Mastering Payroll Categories of Workers  Common law employees  Statutory employees  St

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Mastering Payroll Categories of Workers  Common law employees  Statutory employees  St Powered By Docstoc
					                                          Mastering Payroll
                                         Categories of Workers
         Common-law employees
         Statutory employees
         Statutory nonemployees*
         Independent contractors*
         Individuals referred by a temporary help agency*
         Leased employees*

  * Ordinary disbursement – don’t need to meet payroll reporting requirements.

                                    Common-Law Employees
    Length of employment not a factor
    Considered employees when they meet the “common law” test which determines whether an
      employer exercises control over the following areas:
          o Who performs the work
          o What will be done
          o How it will be done
          o When it will be done
    Since test subjective, “safe harbors” used to determine if an individual is an independent
      contractor. These include:
        •      common industry practice
        •      past IRS rulings
        •      court decisions
•Employer may submit form SS-8 for written determination of worker’s status.

                                    Statutory Employees Include . . .
•Driver who is the employer’s agent (acts on employer’s behalf) or is paid by commission
•Full-time life insurance sales agent whose principal activity is selling life insurance and/or annuities for 1
carrier or Co.
•Certain homeworkers who work with materials or goods supplied by the employer, meet specifications
given by the employer and must return the goods or materials to an employer or person named by the
•A full-time traveling or in-city salesperson whose principal activity is to submit orders to the employer
from wholesalers, retailers, contractors, operators of hotels, restaurants, or similar establishments.
•Payments to statutory employees not subject to federal income taxation (FIT), but are subject to
FICA (SS & Med) & FUTA rule. SUTA depends on state law.

                                     Statutory Nonemployees
•A) “substantially all” compensation is based on sales or performance (not hours worked) and B)
performance based pay arrangement and fact that individual won’t be treated as employee for tax
purposes is stipulated in written agreement.

Statutory Nonemployees Include:
•Direct Sellers – sell consumer products in customer’s home or business other than permanent retail
establishment & newspaper distributors, carriers, and directly related businesses
•Licensed Real Estate Agents – if earn compensation based on sales or other achievements.
•Companion sitters – personal attendance, companionship, or household services for children or the
elderly and disabled. Referral agency is not considered sitter’s employer if it only receives a placement
fee rather than % of sitters pay.
•Payments exempt from FIT withholding, FICA tax, & FUTA.

                                        Independent Contractors
•Individual or business that controls the methods and means of the work performed.
•Must provide the payer a taxpayer identification number (TIN) which may be a SS# or employer
identification number (EIN).
•Individuals receiving US-source income who are not eligible for a SS# are assigned an individual
taxpayer identification number (ITIN).

                        Individuals Referred by Temporary Help Agency
•During peak-volume periods or to replace absent employees, companies often contract with temp
•Payment is made to temp agency as an ordinary disbursement.
•The agency is the individual’s employer and responsible for all tax withholdings and payments.
•However, if agency fails to pay employees or withhold taxes properly, then client firm may be liable.
•Temp employees may also be eligible for fringe benefits provided by the company.

                                           Leased Employees
•Some firms use a leasing agency or professional employer organization (PEO) to reduce the costs of
employee turnover and related payroll and administrative expenses.
•The agency is the employer and assumes responsibility for recruitment, wage & tax reporting, and
personnel recordkeeping.
•Client firm can hire or terminate leased individuals as it chooses. It pays the PEO as ordinary
•If PEO fails to pay employees or appropriately withhold and deposit taxes, the client firm is responsible.
•Fringe benefits may be required to leased employees under certain circumstances.
•Many state taxing authorities don’t recognize PEO. CA does.

                     Difference Between Employees & Independent Contractors
•Federal wage-hour law, an individual is presumed to be an employee unless employer can prove
•If employees leave firm to become consultants, but continue to provide same services they did as
employees, the IRS considers them employees.
• If employer is unsure whether individual is employee or independent contactor, it can file form SS-8
form. While awaiting IRS response, assume individual is employee.
• Independent contractors may also complete SS-8 form if they believe they are employees. This can
result in an IRS audit of employment tax records.

