are due for household

employees and paid when the employer taxpayer files Form 1040.

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LO # 5 Forms W2 andW3

• Employers report wages earned and taxes withheld to employees on Form W-2.– W-2s are due to employees by January 31 of

the next year– Copy A is remitted to the Social Security

Administration by February 28th or 29th in a leap year or the next business day if it falls on a weekend.

• Form W-3 is a transmittal form that summarizes all employee W2’s prepared by the company. – It is sent with Copy A of all W-2’s

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LO # 5 Forms W2 andW3

• Form W-2C (Statement of Corrected Income and Tax Amounts) is used to correct a W-2 that was incorrectly prepared.

• Form W-3C (Transmittal of Corrected Income and Tax Statements) accompanies Copy A of the W-2C to the Social Security Administration

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LO # 6 Supplemental Wage Payments

• Supplemental wages are compensation paid in addition to an employee’s regular wages

• Withholding on supplemental wages can be calculated using one of two methods:– Flat tax of 25%– Combine the supplemental payments

with regular wages and calculate the withholding tax.

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LO # 6 Backup Withholding

• Generally, an employer or vendor must withhold 28% of certain taxable payments if the payee fails to furnish a correct taxpayer identification number (TIN)

• Payments include interest, dividends, rents, royalties, commissions, non-employee compensation and certain other payments made in the course of a trade or business

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LO # 6 Form W-9

• Form W-9 is prepared by the recipient and given to the requester. Failure to furnish a correct TIN can result in a $50 penalty. The penalty for willful neglect in completing the form is $500.

• Form is used to:– Certify the TIN the taxpayer is giving is

correct– Certify the taxpayer is not subject to backup

withholding or– Claim exemption from backup withholding if

the taxpayer is a U.S. exempt payee.

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LO # 6 Estimated Tax Payments and Form 1040-ES

• Form 1040-ES is used when a taxpayer must make tax payments for estimated taxes due.

• Estimated payments are required if unpaid tax liability > $1,000 and withholding and credits do not meet certain “safe harbor” thresholds.

• Estimated taxes are due April 15, June 15, September 15, and January 15 (of the next year) or the next business day if they fall on a holiday or weekend.

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