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SOCIAL SECURITY TAXES Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS.

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Presentation on theme: "SOCIAL SECURITY TAXES Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS."— Presentation transcript:

1 SOCIAL SECURITY TAXES Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland Developed by Lisa Swallow, CPA CMA MS

2  FICA (1935)  Federal Insurance Contributions Act  Paid 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% %) = 2.9% HI  3 issues  Are you an EE or independent contractor?  Is service rendered considered employment?  Is compensation considered taxable wages? 

3  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 specifications

4  Government employees – certain exemptions from OASDI/HI depending upon date of hire  Military 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 emergency

5  Persons may be classified as independent contractors if they conduct an independent trade or business  See Figure 3-2 (page 3-5) for characteristics of independent contractors  Hiring agent does not pay/withhold FICA on worker classified as independent  Independent contractor liable for his/her own social security taxes on net earnings

6  Cash  Wages 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)

7  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 tips

8  Meals/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

9  OASDI 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,  $5, x 19 payrolls (before today)= $104,  How much will be taxed for OASDI?  $106, – $104, = $2,  OASDI tax is $2, x 6.2% = $  HI tax is $5, x 1.45% =$  Total FICA is $ $79.75 =$  Is this EE withholding or ER payroll tax expense? Answer - both!!

10 FACTS: Ahmed earns $175,000/year; paid first of every month; determine FICA for 8/1/09 payroll  What do we calculate first?  $175,000/12 = $14, per paycheck  YTD gross prior to current payroll =$14, x 7 = $102,  $106, – %102, = $4, taxed for OASDI  $4, x 6.2% = $ OASDI tax  $14, x 1.45% = $ HI tax (remember - no cap!)  Total FICA = $ $ =$ Remember - the ER has withheld $ from the employee’s paycheck and must match this amount

11  EE and ER portion of FICA if net earnings exceeds $400  Net 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 payments

12 FACTS: 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% = $  Total FICA = $ FACTS: W-2 = $78,000 and self employment income = $36,000; how much is FICA on $36,000?  OASDI ($106, ,000) = $28,500 taxable OASDI wages x 12.4% = $3,  HI = $36,000 taxable HI wages x 2.9% = $  Total FICA $3, , = $4,578.00

13  One Federal Employer Identification Number (EIN) per employer  Obtain directly from with no preregistration necessaryhttp://www.irs.gov  TELE-TIN to obtain (EIN) immediately at  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

14  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 rule

15  EFTPS (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  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 Treasury

16  Federal Tax Deposit Coupons, Form 8109  Take 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 record

17  File Form 941 (Employer’s Quarterly Federal Tax Return)  Download at or call  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

18  Employers who owe $1000 or less per year may file Form 944  Employer must have made timely deposits for prior two years  Can 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)

19  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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