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ACC170

Explore the basics of payroll tax accounting, including calculations for various pay periods and percentages. Learn about FICA Social Security taxes and its implications for both employees and employers. Dive into the specifics of OASDI and HI taxes, with practical examples.

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ACC170

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  1. WELCOME ACC170 Payroll Tax Accounting

  2. ACC 170 – Payroll Tax Accounting Syllabus (see Syllabus Word document)

  3. Bob Bruebach – Resume ADP • ADP • Paychex • ADP • ADP • Corp. Office In-House Payroll

  4. UNDERSTANDING PAY PERIODS = 52 Pay Periods per Year • Example: Annual Salary of $52,000 – what is the weekly amount? Weekly $52,000 / 52 = $1,000.00 per Week Bi-Weekly = 26 Pay Periods per Year • Example: Annual Salary of $52,000 – what is the bi-weekly amount? $52,000 / 26 = $2,000 every 2 Weeks Semi-Monthly = 24 Pay Periods per Year • Example: Annual Salary of $52,000 – what is the semi-monthly amount? $52,000 / 24 = $2,166.66 paid on the 15th and last day of month

  5. UNDERSTANDING PERCENTAGES 0.062 • Example: What is 6.2% of $100.00? 6.2% = Answer: $100.00 * 6.2% = $100.00 * 0.062 = $6.20 = 0.006 0.6% = • Example: What is 0.6% of $500.00? Answer: $500.00 * 0.6% = $500.00 * 0.006 = $3.00

  6. FICA SOCIAL SECURITY TAXES

  7. FICA FICA (Federal Insurance Contributions Act) Two Programs • OASDI – Social Security “Old Age, Survivors and Disability Insurance” • HI – Medicare “Health Insurance” (see Soc. Sec. Benefit Stmt. pdf document) [Social Security Statement Samples (website)] (Ratio of Taxpayers to Beneficiaries)

  8. FICA Calculation of Taxes - Employee Program: OASDI – Social Security Tax: 6.2% (0.062) of Wages up to $127,200. • Wage amount increases every year (in general)since 1972… exceptions 2010, 2011, and 2016. FYI… There was a 4.2% rate for 2012 and 2011. The rate reverted back to 6.2% for 2013. FYI… 2017 - $127,200 2016 - $118,500 2015 - $118,500 2014 - $117,000 2013 - $113,700 2012 - $110,100 2011 - $106,800 2010 - $106,800 2009 - $106,800 2008 - $102,000 2007 - $97,500 <SS Wage history> • If EE changes ER during year, new ER required to start at $0. (EE can get refund of overpaid OASDI on Form 1040.)

  9. FICA Calculation of Taxes – Employee(OASDI – Excess Deducted from Employee)Example Employer #1 Employee works From January 1st to June 30th and earns $130,000: FICA-OASDI deducted from Paychecks during that Time: $127,200 (maximum) * 0.062 = $7,886.40 Employer #2 Employee works from July 1st to December 31st and earns another $130,000: FICA-OASDI deducted from Paychecks during that Time: $127,200 (maximum) * 0.062 = $7,886.40

  10. FICA Calculation of Taxes – Employee(OASDI – Excess Deducted from Employee)Example Below is the portion of the Form 1040 where excess FICA-OASDI is recorded as “additional withholding” toward federal income tax:

  11. FICA Calculation of Taxes - Employee Program: OASDI – Social Security Tax: 6.2% (0.062) of Wages up to $127,200. • Wage amount has increased every year since 1972… except for 2010 and 2011. • If EE changes ER during year, new ER required to start at $0. (EE can get refund of overpaid OASDI on Form 1040.) • FYI… Social Security site  http://www.ssa.gov/ Program: HI – Medicare Tax: 1.45% (0.0145) of Wages – no Maximum. Plus, 0.9% for Wages over $200,000.

