Chapter 3 - Social Security Taxes

Developed by Lisa Swallow, CPA CMA MS
Social Security Taxes
 FICA (1935)
Federal Insurance Contribution Act
for 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
Determination of
Independent Contractor (SECA)
Employee (FICA)
IRS uses 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!!
Specifically Covered
(in addition to common law)
 Life insurance salespeople
 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)
 Military on basic pay (no FICA on excess pay)
More Specific Situations
 Temporary employees – considered EE of temporary agency
 Household employees
If they make $1300+/year
ER must pay FICA – reports on 1040 (still paid by both)
Unless already files 941 - then report on this form
Doesn’t apply to minor unless that’s their 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
Employment Specifically
Exempt from FICA
Children under 18 employed by parent’s
business, if either a sole proprietorship or
partnership (but not corp)
Farm workers if all workers annual
compensation < $2500 or each worker
earned < $150/year
Employees covered under RRTA (Railroad
Retirement Tax Act)
Newspaper carrier less than 18 years old
*this is not an exhaustive list*
What are Taxable Wages?
Wages and salaries
Bonuses and commissions
FMV of noncash compensation
Gifts (over certain amounts)
Stock options
Fringe benefits like personal use of corporate car
Premiums on group term life insurance > $50,000
Taxable Wages
 Tips greater than $20 or more per month
EE must file form 4070 by 10th of following month with ER
50% penalty imposed on EE for not reporting
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]
Don’t have to withhold FICA on allocated tips, only reported
Have to show allocated tip income on W-2
ER can petition IRS to reduce tip allocation to as low as 2%
Employer must file Form 8027 at year end with IRS
Specifically Exempt Wages
Meals/lodging for ER convenience (for example,
Sick pay after 6 consecutive months off (personal
injury – not permanent disability – payments)
Sick pay by 3rd party (insurance company/trustee)
ER SEP* (up to 15% of first $170,000)
SEP contributions through salary reduction must
have FICA withheld
ER-provided nondiscriminatory education assistance
(must have written plan) up to $5,250
Education must maintain/improve skills required
by employment
*Simplified Employee Pension
FICA Taxable Wage Base
 OASDI caps at $89,700 for 2003 (estimated)
 HI never caps
 Facts: Earn $95,000/year - paid semimonthly on the 15th
and 30th; the calculations for 12/15 payroll are:
First must find prior payroll YTD gross $95,000/24 = 3,958.33
3,958.33 x 22 = 87,083.26
How much will be taxed for OASDI?
89,700.00 – 87,083.26 = 2,616.74
OASDI tax is 2,616.74 x 6.2% = 162.24
HI tax is 3,958.33 x 1.45% = 57.40
Total FICA is 162.24 + 57.40 = $219.64
Is this EE withholding or ER payroll tax expense?
Answer - both!!
Example #2 to Calculate FICA
Earns $178,000/year; paid first of every month;
determine FICA for 7/1/03 payroll
What do we calculate first?
178,000/12 = $14,833.33 per paycheck
YTD gross prior to current payroll = 14,833.33 x 6 = 88,999.98
89,700.00 - 88,999.98 = 700.02 taxed for OASDI
700.02 x 6.2% = 43.40 OASDI tax
14,833.33 x 1.45% = 215.08 HI tax (remember - no cap!)
Total FICA = 43.40 + 215.08 = 258.48
Remember - the ER has withheld $258.48 from the
employee’s paycheck and must match this amount
SECA - Independent
Contractor is both EE & ER
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
 Can have W-2 and self employment income
 Example: W-2 = $92,768 and self employment income = $14,500; how
much FICA on $14,500?
Answer: No OASDI because capped on W-2 and
HI = 2.9% x 14,500 = $420.50
 Example: W-2 = $78,000 and self employment income = $21,000; how
much is FICA on $21,000?
Answer: (89,700 - 78,000) = 11,700 OASDI wages x 12.4% = $1450.80 +
21,000 x 2.9% = $609.00
Total FICA = ($1450.80 + 609.00 = $2059.80)
How to Get Set Up
with SSA
 One FEIN per employer
File Form SS-4 with IRS office where tax returns will be filed.
TELE-TIN to obtain Federal Employer Identification Number
(FEIN) immediately (1-866-816-2065).
When purchasing an existing business, the new owner
needs a new FEIN.
SS-5 for everyone > 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)
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
1. Monthly depositor - pay FICA and FIT by 15th of following
2. 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 $2,500), wait and pay
when 941 report is filed
How to Deposit FIT/FICA
 Fill out a Form 8109 coupon
These are sent to you when apply for FEIN.
Take to an authorized financial institution (depository
for federal government)
 Or can use EFTPS (Electronic Federal Tax Payment
must use if total deposits exceed $200,000 for a year
complete Form 9779, EFTPS Business Enrollment
to utilize online capabilities, enroll at
 If mailing, must postmark at least 2 days before due date
 Penalties for late deposits
How to Report FIT/FICA
File Form 941 (Employer’s Quarterly Federal Tax
Download at
Due on last day of month following close of
941E-file are for Reporting Agents who file 10+
returns per quarter
941 TeleFile are for certain depositors sent
TeleFile kits
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
not filing/providing information returns
not supplying proper Taxpayer Identification
Numbers (TINs)