• Employers report employees annual wages and federal taxes withheld on form W-2.
• If annual compensation for independent contractor is $600 or more, it is reported on form 1099-MISC.
• If the independent contractor fails to submit a TIN, or if IRS otherwise requires it, backup withholding
tax is required on payments made to the independent contractor (2008 backup tax rate is 28%).
• Intentional misclassification of employees as independent contractors can result in criminal charges
against the employer.
• Unintentional misclassification may result in employers being assessed 100% of FIT and FICA taxes
they fail to withhold.
       •If certain requirements met, the tax assessment can be reduced to 1.5% of wage amount for failure
       to withhold FIT and 20% of the FICA tax that should have been withheld from the employee.
       •If employer misclassifies an employee AND fails to file Form 1099-MISC, the tax assessment can
       double to 3% of wage amount and 40% of FICA tax that should have been withheld.
• Assessed by multiple federal and state agencies including IRS, Dept of Labor, state employment
agencies, etc.

                                  Fair Labor Standards Act of 1938
• Most companies regardless of size are required to comply with federal regulations when paying
• Overtime and child labor laws
• Silent on method (ck vs. cash) and frequency of payment.

• Federal Minimum Wage
      •7/24/07:    $5.85
      •7/24/08:    $6.55
      •7/24/09:    $7.25
                                Exceptions to Federal Minimum Wage
  •Tipped employees: minimum wage $2.13 hr + tips.
          •After applying tips for week, average hourly wage must exceed required minimum wage.
  •Computer professionals exempt from overtime if they’re paid at least $27.63 hr or $455 a week
  •Recipients of opportunity wage - new employees under age 20 need only be paid $4.25 hr the first 90
  consecutive calendar days of employment (providing current employees are not displaced or their hours
  cut to hire new employees)

                                           Enterprise Tests
•Firms whose gross annual sales are below thresholds don’t have to comply with minimum wage and
overtime requirements.
•Test used depends upon date business began operations.
•Even if enterprise is not covered by federal wage-hour law, some of its individual employees may be.
(Detailed information available from US Dept of Labor, Wage & Hour Division)

                                Old Enterprise Coverage Test
                       (businesses that began operations before 4/1/90)
Type of Company                Threshold
Dry Cleaner                    $0 +
Construction Companies         $0 +
Schools                        $0 +
Hospitals                      $0 +
Nursing Homes                  $0 +
Retail Enterprises             $362,500 +
Nonretail Enterprises          $250,000 +

* coverage in any calendar quarter determined by total sales over previous four calendar quarters.
                                New Enterprise Coverage Test
                       (businesses that began operations after 3/31/90)
Type of Company                Threshold
Dry Cleaner                    $500,000 +
Construction Companies         $500,000 +
Schools                        $0 +
Hospitals                      $0 +
Nursing Homes                  $0 +
Retail Enterprises             $500,000 +
Nonretail Enterprises          $500,000 +

* coverage in any calendar quarter determined by total sales over previous four calendar quarters.

                               Other Exemptions to OT & Min Wage
•Mom & Pop Shops – Family businesses that employ only family members may also be exempt from
minimum wage and overtime rules.
•Exemption by special certificate – employer may apply to US Dept of Labor for special certificate.
      •Handicapped persons
      •Fulltime students
•Outside salespersons

                                  State Wage-Hour Law Regulates:
•   Frequency of payment
•   When terminated employee must be paid
•   Method of payment
•   Proper treatment of unclaimed wages (escheat law)
•   Whether unused vacation must be paid at termination.

                                    Unclaimed Wages (Escheat Law)
• Many states have escheat law which requires individual’s unclaimed assets (including wages) be
submitted to the state after a certain time period.

                                       Federal vs. State Law
• Employer must observe the law that is most favorable to the employee

                                   For What Must Employees Be Paid?
                                            (Per Federal Law)
•All principal activities of a job and all activities necessary to the performance of those principal
•Home to work travel – generally not considered work time, even if employees drive company vehicle
home.      (If employer agrees to pay for this, it isn’t counted as OT).
•Home to work travel must be paid if:
            •Employee on 24 hour call takes company vehicle home in order to respond to emergency calls
            OR . . .
            •After returning home from regular shift and worksite, employee called to work at a job site that
            isn’t their normal place of work. Travel from home to remote site and back considered hours
            worked .
                                For What Must Employees Be Paid?
                                         (Per Federal Law)
•Home to work travel – generally not considered work time, even if employees drive company vehicle
home.    (If employer agrees to pay for this, it isn’t counted as OT).
      •Home to work travel must be paid if:
         •Employee on 24 hour call takes company vehicle home in order to respond to emergency calls
         OR . . .
         •After returning home from regular shift and worksite, employee called to work at a job site that
         isn’t their normal place of work. Travel from home to remote site and back considered hours
         worked .

