Payroll Accounting - Chapter 3 - Social Security Taxes

Tips

FICA considers cash tips of $20 or more in a calendar month to be taxable wages. Employees must report their tips in writing to their employers by the 10th of the month following the month in which the tips where received. Employers can require more frequent reporting. Rules for reporting tips are summarized in attached image.

Form 945

Annual Return of Withheld Federal Income Tax

Taxable wages

Wages include the following: - Actual money received - Cash value of meals and lodging provided for the convenience of the employees - Bonuses and commissions paid by the employer with respect to to the employment For other types of payments that are considered wages under FICA see image

Failure to fully pay employment taxes

Nearly one-third of small firms are hit with penalties for payroll mistakes, with the average fine being $848

Employer-provided group-term life insurance

in excess of $50,000 is taxable and subject to social security and Medicare tax withholding

Form 941-X

Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund Used to correct errors on previously Form 941s. It is a stand-alone form that is not attached to form 941

FICA provides specific coverage for the following list of four occupations. Although they are contractors under common law, they're treated by statute as employees. They will not be covered under FICA if they have substantial interest in the facilities used in connection with their jobs or if the services consist of a single transaction

1. Agent-drivers and commission-drivers who distribute food and beverage products or handle laundry or dry cleaning 2. Full time life insurance salespersons who sell primarily for one company 3. Full time traveling or city salespersons for one firm or person 4. An individual who works at home on materials or goods that you supply and must be returned to you or a person you name if you also furnish specifications for the work to be done.

Form 943

Employer's Annual Federal Tax Return for Agricultural Employees

Self-Employment Contributions Act (SECA)

Requires that self-employed individuals contribute to the OASDI and Medicare programs, but at a higher tax rate. Extended coverage under the social security system to the self-employed in 1951

Safe Harbor Rule (98 Percent Rule)

rule that determines if an employer has satisfied the deposit obligations by (a) having no shortfall (under deposit) that exceeds the greater of $100 or 2 percent of the amount of employment taxes required to be deposited and (b) having deposited the shortfall on or before the shortfall make-up date.

Employees' FICA (OASDI/HI) taxes and withholdings

FICA requires employers to collect the OASDI/HI taxes from their employees and pay the taxes to the IRS at the same time they pay their own tax. The employer deducts the tax from the wages at the time of payment. The amount of each tax to be withheld is computed by applying to the employee's taxable wages the tax rate in effect at the time that the wages are received.

OASDI (Old Age, Survivors, and Disability Insurance)

HI (Hospital insurance)

Deposit requirements for employers of household employees

Household or domestic employees are usually not subject to federal income tax withholding, but they may voluntarily request that federal income taxes be withheld from their wages. Even though federal income taxes are not withheld, they are subject to FICA taxes if each worker has been paid cash wages of $2,200 or more in a calendar year. Noncash items given to household employees are not subject to FICA tax. Employers who withhold and pay FICA taxes and federal income taxes for household services must report these taxes on form W-2, Wage and Tax Statement for each employee

Failure to file employment tax returns

The IRS reports that over 6.6 million employers file more than 23 million 941s every year

taxable wage base

The wage base applies to amounts paid employees in a calendar year and not to the time when the services where performed by the employees. The employer does not "match the employee's supplemental HI rate of 0.9% rate on wages in excess of $200,000. The employer HI rate is 1.45% on all wages. Just as social security benefits increase each year based on changes in the Consumer Price Index, the taxable wage base is increased also. see image for example

Successor Employer

Wages paid by the prior employer can be counted toward the annual OASDI wage base by a successor employer if all the following criteria are met: 1. The successor has acquired all the property used in the prior employer's business. 2. The affected employees were employed immediately before and continued working right after the transfer of the business. 3. Wages were paid by the prior employer during the calendar year of acquisition.

Family employment

Work performed for a parent by a child under the age of 18 is exempt from FICA. If the work is not in the course of the parent's business and the child is under 21, the exemption also applies. However, if the child's services are done for a corporation, a partnership (unless each partner is a parent of the child), or an estate, the exemption does not apply).

Lookback period

the block of time, consisting of four quarters beginning July 1 of the second preceding year and ending June 30 of the prior year, used to determine if an employer is a monthly or a semiweekly depositor. At the end of the year, the IRS sends a notice to employers whose deposit schedules will change for the upcoming year.

Shortfall

the excess of the amount of employment taxes required to be deposited over the amount deposited on or before the last date prescribed for the deposit.

