Overview of Payroll Taxes Amounts paid to workers may be subject to the following withholdings and taxes: Federal income tax withheld (FITW) State income tax withheld (SITW) Employment taxes (such as Social Security) Unemployment taxes Depending on how a worker is classified, employers may be responsible for withholding and paying employee payroll taxes—and paying employer payroll taxes Mastering Payroll
Overview of Payroll Taxes Some payroll taxes are employee paid, such as: Federal income tax withheld (FITW) and state income tax withheld (SITW) from wages The employee half of FICA tax, which consists of: Social Security (OASDI) tax—6.2% of the employee’s first $106,800 of wages paid in 2010 Medicare (HI) tax, 1.45% of all the worker’s wages Other taxes are employer paid, such as: The employer half of FICA—6.2% of OASDI, 1.45% of HI Federal unemployment insurance (FUTA), state unemployment insurance (SUI) and sometimes state disability insurance (SDI)
Workers who pass the “common-law” test but are treated as employees Workers not classified as employees Mastering Payroll Types of Workers Common-law employees Statutory employees Statutory nonemployees Independent contractors Workers from a temporary agency (“temps”) Leased employees Employees who pay FICA and FIT, but do not have FIT withheld
Mastering Payroll Common-Law Employees A worker is a common-law employee if the employer controls: who performs the work what work will be done how the work will be done when the work will be done When unsure about a worker’s classification, use IRS Form SS-8. It includes 20 questions the IRS uses to determine a worker’s status
Mastering Payroll Common-Law Employees Common-law employees are workers for whom you must: withhold FIT (and SIT) and employee FICA on wages and other payments provide at year end a W-2 showing taxable wages paid and taxes withheld pay employer FICA and unemployment taxes (e.g., FUTA, SUI, possibly SDI) periodically remit to the IRS both employer taxes and withheld employee taxes
Mastering Payroll Statutory Employees Statutory employees are: drivers who are the employer’s agent or are paid commissions full-time life insurance sales agents working primarily for one insurance carrier certain home workers full-time traveling or in-city salespersons Statutory employee pay: subject to FICA and FUTA —but not FITW—and possibly SITW, but this varies by state
Mastering Payroll Statutory Nonemployees Statutory nonemployees are: workers paid by commission (not by the hour) and whose employment contracts state that they are not employees for FITW and FICA purposes direct sellers licensed real estate agents companion sitters Statutory nonemployee pay: Exempt from FUTA, FITW and FICA. Statutory nonemployees pay all their own FIT and FICA taxes, but are not subject to FUTA
Mastering Payroll Independent Contractors (ICs) Independent contractors (ICs) are workers who: control the methods and means of the work they perform do not have FIT, SIT or FICA withheld, nor do FUTA or SUI apply; but if an IC fails to provide a taxpayer identification number (TIN) or SSN, backup FIT must be withheld have payments to them reported not on a W-2, but on Form 1099-MISC and are responsible for all of their FIT and FICA taxes
Mastering Payroll Temporary Help Agency Referrals Temps are workers who: are employed by a temp agency and work at the client company on a temporary basis do not have FIT or FICA withheld by the client company (because they are the agency’s employees)
Mastering Payroll Leased Employees Leased employees: are employed by a leasing agency and work at the client company, which can hire or terminate them as it sees fit do not have FIT or FICA withheld by the client company (because they are the leasing company’s employees)
Mastering Payroll Federal Wage-Hour Law Employers covered by the Fair Labor Standards Act of 1938 (FLSA) must pay a minimum hourly wage and overtime rates to all employees covered by FLSA. The FLSA defines which hours of work an employee must be paid for. The “Enterprise Test” determines which businesses are covered by, or exempt from FLSA. Virtually all employers are covered. Exception: “Mom and Pop” shops are not subject to the enterprise test and are exempt from FLSA.
