Payroll Accounting 2013
Bernard J. Bieg and Judith A. Toland
CHAPTER 3
SOCIAL SECURITY TAXES
Developed by Lisa Swallow, CPA CMA MS
Learning Objectives
• Identify which persons are covered under social security
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law
Identify types of compensation that are defined as wages
Apply current tax rates and wage base for FICA/SECA
purposes
Describe different requirements/procedures for
depositing FICA/FIT taxes
Complete Form 941
Coverage under FICA
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FICA (1935)
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SECA (1951)
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Federal Insurance Contributions Act
Tax paid both by employees and employers
6.2% employer OASDI plus 1.45% HI
4.2% employee OASDI plus 1.45% HI for 2012
6.2% employee OASDI plus 1.45% HI for 2013
Self-Employment Contributions Act
Tax upon net earnings of self-employed
(4.2% + 6.2%) = 10.4% OASDI plus (1.45% + 1.45%) = 2.9% HI for 2012
(6.2% + 6.2%) = 12.4% OASDI Plus 2.9% HI for 2013
3 issues
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Are you an employee or an independent contractor?
Is service rendered considered employment?
Is compensation considered taxable wages?
http://www.socialsecurity.gov/employer
LO-1
Independent Contractor (SECA)
vs. Employee (FICA)
Every person is an employer if “person employs one or more individuals
for performance of services in U.S.”
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***Person includes trusts, estates, individual, partnership or corporation***
Certain occupations specifically covered by FICA
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Full-time life insurance salespersons
Agent- and commission-drivers of food/beverages or dry cleaning
Full-time traveling salespersons
Individual working at home on products that employer supplies and are returned to
furnished specifications
If employer misclassifies employees, there is a penalty
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Generally equal to employer’s share of FICA plus income taxes/FICA that were not
withheld from employees’ earnings
However, if employee reported earnings on 1040, penalty is voided
Penalty may be reduced if employer filed a 1099
LO-1
More Specific Situations
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Government employees – certain exemptions from OASDI/HI depending upon
date of hire
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In-patriates - may be exempt from FICA (20 countries)
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Family employees – in certain situations, children may be exempt from FICA
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Household employees
If they make cash wages of $1,800 or more per year
• Must pay if domestic employee, like a nanny or cook, is under your control
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Additional exemptions - inmates, medical interns, student nurses and workers
serving temporarily in case of emergency
LO-1
Independent Contractor
• Persons may be classified as independent contractors if
they conduct an independent trade or business
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See Figure 3-2 (page 3-5) for characteristics of independent
contractors
See http://www.irs.gov/pub/irs-pdf.p1779.pdf for criteria
• 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
LO-1
What are Taxable Wages?
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Cash
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Wages and salaries
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Bonuses and commissions
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Cash value of meals/lodging provided (but only if for
employee’s convenience)
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Fair market value of noncash compensation, examples include:
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Gifts (over certain amounts)
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Stock payments
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Fringe benefits like personal use of corporate car
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Prizes
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Premiums on group term life insurance > $50,000
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Vacation pay
Other types of taxable wages found in Figure 3-3 (page 3-6)
LO-2
What are Taxable Wages?
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Tips greater than $20 or more per month
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Employee can report tips to employer using Form 4070
Employer calculates FICA on tips and withholds from regular paycheck on
these reported tips
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Must withhold on first paycheck after tips are reported
Employer must pay FICA on reported tips
“Large employers” (11+ employees) must allocate
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[(Gross receipts x .08) – reported tips]
Don’t have to withhold FICA on allocated tips, only reported tips
Employer can claim a credit for SS/Medicare taxes paid on certain
employees’ tips on Form 8846
Have to show allocated tip income on W-2; employer files Form 8027 at year-end with IRS
showing food/beverage receipts and reported tips
LO-2
Specifically Exempt Wages
Meals/lodging for employer’s convenience
Sick pay
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Only after 6 consecutive months off (personal injury)
Sick pay by 3rd party (insurance company/trustee) with specific stipulations
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
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Job-related educational expenses not subject to FICA
Payments for non-job related expenses up to $5,250
LO-2
FICA Taxable Wage Base
• OASDI wages cap (actual) at $110,100 for 2012
• OASDI wages cap (actual) at $113,700 for 2013
• HI wages never cap – since there is no ceiling, employers compute HI tax on full
amount of wages
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However, please be aware that tentative legislation for 2013 creates:
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An additional .9% HI surtax on taxpayers receiving wages in excess of $200,000
($250,000 if married filing jointly)
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A surtax of 3.8% on modified AGI in excess of $200,000 ($250,000 if married filing
join)
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Employer doesn’t match these surtaxes for HI
Interesting note: In 1950 there were 16 workers paying into Social Security for every
one person collecting benefits.
