WELCOME
ACC170
Payroll Tax Accounting
ACC 170 – Payroll Tax Accounting
Syllabus
(see Syllabus Word document)
Bob Bruebach – Resume
Experience
1.
2.
3.
ADP
Paychex
ADP
1.
2.
ADP
Corp.
Office
In-House
Payroll
ARENS CONTROLS COMPANY, L.L.C.
A CURTISS-WRIGHT COMPANY
Arlington Heights, IL
Vice President Finance Controller
Manufacturer
Sales of $55+ million
November 1999 to Present
ROHM AND HAAS COMPANY
Chicago Heights, IL
Senior Financial Analyst/Plant Controller
Regional Credit Manager
Chemical Manufacturer
Sales of $6 billion
February 1995 to November 1999
August 1988 to February 1995
BUSINESS COMMUNICATIONS OF ILLINOIS, INC.
Burr Ridge, IL
Vice President of Finance/Controller
Office Machine Dealership
Sales of $5.5 million
June 1987 to August 1988
SHARP ELECTRONICS CORPORATION
Romeoville, IL
Assistant Operations Manager
Regional Credit Supervisor
Electronics Manufacturer
Sales of $8 billion
February 1985 to June 1987
July 1983 to February 1985
Education
MBA, University of Chicago
CPA (Certified Public Accountant)
MBA, Northern Illinois University
BS, Finance, Northern Illinois University
June 1999
November 1987
May 1986
May 1981
UNDERSTANDING PAY PERIODS
Weekly = 52 Pay Periods per Year
 Example:
• Annual Salary of $52,000 – what is the weekly amount?
• $1,000.00 per Week ($52,000 / 52)
Bi-Weekly = 26 Pay Periods per Year
 Example:
• Annual Salary of $52,000 – what is the bi-weekly amount?
• $2,000 every 2 Weeks ($52,000 / 26)
Semi-Monthly = 24 Pay Periods per Year
 Example:
• Annual Salary of $52,000 – what is the semi-monthly amount?
• $2,166.66 paid on the 15th and last day of month ($52,000 / 24)
UNDERSTANDING PERCENTAGES
6.2% = 0.062
 Example:
• What is 6.2% of $100.00?
• Answer: $100.00 * 6.2%
$100.00 * 0.062
=
= $6.20
0.6% = 0.006
 Example:
• What is 0.6% of $500.00?
• Answer: $500.00 * 0.6%
$500.00 * 0.006
=
= $3.00
FICA
SOCIAL SECURITY TAXES
FICA
FICA
(Federal Insurance Contributions Act)
Two Programs
• OASDI – Social Security
“Old Age, Survivors and Disability Insurance”
• HI – Medicare
“Health Insurance”
(see Soc. Sec. Benefit Stmt. pdf document)
(Ratio of Taxpayers to Beneficiaries)
FICA
Calculation of Taxes - Employee
Program: OASDI – Social Security
Tax:
6.2% (0.062) of Wages up to $117,000.
FYI…
 Wage amount has increased every year
There was a 4.2%
rate for 2012 and
2011. The rate
reverted back to 6.2%
for 2013.
since 1972… except
for 2010 and 2011.
FYI…
2014 - $117,000
 If EE changes ER during
year, new
2013 - $113,700
ER required to start2012
at -$0.
(EE can get
$110,100
refund of overpaid OASDI on
Form
1040.)
2011
- $106,800
2010 - $106,800
2009 - $106,800
2008 - $102,000
2007 - $97,500
2006 - $94,200
2005 - $90,000
<SS Wage history>
FICA
Calculation of Taxes – Employee
(OASDI – Excess Deducted from Employee)
Example
Employer #1
Employee works From January 1st to June 30th and earns $125,000:
FICA-OASDI deducted from Paychecks during that Time:
$117,000 (maximum) * 0.062 = $7,254.00
Employer #2
Employee works from July 1st to December 31st and earns another $125,000:
FICA-OASDI deducted from Paychecks during that Time:
$117,000 (maximum) * 0.062 = $7,254.00
FICA
Calculation of Taxes – Employee
(OASDI – Excess Deducted from Employee)
Example
Below is the portion of the Form 1040 where excess FICA-OASDI is
recorded as “additional withholding” toward federal income tax:
FICA
Calculation of Taxes - Employee
Program: OASDI – Social Security
Tax:
6.2% (0.062) of Wages up to $117,000.
