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CHAPTER 3

CHAPTER 3. SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS. Social Security Taxes. FICA (1935) Federal Insurance Contribution Act for employees and employers 6.2% OASDI plus 1.45% HI SECA (1951) Self Employed Contribution Act

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CHAPTER 3

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  1. CHAPTER 3 SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

  2. Social Security Taxes • FICA (1935) • Federal Insurance Contribution Act • for employees and employers • 6.2% OASDI plus 1.45% HI • SECA (1951) • Self Employed Contribution 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 compensation considered taxable wages? • Calculating FICA and SECA under varying situations http://www.ssa.gov/employer

  3. Determination of Independent Contractor (SECA) vs. Employee (FICA) • IRS uses 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.ustreas.gov/prod/forms-pubs/pubs/p15a02.htm

  4. Specifically Covered (in addition to common law) • Life insurance salespeople • Traveling salespeople • Agent- and commission-drivers of food/beverages • Not-for-profit EE (except ministers): • minister can irrevocably elect FICA coverage • Federal employees (only HI if hired prior to 1984) • Military on basic pay (no FICA on excess pay)

  5. More Specific Situations • Temporary employees – considered EE of temporary agency • Household employees • If they make $1300+/year • ER must pay FICA – reports on 1040 (still paid by both) • Unless already files 941 - then report on this form • Doesn’t apply to minor unless that’s their occupation • Must pay if he/she under your control (gardener/nanny/cook) • Corporation • Officers are EE • Board of director members are not EE • Partnership • Partners are not EE

  6. Employment Specifically Exempt from FICA • Children under 18 employed by parent’s business, if either a sole proprietorship or partnership (but not corp) • Farm workers if all workers annual compensation < $2500 or each worker earned < $150/year • Employees covered under RRTA (Railroad Retirement Tax Act) • Ambassadors/diplomats • Newspaper carrier less than 18 years old *this is not an exhaustive list*

  7. What are Taxable Wages? • Cash • Wages and salaries • Bonuses and commissions • FMV of noncash compensation • Gifts (over certain amounts) • Stock options • Fringe benefits like personal use of corporate car • Prizes • Premiums on group term life insurance > $50,000

  8. Taxable Wages (Continued) • Tips greater than $20 or more per month • EE must file form 4070 by 10th of following month with ER • 50% penalty imposed on EE for not reporting • ER calculates FICA on tips and withholds from regular paycheck on these reported tips • ER must match but they receive a business tax credit roughly equivalent to the ER paid FICA on tips • “Large employers” (11+ EE) 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 can petition IRS to reduce tip allocation to as low as 2% • Employer must file Form 8027 at year end with IRS

  9. Specifically Exempt Wages • Meals/lodging for ER convenience (for example, paramedic) • Sick pay after 6 consecutive months off (personal injury – not permanent disability – payments) • Sick pay by 3rd party (insurance company/trustee) • ER SEP* (up to 15% of first $170,000) • SEP contributions through salary reduction must have FICA withheld • ER-provided nondiscriminatory education assistance (must have written plan) upto $5,250 • Education must maintain/improve skills required by employment *Simplified Employee Pension

  10. FICA Taxable Wage Base • OASDI caps at $89,700 for 2003 (estimated) • HI never caps • Facts: Earn $95,000/year - paid semimonthly on the 15th and 30th; the calculations for 12/15 payroll are: • First must find prior payroll YTD gross $95,000/24 = 3,958.33 • 3,958.33 x 22 = 87,083.26 • How much will be taxed for OASDI? • 89,700.00 – 87,083.26 = 2,616.74 • OASDI tax is 2,616.74 x 6.2% = 162.24 • HI tax is 3,958.33 x 1.45% = 57.40 • Total FICA is 162.24 + 57.40 = $219.64 • Is this EE withholding or ER payroll tax expense? Answer - both!!

  11. Example #2 to Calculate FICA • Earns $178,000/year; paid first of every month; determine FICA for 7/1/03 payroll • What do we calculate first? • 178,000/12 = $14,833.33 per paycheck • YTD gross prior to current payroll = 14,833.33 x 6 = 88,999.98 • 89,700.00 - 88,999.98 = 700.02 taxed for OASDI • 700.02 x 6.2% = 43.40 OASDI tax • 14,833.33 x 1.45% = 215.08 HI tax (remember - no cap!) • Total FICA = 43.40 + 215.08 = 258.48 Remember - the ER has withheld $258.48 from the employee’s paycheck and must match this amount

  12. SECA - Independent Contractor is both EE & ER • EE and ER portion of FICA if net income exceeds $400 • Net Income = Revenue – Expense • 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 • Example: W-2 = $92,768 and self employment income = $14,500; how much FICA on $14,500? • Answer: No OASDI because capped on W-2 and HI = 2.9% x 14,500 = $420.50 • Example: W-2 = $78,000 and self employment income = $21,000; how much is FICA on $21,000? • Answer: (89,700 - 78,000) = 11,700 OASDI wages x 12.4% = $1450.80 + 21,000 x 2.9% = $609.00 Total FICA = ($1450.80 + 609.00 = $2059.80)

  13. How to Get Set Up with SSA • One FEIN per employer • File Form SS-4 with IRS office where tax returns will be filed. • TELE-TIN to obtain Federal Employer Identification Number (FEIN) immediately (1-866-816-2065). • When purchasing an existing business, the new owner needs a new FEIN. • SS-5 for everyone > one year old • 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)

  14. Deposit Requirements for FICA and FIT (always go together) • Each November, based upon a look back period, IRS tells ER what type of depositor he/she is • 1. Monthly depositor - pay FICA and FIT by 15th of following month • 2. Semiweekly depositor • If payroll was W-F, deposit by next Wednesday • If payroll was S-T, deposit by next Friday • Exceptions • If really big ($100,000+ of federal payroll tax liability), taxpayer has until close of next banking day • If really small (quarterly owe less than $2,500), wait and pay when 941 report is filed

  15. How to Deposit FIT/FICA • Fill out a Form 8109 coupon • These are sent to you when apply for FEIN. • Take to an authorized financial institution (depository for federal government) • Or can use EFTPS (Electronic Federal Tax Payment System) • must use if total deposits exceed $200,000 for a year • complete Form 9779, EFTPS Business Enrollment Form • to utilize online capabilities, enroll at www.eftps.gov • If mailing, must postmark at least 2 days before due date • Penalties for late deposits

  16. How to Report FIT/FICA • File Form 941 (Employer’s Quarterly Federal Tax Return) • Download at www.irs.ustreas.gov • Due on last day of month following close of quarter: 1/31 4/30 7/30 10/31 • 941E-file are for Reporting Agents who file 10+ returns per quarter • 941 TeleFile are for certain depositors sent TeleFile kits

  17. Types of Penalties • Failure-to-comply penalties will be added to tax and interest charges; negligence can also result in fines/imprisonment • Imposed for following: • not filing employment tax returns on time • not paying taxes when due • not making timely deposits • not furnishing W-2s • not filing/providing information returns • not supplying proper Taxpayer Identification Numbers (TINs)

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