CHAPTER 3

SOCIAL SECURITY TAXES

Payroll Accounting 2006 Payroll Accounting 2006 Bernard J. BiegBernard J. Bieg

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

Social Security Taxes FICA (1935)

Federal Insurance Contribution Act Paid by employees and employers 6.2% OASDI plus 1.45% HI

SECA (1951) Self Employed Contribution 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 EE or independent contractor? Is compensation considered taxable wages? Calculating FICA and SECA under varying situations

http://www.ssa.gov/employer

Determination of Independent Contractor (SECA) vs. Employee (FICA)

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

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

o 3 Categories of evidence Behavioral Control Financial Control Type of Relationship

Can file SS-8 with IRS if uncertain what to do!!Access http://www.irs.gov/formspubs/

Specifically Covered (in addition to common law)

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

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

no FICA on excess pay

More Specific Situations

Temporary employees – considered EE of temporary agency Household employees

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

• Doesn’t apply to minor unless that’s his or her occupation

• Must pay if he/she under your control (gardener/nanny/cook)

Corporation• Officers are EE• Board of director members are not EE

Partnership• Partners are not EE

What are Taxable Wages?

Cash Wages and salaries Bonuses and commissions

FMV of noncash compensation Gifts (over certain amounts) Stock options Fringe benefits like personal use of corporate

car Prizes Premiums on group term life insurance >

$50,000

What are Taxable Wages? (Continued)

Tips greater than $20 or more per month• EE must file form 4070 by 10th of following month

with ER ER calculates FICA on tips and withholds from

regular paycheck on these reported tips ER must match but they receive a business tax

credit roughly equivalent to the ER paid FICA on tips

“Large employers” (11+ EE) 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 can petition IRS to reduce tip allocation to as low as 2%

ER files Form 8027 at year end with IRS

Specifically Exempt Wages

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

Sick pay After 6 consecutive months off (personal injury) Sick pay by 3rd party (insurance company/trustee)

ER contribution to pension plan• SEP contributions through salary reduction must have

FICA withheld ER-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 $93,000 for 2006 (estimated) HI wages never capFACTS: Tamara earn $95,000/year; paid semimonthly on the

15th and 30th; determine FICA for 12/30/06 payroll First must find prior payroll YTD gross $95,000/24 =

3,958.33 3,958.33 x 23 = 91,041.59 How much will be taxed for OASDI?

93,000.00 – 91,041.59 = 1958.41 OASDI tax is 1958.41 x 6.2% = 121.42

HI tax is 3,958.33 x 1.45% = 57.40 Total FICA is 121.42 + 57.40 = 178.82 Is this EE withholding or ER payroll tax expense?

Answer - both!!

Example #2 to Calculate FICA

FACTS: Ahmed earns $175,000/year; paid first of every month; determine FICA for 7/1/06 payroll What do we calculate first? 175,000/12 = $14,583.33 per paycheck YTD gross prior to current payroll = 14,583.33 x 6 =

87,499.98 93,000.00 - 87,499.98 = 5,500.02 taxed for OASDI 5,500.02 x 6.2% = 341.00 OASDI tax 14,583.33 x 1.45% = 211.46 HI tax (remember - no cap!) Total FICA = 341.00 + 211.46 = 552.46

Remember - the ER has withheld $552.46 from the employee’s paycheck and must match this amount

SECA and Independent Contractors

EE and ER portion of FICA if net income exceeds $400• Net Income = Revenue – Expense

Partnerships – distributive share of partnership net income subject to FICA

If you own more than one business - offset losses and income and calculate FICA based on combined net income

Report self employment income on Schedule C Can have W-2 and self employment income

Calculating FICA with W-2 and Self Employed Earnings

FACTS: W-2 = $97,768 and self employment income = $14,500; how much FICA on $14,500?

No OASDI because capped on W-2 HI = 2.9% x 14,500 = $420.50 Total FICA $420.50

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

OASDI (93,000 - 78,000) = 15,000 taxable OASDI wages x 12.4% = $1,860.00

HI = 21,000 taxable HI wages x 2.9% = $609.00 Total FICA $1,860.00 + 609.00 = $2,469.00

How to Get Set Up with SSA

One Federal Employer Identification Number (EIN) per employer

• File Form SS-4 with IRS office where tax returns will be filed

TELE-TIN to obtain (EIN) immediately • 1-800-829-4933

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

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

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

Deposit Requirements for FICA and FIT (always go together)

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

monthor

Semiweekly depositor If payroll was W-F, deposit by next Wednesday If payroll was S-T, deposit by next Friday

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

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

when 941 report is filed

How to Deposit FIT/FICA Fill out a Form 8109 coupon

These are sent to you when apply for EIN Take to an authorized financial institution

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

System) Must use if total deposits exceed $200,000 for a

year Complete Form 9779, EFTPS Business Enrollment

Form To utilize online capabilities, enroll at

www.eftps.gov If mailing, postmark at least 2 days before due date Penalties for late deposits

How to Report FIT/FICA

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

Due on last day of month following close of quarter 1/31 4/30 7/30 10/31

941 e-file available for employers who meet requirements File Form 4996 and then electronically

submit 941

Types of Penalties

Failure-to-comply penalties will be added to tax and interest charges; negligence can also result in fines/imprisonment

Imposed for following: not filing employment tax returns on time not paying taxes when due not making timely deposits not furnishing W-2s (information returns) writing bad checks