CH 3 & 4 Payroll Accounting

What are the types of tax deferred retirement plans the book discussed

401(k)- set % of EE wages is contributed on a pretax basis. ERs can limit % of EEs pay that can be contributed (limit can be lower than max set by law) Simple plan- for a company with up to 100 EEs. ER can offer a simple plan as part of 401(k). Allows EEs to contribute a % of pay to retirement Section 403(b) plan- for EEs of tax exempt organizations Section 457)b) plan- for EEs of state & local gov't & of tax exempt organizations other than churches

Are EE traveling expenses under a non-accountable plan subject to withholding tax

A non accountable plan is an arrangement that doesn't meet all of the previous requirements. All amounts paid under this plan are considered wages & are subject to income tax withholding

How does an employer withhold taxes on taxable fringe benefits

Determination of the value of fringe benefits must be made by Jan. 31 of following year. Employer may add the value of fringe benefits to regular wages for a pay period & figure withholding taxes on the total or may withhold the tax on the value of the benefits at the flat 25% supplemental wage rate. Employer may choose to withhold income tax on the value of employees personal use of a vehicle. Employer must, however, withhold social security, medicare, or railroad retirement taxes on use of vehicle

Define cafeteria plans

EE choose between cash or qualified benefits. EEs can select various levels of health, accident, & life insurance coverage or choose to contribute to cash or deferred plans Salary reductions are used to pay for desired benefits, & these pretax contributions are not included in taxable wages for FIT These salary reductions are also exempt from FICA & FUTA taxes & from most state taxes

Define tax deferred retirement accounts

EEs contribute amounts from their wages into retirement accounts. These contributions reduce the amount of EE wages subject to FIT Upon retirement, EEs get their contributions & then they're subject to FIT

By what date must an employer provide a W2

ER must give EE Form W2 on or before Jan. 31 following the close of the calendar year

What is a W4

ER uses the information from Form W4, EE's withholding allowance certificate to compute the amount of income tax to withhold from EEs wages ER must have one for each EE Contains withholding allowance certificate, detailed instructions, & worksheets for EE to use when completing certificate

Is there a penalty for failing to report tips

Employees failing to report tips to employer may be penalized 50% of FICA tax due on tips. Tax court may also rule non-reporting of tip income constitutes fraud.

What is the supplemental HI rate? On what amount is it calculated? Who must pay it?

Employer doesn't match employee's supplemental HI rate of 0.9% on wages in excess of $200,000. The employer HI rate is 1.45% on all wages

Define taxable wages

Employer withholds FIT on the gross amount of wages before state/local, insurance premiums, savings bonds, profit sharing contributions & union dues are deducted

The employer FICA taxes are not computed on the wages paid to each employee. How are they computed

Employer's portion of tax is based on total wages paid to all employees.

How is Form 944 used

Employers Annual Federal Tax Return- can be used by employers who owe $1,000 or less in employment taxes per year & haven't had any late deposits for 2 years. These employers have to file the form & pay their employment taxes once a year

Must employers pay FICA tax on tips

Employers are liable for their share of FICA tax on any tips subject to employees FICA tax. Employers are allowed a business tax credit on their income tax return for FICA taxes pain on their employees tip income

Describe failure to furnish information returns

Employers who fail to timely file their information returns with the gov't are subject to fines for each failure. Penalty is based on when the correct information is filed

In addition to federal withholding, many states also have withholding requirements. Do all states allow tax sheltering for cafeteria plans & 401(k) accounts

Even though most states don't tax deductions made for cafeteria plans & 401(k) accounts, some states don't allow for the tax sheltering of these deductions from EE wages

Define Employer

Every person is an employer if the person employs one or more individuals for the performances of services in the US, unless such services or employment are specifically exempted by the law

Define FICA

Federal Insurance Contributions Act

What form is used to report tips by employees to employers

Form 4070

What is the name of the quarterly report the employer uses to report FICA & withholding taxes

Form 941, Employers Quarterly FIT

What is a W3

Form W3, Transmittal of Wage & Tax Statements, must be filed with Social Security Administration by ERs as a transmittal for Forms W2 ER indicates the number of documents being transmitted. Enables Social Security Administration & IRS to compare totals to amounts for income tax withholdings, social security wages, social security tips, & medicare wages & tips, as reported on ERs 941s for the year

What is the formula used to calculate a "grossed up supplemental" wage payment

Grossed up amount= intended payment/1- applicable tax rates (FICA, 25% FIT rate, state tax rate)

What is the employee & employer HI rate & taxable wage base amount

HI portion of FICA tax is 1.45% withheld on total earning plus an additional 0.9% on wages over $200,000

When does the "one-day" rule come into effect

If $100,000 is reported in un-deposited taxes on any day during a deposit period a deposit is required by the close of the next business day. The company will change to a semiweekly status if the employer falls under the one day rule at any time during this or last year

What is an exemption from income tax withholding

If EE had no income tax liability last year & expect none in current year Exemption is valid for 1 year & must be claimed by Feb. 15 (w/ W4) of each succeeding year EEs may not claim exemption if: another person claims EE as dependent & income exceeds $1,050 annually & includes more than $350 of unearned income or if unearned income is less than $350 but total income exceeds $6,300

