CHAPTER 3

1. CHAPTER 3 Payroll Accounting 2011 Bernard J. Bieg and Judith A. Toland SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

2. Learning Objectives • Identify which persons are covered under social security law • Identify types of compensation that are defined as wages • Apply current tax rates and wage base for FICA/SECA purposes • Describe different requirements/procedures for depositing FICA/FIT taxes • Complete Forms 941 and 8109

3. 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/employer

4. 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 status • See 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

5. 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

6. 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 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 • If ER misclassifies EE, penalties will accrue to the ER • If EE did report the earnings on his/her federal tax return, the penalty is voided

7. 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)

8. Whatare Taxable Wages? • 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 • ER can claim a credit for SS/Medicare taxes paid on employees’ tips on Form 8846

9. SpecificallyExempt 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

10. FICATaxable Wage Base • OASDI wages cap at $106,800 for 2010 • HI wages never cap • The Patient Protection & Affordable Care Act of 2010 created additional .9% HI tax on taxpayers receiving wages in excess of $200,000 ($250,000 if married filing jointly) beginning in 2013. 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

11. 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

12. Tax Holiday • Hiring Incentives to Restore Employment Act of 2010 provides relief for employer’s share of OASDI tax • On wages paid 3/19/10 - 12/31/10 • For qualified employees only • Full-time or part-time • Retention credit also available if remain employed for 52 consecutive weeks

13. 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

14. Calculating FICA with W-2 and Self-Employed Earnings Facts: Celia’s W-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

15. Calculating FICA with W-2 and Self-Employed Earnings 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

16. 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 own 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 #) • 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 – via internet, telephone or paper request

17. Depositing 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. 3-19)

18. 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 • Can continue coverage up to 15 months • Government subsidizes 65% of this cost • Company is ‘reimbursed’ its 65% by taking a deduction on Form 941 • Employee pays 35%

19. How to Deposit FIT/FICA Electronically • EFTPS (Electronic Federal Tax Payment System) • Most employers must use EFTPS – major exception is for businesses owing $2500 or loss in quarterly tax liabilities • 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

20. How to Deposit FIT/FICA by Coupon • Federal Tax Deposit Coupons, Form 8109 • Will most likely not be used beginning 1/1/11 • Take to Treasury Tax & Loan institution or mail to Financial Agent at Federal Tax Deposit Processing 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

21. 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 941if 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

22. 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 • Employer may chose to file Form 941 quarterly instead – need to notify IRS • Can correct errors on previously filed Form 941 by filing Form 941-X

23. 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!!