Self-employment OASDI/HI taxes

the self-employment tax rate for 2020 on the net earnings is 15.3% - 12.4% for OASDI and 2.9% for HI (double the employee rate). Self-employment income is subject to 0.9% additional HI tax on earned income in excess of $200,000

Shortfall makeup rules

1. Monthly depositors: The shortfall must be deposited or remitted by the quarterly return due date, in accordance with the applicable form and instruction 2. Semiweekly depositors and those subject to the $100,000 one day rule: The shortfall must be deposited on or before the first Wednesday or Friday, whichever is earlier, falling on or after the 15th day of the month following the month in which the deposit was required to be made. 3. Shortfall over $100,000: If the shortfall is more than $100,000, the one-day rule overrides the safe harbor rule.

Attributed Tip Income Program (ATIP)

Alternative tip reporting method. Under ATIP, a formula based on the employer's credit card cases determines the amount of tips that must be reported to the IRS. The employer then assigns the required amount of tips among all the tipped employees. To be eligible to use ATIP, the employer must have at least 20 percent of its gross receipts that show charged tips and at least 75 percent of tis tipped employees must sign a participation agreement.

Totalization agreements

Bilateral agreements entered into by over 20 countries to eliminate double taxation for individuals on international assignments. Inpatriates (employees transferred from a foreign country to a company's home country) who are working in the US from one of these countries will not have social security taxes withheld on US sourced income. If the worker is from a country that has no such agreement, social security tax must be withheld. Expatriates (employees transferred from a company's home country to a foreign country) will be subject to US social security tax and could also be subject to foreign social security taxes).

Tax rates

Employee and Employer OASDI Rate 6.20% Wage base $137,700 Maximum tax $8,537.40 Employee* and Employer HI Rate 1.45% Wage base no limit Maximum tax no maximum * Employee HI: plus an additional 0.9% on wages over $200,000

Contributions to deferred compensation plans

Employee pretax (federal income tax) contributions under a qualified cash or deferred compensation arrangement, are subject to FICA tax. Employers' matching contributions are tax free

Failure to furnish payee statements

If employers willfully fail to furnish their employees with properly executed wage and tax statements or willfully furnish false or fraudulent statements, the civil penalty is $280 for each statement.

Exempt payments

- Meals and lodgings - IRS places no specific value on meals or lodgings furnished by employers, but relies on state valuations. If no state valuation, then fair value is defined by the reasonable prevailing value - Sick pay - the first 6 months is subject to FICA, payments made after the expiration of 6 consecutive calendar months following the last month the employee worked are not taxed. Does not include amounts paid to those who are permanently disabled. Sick payments may be made by a third party. - Makeup pay for military duty - Applies to active duty soldiers and reservists activated for more than 30 days

The following are exempt from both OASDI and HI portions of the tax:

- Medical interns - Student nurses - Inmates of US penal institutions - Those serving temporarily in case of emergency (storm, flood, etc)

Different rules apply for government employees

1. Federal - Hired after 1983 - full coverage. - Hired prior to 1984 - only Medicare (HI) applies. 2. State and local - Work done after July 1, 1991 and not in a public retirement plan - full coverage - Hired after March 31, 1986, and not covered by a public retirement plan - Medicare (HI) only 3. Military - Basic Pay - Full FICA tax - Temporary service with National Guard - difference in pay covered by civilian employer - subject to FICA tax

Employer's FICA (OASDI) taxes

Along with withholding the correct amount of FICA tax from employee's taxable earnings, the employer must make contributions to the program. The employer's portion of the tax is based on the wages paid to the employees. Not on the wages to each employee, but to all employees combined. The calculations for employees' and employer FICA taxes may result in slightly different amounts. The difference is reconciled on Form 941 as current quarter's fractions of cents. As with employee withholdings, once the OASDI taxable wage base is reached, the employer no longer contributes for that particular employee. The employer's OASDI tax is 6.2% of total employees' wages paid, and the HI tax is 1.45% of total employees' wages paid.

Household Employee

An individual who performs nonbusiness services in a taxpayer's home. In order to be liable for FICA taxes, the employee must receive $2,200 or more in cash wages from any one employer in the year (for election workers its $1,900 or more)

Form W-7

Application for IRS Individual Taxpayer Identification Number (ITIN). An ITIN begins with the number and is intended for tax purposes only. Used for aliens who must file US tax returns but are not eligible to receive a social security number.