 Wage amount has increased every year
since 1972… except for 2010 and 2011.
 If EE changes ER during year, new
ER required to start at $0. (EE can get
refund of overpaid OASDI on Form 1040.)
 FYI… Social Security site  http://www.ssa.gov/
Program: HI – Medicare
Tax:
1.45% (0.0145) of Wages – no Maximum.
Plus, 0.9% for Wages over $200,000.
FICA
FICA Taxes - EE Examples
Example 1
If John has cumulative wages of $50,000 and his next paycheck was
$5,000, calculate:
$5,000 * 0.062 = $310.00
a) the SS (OASDI) part of FICA: ____________________
$5,000 * 0.0145 = $72.50
b) the Medicare (HI) part of FICA: ___________________
FICA
FICA Taxes - EE Examples (cont.)
Example 2
If Mary has $109,600 of cumulative earnings and her next paycheck was $8,000,
calculate:
First  Check to see if maximum reached:
 $109,600 + $8,000 = $117,600, which exceeds $117,000 maximum.
Second  Calculate the amount wages subject to the tax:
 $117,000 - $109,600 = $7,400
 So, only $7,400 of the $8,000 paid is subject to the tax.
$7,400 * 0.062 = $458.80
a) the SS (OASDI) part of FICA: ________________________
$8,000 * 0.0145 = $116.00
b) the Medicare (HI) part of FICA: _______________________
FICA
FICA Taxes - EE Examples
Example 3
The Johnson Company pays their employees on a monthly basis. Sam is paid
$20,000 per month. What are the amounts for FICA-SS and FICA-HI that are
withheld for Sam’s June 30th paycheck:
First, what will be Sam’s cumulative earnings including the June 30th paycheck:
• 6 * $20,000 = $120,000  exceeds $117,000
So, need to calculate cumulative earnings PRIOR TO June 30th paycheck:
• 5 * $20,000 = $100,000
Since the maximum wages for FICA-SS are $117,000, then only $17,000 of the
$20,000 of the June 30th paycheck are subject to FICA-SS tax:
$17,000 * 0.062 = $1,054.00 FICA-HI: ______________________
$20,000 * 0.0145 = $290.00
FICA-SS: $______________________
FICA
Calculation of Taxes – Employer Portion
Program: OASDI – Social Security
Tax:
6.2% (0.062) of Total “OASDI” Wages.
 Use wages only subject to OASDI Tax.
Program: HI – Medicare
Tax:
1.45% (0.0145) of Total “HI” Wages.
(Employer does not pay 0.9% additional tax for
Wages over $200,000.)
FICA
FICA Taxes - ER Examples
Example 4
Calculate Employees’ and Employer’s Share of FICA taxes:
Employee
Joe
Sue
Doug
Totals
Bi-Weekly
Wages
$2,000
$3,000
$2,000
---------$7,000
FICA
OASDI
Tax
$124.00
$186.00
$124.00
----------$434.00
$7,000 * 0.062
Employer OASDI: $434.00
FICA
HI
Tax
$29.00
$43.50
$29.00
----------$101.50
$7,000 * 0.0145
Employer HI: $101.50
FICA
FICA Taxes - ER Examples (cont.)
Example 5
Calculate Employees’ and Employer’s Share of FICA taxes:
Cumulative
Employee Earnings
Tom
$62,000
Diane
$114,600
Jenny
$50,000
Totals:
Weekly
Wages
$1,000
$4,000
$3,000
---------$8,000
OASDI
Taxable
Wages
$1,000
$2,400
$3,000
----------$6,400
$6,400 * 0.062
Employer OASDI: $396.80
FICA
OASDI
Tax__
$ 62.00
$148.80
$186.00
----------$396.80
HI
FICA
Taxable
HI
Wages_
Tax_
$1,000
$14.50
$4,000
$58.00
$3,000
$43.50
----------- ----------$8,000 $116.00
$8,000 * 0.0145
Employer HI: $116.00
FICA
History Review
History…
<SS Wage history>
<SS Rate history>
<SS Total history>
941 Taxes
Tax Deposit Requirements
Total of FICA taxes and withheld FIT
• New Employers  Monthly Depositor until
(Federal Income Taxes)
lookback is established. (If $100,000
or more,
then pay next business day and become a semiweekly depositor.)
