Bernard J. Bieg and Judith A. Toland Payroll Accounting 2012 Bernard J. Bieg and Judith A. Toland CHAPTER 3 SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

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 Form 941

Coverage under FICA http://www.ssa.gov/employer 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 employee or an independent contractor? Is service rendered considered employment? Is compensation considered taxable wages? http://www.ssa.gov/employer LO-1

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 If employer misclassifies employees, there is a penalty (generally equal to employer’s share of FICA plus income taxes/FICA that were not withheld from employees’ earnings) LO-1

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 payments 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) LO-2

By 2042, that ratio is projected to be 2 to 1. FICA Taxable Wage Base OASDI wages cap at $110,100 for 2012 HI wages never cap – since there is not ceiling, employers compute HI tax on full amount of wages 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 Interesting note: In 1950 there were 16 workers paying into Social Security for every one person collecting benefits. By 2042, that ratio is projected to be 2 to 1. LO-3

Calculating FICA Facts: Tamara earns $132,000/year and is paid semimonthly on the15th and 30th; determine FICA for October 30th payroll First must find prior payroll year-to-date gross $138,000/24 =$ 5,750.00 Hint: how many payrolls were run before the 10/30 payroll? Multiply that by the gross per payroll $5,750.00 x 19 payrolls (before today)= $109,250.00 How much will be taxed for OASDI? $110,100.00 – $109,250.00 = $850.00 OASDI tax is $850.00 x 6.2% = $52.70 How much will be taxed for HI? HI tax is $5,750.00 x 1.45% =$ 83.38 How much is total FICA? Total FICA is $52.70 + $83.38 =$136.08 LO-3

SECA and Independent Contractors Employee and employer portion of FICA is paid 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 $110,100 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 LO-3

Calculating FICA with W-2 and Self-Employed Earnings Facts: Celia’s W-2 = $117,768 and her self- employment income = $14,500; how much is her FICA on $14,500? No OASDI is due because she capped on W-2 HI = $14,500 x 2.9% = $420.50 Total FICA = $420.50 LO-3

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 – pay within 3 business days; however, if any of the 3 days is a nonbusiness day, add one business day to required deposit date However, there is an exception: One-day rule states that if $100,000 or more of federal payroll tax liability is due, taxpayer has until close of next banking day Different requirements for agricultural and household employees New employers are monthly depositors unless $100,000+ of liability triggers one-day rule and converts them to semiweekly Amount deposited may be affected by safe harbor rule (see p. 3-19) LO-4

How to Deposit FIT and FICA Electronically Employers must use EFTPS (Electronic Federal Tax Payment System) Most employers must use EFTPS – only exception is for businesses owing $2,500 or loss in quarterly tax liabilities Enroll in EFTPS Online at http://www.eftps.gov All new employers automatically pre-enrolled Two methods EFTPS (direct) – withdraw funds from employer’s bank account and route to Treasury EFTPS (through financial institution) – employer instructs his/her bank to send payment directly to Treasury LO-4

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!! LO-5