Mastering Payroll Which Firms Are Covered by FLSA? Employers covered by FLSA include: Businesses started after on March 31, 1990 that have gross annual sales of at least $500,000 Dry cleaners and construction companies that started before April 1, 1990 Retailers started before April 1, 1990 that have annual gross sales of at least $362,500 Nonretail businesses started before April 1, 1990, that have gross annual sales of at least $250,000 Schools, hospitals and nursing homes
Mastering Payroll The Federal Minimum Wage The amount changes periodically: As of July 24, 2009, the minimum wage is $7.25 an hour Tipped employees have a lower minimum wage—but their total earnings must average at least the minimum wage The formula: $2.13/hour tipped employee + tips = at least federal minimum wage, or the employer must make up the difference Under federal law an employee may not be docked an amount that reduces wages for the workweek below the federal minimum wage
Mastering Payroll Tipped Employee Wages Example: Darla, a waitress, earns $2.13 an hour plus tips. In October 2009, Darla works 35 hours one week and earns $280: $74.55 wages ($2.13 × 35) +$ in tips Darla’s hourly pay: $280/35 = $8.00 $8 is more than the federal minimum wage of $7.25, so no additional pay is required. Darla’s employer can pay her $74.55 ($2.13 × 35 hours) for the week
Mastering Payroll Tipped Employee Wages: Example Example: One week in November 2009, Darla works 40 hours and earns $240: $85.20 wages ($2.13 × 40) + $ tips. Darla’s average hourly pay: $240/40 = $6.00 $6 is less than the federal minimum of $7.25, so her employer must pay her $50 more: ×40 = $290 $240 earned. Darla’s employer must pay her $135.20: $6 is less than the federal minimum of $7.25, so her employer must pay her $50 more: $7.25 federal minimum × 40 = $290 $240 earned. Darla’s employer must pay her $135.20: $85.20 ($2.13 × 40) + $50 = $ wages $85.20 ($2.13 × 40) + $50 = $ wages
Mastering Payroll Federal Minimum Wage Exemptions In addition to tipped employees, others exempt from the minimum wage include: Outside salespersons Employees under age 20 paid at least $4.25 an hour (applies only to the first 90 days), provided they do not displace or reduce other employees’ work hours Employees exempt by special certificate Mom and pop shop employees
Mastering Payroll State Laws Payroll rules covered by state law include: Frequency of wage payments When a terminating employee must be paid Method of payment (cash, check, EFT, etc.) Rules for unclaimed wages—escheat law requires employers to remit unclaimed wages to the state after a specified time period When federal v. state laws conflict, follow the one most favorable to the employee
Mastering Payroll Federal v. State Law Example: Jose works in a state with no minimum wage. If, for the first week in December 2009 he works 40 hours, how much must he be paid? $290 ($7.25 × 40 hours) Federal minimum wage
Mastering Payroll Federal v. State Law Example: Dan works in Massachusetts, which has a minimum wage of $8.00. If Dan works 40 hours one week in January 2009, how much must he be paid for the week? $320 ($8.00 × 40 hours) The greater of $7.25 or $8 an hour
Mastering Payroll Federal v. State Law Example: Ming works in Wyoming, which has a minimum wage of $5.15. If Ming works 30 hours one week in March 2010, how much must she be paid for the week? $ ($7.25 × 30 hours) The greater of $7.25 v. $5.15 an hour Federal minimum wage as of July 24, 2009
Mastering Payroll What Activities Count as “Work”? Federal law specifies those activities for which employees must be paid: Travel time Time spent showering and changing clothes when requested by the employer Nonproductive time on the job
Mastering Payroll Travel Time Employees must be paid for hours of travel: from one worksite to another during normal working hours to a worksite a significant distance from the employee’s normal worksite Employees need not be paid for time commuting to and from work—unless: the employee is on 24-hour call and takes a company vehicle home in order to respond to emergency calls after finishing a normal shift, is called back to work at a job site other than the employee’s normal job site
Mastering Payroll Travel Time normal working hours. Employees must be paid travel time for overnight trips—but only for those hours of travel that are during the employee’s normal working hours. The day of the week is irrelevant—the hours when the travel occurs determine if an employee must be paid Example: If Tyree work 9-5, M-F, and travels Monday from 6-8 p.m., he need not be paid for the travel time. But if he travels Sunday from 1-3 p.m. he is due 2 hours’ pay
Mastering Payroll Travel Time Example: Jan normally works 8 a.m. – 5 p.m., M - F. To attend a seminar, she leaves home for the airport Monday at noon and arrives at her hotel in another city at 8 p.m. How many travel hours must Jan be paid for? Jan’s normal work hours are 8 a.m. – 5 p.m. She must be paid for travel time during these hours, which was noon - 5 p.m. She does not have to be paid for her travel time between 5 p.m. and 8 p.m.
