CHAPTER 3 CHAPTER 3 SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES

Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland

Developed by Lisa Swallow, CPA CMA MSDeveloped 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• FICA (1935)

• Federal Insurance Contributions Act• Tax paid both by employees and employers• 6.2% employer OASDI plus 1.45% HI • 4.2% employee OASDI plus 1.45% HI for 2012• 6.2% employee OASDI plus 1.45% HI for 2013

• SECA (1951) • Self-Employment Contributions Act• Tax upon net earnings of self-employed• (4.2% + 6.2%) = 10.4% OASDI plus (1.45% + 1.45%) = 2.9% HI for

2012• (6.2% + 6.2%) = 12.4% OASDI Plus 2.9% HI for 2013

• 3 issues• Are you an employee or an independent contractor?• Is service rendered considered employment?• Is compensation considered taxable wages?

http://www.socialsecurity.gov/employer LO-1

Independent Contractor (SECA) vs. Employee (FICA)

• Every person is an employer if “person employs one or more individuals for performance of services in U.S.”***Person includes trusts, estates, individual, partnership or

corporation***

• Certain occupations specifically covered by FICA•Full-time life insurance salespersons•Agent- and commission-drivers of food/beverages or dry cleaning•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•However, if employee reported earnings on 1040, penalty is voided•Penalty may be reduced if employer filed a 1099 LO-1

More Specific Situations

• Government employees – certain exemptions from OASDI/HI depending upon date of hire

• 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 $1,800 or more per year • Must pay if domestic employee, like a nanny or cook, is under

your control • Additional exemptions - inmates, medical interns, student

nurses and workers serving temporarily in case of emergency

LO-1

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• See http://www.irs.gov/pub/irs-pdf.p1779.pdf for

criteria• Hiring agent does not pay/withhold FICA

on worker classified as independent• Independent contractor liable for his/her

own social security taxes on net earningsLO-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• Vacation pay

• Other types of taxable wages found in Figure 3-3 (page 3-6) LO-2

What are Taxable Wages? • Tips greater than $20 or more per month

• Employee can report tips to employer using Form 4070• Employer calculates FICA on tips and withholds from

regular paycheck on these reported tips• Must withhold on first paycheck after tips are reported• Employer must pay 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

• Employer can claim a credit for SS/Medicare taxes paid on certain employees’ tips on Form 8846

Have to show allocated tip income on W-2; employer files Form 8027 at year-end with IRS showing food/beverage

receipts and reported tips LO-2

Specifically Exempt Wages

• Meals/lodging for employer’s convenience• Sick pay • Only after 6 consecutive months off (personal injury) • Sick pay by 3rd party (insurance company/trustee) with

specific stipulations• 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 LO-2

FICA Taxable Wage Base• OASDI wages cap (actual) at $110,100 for 2012• OASDI wages cap (actual) at $113,700 for 2013• HI wages never cap – since there is no ceiling, employers

compute HI tax on full amount of wages• However, please be aware that tentative legislation for

2013 creates:• An additional .9% HI surtax on taxpayers receiving wages in

excess of $200,000 ($250,000 if married filing jointly) • A surtax of 3.8% on modified AGI in excess of $200,000

($250,000 if married filing join)• Employer doesn’t match these surtaxes for HI

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 FICAFacts: Tamara earns $138,000/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 • Tamara’s OASDI tax is $850.00 x 4.2% = $35.70• Employer’s OASDI tax is $850.00 x 6.2% = $52.70

• How much will be taxed for HI?• Both Tamara’s and the employer’s HI tax is $5,750.00 x 1.45% =$ 83.38

• How much is total FICA?• Total FICA for Tamara is $35.70 + $83.38 = $119.08• Total FICA for employer is $52.70 + $83.38 =$136.08

LO-3

Another Example - Calculating FICAFacts: Ahmed earns $175,000/year and is paid the first

of every month; determine FICA for August 1 payroll

• What do we calculate first?• $175,000/12 = $14,583.33 per paycheck• Then count number of payrolls before today’s payroll!• Year to date gross prior to current payroll is $14,583.33 x 7 =

