1. Bernard J. Bieg and Judith A. Toland
Payroll Accounting 2012
Bernard J. Bieg and Judith A. Toland
CHAPTER 3
SOCIAL SECURITY TAXES
Developed by Lisa Swallow, CPA CMA MS

2. 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

3. Coverage under FICA http://www.ssa.gov/employer 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 employee or an independent contractor?
Is service rendered considered employment?
Is compensation considered taxable wages?
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4. 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
See Figure 3-2 on p. 3-5 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
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)
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5. 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
Other types of taxable wages found in Figure 3-3 (page 3-6)
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6. By 2042, that ratio is projected to be 2 to 1.
FICA Taxable Wage Base
OASDI wages cap at $110,100 for 2012
HI wages never cap – since there is not ceiling, employers compute HI tax on full amount of wages
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
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.
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7. Calculating FICA
Facts: Tamara earns $132,000/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, x 19 payrolls (before today)= $109,250.00
How much will be taxed for OASDI?
$110, – $109, = $850.00
OASDI tax is $ x 6.2% = $52.70
How much will be taxed for HI?
HI tax is $5, x 1.45% =$ 83.38
How much is total FICA?
Total FICA is $ $83.38 =$136.08
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8. 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
Can have W-2 and self employment income
Count both towards calculating cap of $110,100 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
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9. 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?
No OASDI is due because she capped on W-2
HI = $14,500 x 2.9% = $420.50
Total FICA = $420.50
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10. 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 – pay within 3 business days; however, if any of the 3 days is a nonbusiness day, add one business day to required deposit date
However, 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
Different requirements for agricultural and household employees
New employers are monthly depositors unless $100,000+ of liability triggers one-day rule and converts them to semiweekly
Amount deposited may be affected by safe harbor rule (see p. 3-19)
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11. How to Deposit FIT and FICA Electronically
Employers must use EFTPS (Electronic Federal Tax Payment System)
Most employers must use EFTPS – only exception is for businesses owing $2,500 or loss in quarterly tax liabilities
Enroll in EFTPS Online at
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 Treasury
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12. 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!!
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