Mastering Payroll Travel Time Example: Chen normally works 7 a.m. – 4 p.m., M-F. On Sunday, he leaves home on a business trip and arrives at the hotel at 11 a.m. The following Saturday, he leaves the hotel at 1 p.m. arriving home at 6 p.m. How many travel hours must Chen be paid for Sunday? for Saturday? Sunday paid travel hours: a.m. = 4 hours during Chen’s normal work hours, 7 a.m. - 4 p.m. Saturday paid travel: 1 p.m. - 4 p.m. = 3 hours during Chen’s normal work hours, 7 a.m. - 4 p.m.
Mastering Payroll Premium Pay for Overtime (OT) FLSA requires at least 1½ times employees’ regular hourly pay rate for each hour actually worked over 40 hours for the workweek: A workweek is defined as 7 consecutive days or 168 consecutive hours—but need not be Monday - Sunday as long as the employer uses the same 7 days consistently Excludable: Vacation, holiday or sick pay are not hours actually worked. Paid commuting time to and from work are not hours actually worked. Prohibited: Applying one workweek’s overtime hours to another workweek to avoid paying OT
Mastering Payroll Premium Pay for Overtime (OT) How is a salaried employee’s regular hourly rate of pay calculated? Annual pay ÷ hours worked per year Monthly pay ÷ hours worked per month Weekly pay ÷ hours worked per week Biweekly pay ÷ hours worked per biweekly period
Mastering Payroll Premium Pay for Overtime (OT) Example: Serge’s daughter is getting married next week so he arranges to work 48 hours this week and take off one day next week. Serge’s regular hourly pay rate is $24. How much must he be paid for this week? for next week? Serge’s OT pay rate: $24 × 1.5 = $36 ×× Week 1: (40 hrs × $24) + (8 hrs × $36) = $1,248 Serge must be paid hours 8 OT for this week × Week 2: 32 hrs × $24 = $768 Serge’s employer may not apply the extra 8 hours in Week 1 to Week 2 to avoid OT pay in Week 1
Mastering Payroll Premium Pay for Overtime (OT) Example: Marina’s workweek is Monday - Friday. She is out sick Monday and Tuesday, but is given 16 hours sick pay for the time. To make up for this time, Marina works 36 hours, Wednesday-Friday. If Marina’s hourly pay rate is $20, how much must she be paid this week? × $20 × 52 hrs (16 sick pay + 36 worked) = $1,040 The 16 hours sick pay are not hours actually worked, so they need not be included to determine if Marina is entitled to OT pay
Mastering Payroll Premium Pay for Overtime (OT) Example: Jo is paid $500 for a 40-hr workweek. This week, Jo works 50 hours. What is Jo’s OT pay rate? What is her total pay for the week? × $500 × 52 weeks = $26,000 per year × $26,000 ÷ 2,080 hrs (40 hrs × 52 wks) = $12.50/hr × $12.50 × 1.5 premium rate = $18.75 OT hourly rate × $500 (40 hr week) + $ OT pay (10 hrs × $18.75) = $ Jo’s pay for the week
Mastering Payroll Premium Pay for Overtime (OT) Example: James is paid $1,200 for a 32-hr workweek. This week, James works 42 hours. What is James’s OT pay rate? What is his total pay for the week? × $1,200 × 52 weeks = $62,400 per year × $62,400 ÷ 1,664 hrs (32 hrs × 52 wks) = $37.50/hr × $37.50 × 1.5 premium rate = $56.25 OT hourly rate ×× $1,500 ($37.50 × 40 hrs) + $ ($56.25 × 2 hrs) = $1, total pay for the week
Mastering Payroll Premium Pay for Overtime (OT) The following employees are exempt from OT (unless favorable state laws apply): Executives paid at least $455 a week Administrative personnel paid at least $455 a week Persons actively responsible for establishing and enforcing company policy and general business operations Professionals who do advanced work in science or learning and earn at least $455 a week. Includes computer systems professionals earning at least $27.63 an hour. Outside salespersons—persons regularly and normally working away from the employer’s place of business to make sales calls
Mastering Payroll Hiring Employees Employers must obtain from new hires: A Social Security number (SSN) Those without one can apply for by completing Form SS-5, Application for New Social Security Card Form W-4, Employee Withholding Allowance Certificate Provides data that employers use to determine how much FIT to withhold State withholding certificate (if required) Age certificate (from those within 2 years of the legal age they are allowed to work) State exemption certificate (for example, when your state has reciprocal agreements with neighboring states)
