SOCIAL SECURITY TAXES

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CHAPTER 3
Payroll Accounting 2006 Bernard J. Bieg

• SOCIAL SECURITY TAXES

Developed by Lisa Swallow, CPA CMA MS
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Social Security Taxes

• FICA (1935)
• Federal Insurance Contribution Act
• Paid by employees and employers
• 6.2 OASDI plus 1.45 HI
• SECA (1951)
• Self Employed Contribution 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 compensation considered taxable wages?
• Calculating FICA and SECA under varying
  situations
• http//www.ssa.gov/employer

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Determination of Independent Contractor
(SECA) vs. Employee (FICA)

• IRS historically used 20-point test to
  determine common law relationship - examples
  from list include
• How many companies does person work for
• Control work/schedule/where performed
• Who provides tools
• Can person incur profit or loss
• 3 Categories of evidence
• Behavioral Control
• Financial Control
• Type of Relationship
• Can file SS-8 with IRS if uncertain what to do!!
• Access http//www.irs.gov/formspubs/

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Specifically Covered (in addition to common law)

• Full time life insurance salespeople
• Full time traveling salespeople
• Agent- and commission-drivers of food/beverages
• Not-for-profit EE (except ministers)
• minister can irrevocably elect FICA coverage
• Federal employees (only HI if hired prior to
  1984)
• In-patriates
• Military on basic pay
• no FICA on excess pay

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More Specific Situations

• Temporary employees considered EE of temporary
  agency
• Household employees
• If they make 1400/year
• ER must pay FICA reports on 1040 (still paid by
  both)
• Unless already files 941 - then report on this
  form
• Doesnt apply to minor unless thats his or her
  occupation
• Must pay if he/she under your control
  (gardener/nanny/cook)
• Corporation
• Officers are EE
• Board of director members are not EE
• Partnership
• Partners are not EE

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What are Taxable Wages?

• Cash
• Wages and salaries
• Bonuses and commissions
• FMV of noncash compensation
• Gifts (over certain amounts)
• Stock options
• Fringe benefits like personal use of corporate
  car
• Prizes
• Premiums on group term life insurance gt 50,000

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What are Taxable Wages? (Continued)

• Tips greater than 20 or more per month
• EE must file form 4070 by 10th of following month
  with ER
• ER calculates FICA on tips and withholds from
  regular paycheck on these reported tips
• ER must match but they receive a business tax
  credit roughly equivalent to the ER paid FICA on
  tips
• Large employers (11 EE) must allocate
• (Gross receipts x .08) reported tips
• Dont have to withhold FICA on allocated tips,
  only reported tips
• Have to show allocated tip income on W-2
• ER can petition IRS to reduce tip allocation to
  as low as 2
• ER files Form 8027 at year end with IRS

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Specifically Exempt Wages

• Meals/lodging for ER convenience (for example,
  paramedic)
• Sick pay
• After 6 consecutive months off (personal injury)
• Sick pay by 3rd party (insurance company/trustee)
  
• ER contribution to pension plan
• SEP contributions through salary reduction must
  have FICA withheld
• ER-provided nondiscriminatory education
  assistance
• Job-related educational expenses not subject to
  FICA
• Payments for non-job related expenses up to
  5,250

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FICA Taxable Wage Base

• OASDI wages cap at 93,000 for 2006 (estimated)
• HI wages never cap
• FACTS Tamara earn 95,000/year paid semimonthly
  on the 15th and 30th determine FICA for 12/30/06
  payroll
• First must find prior payroll YTD gross
  95,000/24 3,958.33
• 3,958.33 x 23 91,041.59
• How much will be taxed for OASDI?
• 93,000.00 91,041.59 1958.41
• OASDI tax is 1958.41 x 6.2 121.42
• HI tax is 3,958.33 x 1.45 57.40
• Total FICA is 121.42 57.40 178.82
• Is this EE withholding or ER payroll tax expense?
• Answer - both!!

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Example 2 to Calculate FICA

• FACTS Ahmed earns 175,000/year paid first of
  every month determine FICA for 7/1/06 payroll
• What do we calculate first?
• 175,000/12 14,583.33 per paycheck
• YTD gross prior to current payroll 14,583.33 x
  6 87,499.98
• 93,000.00 - 87,499.98 5,500.02 taxed for OASDI
• 5,500.02 x 6.2 341.00 OASDI tax
• 14,583.33 x 1.45 211.46 HI tax (remember - no
  cap!)
• Total FICA 341.00 211.46 552.46
• Remember - the ER has withheld 552.46 from the
  employees paycheck and must match this amount

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SECA and Independent Contractors

• EE and ER portion of FICA if net income exceeds
  400
• Net Income Revenue Expense
• 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
• Report self employment income on Schedule C
• Can have W-2 and self employment income

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Calculating FICA with W-2 and Self Employed
Earnings

• FACTS W-2 97,768 and self employment income
  14,500 how much FICA on 14,500?
• No OASDI because capped on W-2
• HI 2.9 x 14,500 420.50
• Total FICA 420.50
• FACTS W-2 78,000 and self employment income
  21,000 how much is FICA on 21,000?
• OASDI (93,000 - 78,000) 15,000 taxable OASDI
  wages x 12.4 1,860.00
• HI 21,000 taxable HI wages x 2.9 609.00
• Total FICA 1,860.00 609.00 2,469.00

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How to Get Set Up with SSA

• One Federal Employer Identification Number (EIN)
  per employer
• File Form SS-4 with IRS office where tax returns
  will be filed
• TELE-TIN to obtain (EIN) immediately
• 1-800-829-4933
• When purchasing an existing business, the new
  owner needs a new EIN
• SS-5 for everyone gt one year old
• 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)

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Deposit Requirements for FICA and FIT (always go
together)

• Each November, based upon a look back period, IRS
  tells ER what type of depositor he/she is
• Monthly depositor - pay FICA and FIT by 15th of
  following month
• or
• Semiweekly depositor
• If payroll was W-F, deposit by next Wednesday
• If payroll was S-T, deposit by next Friday
• Exceptions
• If really big (100,000 of federal payroll tax
  liability), taxpayer has until close of next
  banking day
• If really small (quarterly owe less than 2500),
  wait and pay when 941 report is filed

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How to Deposit FIT/FICA

• Fill out a Form 8109 coupon
• These are sent to you when apply for EIN
• Take to an authorized financial institution
  (depository for federal government)
• Or can use EFTPS (Electronic Federal Tax Payment
  System)
• Must use if total deposits exceed 200,000 for a
  year
• Complete Form 9779, EFTPS Business Enrollment
  Form
• To utilize online capabilities, enroll at
  www.eftps.gov
• If mailing, postmark at least 2 days before due
  date
• Penalties for late deposits

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How to Report FIT/FICA

• File Form 941 (Employers Quarterly Federal Tax
  Return)
• Download at www.irs.gov/formspubs/
• Due on last day of month following close of
  quarter
• 1/31 4/30 7/30 10/31
• 941 e-file available for employers who meet
  requirements
• File Form 4996 and then electronically submit 941

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Types of Penalties

• Failure-to-comply penalties will be added to tax
  and interest charges negligence can also result
  in fines/imprisonment
• Imposed for following
• not filing employment tax returns on time
• not paying taxes when due
• not making timely deposits
• not furnishing W-2s (information returns)
• writing bad checks