Bernard J. Bieg and Judith A. Toland Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland CHAPTER 3 SOCIAL SECURITY TAXES Developed by Lisa Swallow, CPA CMA MS

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

Coverage under FICA http://www.socialsecurity.gov/employer FICA (1935) Federal Insurance Contributions Act Tax paid both by employees and employers 6.2% employer OASDI plus 1.45% HI 4.2% employee OASDI plus 1.45% HI for 2012 6.2% employee OASDI plus 1.45% HI for 2013 SECA (1951) Self-Employment Contributions Act Tax upon net earnings of self-employed (4.2% + 6.2%) = 10.4% OASDI plus (1.45% + 1.45%) = 2.9% HI for 2012 (6.2% + 6.2%) = 12.4% OASDI Plus 2.9% HI for 2013 3 issues Are you an employee or an independent contractor? Is service rendered considered employment? Is compensation considered taxable wages? http://www.socialsecurity.gov/employer LO-1

Independent Contractor (SECA) vs. Employee (FICA) Every person is an employer if “person employs one or more individuals for performance of services in U.S.” ***Person includes trusts, estates, individual, partnership or corporation*** Certain occupations specifically covered by FICA Full-time life insurance salespersons Agent- and commission-drivers of food/beverages or dry cleaning 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 However, if employee reported earnings on 1040, penalty is voided Penalty may be reduced if employer filed a 1099 LO-1

More Specific Situations Government employees – certain exemptions from OASDI/HI depending upon date of hire 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 $1,800 or more per year Must pay if domestic employee, like a nanny or cook, is under your control Additional exemptions - inmates, medical interns, student nurses and workers serving temporarily in case of emergency LO-1

Independent Contractor 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 See http://www.irs.gov/pub/irs-pdf.p1779.pdf for criteria 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 LO-1

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 Vacation pay Other types of taxable wages found in Figure 3-3 (page 3-6) LO-2

What are Taxable Wages? Tips greater than $20 or more per month Employee can report tips to employer using Form 4070 Employer calculates FICA on tips and withholds from regular paycheck on these reported tips Must withhold on first paycheck after tips are reported Employer must pay 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 Employer can claim a credit for SS/Medicare taxes paid on certain employees’ tips on Form 8846 Have to show allocated tip income on W-2; employer files Form 8027 at year-end with IRS showing food/beverage receipts and reported tips LO-2

Specifically Exempt Wages Meals/lodging for employer’s convenience Sick pay Only after 6 consecutive months off (personal injury) Sick pay by 3rd party (insurance company/trustee) with specific stipulations Pay for difference between employees’ salary and military pay for soldiers/reservists activated more than 30 days Employer contribution to pension plan Employer-provided nondiscriminatory education assistance Job-related educational expenses not subject to FICA Payments for non-job related expenses up to $5,250 LO-2

By 2042, that ratio is projected to be 2 to 1. FICA Taxable Wage Base OASDI wages cap (actual) at $110,100 for 2012 OASDI wages cap (actual) at $113,700 for 2013 HI wages never cap – since there is no ceiling, employers compute HI tax on full amount of wages However, please be aware that tentative legislation for 2013 creates: An additional .9% HI surtax on taxpayers receiving wages in excess of $200,000 ($250,000 if married filing jointly) A surtax of 3.8% on modified AGI in excess of $200,000 ($250,000 if married filing join) Employer doesn’t match these surtaxes for HI 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. LO-3

Calculating FICA Facts: Tamara earns $138,000/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 $5,750.00 x 19 payrolls (before today)= $109,250.00 How much will be taxed for OASDI? $110,100.00 – $109,250.00 = $850.00 Tamara’s OASDI tax is $850.00 x 4.2% = $35.70 Employer’s OASDI tax is $850.00 x 6.2% = $52.70 How much will be taxed for HI? Both Tamara’s and the employer’s HI tax is $5,750.00 x 1.45% =$ 83.38 How much is total FICA? Total FICA for Tamara is $35.70 + $83.38 = $119.08 Total FICA for employer is $52.70 + $83.38 =$136.08 LO-3

Another Example - Calculating FICA Facts: Ahmed earns $175,000/year and is paid the first of every month; determine FICA for August 1 payroll What do we calculate first? $175,000/12 = $14,583.33 per paycheck Then count number of payrolls before today’s payroll! Year to date gross prior to current payroll is $14,583.33 x 7 = $102,083.31 $110,100.00 – $102,083.31 = $8,016.69 taxed for OASDI for 2012 113,700 – 102,083.31 = 11,616.69 taxed for OASDI for 2013 Ahmed’s OASDI tax is $8,016.69 x 4.2% = $336.70 The employer’s OASDI tax is $8,016.69 x 6.2% = $497.03 OASDI for both employee and employer at 6.2% for 2013 at $11,616.69 Both Ahmed’s and the employer’s HI Tax is $14,583.33 x 1.45% = $211.46 (remember - no cap!) Total FICA for Ahmed is $336.70 + $211.46 = $548.16 Total FICA for the employer is $497.43 + $211.46 =$ 708.49 LO-3