Mastering Payroll Form I-9 An I-9 is completed as follows: Section 1. Completed by the employee Employee provides name, address, DOB, SSN, and a signs an oath that he or she is legally able to work in the U.S. Section 2. Reviewed and signed by employer after viewing documents that substantiate the employee’s identity and authorization to work in the U.S. To verify, examine just one document from List A —or one each from Lists B and C
Mastering Payroll Form I-9 List A. Acceptable documents include: U.S. passport (expired or unexpired) Certain unexpired foreign passports Permanent resident card Alien registration receipt card Employers need examine only one document from this list to verify both the employee’s identity and right to work in the U.S.
Mastering Payroll Form I-9 List B. Acceptable documents include: Driver’s license with photo School ID card with photograph Voter registration card with photo U.S. military card or draft record List C. Acceptable documents include: U.S. Social Security Card Birth certificate U.S. citizen identification card If a document from List A is not presented, employers must use one document each from Lists B and C
Mastering Payroll Form W-4 All employees must complete Form W-4, Federal Withholding Allowance Certificate. The W-4 provides an employer with the data needed to withhold FIT from that employee’s pay Prohibited: Employers cannot withhold a flat dollar amount or flat percentage of pay Permitted: Employees can ask to have an additional flat dollar amount of FIT withheld Until a W-4 is submitted, an employer must withhold FIT as if the employee is single with zero allowances
Mastering Payroll Form W-4 Employers should not accept a W-4 that: is incomplete is altered by additions or deletions contains information that the employer knows to be false Employers should refrain from giving tax advice about employee withholding. Explain what data is needed but do not suggest more or fewer exemptions, etc.
Mastering Payroll Form W-4 If an employee wants to change the number of withholding allowances, require a new W-4 Employers must implement a W-4 by the start of the first payroll period ending on or after the 30 th day from the date that a W-4 is submitted A W-4 needs to be sent to the IRS only if the IRS asks for it
Mastering Payroll Form W-4 An employee may claim exempt from withholding —enter zero exemptions W-4—only if that employee: had no tax liability the previous year, and expects to have no tax liability this year An employee who claims exempt must file a new W-4 each year by February 15 (if this is a weekend or legal holiday, by the next business day)
Mastering Payroll FICA Taxes FICA tax consists of two taxes: Social Security tax—6.2% withheld from the employee’s first $106,800 for 2010, or up to $6,621 Medicare tax—1.45% withheld from wages without limit The employer matches both taxes: Employers remit all FICA by IRS deposit schedules When excess FICA tax paid New employees who end up having more than $6,621 withheld may claim a refund on their personal tax return — but any employer excess tax paid is not refunded
Mastering Payroll FICA Taxes Employees exempt from FICA tax: Children, foster children and stepchildren under age 18 employed by sole proprietorships 100% owned by their parents Children, foster children and stepchildren under age 18 employed by a partnership 100% owned by the parents Children under age 21 doing domestic work in their parents’ home Parents employed by their children for domestic work
Mastering Payroll Federal Income Tax Withheld (FITW) Factors used to determine FITW: Employer pay period (weekly, biweekly, etc.) Employee marital status on the W-4 Employee personal allowances on the W-4 Employee federal taxable wages for the period These factors are used to find the correct amount of FITW for a paycheck using the IRS withholding tables in IRS Pub. 15, Circular E, Employer’s Tax Guide.
