SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES

Payroll Accounting 2009 Payroll Accounting 2009

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

FICA (1935) Federal Insurance Contributions Act Paid 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 independent contractor? Is service rendered considered employment? Is compensation considered taxable wages?

http://www.ssa.gov/employer

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

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 $1600 or more per year Must pay if employee, like a nanny is under your

control ER must match FICA

Certain ministers/religious practitioners are exempt Additional exemptions for inmates, medical interns,

student nurses and workers serving temporarily in case of emergency

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 contractors 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

Cash Wages and salaries Bonuses and commissions

Cash value of meals/lodging provided 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)

Tips greater than $20 or more per month EE must file Form 4070 with ER

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 yea- end with IRS showing

food/beverage receipts and reported tips

Meals/lodging for ER convenience Sick pay

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

specific stipulations for ER match If paid directly to EE in lieu of health insurance

payments is taxable Pay for difference between employees’ salary and

military pay (soldiers/reservists activated 30+ days)

ER contribution to pension plan ER provided nondiscriminatory education

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

OASDI wages cap at $106,500 for 2009 (estimated) HI wages never cap

FACTS: Tamara earn $132,000/year; paid semimonthly on the 15th and 30th; determine FICA for 10/30/09 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?

$106,500.00 – $104,500.00 = $2,000.00 OASDI tax is $2,000.00 x 6.2% = $124.00

HI tax is $5,500.00 x 1.45% =$ 79.75 Total FICA is $124.00 + $79.75 =$ 203.75 Is this EE withholding or ER payroll tax expense?

Answer - both!!

FACTS: Ahmed earns $175,000/year; paid first of every month; determine FICA for 8/1/09 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 $106,500.00 – %102,083.31 = $4,416.69 taxed for OASDI $4,416.69 x 6.2% = $273.83 OASDI tax $14,583.33 x 1.45% = $211.46 HI tax (remember - no

cap!) Total FICA = $273.83 + $211.46 =$ 485.29

Remember - the ER has withheld $485.29 from the employee’s paycheck and must match this amount

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

partnership income Partnerships

Distributive share of partnership net income subject to FICA 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 $106,500

Report on Schedule C “Profit or Loss from Business”

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

payments

FACTS: W-2 = $107,768 and 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: W-2 = $78,000 and self employment income = $36,000; how much is FICA on $36,000?

OASDI ($106,500 - 78,000) = $28,500 taxable OASDI wages x 12.4% = $3,534.00

HI = $36,000 taxable HI wages x 2.9% = $1044.00 Total FICA $3,534.000 + 1,044.00 = $4,578.00

One Federal 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

When purchasing an existing business, the new owner needs a new EIN

SS-5 required for everyone one year old or older To apply for social security number Required under SSA

W-7 for ITIN (aliens who must file a tax return, but are ineligible for SS number)

Three ways available to verify social security numbers

Each November, based upon a look back period, IRS notifies ER as to what ‘type ‘of depositor he/she is Monthly - pay FICA and FIT by 15th of following month

or 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 dayor

No deposit required - owe less than $2500 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

EFTPS (Electronic Federal Tax Payment System) Must use if total deposits exceed $200,000 for a

year 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

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

IRS reconciles deposits with payments claimed by employer on quarterly payroll return (Form 941)

Coupon has stub that ER keeps as payment record

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

Payments made with 941 if taxes for quarter are less than $2500 or making monthly deposit Attach 941-V

941 e-file available for employers who meet requirements File Form 4996 and then electronically submit 941

Employers who owe $1000 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 $4000 or less per year IRS can require 941-M (monthly reporting) if

employer doesn’t deposit 941 taxes on time Can amend previously filed Form 941s by filing

Form 941X (replaces 941C)

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!!*