1. School of Business and Management
AC122.01: Unit 4 Seminar June 29, 2011
School of Business and Management

2. Agenda
Welcome
Seminar Rules
Chapter 3 Social Security Taxes
Questions

3. Seminar Rules by Greg Rose
If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one!
When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue.
Please do NOT start side conversations.
Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good!
Don`t worry about typos. Be clear as you can and refrain
from smileys and slang – use proper English.
Assignments Grading
Late Policy
Seminar procedures and Polling
Questions

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

5. Coverage under FICA FICA (1935) Federal Insurance Contributions Act
Tax paid both by employees and employers
6.2% OASDI plus % 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?

6. 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
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

7. 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

8. Independent Contractor
Persons may be classified as independent contractors if they conduct an independent trade or business
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

9. 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

10. What are 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

11. Specifically Exempt 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

12. FICA Taxable 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 th and 30th; determine FICA for October 30th payroll
First must find prior payroll YTD gross $132,000/24 =$ 5,500.00
$5, x 19 payrolls (before today)= $104,500.00
How much will be taxed for OASDI?
$106, – $104, = $2,300.00
OASDI tax is $2, x 6.2% = $142.60
HI tax is $5, x 1.45% =$ 79.75
Total FICA is $ $79.75 =$

13. Example 3-2B OASDI HI 9th paycheck 322.40 75.40
21st paycheck
106,800 – (20 x 5,200) = 2,800 Remaining taxable income for OASDI
24th paycheck
119,600 (23 x 5,200) >106,800 This indicates that the worker has reached the cap on taxable income for OASDI

14. 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 = $102,083.31
$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

15. Example 3-3B
Eric Sherm began working as a part time waiter on April 1, 2011 at Yardville Restaurant. The cash tips of $475 that he received during April were reported on Form 4070, which he submitted to his employer on May 1. During May, he was paid wages of $630 by the restaurant. Compute:
The amount of FICA taxes that the employer should withhold from Sherm’s wages during May.

16. ( $475 tips + $630 paid wages = $1,105)
Example 3-3B
b. The amount of the employer’s FICA taxes on Sherm’s wages and tips during May.
OASDI HI
$ $16.02
( $475 tips + $630 paid wages = $1,105)
$1,105 X .062 = $68.51
$1,105 X = $16.02

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

18. Amanda Autry and Carley Wilson are partners in A & W Gift shop, which employs the individuals listed below. Paychecks are distributed every Friday to all employees. Based on the information given, compute the amounts listed below for a weekly payroll period.
Example 3-6B
Name /Position
Salary
OASDI Taxable Earnings
OASDI Tax
HI Taxable Earnings
HI Tax
Kelly Simon, Office
$650/wk
$650.00
$40.30
$9.43
Jim Tress, Sales
$3,450/
Month
$796.15
$49.36
$11.54
May Aha, Delivery
$520/ wk
$520.00
$32.24
$7.54
Amanda Autry, Partner
$1,900/ wk
0.00
Carley Wilson Partner
$1,900/ wk
Totals
$1,966.15
$121.90
$28.51
Employers OASDI Tax
Employer’s HI Tax
28.51

19. Amanda Autry and Carley Wilson are partners in A & W
Name /Position
Salary
OASDI Taxable Earnings
OASDI Tax
HI Taxable Earnings
HI Tax
Kelly Simon, Office
$650/wk
$650.00
$40.30
$9.43
Jim Tress, Sales
$3,450/
Month
$796.15
$49.36
$11.54
May Aha, Delivery
$520/ wk
$520.00
$32.24
$7.54
Amanda Autry, Partner
$1,900/ wk
0.00
Carley Wilson Partner
$1,900/ wk
Totals
$1,966.15
$121.90
$28.51
Employers OASDI Tax
Employer’s HI Tax
28.51

20. 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

21. 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

22. 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, ,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, , = $4,615.20

23. Example 3-8B a. OASDI: $74,700 X .062 = $4,631.40
George Parker was paid a salary of $74,700 during 2011 by Umberger Company. In addition, during the year, Parker started his own business as a public accountant and reported as net business income of $38,900 on his income tax return for Compute the following:
The amount of FICA taxes that was withheld from his earnings during 2011 by Umberger.
Parker’s self employment taxes on the income derived from the public accounting business for 2011
a. OASDI: $74,700 X .062 = $4,631.40
HI: $74,700 X = $1,083.15
OASDI $106,800 - $74,700 = $32,100 X .124 = $3,980.40
HI: $38,900 X = $1,128.10

24. Amount deposited may be affected by safe harbor rule (see p. 3-19)
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
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)

25. 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%

26. 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
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

27. How to Deposit FIT/FICA by Coupon
The use of Federal Tax Deposit Coupons, Form 8109 ended 01/11/2011
All Federal tax deposits must be made electronically
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 but no Form 8109 coupons as of 2011

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

29. 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

30. 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!!

31. Seminar Day and time of Seminar Wednesday at 8:00 – 9:00 PM EST
We will have a seminar each week.
Day and time of Seminar
Wednesday at 8:00 – 9:00 PM EST
Polling may be used.

32. Thank you for attending this seminar.
Questions
Thank you for attending this seminar.