$102,083.31• $110,100.00 – $102,083.31 = $8,016.69 taxed for OASDI for 2012• 113,700 – 102,083.31 = 11,616.69 taxed for OASDI for 2013

• Ahmed’s OASDI tax is $8,016.69 x 4.2% = $336.70 • The employer’s OASDI tax is $8,016.69 x 6.2% = $497.03

• OASDI for both employee and employer at 6.2% for 2013 at $11,616.69• Both Ahmed’s and the employer’s HI Tax is $14,583.33 x 1.45% =

$211.46 (remember - no cap!)• Total FICA for Ahmed is $336.70 + $211.46 = $548.16• Total FICA for the employer is $497.43 + $211.46 =$ 708.49

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

• In 2013 self-employed taxes = 15.3% (6.2% + 1.45% and 6.2% + 1.45%)

• Can have W-2 and self employment income• Count both towards calculating cap of $113,700 for

OASDI in 2013• Report on Schedule C (Form 1040) “Profit or Loss from

Business”• Also file Schedule SE (Form 1040) “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?

LO-3

• No OASDI is due because Celia capped on W-2

• HI = $14,500 x 2.9% = $420.50• Total FICA is therefore = $420.50

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 Felipe’s self-employment tax on

$36,000?

LO-3

• OASDI ($110,100 - $78,000) = $32,100 taxable OASDI wages x 10.4%* = $3,338.40 for 2012

• (113,700 – 78,000)$35,700 x 12.4% = 4,426.80 for 2013

• HI = $36,000 taxable HI wages x 2.9%** = $1,044.00

• Total FICA due on self-employment = $3,338.40 + 1,044.00 = $4,382.40 for 2012

• 4,426.80 + 1,044 = 5470.80 for 2013

*4.2% + 6.2% = 10.4% **1.45% + 1.45% = 2.9%

Problems3 – 3A, 3 – 4 A, 3 – 17 A

Problems3 – 1 A, 3 – 2 A, 3 – 5 A, 3 – 7 A

Problems3 – 8 A, 3 - 9 A, 3 – 10 A

How to Get Set Up with SSA • One employer identification number (EIN) per employer

obtained by completing a Form SS-4 (see Figure 3-5 on page 3-15)• 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• Required for children age one or over who are claimed as

dependents on federal income tax return• W-7 completed for aliens who must file a tax return, but are

ineligible for social security #• Employer can verify SS numbers by internet or telephone

http://www.ssa.gov/employer/ssnv.htmLO-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 (“lookback period”)• Monthly - pay FICA and FIT by 15th of following month• Semiweekly – if payday is W, Th or F then due following W and if payday

is S, S, M or T then due following FHowever, 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

• New employers are monthly depositors unless $100,000+ of liability triggers one-day rule and converts them to semiweekly

• Different requirements for agricultural and household employees

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

LO-4

Credit Against the Required 941 Deposits

• Consolidated Omnibus Budget Reconciliation Act (COBRA) gives employees involuntarily terminated between 9/1/08 – 3/31/10 the option to continue coverage under company’s group health insurance

• Can continue coverage up to 15 months• Government subsidizes 65% of premium cost• Company is ‘reimbursed’ its 65% by taking a

deduction on Form 941• Employee pays 35% of premium

LO-4

How to Deposit FITand FICA Electronically• Old paper-based system has been replaced

by an electronic depositing system• Most employers are now on EFTPS (Electronic

Federal Tax Payment System) - only exception is for businesses owing $2,500 or less 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 TreasuryLO-4

Problem3 - 15A

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

• Make deposit with Form 941 if taxes for quarter are less than $2,500 • Use 941-V when making payment or can pay by credit card

• 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

• Can correct errors on previously filed Form 941 by filing Form 941-X

LO-5

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

and IRS will respond with notification letter• Employer may chose to file Form 941 quarterly

instead – need to notify IRS

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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• Not supplying identification numbers• Writing bad checks

Note: IRS reports that 100,000 businesses owe more than two years of payroll taxes

(estimated at $58 billion)!! LO-5

Problem3 – 11 A, 3 – 1 2A, 3 – 13 A, 3 – 14 A, 3 –

16 A