  12. FICA FICA Taxes - EE Examples Example 1 If John has cumulative wages of $50,000 and his next paycheck was $5,000, calculate: a) the SS (OASDI) part of FICA: ____________________ b) the Medicare (HI) part of FICA: ___________________ $5,000 * 0.062 = $310.00 $5,000 * 0.0145 = $72.50

  13. FICA FICA Taxes - EE Examples (cont.) Example 2 If Mary has $119,800 of cumulative earnings and her next paycheck was $8,000, calculate: a) the SS (OASDI) part of FICA: ________________________ b) the Medicare (HI) part of FICA: _______________________ First  Check to see if maximum reached: • $119,800 + $8,000 = $127,800, which exceeds $127,200 maximum. Second  Calculate the amount wages subject to the tax: • $127,200 - $119,800 = $7,400 • So, only $7,400 of the $8,000 paid is subject to the tax. $7,400 * 0.062 = $458.80 $8,000 * 0.0145 = $116.00

  14. FICA FICA Taxes - EE Examples Example 3 The Johnson Company pays their employees on a monthly basis. Sam is paid $25,000 per month. What are the amounts for FICA-SS and FICA-HI that are withheld for Sam’s June 30th paycheck: First, what will be Sam’s cumulative earnings including the June 30th paycheck: • 6 * $25,000 = $150,000 So, need to calculate cumulative earnings PRIOR TO June 30th paycheck: • 5 * $25,000 = $125,000 Since the maximum wages for FICA-SS are $127,200, then only $2,200 of the $25,000 of the June 30th paycheck are subject to FICA-SS tax: FICA-SS: ______________________ FICA-HI: ______________________  exceeds $127,200 $25,000 * 0.0145 = $362.50 $2,200 * 0.062 = $136.40

  15. FICA Calculation of Taxes – Employer Portion Program: OASDI – Social Security Tax: 6.2% (0.062) of Total “OASDI” Wages. • Use wages only subject to OASDI Tax. Program: HI – Medicare Tax: 1.45% (0.0145) of Total “HI” Wages. (Employer does not pay 0.9% additional tax for Wages over $200,000.)

  16. $7,000 * 0.062 $7,000 * 0.0145 Employer OASDI: $434.00 Employer HI: $101.50 FICA FICA Taxes - ER Examples Example 4 Calculate Employees’ and Employer’s Share of FICA taxes: FICA FICA Bi-Weekly OASDI HI EmployeeWagesTaxTax Joe $2,000 Sue $3,000 Doug $2,000 ---------- Totals $7,000 $124.00 $29.00 $186.00 $43.50 $124.00 $29.00 ----------- ----------- $434.00 $101.50

  17. $6,400 * 0.062 $8,000 * 0.0145 Employer OASDI: $396.80 Employer HI: $116.00 FICA FICA Taxes - ER Examples (cont.) Example 5 Calculate Employees’ and Employer’s Share of FICA taxes: OASDI FICA HI FICA Cumulative Weekly Taxable OASDI Taxable HI EmployeeEarningsWagesWages Tax__ Wages_ Tax_ Tom $62,000 $1,000 Diane $124,800 $4,000 Jenny $50,000 $3,000 ---------- Totals: $8,000 $1,000 $ 62.00 $1,000 $14.50 $2,400 $148.80 $4,000 $58.00 $3,000 $186.00 $3,000 $43.50 ----------- ----------- ----------- ----------- $6,400 $396.80 $8,000 $116.00 $1,000 $1,000 $1,000 $ 62.00 $1,000 $14.50 $4,000 $2,400 $2,400 $148.80 $4,000 $58.00

  18. FICA FYI …Historical Review History… FICA Rate History Graph 1937-2017 FICA Maximum Earnings and Tax Rates 1937-2015

  19. (Federal Income Taxes) 941 Taxes Tax Deposit Requirements • Total of FICA taxes and withheld FIT New Employers  Monthly Depositor until lookback is established. (If $100,000 or more, then pay next business day and become a semi-weekly depositor.) (lookback period = 4 calendar quarters beginning July 1st of 2nd preceding year and ending June 30th of the previous year.)

  20. 941 Taxes Tax Deposit Requirements (cont.)

  21. 941 Taxes FYI… Tax Deposit Requirements (cont.)

  22. 941 Taxes FYI… Tax Deposit Requirements (cont.) FYI… The 15.3% is based on: FICA-SS-EE: 6.20% FICA-SS-ER: 6.20% FICA-HI-EE: 1.45% FICA-HI-ER: 1.45% 15.30%

  23. 941 Taxes FYI… Tax Deposit Requirements (cont.)

  24. 941 Taxes FYI… Tax Deposit Requirements (cont.)

  25. 941 Taxes FYI… Tax Deposit Requirements (cont.)