Mastering Payroll Form 941 Tax Deposits FITW + FICA are known as “941 taxes” because they are reported on Form 941, Employer’s Quarterly Federal Tax Return. The 941 shows the employer’s accumulated FITW + FICA withheld + employer FICA for the quarter When a pay period spans two quarters, report the liabilities for each quarter separately 941 taxes not yet paid are “941 liabilities”
Mastering Payroll Form 941 Tax Deposits Not every employer must file a 941: 941 liability under $2,500 for the quarter: Remit FITW and FICA taxes with that quarter’s 941 941 liability under $1,000 for the year: The employer may have the option of filing and paying FITW and FICA annually using Form 944 (instead of Form 941) by Jan. 31 of the following year. Using Form 944 requires IRS approval.
Mastering Payroll Form 941 Tax Deposits 941 liabilities may be paid electronically using IRS EFTPS—or at a qualified financial institution using Form 8109, Federal Tax Deposit Coupon When aggregate 941 taxes go over $200,000 within a calendar year, they must be remitted electronically, not in the subsequent year, but in the year after that
Mastering Payroll Form 941 Tax Deposits Due dates for depositing 941 liabilities A new employer is a monthly depositor through the end of the first calendar year—with very few exceptions An employer automatically becomes a semiweekly depositor if it reaches a liability of: over $100,000 for the calendar year, or $50,000 for the lookback period
Mastering Payroll The Lookback Period How does the lookback period work? The lookback period is July 1–June 30 of the prior year Example: For 2010 deposits, the lookback period is July 1, 2008–June 30, 2009 At the end of each calendar year, a monthly depositor uses the lookback period to determine its deposit status for next year Employers with up to $50,000 in accumulated 941 taxes for the lookback period are monthly depositors Employers with over $50,000 in accumulated 941 taxes for the lookback period become semiweekly depositors
Mastering Payroll How Monthly Depositors Remit Taxes Monthly depositors must remit 941 taxes: by the 15 th of the month following the month in which the liability is incurred by the next banking day if the 15 th falls on a weekend or legal holiday
Mastering Payroll Monthly Depositors: Example Example: Diaz Corporation is a monthly depositor. For March, Diaz’s’ s accumulated FITW and FICA tax liability is $3,500. The company must remit this 941 tax liability to the IRS: By April 15, either electronically or at a qualified financial institution using Form 8109 If April 15 is on a weekend or legal holiday, Diaz has until the next banking day to make the deposit
Mastering Payroll How Semiweekly Depositors Remit Taxes Employers with accumulated 941 tax liabilities over $50,000 for the lookback period remit payment using the Wednesday/Friday rule The due date is extended one business day if a legal holiday falls on any day between payday and the Wednesday/Friday deposit date
Mastering Payroll The Wednesday/Friday Rule Payday falls onDeposit due date MondayThe next Friday TuesdayThe next Friday WednesdayThe next Wednesday ThursdayThe next Wednesday FridayThe next Wednesday SaturdayThe next Friday SundayThe next Friday
Mastering Payroll Semiweekly Depositors Example: Watson Co., a semiweekly depositor, pays its employees on the 15 th and last day of the month. May 15 is a Tuesday. When must Watson remit its 941 taxes to the IRS?