Employment

Applies to any service performed by employees for their employer, regardless of the citizenship or residence of either. FICA covers most types of employment, but there are specific exclusion. If an employee's services performed during one-half or more of any period constitute covered employment, then all employee's services for that pay period must be counted as covered employment, and vice versa. In these cases, a pay period cannot exceed 31 consecutive days. See image

Form 9779

Business Enrollment Form for EFTPS (Electronic Federal Tax Payment System). Enrollment takes from three to six weeks, and a confirmation package will be sent by the IRS to the employer with a personal identification number (PIN) and payment instructions. If a deposit is required and the employer has not yet received the EIN, the deposit must be mailed directly to the IRS with an explanation attached.

Failure to make timely deposits

Deposits are applied to the most recent tax liability within the quarter; however, a depositor can designate to the IRS the period to which a deposit is to be applied. The employer has 90 days from the date of a penalty notice to make the designation.

Form 944

Employer's Annual Federal Tax Return Can be used by employers who owe $1,000 or less in employment taxes per year and have not been late with any deposits for two years. These employers have to file the form and pay their employment taxes only once a year. Employers who believe they are eligible can contact the IRS and express their wish to file a Form 944. Approximately 17% of filers are eligible to file Form 944. This is basically the same as a Form 941 (Quarterly)

Form 941

Employer's Quarterly Federal Tax Return Balance due can be paid with a credit card

Payroll taxes for independent contractors

Employers don't pay or withhold payroll taxes for contractors, but contractors are liable for social security taxes (self-employment taxes) on the net earnings of their businesses. Misclassifying employees carries a penalty for the employer. Generally it's the employer's share of FICA taxes plus the income and FICA taxes that weren't withheld from the employee's earnings. If the employee did report the earnings on the tax return, the penalty is voided. If not reported, the employer may qualify for a reduced rate of 1.5% of the employee's wage if a Form 1099 was filed (3.0% if not filed). A reduced rate might also apply to the employees share of FICA taxes - 20% of the full FICA tax if Form 1099 was filed (40% if not filed).

Employee's application for social security card

Every employee must have a social security number. The application for a social security card (Form SS-5) can be filed with any field office of the SSA.

Employer Identification Number (EIN)

Every employer of one or more persons must file an application for an identification number (EIN). EINs can be obtained directly from the internet; no preregistration is required, and the number that is issued is immediately recognized by the IRS systems. EINs can also be requested by phone and by mail or fax (form SS-4)

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 employment are specifically exempted by the law. The term "person", means an individual, a trust or estate, a partnership, or a corporation.

Taxable year

In computing the taxes on self-employment income, sole proprietors use the same taxable year as that used for income tax purposes. In the case of a partnership, the taxable year of the partners may not correspond with that of the partnership.In such instances, the partners are required to include in computing net earnings from self-employment in their distributive share of the income or loss from the partnership for any taxable year ending with or within their taxable year.

Completing the return

In making entries on the form: - dollar signs and decimal points are not used - zero value line items are left blank - negative amounts are shown with a minus sign - no rounding to the nearest dollar

Payments for educational assistance

Refers to the expenses that an employer pays for an employee's education such as tuition, fees, and payments for books, supplies, and equipment. Also includes the cost of employer provided courses of instruction. Excludes payment for tools or supplies that employees keep after they complete a course of instruction. Payments for job-related educational expenses are not subject to FICA taxes if the education maintains or improves skills required by the individual's employments. Payments for non-job related educational expenses up to $5,250 are also exempt from FICA taxes.

Self-employment income

SECA uses an individual's self-employment income as the basis for levying taxes and for determining the amount of income to credit toward OASDI insurance benefits or HI coverage. Self-employment income generally consists of the net earnings derived by individuals from a business or profession carried on as a sole proprietorship or as a partnership. Self-employed persons determine their net earnings by finding the sum of the following: 1. The gross income derived by an individual from any business or profession carried on, less allowable deductions attributable to such a business or profession, and 2. The individual's distributive share (whether or not distributed) of the ordinary net income or loss from any business or profession carried on by a partnership of which the individual is a member.

Reporting self-employment income

Sole proprietors report their self-employment income by transferring certain date from Schedule C (Form 1040), Profit or Loss from Business to Schedule SE (Form 1040), Self-Employment Tax. SECA requires self-employment persons to include SECA taxes in their quarterly payment of estimated income taxes. The taxpayer's estimated tax is the sum of the estimated income taxes and SECA taxes less any credits against the tax.

Test for independent contractor status

Workers may be classified at independent contractors if they: 1. Hire, supervise, and pay assistants 2. Determine the sequence of their work 3. Set their own hours of work 4. Work for an many employers as they wish 5. Are paid by the job 6. Make their services available to the public 7. Have an opportunity for profit or loss 8. Furnish their own tools 9. Have a substantial investment in their trade 10. May be dismissed only under terms of contract.