  26. 941 Taxes Tax Deposit Requirements (cont.) • If $200,000 or more in a calendar year – must FILE (deposit) ELECTRONICALLY. • The amount includes all taxes, not just P/R taxes. • You will be notified when you are required to file electronically. • Penalty of 10% if not followed. • Once EFT is required, then EFT every year. • Beginning in 2011 – Payroll Taxes (as well as ALL federal tax deposits) must be deposited electronically.

  27. 941 Taxes Form 8109 Coupon (see Form 8109 pdf document) • Beginning in 2011, Form 8109 cannot be used since all taxes are now deposited electronically!

  28. 941 Taxes Form 941 • Quarterly report of Total FICA Taxes and Withheld FIT (aka “941” Taxes). • Due date is the last day of following month - (10 additional days allowed if timely deposits have been made). (see Form 941 pdf document) (Form 941 – 2013 – COBRA Assistance Example)

  29. 941 Taxes fyi… Penalties • Failure to Pay  ½% for each month, to a maximum of 25%. • Failure to File  5% for each month, to a maximum of 25%. • Failure to Make Timely Deposits  2-15% of undeposited taxes, based on days late, or amount of days after IRS notice. May include CRIMINAL CHARGES, as well.

  30. FICA Coverage • FICA cover most employees. • Examples of workers who are not covered include: • Medical Interns & Student Nurses • Household Employees who receive less than $2,000 from one employer in one year. • Partners in a Partnership • Federal & State EE’s covered by a retirement system – HI only. • Ministers – may elect not to be covered for religious reasons (difficult). Covered under SECA. • Independent Contractors

  31. FICA Determination of Independent Contractor (SECA) vs. Employee (FICA) • IRS historically used 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.gov/formspubs/

  32. FICA Specifically Covered(in addition to common law) • Full time life insurance salespeople • Full time traveling salespeople • Agent- and commission-drivers of food/beverages • Statutory Employees (IRS) Information: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Statutory-Employees

  33. FICA What are Taxable Wages? • Wages, Salaries, Vacation Pay, Bonuses, Commissions. • Moving Expense Reimbursement (non-qualified) • Cash Tips over $20 in a Calendar Month • Non-Cash Compensation (“fringe benefits”): • Personal Use of a Company Car • Employer paid premiums for Group Term Life Insurance in excess of $50,000 • Non-Cash Awards & Prizes

  34. FICA Self Employed Contributions Act (SECA) • FICA taxes are due on Self-Employed Income (from Schedule C) • Same wage base for OASDI  $127,200 • FICA-OASDI: 12.4% • FICA-HI: 2.9% …plus, 0.9% for Wages over $200,000. • Use Schedule SE to calculate/report FICA taxes • The tax ultimately gets “located” on 1040 form (line 56). • Deduction for 50% of the Self-Employment Tax (SECA) is on the 1040 form (line 27).

  35. HISTORY INCOME TAX ACT • 1913 – 16th Amendment In 1913, the 16th Amendment to the Constitution made the income tax a permanent fixture in the U.S. tax system. The amendment gave Congress legal authority to tax income and resulted in a revenue law that taxed incomes of both individuals and corporations. 1943 – Withholding Tax Act On the eve of WWII, few Americans paid income taxes. Those that owed taxes paid them in one lump sum on March 15 (later changed to April 15). To pay for the war, the Revenue Act of 1942 lowered exemptions and raised income tax rates. The Current Tax Payment Act of 1943 required employers to collect the tax by deducting it from the employee's paycheck—just like the Social Security tax that began in 1935. Although the withholding tax was sold as a wartime emergency, like most expansions of government instituted during wartime, it has been a way of life for most Americans ever since.

  36. HISTORY FEDERAL INSURANCE CONTRIBUTION ACT(FICA) • 1935 • OASDI FDR – Franklin Delano Roosevelt • Elected President in 1932 …in 1965 • HI – Medicare added

  37. HISTORY SELF-EMPLOYED CONTRIBUTION ACT(SECA) • 1951 Tax upon the earnings of the Self- Employed

  38. HISTORY UNEMPLOYMENT TAX ACTS • 1935

  39. HISTORY UNEMPLOYMENT TAX ACTS (cont.) • 1935 • FUTA – Federal Unemployment Tax Act • SUTA – State Unemployment Tax Act

  40. HISTORY FAIR LABOR STANDARDS ACT(FLSA) • 1938 The Fair Labor StandardsAct was passed by Congress on 25th June, 1938. The main objective of the act was to eliminate "labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency and well-being of workers". The act established maximum working hours of 44 a week for the first year, 42 for the second, and 40 thereafter. Minimum wages of 25 cents an hour were established for the first year, 30 cents for the second, and 40 cents over a period of the next six years. The Fair Labor Standards Act also prohibited child labor in all industries engaged in producing goods in inter-state commerce.

