CHAPTER 3CHAPTER 3

SOCIAL SECURITY TAXESSOCIAL SECURITY TAXES

Payroll Accounting 2005 Payroll Accounting 2005 Bernard J. BiegBernard J. Bieg

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Social Security TaxesSocial Security Taxes

FICA (1935) FICA (1935) Federal Insurance Contribution ActFederal Insurance Contribution Act for employees and employersfor employees and employers 6.2% OASDI plus 1.45% HI6.2% OASDI plus 1.45% HI

SECA (1951) SECA (1951) Self Employed Contribution ActSelf Employed Contribution Act Tax upon net earnings of self-employedTax upon net earnings of self-employed 6.2% + 6.2% = 12.4% OASDI plus 1.45% + 1.45% = 2.9% HI6.2% + 6.2% = 12.4% OASDI plus 1.45% + 1.45% = 2.9% HI

3 issues:3 issues: Are you an EE or independent contractor?Are you an EE or independent contractor? Is compensation considered taxable wages?Is compensation considered taxable wages? Calculating FICA and SECA under varying situationsCalculating FICA and SECA under varying situations

http://www.ssa.gov/employerhttp://www.ssa.gov/employer

Determination of Determination of Independent Contractor (SECA) Independent Contractor (SECA)

vs. vs. Employee (FICA)Employee (FICA)

IRS historically used 20-point test to determine IRS historically used 20-point test to determine “common law relationship” - examples from list “common law relationship” - examples from list includeinclude

How many companies does person work forHow many companies does person work for Control work/schedule/where performedControl work/schedule/where performed Who provides toolsWho provides tools Can person incur profit or lossCan person incur profit or loss

3 Categories of evidence3 Categories of evidence Behavioral ControlBehavioral Control Financial ControlFinancial Control Type of RelationshipType of Relationship

Can file SS-8 with IRS if uncertain what to do!!Can file SS-8 with IRS if uncertain what to do!!Access http://www.irs.ustreas.gov/prod/forms-pubs/pubs/p15a02.htmAccess http://www.irs.ustreas.gov/prod/forms-pubs/pubs/p15a02.htm

Specifically Covered Specifically Covered (in addition to common (in addition to common

law)law) Full time life insurance salespeopleFull time life insurance salespeople Full time traveling salespeopleFull time traveling salespeople Agent- and commission-drivers of food/beveragesAgent- and commission-drivers of food/beverages Not-for-profit EE (except ministers):Not-for-profit EE (except ministers):

minister can irrevocably elect FICA coverageminister can irrevocably elect FICA coverage Federal employees Federal employees (only HI if hired prior to 1984)(only HI if hired prior to 1984) Military on basic pay Military on basic pay

(no FICA on excess pay)(no FICA on excess pay)

More Specific More Specific SituationsSituations

Temporary employees – considered EE of temporary agencyTemporary employees – considered EE of temporary agency Household employeesHousehold employees

If they make $1400+/year If they make $1400+/year ER must pay FICA – reports on 1040 (still paid by both)ER must pay FICA – reports on 1040 (still paid by both) Unless already files 941 - then report on this formUnless already files 941 - then report on this form

Doesn’t apply to minor unless that’s their occupationDoesn’t apply to minor unless that’s their occupation Must pay if he/she under your control (gardener/nanny/cook)Must pay if he/she under your control (gardener/nanny/cook)

CorporationCorporation Officers are EEOfficers are EE Board of director members are not EEBoard of director members are not EE

PartnershipPartnership Partners are not EEPartners are not EE

Employment Employment Specifically Exempt Specifically Exempt

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

Farm workers if all workers annual Farm workers if all workers annual compensation < $2500 or each worker earned compensation < $2500 or each worker earned < $150/year< $150/year

Employees covered under RRTA (Railroad Employees covered under RRTA (Railroad Retirement Tax Act)Retirement Tax Act)

Ambassadors/diplomatsAmbassadors/diplomats Newspaper carrier less than 18 years oldNewspaper carrier less than 18 years old

*this is not an exhaustive list**this is not an exhaustive list*

What are Taxable Wages?What are Taxable Wages?

CashCash Wages and salariesWages and salaries Bonuses and commissionsBonuses and commissions

FMV of noncash compensationFMV of noncash compensation Gifts (over certain amounts)Gifts (over certain amounts) Stock optionsStock options Fringe benefits like personal use of corporate carFringe benefits like personal use of corporate car PrizesPrizes Premiums on group term life insurance > $50,000Premiums on group term life insurance > $50,000

Taxable Wages Taxable Wages (Continued)(Continued)

Tips greater than $20 or more per monthTips greater than $20 or more per month EE must file form 4070 by 10EE must file form 4070 by 10thth of following month with ER of following month with ER 50% penalty imposed on EE for not reporting50% penalty imposed on EE for not reporting

ER calculates FICA on tips and withholds from ER calculates FICA on tips and withholds from regular paycheck on these regular paycheck on these reported tipsreported tips