• (lookback period = 4 calendar quarters beginning July 1st
of 2nd preceding year and ending June 30th of the
previous year.)
941 Taxes
Tax Deposit Requirements (cont.)
Deposit Status
QUARTERLY
MONTHLY
SEMI-WEEKLY
NEXT BUSINESS
DAY
Qualification
Deposit Due
End of the following month
Less than $2,500 at the end
(as a deposit or when filing
of the calendar quarter.
Form 941).
$50,000 or LESS
“lookback” period.
in
the By the 15th of the following
month.
More than $50,000 in the
“lookback” period.
If Payday:
• W,R,F
 following W
• Sa,Su,M,T  following F
$100,000 (accumulated) or more By close of Next Business
on any day.
Day.
941 Taxes
FYI… Tax Deposit Requirements (cont.)
Deposit
Status
Qualification
QUARTERLY
Less than $2,500 at the end of the
calendar quarter.
MONTHLY
$50,000 or LESS in the “lookback”
period.
SEMI-WEEKLY
NEXT BUSINESS
DAY
More than $50,000
“lookback” period.
$100,000
any day.
(accumulated)
in
the
or more on
941 Taxes
FYI… Tax Deposit Requirements (cont.)
Deposit
Status
QUARTERLY
MONTHLY
SEMI-WEEKLY
NEXT BUSINESS
DAY
Firm Size  Firm Salaries,
assuming total ER & EE
FICA taxes (15.3%) and
FIT rate of 15%
Qualification
Less than $2,500 at the end of the
FYI…
calendar quarter.
The 15.3% is based on:
FICA-SS-EE: 6.20%
FICA-SS-ER: 6.20%
$50,000 or LESS in the “lookback”
FICA-HI-EE: 1.45%
period.
FICA-HI-ER: 1.45%
15.30%
More than $50,000
“lookback” period.
$100,000
any day.
(accumulated)
in
the
or more on
941 Taxes
FYI… Tax Deposit Requirements (cont.)
Deposit
Status
QUARTERLY
Firm Size  Firm Salaries,
assuming total ER & EE
FICA taxes (15.3%) and
FIT rate of 15%
Qualification
Less than $2,500 at the end of the
calendar quarter.
$8,250 per Quarter
or $33,000 per Year
MONTHLY
SEMI-WEEKLY
NEXT BUSINESS
DAY
$50,000 or LESS in the “lookback”
period.
More than $50,000
“lookback” period.
$100,000
any day.
(accumulated)
in
the
or more on
941 Taxes
FYI… Tax Deposit Requirements (cont.)
Deposit
Status
QUARTERLY
Firm Size  Firm Salaries,
assuming total ER & EE
FICA taxes (15.3%) and
FIT rate of 15%
Qualification
Less than $2,500 at the end of the
calendar quarter.
$8,250 per Quarter
or $33,000 per Year
MONTHLY
$50,000 or LESS in the “lookback”
period.
$165,000 per Year
SEMI-WEEKLY
NEXT BUSINESS
DAY
More than $50,000
“lookback” period.
$100,000
any day.
(accumulated)
in
the
or more on
941 Taxes
FYI… Tax Deposit Requirements (cont.)
Deposit
Status
QUARTERLY
Firm Size  Firm Salaries,
assuming total ER & EE
FICA taxes (15.3%) and
FIT rate of 15%
Qualification
Less than $2,500 at the end of the
calendar quarter.
$8,250 per Quarter
or $33,000 per Year
MONTHLY
$50,000 or LESS in the “lookback”
period.
$165,000 per Year
SEMI-WEEKLY
More than $50,000
“lookback” period.
in
the
$330,000 per Payroll
NEXT BUSINESS
DAY
$100,000
any day.
(accumulated)
or more on
941 Taxes
Tax Deposit Requirements (cont.)
 If $200,000 or more in a calendar year – must
FILE (deposit) ELECTRONICALLY.
 The amount includes all taxes, not just P/R taxes.
 You will be notified when you are required to file electronically.
 Penalty of 10% if not followed.
 Once EFT is required, then EFT every year.