                                 For What Must Employees Be Paid?
                                          (Per Federal Law)
•Travel that is all in a day’s work (travel from one site to another during employee’s normal shift) must
be paid. (Travel from home to 1st job site not paid, nor from last job site back home.)
•Travel outside normal commuting area must be paid time if overnight stay not required . Employer
allowed to subtract regular commute time from travel time to remote site.
•Overnight travel as a passenger on public conveyance. When employee travels to remote job site and
overnight stay required, only the portion of travel time that occurs during employee’s normal working
hours is considered working time. Even if that travel occurs on Saturday or Sunday.

                                  For What Must Employees Be Paid?
                                           (Per Federal Law)
•Showering & changing clothes at work – if employer requires at work site, then compensable (must be
•Nonproductive time on the job- if employee must remain at work site and is substantially restricted
from engaging in personal activities, that time is compensable (must be paid) even if employee does
nothing during that time.
•Docking pay for employee misconduct – an employee who is otherwise entitled to overtime pay may
not be docked pay if docking reduces the employee’s wages for the workweek to an average hourly rate
that is below the federal minimum.
        •Tom is paid $8 an hour. Employer policy is to dock employees an hour pay for each 5 minutes late
        to work. Can they do this?
        •Yes as long as his average hourly rate is above federal minimum.

                                   Federal Standards for Overtime Pay
•   Every hour actually worked beyond 40 hours in a workweek requires overtime pay
•   Overtime pay = 1 ½ times regular pay*
•   Premium pay – additional ½ times regular pay
•   Exceptions to overtime rules:
        •Federal, state, city employees
        •Health care industry employees
        •Others – see local Dept Labor Wage & Hour office

* Union contract or company policy may dictate greater than time and a half overtime.
                                      Workweek per Federal Law
•   Any 7 consecutive days or 168 consecutive hours.
•   Must be consistent
•   Employees must be made aware of it
•   Can’t continually change to avoid paying overtime

* If employer has 35 hour workweek, don’t need to pay employees for hours worked between 35 and 40
(as long as average hourly rate doesn’t drop below federal minimum wage.)

                                             Pay Periods
•   Weekly
•   Biweekly (every two weeks)
•   Semi-monthly (twice month)
•   Monthly

                                   When “Make-Up Time” is Unlawful
•   Under federal law, each workweek stands alone.
•   An employer cannot transfer overtime hours from one week to another week to avoid paying overtime.
•   If an employee works extra this week you need to be overtime this week.
•   Exceptions: federal, state, and municipal employers.

                                   Who is Entitled to Overtime?
                              (Covered by Federal Wage-Hour Law)
• Nonexempt employees - must be paid overtime under federal law
     •Employees engaged in interstate commerce (accept credit card order & customer’s credit card is
     an out-of-state company).
• Exempt employees – don’t need to be paid OT
     •Job title doesn’t automatically exempt from OT

                                     Categories of Exempt Employees
    1.     Executive – primary duty is management of a company or department. Supervises 2+
    employees and has power to hire and fire. (Minimum salary $455 per week)
    2.     Administrative – actively responsible for establishment and enforcement of company policy and
    business operations or work is directly related to academic instruction or training for a school system,
    educational establishment or institution. (minimum salary $455 per week)
    3.     Professional – performs work of an advanced type in a field of science or learning. Work must
    be varied as well as intellectual or creative and require analysis discretion and judgment. (minimum
    salary $455 per week)

                                   Categories of Exempt Employees
    4. Outside Salespersons – Regularly and customarily work away from employer’s place of business
    while making sales calls (telemarketers not included)
                                                                 Sections 4 – 6

                                     Documentation from New Employees
     •Social security card –Employers permitted to make photocopies of social security cards, but may not
     force employees to make cards available for inspection. If client doesn’t have a SS#, can have them file
     SS-5 to obtain one.
     •W-4- Employee withholding allowance certificate: Tells employers which tax tables or rate schedules
     to use to withhold federal income tax. All employees must complete & sign.
     • State exemption certificates – half states require employees to fill out separate state withholding
     certificate (CA ok with W-4; accepts DE 4 when employee wants state withholding different from federal

                                      Documentation from New Employees
     •Age certificates–Employers should obtain an employment/age certificate from new hires who appear to
     be within 2 years of legal age to work.
           •Upon employee’s termination, the age certificates must be returned to employee.
           •In CA, if employee is under 18 years of age, employer must file a Statement of Intent to Employ
           Minor & Request for Work Permit and submit to school which can then issue a work permit.
     •Form I-9 : All employees must complete & sign. In addition, employer must prove identity AND right to
     work. Employer should keep copies of all documents applicants present.
           •Due date: must complete I-9 by end of 3rd day if expected to work more than 3 days. Otherwise,
           complete by end of 1st day.
           •Keep I-9 for 3 years from date of hire or 1 year from date of termination ,whichever is longer.