ER must match but they receive a business tax credit ER must match but they receive a business tax credit roughly equivalent to the ER paid FICA on tipsroughly equivalent to the ER paid FICA on tips

““Large employers” (11+ EE) must allocate Large employers” (11+ EE) must allocate [[(Gross receipts (Gross receipts xx .08) – reported tips] .08) – reported tips] Don’t have to withhold FICA on Don’t have to withhold FICA on allocatedallocated tips, only tips, only reportedreported

tipstips Have to show allocated tip income on W-2Have to show allocated tip income on W-2 ER can petition IRS to reduce tip allocation to as low as 2%ER can petition IRS to reduce tip allocation to as low as 2%

Employer must file Form 8027 at year end with IRSEmployer must file Form 8027 at year end with IRS

Specifically Exempt Specifically Exempt WagesWages

Meals/lodging for ER convenience (for example, Meals/lodging for ER convenience (for example, paramedic)paramedic)

Sick pay Sick pay after 6 consecutive months off after 6 consecutive months off ((personal personal injury – not permanent disability – payments)injury – not permanent disability – payments)

Sick pay by 3Sick pay by 3rdrd party (insurance company/trustee) party (insurance company/trustee) ER contribution to pension planER contribution to pension plan

SEP contributions through salary reduction must SEP contributions through salary reduction must have FICA withheldhave FICA withheld

ER-provided nondiscriminatory education assistanceER-provided nondiscriminatory education assistance Job-related educational expenses not subject to Job-related educational expenses not subject to

FICAFICA Payments for non-job related expenses up to Payments for non-job related expenses up to

$5,250$5,250

FICA Taxable Wage FICA Taxable Wage BaseBase

OASDI caps at $89,700 for 2005 (estimated)OASDI caps at $89,700 for 2005 (estimated) HI never capsHI never caps Facts: Earn $95,000/year - paid semimonthly on the 15Facts: Earn $95,000/year - paid semimonthly on the 15thth

and 30and 30thth; the calculations for 12/15 payroll are:; the calculations for 12/15 payroll are: First must find First must find prior payroll YTD grossprior payroll YTD gross $95,000/24 = 3,958.33 $95,000/24 = 3,958.33

3,958.33 3,958.33 xx 22 = 87,083.26 22 = 87,083.26 How much will be taxed for OASDI? How much will be taxed for OASDI?

89,700.00 – 87,083.26 = 2616.74 89,700.00 – 87,083.26 = 2616.74 OASDI tax is 2,616.74 OASDI tax is 2,616.74 xx 6.2% = 162.24 6.2% = 162.24

HI tax is 3,958.33 HI tax is 3,958.33 xx 1.45% = 57.40 1.45% = 57.40 Total FICA is 162.24 + 57.40 = 219.64Total FICA is 162.24 + 57.40 = 219.64 Is this EE withholding or ER payroll tax expense?Is this EE withholding or ER payroll tax expense?

Answer - Answer - both!!both!!

Example #2 to Calculate Example #2 to Calculate FICAFICA

Earns $175,000/year; paid first of every month; Earns $175,000/year; paid first of every month; determine FICA for 7/1/05 payrolldetermine FICA for 7/1/05 payroll What do we calculate first?What do we calculate first? 175,000/12 = $14,583.33 per paycheck175,000/12 = $14,583.33 per paycheck YTD gross prior to current payroll = 14,583.33 YTD gross prior to current payroll = 14,583.33 xx 6 = 87,499.98 6 = 87,499.98 89,700.00 - 87,499.98 = 2,200.02 taxed for OASDI89,700.00 - 87,499.98 = 2,200.02 taxed for OASDI 2,200.02 2,200.02 xx 6.2% = 136.40 OASDI tax 6.2% = 136.40 OASDI tax 14,583.33 14,583.33 xx 1.45% = 211.46 HI tax (remember - no cap!) 1.45% = 211.46 HI tax (remember - no cap!) Total FICA = 136.40 + 211.46 = 347.86Total FICA = 136.40 + 211.46 = 347.86

Remember - the ER has withheld $347.86 from the employee’s Remember - the ER has withheld $347.86 from the employee’s paycheck and must match this amountpaycheck and must match this amount

SECA - Independent SECA - Independent Contractor is both EE & Contractor is both EE &

ERER EE and ER portion of FICA if net income exceeds $400EE and ER portion of FICA if net income exceeds $400

Net Income = Revenue – ExpenseNet Income = Revenue – Expense

Partnerships – distributive share of partnership net income subject to FICAPartnerships – distributive share of partnership net income subject to FICA If you own more than one business - offset losses and income and If you own more than one business - offset losses and income and

calculate FICA based on combined net incomecalculate FICA based on combined net income Can have W-2 and self employment income Can have W-2 and self employment income

ExampleExample: W-2 = $92,768 and self employment income = $14,500; how : W-2 = $92,768 and self employment income = $14,500; how much FICA on $14,500? much FICA on $14,500?