How are supplemental payments taxed if paid with regular wages

If ER pays supplemental with regular wages but doesn't specify the amount of each type of wage, the ER withholds as if the total wage were a single payment for a regular pay period If ER indicated amount of each payment, ER may withhold a flat 25% rate on supplemental earnings If EE has already received supplemental wages for the year in excess of 1 million, a 39.6% withholding rate must be used for amount over 1 million

Define employer-employee relationship

If a business has the right to control & direct the worker, it meets the definition of an employer under the common law criteria

Define statutory employees/non-employees

If a worker doesn't qualify as an employee under common law test, FIT are not withheld Under certain conditions they may be considered an employee for FICA & FUTA taxes (applies to agent drivers, full time life insurance salespersons, homeworkers, & traveling or city salespersons) Direct sellers & qualified real estate agents are considered non employees. They're treated as self employed for all federal tax purposes

Additional HI for self employed?

Income is subject to 0.9% additional HI tax on earned income in excess of $200,000

Describe failure to fully pay employment taxes

1) 0.5% of amount shown as tax on a return/month 2) 20% of the underpayment for negligence or intentional disregard of payment rules 3) 75% of underpayment if due to fraud with intent to evade tax 4) 100% penalty 5) $10,000 and up to 5 years in prison OR both

Describe the failure to make timely deposits

1) 1-5 days late- 2% of un-deposited taxes 2) 6-15 days late- 5% 3) 6+ days late- 10% 4) Deposits made at unauthorized financial institutions- 10% 5) Deposits made electronically but not with EFTPS- 10% 6) Amounts unpaid for more than 10 days after IRS notice- 15%

Describe the failure to file employment tax return

1) A % of the amount of tax required will be added to the tax 2) 5% combined penalty of the net amount of tax that should have been reported 3) 15% per month, not to exceed 75% for fraudulent failure to file 4) Not more than $25,000, imprisonment of not more then 1 year OR both

What are the procedures an ER uses to collect income tax on tips

1) ER collects tax from EE's wages or form other funds EE makes available 2) When tips are reported in connection w/ employment where the EE also receives a regular wage, comput the withholding tax on the aggregate- treat tips as supplemental wage payment 3) If the withholding tax exceeds amount of wages paid to EE, the EE must pay the uncollected portion of the taxes directly to the IRS when filing the annual income tax return 4) ER isn't required to audit or verify the accuracy of tip income reported

What is included in wages

1. Actual money received by the employee, whether called wages or salaries 2. Cash value of meals & lodging provided for the convenience of the employee 3. Bonuses & commissions paid by the employer with respect to employment

What payments are exempt from FICA

1. Meals & lodging- furnished to employees for the convenience of the employer 2. Sick pay- 1st 6 months of sick pay employee receives is taxed by FICA. Payments after 6 months are not taxed 3. Makeup pay for military duty- applies to active duty & reservists activated for 30+ days- paid by employer to make up salary difference between civilian and military pay 4. Payments of educational assistance- payments for job related educational expenses are not subject to FICA tax

What conditions must exist before individual can withhold income tax

1. There must be, or have been, an employer- employee relationship 2. The payments received by employee must be defined as wages under the law 3. The employment must not be exempted by the law

If an employer is deemed to be a monthly depositor, when must they make required deposits of taxes

Reported $50,000 or less in look back period must deposit by the 15th of the following month

If an employer is deemed to be a semiweekly depositor, when must they make required deposit of taxes

Reported more than $50,000 in a look back period deposit must be made with in 3 business days of semiweekly period. If they payday is on a Wednesday, Thursday, or Friday- deposit is due the next Wednesday. If they payday is on Saturday, Sunday, Monday, or Tuesday- deposit is due the next Friday.

Define SECA

Self Employment Contributions Act

What are considered non taxable fringe benefits

Services provided at no additional cost Qualified EE discounts Working condition fringes Qualified transportation fringes Use of on premis athletic facilities Reduction tuition for education Jon placement assistance

What are supplemental wage payments

Supplemental wage payments include items such as vacation pay, bonuses, commissions, exercised non-qualified stock options, & dismissal pay ER must decide whether to lump regular wages & supplemental wages together or withhold from the supplemental wages separately

What is considered taxable tips for incomes tax purposes

Tips paid by ER for charge customers & tips EE receives directly from customers ER collects income tax, as well as social security taxes, on reported tips

Define health savings account

Used by EEs who have high deductible health insurance to pay for medical expenses by themselves & their dependents. Contributions made into the plan by ER are excluded form EE taxable income. EE contributions into the account must be included in wages & are subject to withholding taxes If contributions are part of salary reduction arrangement in a qualified cafeteria plan, they're not subject to withholding taxes.

Define deferred arrangements

Usually set up as retirement plans (401(k) & IRAs) Most common is the defined contribution plan that provides future benefits based solely on the amount paid by each EE & ER into the account, plus investment gains. These plans are tax deferred savings or stock accounts held in trust for EEs.