                     Partial List of Acceptable Documentation
                          (Must Prove Identity AND Right to Work in US)

                                Proof of Identity               Employment Authorization          Proof of Identity & Right to Work
                   •US or Canadian driver's license            •Social Security card             •US passport (expired or unexpired)
                   •ID card issued by federal state or local   •Birth certificate                •Certain unexpired foreign
                   government with photo                       •US citizen identification card   passports with temporary I-551
                   • School ID with photo                      •Certificate of birth abroad      stamp
                   •Voter registration card                    •Unexpired employment             •Permanent resident card
                   •US Coast Guard Merchant Marine card        authorization                     •Alien registration receipt card
                   •US military card or draft record                                             •Unexpired employment
                   •Military dependent ID card                                                   authorization document
                   •Native American tribal document

Employers Should Keep Following (partial list)
    • Name
    • Address
    • Sex
    • Date of birth
    • Social Security number
    • Federal withholding certificates (W-4’s)
• Date hired
• Date terminated
• Salary or hourly rate

                           Employment Records, Tax Returns & Documents
•Must keep for at least 4 years from April 15th per IRS:
       •Form 941, Form 944, Form W-3, Form 1042-S, Form W-2
•Must keep 940 at least 4 years from Jan 31st
•Must keep state and unemployment tax returns for at least 4 years from filing date
•However, employers advised to retain payroll records for at least 15 years (period needed in event of
audit and subsequent appeals to avoid penalties)

                   Employee’s Withholding Allowance Certificate (Form W-4)
•Amount withheld is generally determined by employee’s marital status and number of allowances.
•All employees must sign & complete W-4.
•Electronic signature of W-4 allowed at federal level, but many states require original signed certificate.
•New Employees – should complete their W-4 on first day of work. Until submitted, FIT based on single
with zero allowances.
•Current Employees – to change withholding, must sign and complete new W-4.
       •Employer required to make changes by the next pay period 30 days after new W-4 submitted.
       •Tammy paid semimonthly on 5th and 20th. She submits a new W-4 on the 8th of April. When
       must changes be implemented?
       •By May 20th : 30 days from 4/8 is 5/8 and next paycheck is 5/20.

                     Employee’s Withholding Allowance Certificate (Form W-4)
•Employees who claim exempt from federal income tax (FIT) must submit new W-4 each year by 2/15 (or
next business day if it falls on weekend)
       •If employee fails to submit new W-4 by 2/15 employer must withhold as though single and 0
•To claim exempt, employee needs to have owed no federal income tax previous year and not expect to
owe any for current year.

                                  Submitting Copies of W-4 to IRS
•Prior to 1 quarter 2005, employers were required to submit copies of W-4 to the IRS when more than 10
allowances or employee claimed exempt and made more than $200 per week.
•Now only required to submit W-4 if requested by IRS.
•After IRS reviews requested forms, you may get “lock-in” letter directing you to change number of
exemptions by specified date.
       •If employee disagrees, you withhold at “lock-in” rate until IRS decides upon employee’s appeal.

                                    When to Reject Employee’s W-4
• Incomplete – fails to sign and date, or fails to complete side 1 (side 2 is worksheet & can skip)
• Altered with additions or deletions:
       •Addition if note that says, “please withhold a flat $XXX from my paycheck”
       •Deletion when employee crosses out perjury statement (when believe income tax unconstitutional)
• Information employer knows to be false :
       •Employee tells them it is false
       •IRS regulations say employer is not responsible for truthfulness or accuracy of information
       employees provide on W-4
                                  Additional Taxes or Flat Taxes
• Additional Tax -Employer may withhold an additional fixed dollar amount of tax provided minimum
required tax already withheld.
• Flat dollar or percentage of tax – Employer may not withhold a flat dollar amount or flat percentage
(such as 15%).
       •However, employees may review the graduated tables and request an additional amount be
       withheld from each paycheck.