By 2042, that ratio is projected to be 2 to 1.
LO-3
Calculating FICA
Facts: Tamara earns $138,000/year and is paid semimonthly on the15th
and 30th; determine FICA for October 30th payroll
First must find prior payroll year-to-date gross $138,000/24 =$ 5,750.00
Hint: how many payrolls were run before the 10/30 payroll? Multiply that by the
gross per payroll
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$5,750.00 x 19 payrolls (before today)= $109,250.00
How much will be taxed for OASDI?
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$110,100.00 – $109,250.00 = $850.00
Tamara’s OASDI tax is $850.00 x 4.2% = $35.70
Employer’s OASDI tax is $850.00 x 6.2% = $52.70
How much will be taxed for HI?
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Both Tamara’s and the employer’s HI tax is $5,750.00 x 1.45% =$ 83.38
How much is total FICA?
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Total FICA for Tamara is $35.70 + $83.38 = $119.08
Total FICA for employer is $52.70 + $83.38 =$136.08
LO-3
Another Example - Calculating FICA
Facts: Ahmed earns $175,000/year and is paid the first of every month;
determine FICA for August 1 payroll
What do we calculate first?
$175,000/12 = $14,583.33 per paycheck
Then count number of payrolls before today’s payroll!
Year to date gross prior to current payroll is $14,583.33 x 7 = $102,083.31
$110,100.00 – $102,083.31 = $8,016.69 taxed for OASDI for 2012
113,700 – 102,083.31 = 11,616.69 taxed for OASDI for 2013
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Ahmed’s OASDI tax is $8,016.69 x 4.2% = $336.70
The employer’s OASDI tax is $8,016.69 x 6.2% = $497.03
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OASDI for both employee and employer at 6.2% for 2013 at $11,616.69
Both Ahmed’s and the employer’s HI Tax is $14,583.33 x 1.45% = $211.46
(remember - no cap!)
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Total FICA for Ahmed is $336.70 + $211.46 = $548.16
Total FICA for the employer is $497.43 + $211.46 =$ 708.49
LO-3
SECA and Independent Contractors
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Employee and employer portion of FICA is paid if net earnings
exceed $400
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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
• In 2013 self-employed taxes = 15.3% (6.2% + 1.45% and 6.2% +
1.45%)
• Can have W-2 and self employment income
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Count both towards calculating cap of $113,700 for OASDI in 2013
Report on Schedule C (Form 1040) “Profit or Loss from Business”
• Also file Schedule SE (Form 1040) “Self-Employment Tax”
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Must include SECA taxes in quarterly estimated payments
LO-3
Calculating FICA with W-2 and
Self-Employed Earnings
Facts: Celia’s W-2 = $117,768 and her self-employment income
= $14,500; how much is her FICA on $14,500?
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No OASDI is due because Celia capped on W-2
HI = $14,500 x 2.9% = $420.50
Total FICA is therefore = $420.50
LO-3
Calculating FICA with W-2 and
Self-Employed Earnings
Facts: Felipe’s W-2 = $78,000 and his self-employment
income = $36,000; how much is Felipe’s selfemployment tax on $36,000?
