Developed by Lisa Swallow, CPA CMA MS

 Identify which persons are covered under social security law
 Identify types of compensation that are defined as wages
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Apply current tax rates and wage base for
FICA/SECA purposes
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Describe different requirements/procedures for depositing FICA/FIT taxes
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Complete Forms 941 and 8109

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FICA (1935)
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Federal Insurance Contributions Act
 Tax paid both by employees and employers
 6.2% OASDI plus 1.45% HI
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SECA (1951)
 Self-Employment Contributions Act
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Tax upon net earnings of self-employed
(6.2% + 6.2%) = 12.4% OASDI plus (1.45% + 1.45%) = 2.9% HI
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3 issues
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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
 See Figure 3-2 on p. 3-5 to determine status
 Certain occupations specifically covered
 Agent- and commission-drivers of food/beverages or dry cleaning
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Full-time life insurance salespersons
Full-time traveling salespersons
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Individual working at home on products that employer supplies and are returned to furnished specifications

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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
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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

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Persons may be classified as independent contractors if they conduct an independent trade or business
 See Figure 3-2 (page 3-5) for characteristics of independent contractors
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
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If EE did report the earnings on his/her federal tax return, the penalty is voided

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Cash
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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:
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Gifts (over certain amounts)
Stock options
Fringe benefits like personal use of corporate car
Prizes
Premiums on group term life insurance > $50,000
Other types of taxable wages found in Figure 3-3 (page 3-6)

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Tips greater than $20 or more per month
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EE can report tips to ER using Form 4070
ER 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
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ER must match FICA on reported tips
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“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
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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
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ER can claim a credit for SS/Medicare taxes paid on employees’ tips on Form 8846

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Meals/lodging for employer’s convenience
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Sick pay
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After 6 consecutive months off (personal injury)
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Sick pay by 3 rd party (insurance company/trustee) with specific stipulations for ER match
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Pay for difference between employees’ salary and military pay for soldiers/reservists activated more than 30 days
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Employer contribution to pension plan
 Employer-provided nondiscriminatory education assistance
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Job-related educational expenses not subject to FICA
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Payments for non-job related expenses up to $5,250

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OASDI wages cap at $106,800 for 2010
HI wages never cap
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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
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$5,500.00 x 19 payrolls (before today)= $104,500.00
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How much will be taxed for OASDI?
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$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
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Total FICA is $142.60 + $79.75 =$ 222.35

Facts: Ahmed earns $175,000/year; paid first of every month; determine FICA for August 1 payroll
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What do we calculate first?
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$175,000/12 = $14,583.33 per paycheck
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YTD gross prior to current payroll =$14,583.33 x 7 = $102,083.31
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$106,800.00 – $102,083.31 = $4,716.69 taxed for OASDI
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$4,716.69 x 6.2% = $292.43 OASDI tax
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$14,583.33 x 1.45% = $211.46 HI tax (remember - no cap!)
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Total FICA = $292.43 + $211.46 =$ 503.89

 Hiring Incentives to Restore Employment
Act of 2010 provides relief for employer’s share of OASDI tax
 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

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EE and ER portion of FICA if net earnings exceed $400
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Net Earnings = Net income + distributive share of partnership income
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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
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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”
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Must include SECA taxes in quarterly estimated payments

Facts: Celia’s W-2 = $107,768 and her selfemployment income = $14,500; how much is
FICA on $14,500?
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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 selfemployment 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
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Total FICA $3,571.20 + 1,044.00 = $4,615.20

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One employer identification number (EIN) per employer
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Obtain directly from http://www.irs.gov
with no preregistration necessary
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TELE-TIN to obtain (EIN) immediately at 1-800-829-4933
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Can still fax/mail Form SS-4
 If purchasing an existing business, new owner needs own EIN
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SSN required for everyone that is employed or self-employed
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To apply for social security number file SS-5
 W-7 for ITIN (aliens who must file a tax return, but are ineligible for SS #)
 Required for children age one or over who are claimed as dependents on federal income tax return
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Three ways available for employers to verify SSNs – via internet, telephone or paper request

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FICA & FIT always deposited together
Each November, IRS notifies ER whether they will be a monthly or semiweekly depositor for next calendar year
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Monthly - pay FICA and FIT by 15th of following month
Semiweekly
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If payroll was W-F, deposit by next Wednesday
If payroll was S-T, deposit by next Friday or
Amount deposited may be affected by safe harbor rule (see p. 3-19)
One day - $100,000 or more of federal payroll tax liability, taxpayer has until close of next banking day
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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

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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
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ACH debit method – withdraw funds from employer’s bank account and route to Treasury
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ACH credit method – employer instructs his/her bank to send payment directly to Treasury

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Federal Tax Deposit Coupons, Form 8109
 Will most likely not be used beginning 1/1/11
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Take to Treasury Tax & Loan institution or mail to
Financial Agent at Federal Tax Deposit Processing in St.
Louis, MO
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Timely deposits requires postmarking two days before due date
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Federal depository stamps date on coupon and forwards to IRS
 Coupon has stub that ER keeps as payment record

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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
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
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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

 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
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Can also be used by new employers paying wages of $4,000 or less per year
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Employer should contact IRS and express interest
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Employer may chose to file Form 941 quarterly instead – need to notify IRS
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Can correct errors on previously filed Form 941 by filing Form 941-X

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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
Writing bad checks
Note: IRS estimates a full 30% of all employers incur penalties for insufficient/late deposits of payroll taxes!!