AC122.01: Unit 4 Seminar
June 29, 2011
School of Business and Management

Seminar Rules by Greg Rose
1.
If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one!
2.
When asking questions, please RAISE YOUR HAND (TYPE //).
Otherwise you might interrupt a stream of dialogue.
3.
Please do NOT start side conversations.
4.
Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good!
5.
Don`t worry about typos. Be clear as you can and refrain from smileys and slang – use proper English.
• Assignments Grading

SOCIAL SECURITY TAXES
Developed by Lisa Swallow, CPA CMA MS

 FICA (1935)
 Federal Insurance Contributions Act
 Tax paid both by employees and employers
 6.2% OASDI plus 1.45% HI
 SECA (1951)
 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 an 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 $1,700 or more per year
 Must pay if domestic employee, like a nanny, is under your control
 Additional exemptions 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
 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
 If ER misclassifies EE, penalties will accrue to the ER
 If EE did report the earnings on his/her federal tax return, the penalty is voided

 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 options
 Fringe benefits like personal use of corporate car
 Prizes
 Premiums on group term life insurance > $50,000

 Tips greater than $20 or more per month
 EE can report tips to ER using Form 4070
 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 year-end with IRS showing food/beverage receipts and reported tips
 ER can claim a credit for SS/Medicare taxes paid on employees’ tips on Form 8846

 Meals/lodging for employer’s convenience
 Sick pay
 After 6 consecutive months off ( personal injury)
 Sick pay by 3 rd party (insurance company/trustee) with specific stipulations for ER match
 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

 OASDI wages cap at $106,800 for 2010
 HI wages never cap
 The Patient Protection & Affordable Care Act of 2010 created additional
.9% HI tax on taxpayers receiving wages in excess of $200,000
($250,000 if married filing jointly) beginning in 2013.
Facts: Tamara earn $132,000/year; paid semimonthly on the
15 th and 30 th ; determine FICA for October 30th 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?
 $106,800.00 – $104,500.00 = $2,300.00
 OASDI tax is $2,300.00 x 6.2% = $142.60
 HI tax is $5,500.00 x 1.45% =$ 79.75
 Total FICA is $142.60 + $79.75 =$ 222.35

a.
9 th paycheck
OASDI
322.40
HI
75.40
a.
106,800 – (8 x 5,200) = 65,200
21 st paycheck 173.60
75.40
106,800 – (20 x 5,200) = 2,800 Remaining taxable income for
OASDI a.
24 th paycheck 0 75.40
119,600 (23 x 5,200) >106,800 This indicates that the worker has reached the cap on taxable income for OASDI

Facts: Ahmed earns $175,000/year; paid first of every month; determine FICA for August 1 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
 $106,800.00 – $102,083.31 = $4,716.69 taxed for OASDI
 $4,716.69 x 6.2% = $292.43 OASDI tax
 $14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!)
 Total FICA = $292.43 + $211.46 =$ 503.89
Remember - the ER has withheld $503.89 from the employee’s paycheck and must match this amount

Eric Sherm began working as a part time waiter on April
1, 2011 at Yardville Restaurant. The cash tips of $475 that he received during April were reported on Form
4070, which he submitted to his employer on May 1.
During May, he was paid wages of $630 by the restaurant. Compute: a. The amount of FICA taxes that the employer should withhold from Sherm’s wages during May.

b. The amount of the employer’s FICA taxes on Sherm’s wages and tips during May.
OASDI a. $68.51
b. $68.51
HI
$16.02
$16.02
( $475 tips + $630 paid wages = $1,105)
$1,105 X .062 = $68.51
$1,105 X .0145 = $16.02


 On wages paid 3/19/10 - 12/31/10
 For qualified employees only
 Full-time or part-time
 Retention credit also available if remain employed for 52 consecutive weeks