AnswerAnswer: : No OASDI because capped on W-2 and No OASDI because capped on W-2 and HI = 2.9% x 14,500 = $420.50HI = 2.9% x 14,500 = $420.50

ExampleExample: W-2 = $78,000 and self employment income = $21,000; how : W-2 = $78,000 and self employment income = $21,000; how much is FICA on $21,000? much is FICA on $21,000?

Answer: Answer: (89,700 - 78,000) = 11,700 OASDI wages x 12.4% = $1,450.80 +(89,700 - 78,000) = 11,700 OASDI wages x 12.4% = $1,450.80 +

21,000 HI wages x 2.9% = $609.00 21,000 HI wages x 2.9% = $609.00

Total FICA = ($1,450.80 + 609.00 = $2,059.80)Total FICA = ($1,450.80 + 609.00 = $2,059.80)

How to Get Set Up How to Get Set Up with SSAwith SSA

One Federal Employer Identification Number One Federal Employer Identification Number (EIN) per employer(EIN) per employer File Form SS-4 with IRS office where tax returns File Form SS-4 with IRS office where tax returns

will be filedwill be filed TELE-TIN to obtain (EIN) immediately (1-866-816-2065)TELE-TIN to obtain (EIN) immediately (1-866-816-2065)

When purchasing an existing business, the new When purchasing an existing business, the new owner needs a new EINowner needs a new EIN

SS-5 for everyone > one year oldSS-5 for everyone > one year old To apply for social security numberTo apply for social security number Required under SSARequired under SSA

W-7 for ITIN (aliens who must file a tax return, but are W-7 for ITIN (aliens who must file a tax return, but are ineligible for SS number)ineligible for SS number)

Deposit Requirements for FICA Deposit Requirements for FICA and FIT (always go together)and FIT (always go together)

Each November, based upon a look back period, IRS Each November, based upon a look back period, IRS tells ER what type of depositor he/she is tells ER what type of depositor he/she is Monthly depositor - pay FICA and FIT by 15th of following Monthly depositor - pay FICA and FIT by 15th of following

month month OROR Semiweekly depositorSemiweekly depositor

If payroll was W-F, deposit by next WednesdayIf payroll was W-F, deposit by next Wednesday If payroll was S-T, deposit by next FridayIf payroll was S-T, deposit by next Friday

ExceptionsExceptions If really big ($100,000+ of federal payroll tax liability), taxpayer If really big ($100,000+ of federal payroll tax liability), taxpayer

has until close of next banking dayhas until close of next banking day If really small (quarterly owe less than $2500), wait and pay when If really small (quarterly owe less than $2500), wait and pay when

941 report is filed941 report is filed

How to Deposit How to Deposit FIT/FICAFIT/FICA

Fill out a Form 8109 couponFill out a Form 8109 coupon These are sent to you when apply for EINThese are sent to you when apply for EIN Take to an authorized financial institution (depository Take to an authorized financial institution (depository

for federal government)for federal government) Or can use EFTPS (Electronic Federal Tax Payment Or can use EFTPS (Electronic Federal Tax Payment

System)System) MustMust use if total deposits exceed $200,000 for a year use if total deposits exceed $200,000 for a year Complete Form 9779, EFTPS Business Enrollment Complete Form 9779, EFTPS Business Enrollment

Form Form To utilize online capabilities, enroll at To utilize online capabilities, enroll at www.eftps.govwww.eftps.gov

If mailing, must postmark at least 2 days before due dateIf mailing, must postmark at least 2 days before due date Penalties for late depositsPenalties for late deposits

How to Report FIT/FICAHow to Report FIT/FICA

File Form 941 (Employer’s Quarterly Federal File Form 941 (Employer’s Quarterly Federal Tax Return)Tax Return) Download at Download at www.irs.ustreas.govwww.irs.ustreas.gov

Due on last day of month following close of Due on last day of month following close of quarterquarter

1/31 4/30 7/30 10/311/31 4/30 7/30 10/31

941E-file are for reporting agents who file 10+ 941E-file are for reporting agents who file 10+ returns per quarter returns per quarter

941 TeleFile are for certain depositors sent 941 TeleFile are for certain depositors sent TeleFile kitsTeleFile kits

Types of PenaltiesTypes of Penalties Failure-to-comply penalties will be added to tax Failure-to-comply penalties will be added to tax

and interest charges; negligence can also result in and interest charges; negligence can also result in fines/imprisonmentfines/imprisonment

Imposed for following:Imposed for following: not filing employment tax returns on timenot filing employment tax returns on time not paying taxes when duenot paying taxes when due not making timely depositsnot making timely deposits not furnishing W-2snot furnishing W-2s not filing/providing information returnsnot filing/providing information returns not supplying proper Taxpayer Identification Numbers not supplying proper Taxpayer Identification Numbers

(TINs)(TINs)