Mastering Payroll Semiweekly Depositors: Example Example: Watson Co., a semiweekly depositor, pays its employees on the 15 th and last day of the month. May 15, is a Tuesday. Watson must remit its 941 taxes to the IRS: that Friday, May 18 If the taxes were due on a legal holiday that fell on any day from May 16–18, the taxes would be due on the next business day, Monday, May 21
Mastering Payroll Semiweekly Depositors: Example Example: Watson Co.’s payday falls on May 31, a Thursday. When must Watson remit its 941 taxes to the IRS?
Mastering Payroll Semiweekly Depositors Payday Falls on:Deposit Due Date MondayThe next Friday TuesdayThe next Friday WednesdayThe next Wednesday ThursdayThe next Wednesday FridayThe next Wednesday SaturdayThe next Friday SundayThe next Friday
Mastering Payroll Semiweekly Depositors Example: Watson Co.’s payday falls on May 31, a Thursday. When must Watson remit its 941 taxes to the IRS? Because May 31 is a Thursday, Watson must remits it 941 taxes by the following Wednesday, June 6 If any day from June 1 – June 6 is a legal holiday, Watson has until the next banking day, Thursday, June 7 to make the deposit
Mastering Payroll Form 941 Deposit Shortfalls Rules for underpayments No penalties for a 941 underpayment that: does not exceed $100 or 2% of the liability, and is deposited timely Monthly depositors remit a shortfall with their next 941 Semiweekly depositors remit a shortfall by the earlier of: the Wednesday or Friday following the 15 th of the month following the month of the shortfall the 941 due date
Mastering Payroll Shortfalls: Monthly Depositors On May 5, monthly depositor FreeCo discovers that its June 941 taxes deposited July 15 were short $95. Because the shortfall is under $100, FreeCo can avoid penalties by paying the $95 by July 31, the due date of its second quarter 941 (July 31 is earlier than August 15, its next deposit date)
Mastering Payroll Shortfalls: Semiweekly Depositors Semiweekly depositor, Redeye, Inc. discovers its 941 deposit for the period ending Friday, May 22, was short by $178—1.75% of its 941 liability for the period. Because the shortfall is less than 2% of Redeye’s 941 liabilities for the period, it can avoid penalties by depositing $178 by the first Wednesday or Friday after June 15 (the 15 th of the month following the month of the shortfall)
Mastering Payroll The One-Banking-Day Deposit Rule An employer that incurs a 941 liability of $100,000 at any time must remit its 941 taxes within one banking day Once the one-banking-day deposit rule is triggered, that employer: becomes a semiweekly depositor for the remainder of the year and remains a semiweekly depositor in the following calendar year
Mastering Payroll Form 941 Recap To review: Form 941, Employer’s Quarterly Federal Tax Return, reconciles wages paid and employment taxes withheld/owed with the amount of tax deposited for the quarter Each quarter’s 941 is filed at the end of the month following the end of the quarter. For example, the first quarter ends March 31, so the first-quarter 941 is filed April 30
Mastering Payroll FUTA Tax and Form 940 FUTA (Federal Unemployment Tax Act) tax is paid by the employer—not employees—to fund state unemployment benefit programs. An employer pays FUTA tax if the company: pays wages of at least $1,500 in a calendar quarter or employs at least one person for some part of any day in 20 weeks Many states impose a similar SUI (state unemployment insurance) tax on wages
Mastering Payroll FUTA Tax and Form 940 The FUTA tax rate is 6.2% of the first $7,000 of each employee’s taxable wages If employers remit the SUI tax timely and in full throughout the year, their FUTA rate is reduced to.8%
Mastering Payroll FUTA Tax and Form 940 Form 940 is due January 31 of the next year Employers that deposit all FUTA taxes on time in full during the year have until February 10 of the following year to file Form 940 If the FUTA tax liability for a quarter is: over $500—tax must be deposited before the end of the month following the end of the quarter, even though the 940 is not due then $500 or less, tax can be rolled over to the next quarter and the next until it exceeds $500, but is always due the following year on January 31
Mastering Payroll Form 940: Paper v. Electronic Filing Employers required to remit 941 taxes electronically must do the same for FUTA. If not, FUTA taxes can be deposited at a qualified financial institution using Form 8109
Mastering Payroll Form 945 Form 945, Annual Return of Withholding of Federal Income Tax, is used to report FITW on nonpayroll payments, such as: Backup withholding taxes—FITW on certain employee wages or on payments to independent contractors who failed to supply a SSN or TIN Gambling winnings Retirement pay Pension, annuity, IRA and other payments
