CHAPTER - PowerPoint Presentation

Slide1

CHAPTER 3

SOCIAL SECURITY TAXESSlide2

Coverage under FICAFICA (1935) Federal Insurance Contributions ActPaid 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 EE or independent contractor?

Is service rendered considered employment?

Is compensation considered taxable wages?

http://www.ssa.gov/employerSlide3

Determination of 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 specificationsSlide4

More Specific SituationsGovernment employees – certain exemptions from OASDI/HI depending upon date of hireMilitary 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 $1600 or more per year

Must pay if employee, like a nanny is under your control

ER must match FICA

Certain ministers/religious practitioners are exempt

Additional exemptions for inmates, medical interns, student nurses and workers serving temporarily in case of emergencySlide5

Independent ContractorPersons may be classified as independent contractors if they conduct an independent trade or businessSee Figure 3-2 (page 3-5) for characteristics of independent contractorsHiring agent does not pay/withhold FICA on worker classified as independent

Independent contractor liable for his/her own social security taxes on net earningsSlide6

What are Taxable Wages?CashWages and salaries

Bonuses and commissions

Cash value of meals/lodging provided 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

Other types of taxable wages found in Figure 3-3 (page 3-6)Slide7

What are Taxable Wages? (Continued)Tips greater than $20 or more per month

EE must file Form 4070 with ER

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 yea- end with IRS showing food/beverage receipts and reported tipsSlide8

Specifically Exempt WagesMeals/lodging for ER convenience

Sick pay

After 6 consecutive months off

(

personal injury)

Sick pay by 3

rd

party (insurance company/trustee) with specific stipulations for ER match

If paid directly to EE in lieu of health insurance payments is taxable

Pay for difference between employees’ salary and military pay (soldiers/reservists activated 30+ days)

ER contribution to pension plan

ER provided nondiscriminatory education assistance

Job-related educational expenses not subject to FICA

Payments for non-job related expenses up to $5,250

Slide9

FICA Taxable Wage BaseOASDI wages cap at $106,500 for 2009 (estimated)

HI wages never cap

FACTS: Tamara earn $132,000/year; paid semimonthly on the 15

th

and 30

th

; determine FICA for 10/30/09 payroll

First must find

prior payroll YTD gross

$132,000/24 =$ 5,500.00

$5,500.00

x

19 payrolls (before today)= $104,500.00

How much will be taxed for OASDI?

$106,500.00 – $104,500.00 = $2,000.00

OASDI tax is $2,000.00

x

6.2% = $124.00

HI tax is $5,500.00

x

1.45% =$ 79.75

Total FICA is $124.00 + $79.75 =$ 203.75

Is this EE withholding or ER payroll tax expense?

Answer -

both!!Slide10

Example #2 to Calculate FICAFACTS: Ahmed earns $175,000/year; paid first of every month; determine FICA for 8/1/09 payrollWhat do we calculate first?

$175,000/12 = $14,583.33 per paycheck

YTD gross prior to current payroll =$14,583.33

x

7 = $102,083.31

$106,500.00 – %102,083.31 = $4,416.69 taxed for OASDI

$4,416.69

x

6.2% = $273.83 OASDI tax

$14,583.33

x

1.45% = $211.46 HI tax (remember - no cap!)

Total FICA = $273.83 + $211.46 =$ 485.29

Remember - the ER has withheld $485.29 from the employee’s paycheck and must match this amountSlide11

SECA and Independent ContractorsEE and ER portion of FICA if net earnings exceeds $400Net Earnings = Net income + distributive share of partnership income

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

Can have W-2 and self employment income

Count both towards calculating cap of $106,500

Report on

Schedule C

“Profit or Loss from Business”

Also file

Schedule SE “Self-Employment Tax”

Must include SECA taxes in quarterly estimated paymentsSlide12

Calculating FICA with W-2 and Self Employed EarningsFACTS: W-2 = $107,768 and 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

FACTS: W-2 = $78,000 and self employment income = $36,000; how much is FICA on $36,000?

OASDI ($106,500 - 78,000) = $28,500 taxable OASDI wages x 12.4% = $3,534.00

HI = $36,000 taxable HI wages x 2.9% = $1044.00

Total FICA $3,534.000 + 1,044.00 = $4,578.00Slide13

How to Get Set Up with SSA

One Federal Employer Identification Number (EIN) per employer

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

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

SS-5 required for everyone one year old or older

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)

Three ways available to verify social security numbers Slide14

Deposit Requirements for FICA and FIT (always go together)Each November, based upon a look back period, IRS notifies ER as to what ‘type ‘of depositor he/she is

Monthly - pay FICA and FIT by 15th of following month

or

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

or

No deposit required - owe less than $2500 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 ruleSlide15

How to Deposit FIT/FICA ElectronicallyEFTPS (Electronic Federal Tax Payment System)Must use if total deposits exceed $200,000 for a year

10% penalty on every tax deposit

not made

through EFTPS if required to do so

Enroll in EFTPS-Online at

http://www.eftps.gov

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 TreasurySlide16

How to Deposit FIT/FICA by CouponFederal Tax Deposit Coupons, Form 8109Take to Treasury Tax and Loan institution (federal depository)Or mail to Financial Agent in St. Louis, MO

Timely deposits requires postmarking two days before due date

Federal depository stamps date on coupon and forwards to IRS

IRS reconciles deposits with payments claimed by employer on quarterly payroll return (Form 941)

Coupon has stub that ER keeps as payment recordSlide17

How to Report and Reconcile FIT/FICAFile 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

Payments made with 941 if taxes for quarter are less than $2500 or making monthly deposit

Attach 941-V

941 e-file available for employers who meet requirements

File Form 4996 and then electronically submit 941

Slide18

Employer’s Annual Federal Tax ReturnEmployers who owe $1000 or less per year may file Form 944 Employer must have made timely deposits for prior two yearsCan also be used by new employers paying wages of $4000 or less per year

IRS can require 941-M (monthly reporting) if employer doesn’t deposit 941 taxes on time

Can amend previously filed Form 941s by filing Form 941X (replaces 941C)Slide19

Types of PenaltiesFailure-to-comply penalties will be added to tax and interest charges; negligence can also result in fines/imprisonmentInterest 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!!*