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OASDI ($110,100 - $78,000) = $32,100 taxable OASDI wages x
10.4%* = $3,338.40 for 2012
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(113,700 – 78,000)$35,700 x 12.4% = 4,426.80 for 2013
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HI = $36,000 taxable HI wages x 2.9%** = $1,044.00
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Total FICA due on self-employment = $3,338.40 + 1,044.00 =
$4,382.40 for 2012
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4,426.80 + 1,044 = 5470.80 for 2013
*4.2% + 6.2% = 10.4%
**1.45% + 1.45% = 2.9%
LO-3
Problems
 3 – 3A, 3 – 4 A, 3 – 17 A
Problems
 3 – 1 A, 3 – 2 A, 3 – 5 A, 3 – 7 A
Problems
 3 – 8 A, 3 - 9 A, 3 – 10 A
How to Get Set Up with SSA
One employer identification number (EIN) per employer obtained by
completing a Form SS-4 (see Figure 3-5 on page 3-15)
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If purchasing an existing business, new owner needs own EIN
SSN required for everyone that is employed or self-employed
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Obtain directly from http://www.irs.gov with no preregistration necessary
TELE-TIN to obtain (EIN) immediately at 1-800-829-4933
Can still fax/mail Form SS-4
To apply for social security number file SS-5
Required for children age one or over who are claimed as dependents on
federal income tax return
W-7 completed for aliens who must file a tax return, but are ineligible for
social security #
Employer can verify SS numbers by internet or telephone
http://www.ssa.gov/employer/ssnv.htm
LO-3
Depositing FIT & FICA
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FICA & FIT always deposited together
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Each November, IRS notifies ER whether they will be a monthly or semiweekly
Amount deposited may be
depositor for next calendar year (“lookback period”)
affected by safe
harbor rule ( p. 3-19)
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Monthly - pay FICA and FIT by 15th of following month
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Semiweekly – if payday is W, Th or F then due following W and if payday is S, S, M or T
then due following F
However, there is an exception: One-day rule states that if $100,000 or more of
federal payroll tax liability is due, taxpayer has until close of next banking day
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New employers are monthly depositors unless $100,000+ of liability
triggers one-day rule and converts them to semiweekly
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Different requirements for agricultural and household employees
LO-4
Credit Against the Required 941
Deposits
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Consolidated Omnibus Budget Reconciliation Act (COBRA) gives
employees involuntarily terminated between 9/1/08 – 3/31/10
the option to continue coverage under company’s group health
insurance
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Can continue coverage up to 15 months
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Government subsidizes 65% of premium cost
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Company is ‘reimbursed’ its 65% by taking a deduction on Form
941
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Employee pays 35% of premium
LO-4
How to Deposit FIT
and FICA Electronically
• Old paper-based system has been replaced by an electronic
depositing system
• Most employers are now on EFTPS (Electronic Federal Tax
Payment System) - only exception is for businesses owing
$2,500 or less in quarterly tax liabilities
Enroll in EFTPS Online at http://www.eftps.gov
All new employers automatically pre-enrolled
Two methods
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EFTPS (direct) – withdraw funds from employer’s bank account and route to
Treasury
• EFTPS (through financial institution) – employer instructs his/her bank to send
payment directly to Treasury
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LO-4
Problem
 3 - 15A
How to Report and Reconcile FIT/FICA
• File Form 941 (Employer’s Quarterly Federal Tax Return)
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Download at www.irs.gov/formspubs/ or call 1-800-829-3676
• Due on last day of month following close of quarter
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January 31, April 30, July 30, October 31
If that falls on weekend or legal holiday, file next business day
• Make deposit with Form 941 if taxes for quarter are less than
$2,500
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Use 941-V when making payment or can pay by credit card
• Electronic filing options available for employers who meet
requirements
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Complete an e-file application & then electronically submit 941 or apply for a
PIN on IRS website and file electronically through third-party transmitter
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Can correct errors on previously filed Form 941 by filing Form 941-X
LO-5
Employer’s Annual Federal Tax Return
• Employers who owe $1,000 or less per year may file Form
944
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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 and IRS will respond
with notification letter
Employer may chose to file Form 941 quarterly instead – need to
notify IRS
LO-5
Types of Penalties
• Failure-to-comply penalties will be added to tax and interest
charges; negligence can also result in fines/imprisonment
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Interest set quarterly, based on short-term Treasury bill rate
• Penalties imposed for following:
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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
Not supplying identification numbers
Writing bad checks
Note: IRS reports that 100,000 businesses
owe more than two years of payroll taxes
(estimated at $58 billion)!!
LO-5
Problem
 3 – 11 A, 3 – 1 2A, 3 – 13 A, 3 – 14 A, 3 – 16 A