Mastering Payroll Form 945 Form 945 is used in place of Form 941 by qualified employers Form 945 FIT withheld is not deposited with Form 941 taxes Employers required to remit their 941 taxes electronically must do the same for FUTA using the same monthly or semiweekly deposit rules Exception to the monthly/semiweekly rule: Because Form 945 is an annual return, the $50,000 lookback period is for the second previous calendar year
Mastering Payroll Form 945 DryCo’s 945 liability for 2009 is $40,000. When must DryCo deposit its 945 tax liability for April 2010? Because Dryco’s total 945 taxes for 2009 did not exceed $50,000, it is a monthly depositor for 2010 and will deposit its 945 taxes by May 15 (or next banking day). DryCo uses its 945 tax liability to determine its 945 depositor status— 941 taxes are irrelevant
Mastering Payroll Form W-2 Form W-2, Wage and Tax Statement, is a summary of each employee’s taxable wages and taxes withheld for the year Employers send one a copy of the W-2 to employees, send a second copy to the SSA and keep one copy for their records Employees attach copies of their W-2 to their federal and state income tax returns Some states require a copy of the W-2
Mastering Payroll Form W-2 The W-2 must be provided to: Employees by Jan. 31 (or next business day) Terminated employees by the earlier of January 31 or within 30 days of a request The SSA by: the last day of February (or next business day) if filed electronically, by March 31 (or next business day)
Mastering Payroll Form W-3 Employers filing up to 249 Forms W-2 for the year file Copy A with Form W-3, Transmittal of Wage and Tax Statements, which totals the data on all the W-2s Employers filing 250 or more W-2s for the year must file electronically with the SSA —but are not required to file a W-3
Mastering Payroll How Long Must Records Be Retained? Federal law requires the following records be kept for 3 years: Payroll register Timecards Time sheets (reports of hours worked) Payroll tax records Tax deposit receipts W-4s Personnel files Cancelled and voided checks Work schedules must be kept for 2 years.
Mastering Payroll How Long Must Records Be Retained? Keep the following records for 4 years from April 15 after the year to which the document pertains: Payroll register and payroll tax records Tax deposit receipts Personnel files Cancelled/voided checks Keep the following returns 4 years from their due date: Copies of employment tax returns and supporting documents Returned W-2s and all W-4s
Mastering Payroll When Wages Become Taxable Wages are taxable in the year employees have constructive receipt of their pay—i.e., when pay is available to them: Example: December 2009 paychecks distributed to employees after Christmas but not picked up by some employees until 2010 are taxable to these employees in 2009 Example: Wages earned in late December 2009 but not paid to employees until 2010 are taxable to employees in 2010
Mastering Payroll When Wages Become Taxable Wages are taxable in the year employees have constructive receipt of their pay: Postponing payment to benefit employer or employee can incur substantial employer penalties and interest unless there is a formal deferred compensation plan Advances and overpayments are taxable in the year that they are constructively received. If repaid the same year, deduct from gross wages If repaid in a subsequent year, complex reporting rules apply--consult a CPA or lawyer
Mastering Payroll State Reporting Rules State unemployment insurance (SUI) funds are the state equivalent of FUTA: SUI returns are filed quarterly—taxes generally are due the last day of the month following the end of the quarter SUI rates vary by how many claims were filed in prior years Some states require employers, employees or both to pay SDI
Mastering Payroll State Reporting Rules For state income tax (SIT) due, employers must file a copy of the W-2 with the state: In most states, the deadline is the last day of February—if filed electronically, March 31 Some—but not all—states require filing a state W-2 or copy of the federal W-2 and may or may not have their own W-3 (check state law) For states with no SIT, no W-2s are filed with the state
Mastering Payroll Form 1099 Form 1099 is filed to report payments to independent contractors or investors: 1099-MISC: reports nonemployee compensation totaling at least $600 for the year in commissions, fees, royalties, rent and other payments—used primarily for independent contractors 1099-INT: reports interest paid 1099-DIV: reports dividends paid 1099-R: reports payments to retirees (for annuities, pensions, etc.)