Describe failure to furnish payee statements

W(2)- civil penalty is $100/statement Max penalty- $1,500,000 in calendar year Intentional disregard- $260/statement with no limit on max penalty for year Criminal penalty- $5,000+ and subject to criminal sanctions

List the examples of taxable wages in your book

Wages & salaries Vacation allowances Supplemental payments Bonuses & commissions Taxable fringe benefits Tips Cash awards

Must employers collect FICA tax on tips

Yes

Are EE traveling expenses under an accountable plan subject to withholding tax

Yes if the ER's reimbursement of allowance arrangement meets 3 rules: 1. Business is/was conducted 2. Adequate accounting within a reasonable time period (generally 60 days) 3. EE return of excess substantiated amounts (generally 120 days)

Define Archer medical savings accounts

Accounts for EEs of small businesses & are set up in conjunction with high deductible insurance plans. EEs payroll deductions are subject to FIT withholdings EEs can deduct the contributions on their tax returns & they have control of the account ER contributions not taxed Unused money carry over year to year

What payments are exempt from withholding

Advances Accident & health insurance payments Deceased person's wages Dependent care assistance Domestic service Educational assistance EE business expense reimbursements EE safety & length of service awards EE provided parking Foreign services by US sitizen Group-term life insurance cost Health reimbursement arrangements Individuals under 18 Long term care insurance premiums Minister of churches, members of religious order Moving expense reimbursements Public officials Retirement & pension plans Sickness or injury payments Transportation in a commuter Hwy vehicle & transit pass

Define flexible spending accounts

Allow EEs to have money deducted from their paychecks to cover their out of pocket medical expenses The deductions from EEs pay are made with pretax dollars Reimbursements are made to EEs from an ER-controlled account & unused moneys are forfeited by participants

Define pretax salary reductions

An EE can authorize an ER to deduct certain withholdings from their pay on a pretax basis. These withholdings are taken from their gross pay & therefore reduce the amount of pay that is subject to FIT

Both of these methods consider what

Both distinguish between married & unmarried persons Both provide the full benefit of the allowances claimed by EE on Form W4 Both take into account a standard deduction- an amount of money used to reduce an individuals adjusted gross income in arriving at the taxable income. These amounts are increased for single & married people or surviving spouses age 65+ ir blind. Each year, standard deductions are adjusted for inflation

When can an employer wait & deposit taxes with the filing of the quarterly report?

Businesses with $2,500 or less in quarterly tax liabilities pay when they file their returns w/ Form 941

For FICA purposes, what is considered taxable wages with respect to tips

Cash tips of $20 or more in a calendar month

What type of penalties is an employer who fails to carry out their duties as collection agents subject to

Civil & criminal penalties. There may be additions to the tax, interest charges, fines & imprisonment. Degree of penalty depends on degree of willfulness in employers conduct.

Describe allocated tips

Large food & beverage establishments with 11+ EEs on a day in the preceding year have to pay allocated tips if: the total tips reported by EEs during any pay period are less than 8% of establishment's gross receipts for that period The amount of allocated tips to EE equals the difference between tips reported & 8% of gross receipts, other than "to go" sales & sales with at least 10% service charge added No taxes are withheld on allocated tips

What is a withholding allowance

Law entitles EEs to exempt a portion of earnings from withholding by claiming a personal allowance for their dependents if they five their ER a claim for the allowances EEs cannot claim the same withholding allowance with more than one ER at the same time Personal allowance, allowances for dependents, special withholding allowance, such as child care, & itemized deductions for medical expenses, mortgage interest, & charitable contributions

What is considered "local income taxes"

Many cities & counties have passed local income tax legislation requiring ERs to deduct & withhold income taxes or license fees on salaries or wages paid

How are supplemental payments taxed if paid separately from from regular wages

Method depends on whether or not you withheld income tax from EE's last regular wage payment. If you withheld income tax from EE's regular wages use: Method A: add supplemental wages & regular wages for most recent pay period. Then, figure the income tax as if the total were a single payment. Subtract tax already withheld from regular wage. Withhold remaining tax from supplemental wage Method B: withhold a flat 25% (39.6 if over 1 million) on supplemental pay

What is the OASDI & HI rate for a self employed person

OASDI- 12.4% HI- 2.9%

What is the employee & employer OASDI rate & taxable wages base amount

OASDI- 6.2% w/ wage base: $118,500 HI- 1.45% w/ wage base of no limit

Which 2 taxes are imposed by FICA

OASDI/HI & SECA

When is this quarterly report due

On or before the last day of the month following the close of the calendar quarter for which the return applies

Can a payment be made with the quarterly form? If so, in what situation(s)

Only if either the net taxes for the quarter are less than $2,500 or the payment serves as a deposit for a monthly depositor. From 941 (payment voucher) must be filed with Form 941.

What are the two most common withholding methods

Percentage & wage bracket

Define independent contractor

Persons who follow an independent trade, business, or profession where they offer their services to the public