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

1

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

3

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

4

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

5

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

7

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

8

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!!

9

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

10

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

11

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

13

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)

14

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%

15

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

16

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)

17

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

18

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

19

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!!

20