Payroll Accounting 2004 Bernard J. Bieg

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 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

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.ustreas.gov/prod/forms-pubs/pubs/p15a02.htm

Specifically Covered (in addition to common law)

 Full time life insurance salespeople  Full time 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)

More Specific Situations

 Temporary employees – considered EE of temporary agency  Household employees  If they make $1400+/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

Employment Specifically Exempt from FICA

 Children under 18 employed by parent’s business, if either a sole proprietorship or partnership (but not corporation)  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*

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

Taxable Wages (Continued)

 Tips greater than $20 or more per month   EE must file form 4070 by 10 th 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 tips, only

reported

  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

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 3 rd party (insurance company/trustee)  ER contribution to pension plan   ER-provided nondiscriminatory education assistance (

must have written plan)

up to

$5,250

 SEP contributions through salary reduction must have FICA withheld Education must maintain/improve skills required by employment

FICA Taxable Wage Base

 OASDI caps at $88,200 for 2004 (estimated)  HI never caps  Facts: Earn $95,000/year - paid semimonthly on the 15 th and 30 th ; the calculations for 12/15 payroll are:    First must find

prior payroll YTD gross

3,958.33

x

22 = 87,083.26

How much will be taxed for OASDI?  88,200.00 – 87,083.26 = 1,116.74  OASDI tax is 1,116.74

x

6.2% = 69.24

$95,000/24 = 3,958.33  HI tax is 3,958.33

x

1.45% = 57.40

  Total FICA is 69.24 + 57.40 = $126.64

Is this EE withholding or ER payroll tax expense?

Answer - both!!

Example #2 to Calculate FICA

 Earns $175,000/year; paid first of every month; determine FICA for 7/1/04 payroll      What do we calculate first?

175,000/12 = $14,583.33 per paycheck YTD gross prior to current payroll = 14,583.33

x

6 = 87,499.98

88,200.00 - 87,499.98 = 700.02 taxed for OASDI 700.02

x

6.2% = 43.40 OASDI tax   14,583.33

x

1.45% = 211.46 HI tax (remember - no cap!) Total FICA = 43.40 + 211.46 = 254.86

Remember the ER has withheld $254.86 from the employee’s paycheck and must match this amount

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:

(88,200 - 78,000) = 10,200 OASDI wages x 12.4% = $1264.80 + 21,000 HI wages x 2.9% = $609.00 Total FICA = ($1264.80 + 609.00 = $1873.80)

How to Get Set Up with SSA

 One Federal Employer Identification Number (FEIN) per employer  File Form SS-4 with IRS office where tax returns will be filed  TELE-TIN to obtain (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)

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  Monthly depositor - pay FICA and FIT by 15th of following month OR  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 $2500), wait and pay when 941 report is filed

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

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

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)