                                      Never Give Tax Advice
• Employers may explain how to fill out W-4
• Employers should NOT tell an employee what to claim.
     •“How do I report I’m married and 2 children?”
            •Show how to complete form
     •“Should I claim my wife as an allowance?”
            • Refer to CPA or IRS publications 505, 213, and 919
     •“I have mortgage interest of $5,000 this year and want to reduce my withholding”
            • Direct to worksheet and instruct them to claim as many allowances as necessary to bring
            withholding in line with FIT liability.

                             Taxpayer Identification Numbers (TINs)

• Form SS-4 – submit to receive Employer ID # (EIN)
• Form SS-5 – employee submits to receive SS#
• Form W-7 - employees receiving US source income who are not eligible for SS# submit a W-7 and are
assigned an individual taxpayer identification number (ITIN).

                                Federal Insurance Contributions Act
                               (FICA – Social Security & Medicare)
•Social Security or Old Age, Survivors, and Disability Insurance (OASDI) is taxed at 6.2% of wages up to
$102,000 in 2008 and $106,800 in 2009. Both employee and employer must pay 6.2% each.
•Medicare or Hospital Insurance (HI) is taxed at 1.45% with no limit. Both employer and employee pay
the 1.45%.
•Most employees are covered by FICA. Exemptions include:
       •Railroad Retirement Tax Act
       •Children under 18 employed by their parents
       •Nonresident aliens covered by totalization agreement

                                   Two or More Employers & FICA
• Employer must withhold FICA tax from each employee each year regardless of FICA tax withheld from
previous employer in same year.
• At end of year employee may claim a refund on his or her personal return if withholding exceeds limit.
• Employer is not entitled to a refund.

                               What determines FIT Withholding?
•The following information & IRS Pub 15 (page 88 & 89)
•Employer pay period – daily, weekly, biweekly, semimonthly, monthly, annually, etc.
•Marital status
•Personal allowances – from W-4
•Taxable wages for period (includes bonus, overtime, taxable benefits, etc.)
•Supplemental wages greater than $1mm withhold at 35% flat rate
                                  FICA Withholding for Family Members
                                      (FIT Withholding still required)
    •Children under 18 employed by their parents are exempt from FICA tax.
    •Exemption applies to partnerships, but only if child is related to both partners
    •Parents employed by children – may be exempt FICA tax under certain circumstances – such as when
    domestic services are provided.

    •No exemption for a spouse
    •No exemption for family members employed by Corp.

                                            Federal Deposit Rules
    • Federal tax deposit is made electronically or by delivering or mailing the Federal Tax Deposit Coupon
    (Form 8109) to a “qualified financial institution” along with a single payment covering taxes due.
    • Copies of the deposit receipt and form 8109 should be kept for at least four years.

                            IRS Electronic Federal Tax Payment System (EFTPS)
    •Employers whose total federal employment tax deposits for the previous year totaled $200,000 + are
    required to remit by EFTPS in 2nd calendar year following.
           •JoCo’s federal tax deposits in 2008 exceeded $200,000
           •JoCo must remit all federal taxes by EFTPS starting in 2010
    •Form 8109 (Federal Tax Deposit Coupon) not required if use EFTPS (instead info submitted

                                      Remittance of Payroll Taxes
    •Employers’ remittance date depends on the type of tax and the amount of withholding.
                                      Remittance of Federal Payroll Tax
                                             (excluding FUTA)
    • Federal taxes are remitted with form 8109 – Federal Tax Deposit Coupon (page 100).
    • Federal income, Social Security and Medicare taxes withheld are reported along with the employer’s
    liability on Form 941 (page 124).

    Look-Back Period for Federal Payroll Taxes
   One-year time period from 7/1 to 6/30.
   The amount of federal taxes paid during look-back
    determines the frequency of deposits.

                   Look-back period for 2008

July 1, 2006                                        June 30, 2007
                                            Monthly Depositors

 •If deposit obligation was $50,000 or less in the look-back period, then Monthly Depositor.
 •Must remit taxes by the 15th of the following month.
       •Payroll taxes withheld in January due February 15th.
•Remain monthly depositor even if accumulated liability for that calendar year exceeds $50,000

                                          Semiweekly Depositor
                                        (Wednesday/Friday Rule)
  •If deposit obligation of more than $50,000 in look-back period then semiweekly deposit (also
  semiweekly if one-banking-day rule is triggered)
         •If payday is on Wednesday, Thursday, or Friday, then deposit due by following Wednesday.
         •If payday is on Saturday, Sunday, Monday, or Tuesday then deposit due by that Friday.