 Beginning in 2011 – Payroll Taxes (as well as
ALL federal tax deposits) must be deposited
electronically.
941 Taxes
Form 8109 Coupon
(see Form 8109 pdf document)
 Beginning in 2011, Form 8109 cannot be used
since all taxes are now deposited electronically!
941 Taxes
Form 941
 Quarterly report of Total FICA Taxes and
Withheld FIT (aka “941” Taxes).
 Due date is the last day of following month - (10
additional days allowed if timely deposits have
been made).
(see Form 941 pdf document)
941 Taxes
fyi… Penalties
 Failure to Pay  ½% for each month, to a maximum of 25%.
 Failure to File  5% for each month, to a maximum of 25%.
 Failure to Make Timely Deposits  2-15% of undeposited
taxes, based on days late, or amount of days after IRS notice.
May include CRIMINAL CHARGES, as well.
FICA
Coverage
 FICA cover most employees.
 Examples of workers who are not covered include:
 Medical Interns & Student Nurses
 Household Employees who receive less than
$1,900 from one employer in one year.
 Partners in a Partnership
 Federal & State EE’s covered by a
retirement system – HI only.
 Ministers – may elect not to be covered.
 Independent Contractors
FICA
Determination of
Independent Contractor (SECA) vs. Employee (FICA)
 IRS historically used 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!!
Access http://www.irs.gov/formspubs/
FICA
Specifically Covered
(in addition to common law)
• Full time life insurance salespeople
• Full time traveling salespeople
• Agent- and commission-drivers of food/beverages
FICA
What are Taxable Wages?
 Wages, Salaries, Vacation Pay, Bonuses, Commissions.
 Moving Expense Reimbursement (non-qualified)
 Cash Tips over $20 in a Calendar Month
 Non-Cash Compensation (“fringe benefits”):
 Personal Use of a Company Car
 Employer paid premiums for Group Term Life
Insurance in excess of $50,000
 Non-Cash Awards & Prizes
FICA
Self Employed Contributions Act
(SECA)
 FICA taxes are due on Self-Employed Income (from
Schedule C)
 Same wage base for OASDI  $117,000
 FICA-OASDI: 12.4%
 FICA-HI: 2.9% …plus, 0.9% for Wages over $200,000.
 Use Schedule SE to calculate/report FICA taxes
 The tax ultimately gets “located” on 1040 form (line 56).
 Deduction for 50% of the Self-Employment Tax (SECA)
is on the 1040 form (line 27).
HISTORY
INCOME TAX ACT
• 1913 – 16th Amendment
In 1913, the 16th Amendment to the Constitution made the income tax a permanent
fixture in the U.S. tax system. The amendment gave Congress legal authority to tax
income and resulted in a revenue law that taxed incomes of both individuals and
corporations.
• 1943 – Withholding Tax Act
On the eve of WWII, few Americans paid income taxes. Those that owed taxes paid
them in one lump sum on March 15 (later changed to April 15). To pay for the war,
the Revenue Act of 1942 lowered exemptions and raised income tax rates. The
Current Tax Payment Act of 1943 required employers to collect the tax by deducting
it from the employee's paycheck—just like the Social Security tax that began in 1935.
Although the withholding tax was sold as a wartime emergency, like most expansions
of government instituted during wartime, it has been a way of life for most Americans
ever since.
HISTORY
FEDERAL INSURANCE CONTRIBUTION ACT
(FICA)
• 1935
• OASDI
FDR – Franklin Delano Roosevelt
 Elected President in 1932
…in 1965
• HI – Medicare added
HISTORY
SELF-EMPLOYED CONTRIBUTION ACT
(SECA)
• 1951
• Tax upon the earnings of the Self- Employed
HISTORY
UNEMPLOYMENT TAX ACTS
• 1935
HISTORY
UNEMPLOYMENT TAX ACTS (cont.)
• 1935
• FUTA – Federal Unemployment Tax Act
• SUTA – State Unemployment Tax Act
HISTORY
FAIR LABOR STANDARDS ACT
(FLSA)
• 1938
The Fair Labor Standards Act was passed by
Congress on 25th June, 1938. The main objective
of the act was to eliminate "labor conditions
detrimental to the maintenance of the minimum
standards of living necessary for health, efficiency
and well-being of workers". The act established
maximum working hours of 44 a week for the first
year, 42 for the second, and 40 thereafter.
