Welcome to Unit 4 – Chapter 3 Social Security Taxes

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% %) = 2.9% HI  3 issues  Are you an EE or an independent contractor?  Is service rendered considered employment?  Is compensation considered taxable wages?

Independent Contractor vs. Employee  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

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

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

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)

 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

Specifically Exempt Wages  Meals/lodging for employer’s convenience  Sick pay  After 6 consecutive months off (personal injury)  Sick pay by 3 rd 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

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 15 th and 30 th ; determine FICA for October 30th payroll  First must find prior payroll YTD gross $132,000/24 =$ 5,  $5, x 19 payrolls (before today)= $104,  How much will be taxed for OASDI?  $106, – $104, = $2,  OASDI tax is $2, x 6.2% = $  HI tax is $5, x 1.45% =$  Total FICA is $ $79.75 =$  Is this EE withholding or ER payroll tax expense? Answer - both!!

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, per paycheck  YTD gross prior to current payroll =$14, x 7 = $102,  $106, – $102, = $4, taxed for OASDI  $4, x 6.2% = $ OASDI tax  $14, x 1.45% = $ HI tax (remember - no cap!)  Total FICA = $ $ =$ Remember - the ER has withheld $ from the employee’s paycheck and must match this amount

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

Calculating FICA with W-2 & SE 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% = $  Total FICA = $ Facts: Felipe’s W-2 = $78,000 and his self-employment income = $36,000; how much is FICA on $36,000 ?  OASDI ($106, ,000) = $28,800 taxable OASDI wages x 12.4% = $3,  HI = $36,000 taxable HI wages x 2.9% = $1,  Total FICA $3, , = $4,615.20

How to Get Set Up with SSA  One employer identification number (EIN) per employer  Obtain directly from with no preregistration necessaryhttp://  TELE-TIN to obtain (EIN) immediately at  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

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)

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%

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  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

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)

How to Report and Reconcile FIT/FICA  File Form 941 (Employer’s Quarterly Federal Tax Return)  Download at or call www.irs.gov/formspubs/  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

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

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

Any questions?

Unit 4 Assignments  Practical Problem 3-1A (page 3-37)  Continuing Payroll Problem Chapter 3 (page 3-67)  In the Taxable Earnings Columns, record the amount of each employee’s weekly earnings that is subject to FICA taxes  Using the amount recorded in the previous step, compute the taxes for each employee and record in the appropriate column *Remember to Save your Cont Problem because you will use it again in Chapter 4