  41. HISTORY FAIR LABOR STANDARDS ACT (cont.)(FLSA) • 1938 Minimum Wages, Equal Pay, Overtime, Recordkeeping • Enterprise Coverage / Employee Coverage • Enterprise: (includes all employees if…) • $500K+ in sales • Interstate commerce • Many family establishments are exempted • Individual/Employee • Employee whose company may not meet enterprise coverage, but is involved in interstate commerce Example: a driver for fleet that transports goods, but enterprise annual revenues are $225,000

  42. HISTORY What the FLSA Does Not Cover • No requirement for employers to: • Pay extra for weekend/holiday work • Pay for holidays, vacation or sick time • Grant vacation time

  43. HISTORY FAIR EMPLOYMENT LAWS • Civil Rights Act (1964) EEO (Equal Employment Opportunity) Cannot discriminate – color, race, religion, gender, national origin. Exemptions exist – ex., private membership clubs. (In 1974 the Western Open found an annual home at the Butler National Golf Club in Oak Brook, Illinois. It stayed this way until shortly after the 1990 tournament, when the PGA Tour adopted a policy of holding events only at clubs which allowed minorities and women to be members. This resulted in Butler National being replaced by the Cog Hill Golf & Country Club in Lemont, Illinois. The Dubsdread Course at Cog Hill played host to the Western Open from 1991 to 2006.)

  44. HISTORY FAIR EMPLOYMENT LAWS • Civil Rights Act (1964) Executive Order 11246 Major anti-discrimination regulation for government contractors with contracts > $10,000 For those exemptions under Civil Rights Act, prevents discrimination in organizations that contract with the Federal Government. Requires written plan that shows how under-represented groups are recruited and hired.

  45. HISTORY FAIR EMPLOYMENT LAWS • Civil Rights Act (1964) • Executive Order 11246 • Age Discrimination in Employment Act (ADEA) (1967) Added age protection for all workers over 40. Applies to employers with 20+ employees.

  46. HISTORY FAIR EMPLOYMENT LAWS • Civil Rights Act (1964) • Executive Order 11246 • Age Discrimination in Employment Act (ADEA) (1967) • Americans with Disabilities Act (ADA) (1990) Applies to employers with 15+ employees Reasonable accommodations must be provided (vague) Many companies needed to rewrite job descriptions to specify physical requirements for jobs

  47. HISTORY IMMIGRATION REFORM & CONTROL ACT(IRCA) • 1986 • Proof of Citizenship • Requires employer to verify citizenship • I-9 Form needs to be completed within 3 days of employment • Penalties for noncompliance

  48. HISTORY Family Medical Leave Act(FMLA) • 1993 • Covers companies with 50+ employees within 75 mile radius • EE guaranteed 12 weeks unpaid leave for: • Birth, adoption, critical care • Can use for child, spouse or parent • Leave may be used all at once or at separate times – but must be within 12 months of qualifying event • ER continues health care coverage • Right to return to same/comparable job and continue health coverage in absence

  49. HISTORY Employee Retirement Income Security Act (ERISA) • Trustees must monitor pension plans • Vested 100% in 3-6 years Example of a vesting plan: Years of % Vested in Service Pension Plan 2 50% 4 75% 5 100% • Provides for PBGC Pension Benefit Guaranty Corporation - a federal agency which guarantees benefits to employees • Stringent recordkeeping requirements

  50. FIDUCIARY Fiduciary Responsibility (see Fiduciary Liability from Scarinci & Hollenbeck “pdf” document) • Amounts Withheld from Employees’ Wages for Income Taxes and Social Security to be Paid to the Government • You cannot use these funds for any other purpose (see IRS Cases “pdf” document) (see more recent IRS Cases “docx” document)

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