Minimum wages of 25 cents an hour were
established for the first year, 30 cents for the
second, and 40 cents over a period of the next six
years. The Fair Labor Standards Act also
prohibited child labor in all industries engaged in
producing goods in inter-state commerce.
HISTORY
FAIR LABOR STANDARDS ACT (cont.)
(FLSA)
• 1938
• Minimum Wages, Equal Pay, Overtime, Recordkeeping
• Enterprise Coverage / Employee Coverage
 Enterprise: (includes all employees if…)
 $500K+ in sales
 Interstate commerce
 Many family establishments are exempted
 Individual/Employee
 Employee whose company may not meet enterprise
coverage, but is involved in interstate commerce
•
Example: a driver for fleet that transports goods, but
enterprise annual revenues are $225,000
HISTORY
What the FLSA Does Not Cover
 No requirement for employers to:
 Pay extra for weekend/holiday work
 Pay for holidays, vacation or sick time
 Grant vacation time
HISTORY
FAIR EMPLOYMENT LAWS
• Civil Rights Act (1964)
• EEO (Equal Employment Opportunity)
• Cannot discriminate – color, race, religion, gender,
national origin.
• Exemptions exist – ex., private membership clubs.
(In 1974 the Western Open found an annual home at the Butler
National Golf Club in Oak Brook, Illinois. It stayed this way until
shortly after the 1990 tournament, when the PGA Tour adopted
a policy of holding events only at clubs which allowed
minorities and women to be members. This resulted in Butler
National being replaced by the Cog Hill Golf & Country Club in
Lemont, Illinois. The Dubsdread Course at Cog Hill played host
to the Western Open from 1991 to 2006.)
HISTORY
FAIR EMPLOYMENT LAWS
• Civil Rights Act (1964)
• Executive Order 11246
• Major anti-discrimination regulation for government
contractors with contracts > $10,000
• For those exemptions under Civil Rights Act, prevents
discrimination in organizations that contract with the
Federal Government.
• Requires written plan that shows how underrepresented groups are recruited and hired.
HISTORY
FAIR EMPLOYMENT LAWS
• Civil Rights Act (1964)
• Executive Order 11246
• Age Discrimination in Employment Act (ADEA)
(1967)
• Added age protection for all workers over 40.
• Applies to employers with 20+ employees.
HISTORY
FAIR EMPLOYMENT LAWS
• Civil Rights Act (1964)
• Executive Order 11246
• Age Discrimination in Employment Act (ADEA)
(1967)
• Americans with Disabilities Act (ADA) (1990)
• Applies to employers with 15+ employees
• Reasonable accommodations must be provided (vague)
• Many companies needed to rewrite job descriptions to
specify physical requirements for jobs
HISTORY
IMMIGRATION REFORM & CONTROL ACT
(IRCA)
• 1986
• Proof of Citizenship
• Requires employer to verify citizenship
• I-9 Form needs to be completed within 3 days
of employment
• Penalties for noncompliance
HISTORY
Family Medical Leave Act
(FMLA)
• 1993
• Covers companies with 50+ employees within 75 mile
radius
• EE guaranteed 12 weeks unpaid leave for:
• Birth, adoption, critical care
• Can use for child, spouse or parent
• Leave may be used all at once or at separate times – but must be
within 12 months of qualifying event
• ER continues health care coverage
• Right to return to same/comparable job and continue
health coverage in absence
HISTORY
Employee Retirement Income Security Act
(ERISA)
• Trustees must monitor pension plans
• Vested 100% in 3-6 years
Years of % Vested in
Example of a vesting plan:
Service
Pension Plan
2
50%
4
75%
5
100%
• Provides for PBGC
Pension Benefit Guaranty Corporation - a federal
agency which guarantees benefits to employees
• Stringent recordkeeping requirements
FIDUCIARY
Fiduciary Responsibility
Amounts Withheld from Employees’
Wages for Income Taxes and Social
Security to be Paid to the Government
You cannot use these funds for any other
purpose
(see Fiduciary Liability from Scarinci & Hollenbeck “pdf” document)
(see IRS Cases “pdf” document)
(see more recent IRS Cases “docx” document)