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 In 2013 self-employed taxes = 15.3% (6.2% + 1.45% and 6.2% + 1.45%) Can have W-2 and self employment income Count both towards calculating cap of $113,700 for OASDI in 2013 Report on Schedule C (Form 1040) “Profit or Loss from Business” Also file Schedule SE (Form 1040) “Self-Employment Tax” Must include SECA taxes in quarterly estimated payments LO-3

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 Celia capped on W-2 HI = $14,500 x 2.9% = $420.50 Total FICA is therefore = $420.50 LO-3

Calculating FICA with W-2 and Self-Employed Earnings Facts: Felipe’s W-2 = $78,000 and his self-employment income = $36,000; how much is Felipe’s self- employment tax on $36,000? OASDI ($110,100 - $78,000) = $32,100 taxable OASDI wages x 10.4%* = $3,338.40 for 2012 (113,700 – 78,000)$35,700 x 12.4% = 4,426.80 for 2013 HI = $36,000 taxable HI wages x 2.9%** = $1,044.00 Total FICA due on self-employment = $3,338.40 + 1,044.00 = $4,382.40 for 2012 4,426.80 + 1,044 = 5470.80 for 2013 *4.2% + 6.2% = 10.4% **1.45% + 1.45% = 2.9% LO-3

Problems 3 – 3A, 3 – 4 A, 3 – 17 A

Problems 3 – 1 A, 3 – 2 A, 3 – 5 A, 3 – 7 A

Problems 3 – 8 A, 3 - 9 A, 3 – 10 A

How to Get Set Up with SSA One employer identification number (EIN) per employer obtained by completing a Form SS-4 (see Figure 3-5 on page 3-15) 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 If purchasing an existing business, new owner needs own EIN SSN required for everyone that is employed or self-employed To apply for social security number file SS-5 Required for children age one or over who are claimed as dependents on federal income tax return W-7 completed for aliens who must file a tax return, but are ineligible for social security # Employer can verify SS numbers by internet or telephone http://www.ssa.gov/employer/ssnv.htm How to Get Set Up with SSA LO-3

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 (“lookback period”) Monthly - pay FICA and FIT by 15th of following month Semiweekly – if payday is W, Th or F then due following W and if payday is S, S, M or T then due following F 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 New employers are monthly depositors unless $100,000+ of liability triggers one-day rule and converts them to semiweekly Different requirements for agricultural and household employees Amount deposited may be affected by safe harbor rule ( p. 3-19) LO-4

Credit Against the Required 941 Deposits Consolidated Omnibus Budget Reconciliation Act (COBRA) gives employees involuntarily terminated between 9/1/08 – 3/31/10 the option to continue coverage under company’s group health insurance Can continue coverage up to 15 months Government subsidizes 65% of premium cost Company is ‘reimbursed’ its 65% by taking a deduction on Form 941 Employee pays 35% of premium LO-4

How to Deposit FIT and FICA Electronically Old paper-based system has been replaced by an electronic depositing system Most employers are now on EFTPS (Electronic Federal Tax Payment System) - only exception is for businesses owing $2,500 or less in quarterly tax liabilities Enroll in EFTPS Online at http://www.eftps.gov 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 LO-4

Problem 3 - 15A

How to Report and Reconcile FIT/FICA File 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 If that falls on weekend or legal holiday, file next business day Make deposit with Form 941 if taxes for quarter are less than $2,500 Use 941-V when making payment or can pay by credit card Electronic filing options available for employers who meet requirements Complete an e-file application & then electronically submit 941 or apply for a PIN on IRS website and file electronically through third-party transmitter Can correct errors on previously filed Form 941 by filing Form 941-X LO-5

Employer’s Annual Federal Tax Return Employers who owe $1,000 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 $4,000 or less per year Employer should contact IRS and express interest and IRS will respond with notification letter Employer may chose to file Form 941 quarterly instead – need to notify IRS LO-5

Types of Penalties Note: IRS reports that 100,000 businesses 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 Not supplying identification numbers Writing bad checks Note: IRS reports that 100,000 businesses owe more than two years of payroll taxes (estimated at $58 billion)!! LO-5

Problem 3 – 11 A, 3 – 1 2A, 3 – 13 A, 3 – 14 A, 3 – 16 A