Mastering Payroll Form 1099 Form 1099 is due to: Recipients—by Jan. 31 The IRS—filed by the last day of February for paper forms... by March 31, electronically File with each category of 1099s, Form 1096, Annual Summary and Transmittal of U.S. Information Returns Example: File a 1096 with all Forms 1099-MISC, another with all Forms 1099-INT, etc.
Mastering Payroll The Payroll Register A payroll register includes for each payment: Check number Employee’s name and SSN Gross wages or salary (regular and overtime) Federal taxes withheld FICA taxes withheld State and local income taxes withheld Other deductions (health, dental or life insurance, union dues, uniforms, etc.) Net (cash) payment to the employee
Mastering Payroll Payroll Journal Entries Each payday, you record two journal entries: First journal entry: Employee salaries and deductions ( “payroll distribution”) Second journal entry: Employer payroll tax expenses, such as FUTA and employer FICA
Mastering Payroll Payroll Journal Entries First journal entry: Employee salaries and deductions ( “payroll distribution”): Salary Expensexxx FICA Employeexxx FITW Payablexxx Health Ins. employee contrib.xxx Union Dues employee contrib.xxx Cashxxx
Mastering Payroll Payroll Journal Entries Example: For the pay period ending May 14, 2010, XyCo’s gross wages are $25,000. XyCo withholds from employee pay $1,913 FICA, $4,500 FITW and $400 SITW XyCo’s salaries and deductions for the May 14 th pay period: First journal entry: XyCo’s salaries and deductions for the May 14 th pay period: Salary Expense25,000 FICA Employee 1,913 FITW Payable 4,500 SITW Payable400 Cash18,187
Mastering Payroll Payroll Journal Entries Second journal entry: Employer payroll taxes. Each pay period, employers incur not only salary expense, but employer payroll expenses, such as the employer’s share of FICA, as well as FUTA and SUI taxes. Payroll Tax Expensexxx FICA Employerxxx FUTA Payablexxx SUI Payablexxx
Mastering Payroll Payroll Journal Entries Example: For the pay period ending May 14, 2010, XyCo’s incurs payroll expenses of $1,913 employer FICA, $200 FUTA and $295 SUI. employer payroll tax expenses for the May 14 th pay period: Second journal entry: XyCo’s employer payroll tax expenses for the May 14 th pay period: Payroll Tax Expense2,408 FICA Employer1,913 FUTA Payable 200 SUI Payable295
Mastering Payroll Payroll Journal Entries Another journal entry is recorded when all withheld and employer taxes are remitted to federal and state agencies and vendors, such as insurance companies: FICA Employeexxx FICA Employerxxx FITW Payablexxx Employee Health Ins. xxx Employer Health Ins. xxxx Cashxxx
Mastering Payroll Payroll Journal Entries When the end of a period falls in the middle of a pay period—e.g., December 31, 2009, fell on a Thursday—accrual basis companies must accrue payroll expense. This is explained in detail in Mastering Adjusting Entries.