Example 3-
6B
Amanda Autry and Carley Wilson are partners in A & W Gift shop, which employs the individuals listed below. Paychecks are distributed every Friday to all employees. Based on the information given, compute the amounts listed below for a weekly payroll period.
Name
/Position
Salary OASDI
Taxable
Earnings
OASDI
Tax
Kelly Simon,
Office
Jim Tress,
Sales
May Aha,
Delivery
Amanda
Autry, Partner
$650/wk $650.00
$3,450/
Month
$796.15
$520/ wk $520.00
$1,900/ wk
0.00
Carley Wilson
Partner
$1,900/ wk
0.00
$40.30
$49.36
$32.24
0.00
0.00
Totals $1,966.15
$121.90
Employers $121.90
Employer’s 28.51
HI Taxable
Earnings
HI Tax
$650.00
$796.15
$520.00
0.00
0.00
$9.43
$11.54
$7.54
0.00
0.00
$1,966.15
$28.51

Name
/Position
Salary OASDI
Taxable
Earnings
Kelly Simon,
Office
Jim Tress,
Sales
May Aha,
Delivery
Amanda
Autry, Partner
$650/wk
$1,900/ wk
$650.00
$3,450/
Month
$796.15
$520/ wk $520.00
0.00
Carley Wilson
Partner
$1,900/ wk 0.00
OASDI Tax HI Taxable
Earnings
HI Tax
$40.30
$49.36
$32.24
0.00
0.00
Employers
OASDI Tax
Totals
$121.90
$1,966.15
$121.90
Employer’s
HI Tax
28.51
$650.00
$796.15
$520.00
0.00
0.00
$1,966.15
$9.43
$11.54
$7.54
0.00
0.00
$28.51

 EE and ER portion of FICA 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
 Can have W-2 and self employment income
 Count both towards calculating cap of $106,800 for OASDI
 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: Celia’s W-2 = $107,768 and her 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: Felipe’s W-2 = $78,000 and his self-employment income = $36,000; how much is FICA on $36,000?
 OASDI ($106,800 - 78,000) = $28,800 taxable OASDI wages x 12.4% = $3,571.20
 HI = $36,000 taxable HI wages x 2.9% =
$1,044.00
 Total FICA $3,571.20 + 1,044.00 =
$4,615.20

Example 3-8B
George Parker was paid a salary of $74,700 during 2011 by Umberger
Company. In addition, during the year, Parker started his own business as a public accountant and reported as net business income of $38,900 on his income tax return for 2011. Compute the following: a.
The amount of FICA taxes that was withheld from his earnings during 2011 by Umberger.
b.
Parker’s self employment taxes on the income derived from the public accounting business for 2011 a . OASDI: $74,700 X .062 = $4,631.40
HI: $74,700 X .0145 = $1,083.15 b.
OASDI $106,800 - $74,700 = $32,100 X .124 = $3,980.40
HI: $38,900 X .029 = $1,128.10

 FICA & FIT always deposited together
 Each November, IRS notifies ER whether they will be a monthly or semiweekly depositor for next calendar year
 Monthly - pay FICA and FIT by 15th of following month


Semiweekly
 If payroll was W-F, deposit by next Wednesday
 If payroll was S-T, deposit by next Friday
Amount deposited may be affected by safe harbor rule (see p. 3-19) 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 $2,500 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

 Consolidated Omnibus Budget Reconciliation Act
(COBRA) gives involuntarily terminated employees option to continued coverage under company’s group health insurance
 Can continue coverage up to 15 months
 Government subsidizes 65% of this cost
 Company is ‘reimbursed’ its 65% by taking a deduction on Form 941
 Employee pays 35%

 EFTPS (Electronic Federal Tax Payment
System)
 Most employers must use EFTPS – major exception is for businesses owing $2500 or loss in quarterly tax liabilities
 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


 All Federal tax deposits must be made electronically
 Take to Treasury Tax & Loan institution or mail to Financial Agent at Federal Tax Deposit
Processing in St. Louis, MO
 Timely deposits requires postmarking two days before due date but no Form 8109 coupons as of
2011

 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
 Payments made with 941if taxes for quarter are less than $2,500 or making monthly deposit (attach 941-V)
 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

 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
 Employer may chose to file Form 941 quarterly instead
– need to notify IRS
 Can correct errors on previously filed Form 941 by filing Form 941-X

 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!!