Chapter 3 - Social Security Taxes

Report
SOCIAL SECURITY TAXES

FICA (1935)




SECA (1951)




Federal Insurance Contributions Act
Paid by employees and employers
6.2% OASDI plus 1.45% HI
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/employer
 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





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

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

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)

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
Meals/lodging for ER convenience
 Sick pay




After 6 consecutive months off (personal injury)
Sick pay by 3rd 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


OASDI wages cap at $106,500 for 2009 (estimated)
HI wages never cap
FACTS: Tamara earn $132,000/year; paid semimonthly on the 15th
and 30th; 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!!
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 = $14,583.33 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 amount

EE and ER portion of FICA if net earnings exceeds $400


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


Net Earnings = Net income + distributive share of
partnership 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
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% = $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 = $4,578.00

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

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

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 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 Treasury


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


File Form 941 (Employer’s Quarterly Federal Tax
Return)


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


Download at www.irs.gov/formspubs/ or call 1-800-829-3676
Attach 941-V
941 e-file available for employers who meet
requirements

File Form 4996 and then electronically submit 941

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)

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!!*

similar documents