  •Alternative rule: make deposit 3 banking days from payday.

                                     Following Banking Day Exception
                                          (One-Banking-Day Rule)
  •Employers with a deposit liability of $100,000 + must make deposit next banking day
  •Become semiweekly depositor - Remainder of year & following calendar year
                                             Quarterly Depositors
  • If the employer’s liability for the quarter is less than $2,500, taxes may be paid at the end of the quarter
  with Form 941.

                                             Annual Depositors
  • Employers with estimated annual tax liability of less than $1,000 are eligible to file Form 944
  Employer’s Annual Federal Employment Tax. (Annual instead of quarterly forms)
  • IRS will notify you if eligible for form 944.

  • Return and remit taxes annually by January 31 of the following year.

                                               New Employers
  • Monthly depositor until the end of the calendar year unless the one-banking-day- rule is triggered.
  • Look-back period for new employers may be less than full 12-month period.
                                             Nonbanking Days
  • If due date for deposit falls on Saturday, Sunday, or federal or state holiday, the deposit is due on the
  next banking day.
  • Semiweekly deposits – if nonbanking day falls in period after payday, then deposit is extended by one
         •Payday is Friday, but Monday is a nonbanking day.
         • Normal due date is Wednesday, but nonbanking day pushes due date to Thursday.
         • Payday Tuesday, but Thursday is nonbanking day.
         • Normal due date is Friday but pushed back to Monday.

                                        Completing Deposit Coupon
                                              (Form 8109)
  Shows type of tax:
       •941 or 944          FICA & FIT
       •940                 FUTA
       •945                 backup tax
                                              Safe Harbor
• Deposit timely if the shortfall does not exceed greater of $100 or 2% of the liability.

                              Deposit Status Can Change Each Year
• Employers responsible for determining their own deposit status.
• Should check their forms 941/944 for lookback period each year to make sure deposit frequency is

                                              Sections 7-8

                                     Federal Unemployment Tax
•Provides funds to sate unemployment agencies that give benefits to unemployed.
•Employer pays FUTA (prohibited from deducting out of employee’s check).
•Employers that pays $1,500+ during quarter or that had at least one employee during any day of a week
during 20 weeks in a calendar year.
      •Exceptions: non-profit organizations, certain household employers, certain agricultural employers,
      and sole proprietorships that employ only family members. Also work performed by spouse, or
      child under 21.

•Maximum tax is 6.2% of first $7,000 of taxable wages paid to each employee.
•An employer that pays state unemployment (SUTA) on time (and whose state isn’t in default of federal
loan)is entitled to credit of 5.4% reducing federal tax rate to 0.8%.
• Employers may assume 0.8% first 3 quarters. If lose the 5.4% you make it up in final quarter.
• Assuming YourCo paid its employee $10,000 in 2008, how much FUTA tax would it pay?
       • $7,000 x .008 = $56.
                                             FUTA Payments
• FUTA liability calculated quarterly
       • $500 + liability then it’s due last day of month following end of quarter. (1st Q due April 30th)
       • Less than $500, then may roll over until next quarter until liability exceeds $500 or Jan. 31st of
       following year (whichever comes first)
• Payments made with Form 8109 (940 type of tax)
• If employer required to remit federal taxes electronically, 940 deposits must also be EFT.

                    Employer’s Annual Federal Unemployment Tax Return
                                              (Form 940)
• Used to compute FUTA liability and to reconcile FUTA deposits made during the year. Every employer
that incurred a FUTA liability must file a 940 with IRA.
• Due January 31st of following year (if weekend or holiday then next business day).
       • May extend due date to Feb 10th (IRS permission isn’t required.)

• YourCo. Paid $300,000 in wages in 2008, $95,000 was FUTA taxable. How much is owed in FUTA
       • $95,000 x .008 = $760
                            Employer’s Quarterly Federal Tax Return
                                              (Form 941)
• Used to report quarterly wage and tax information. The IRS uses the 941 to reconcile wages the
employer paid and employment taxes that it withheld to the tax deposited for the quarter and the W-2
forms filed for the year.
• The 941 tells the IRS the period in which the tax liability was incurred.
• The IRS and Social Security Administration reconcile the 941 with Forms W-2 & W-3.
• Due last day of month after end of quarter.
      • 3rd quarter ends Sept. 30th, so Oct. 31st its due.
• Employer that paid on time allowed extension until 10th of second month.

                        Annual Return of Withheld Federal Income Tax
                                         (Form 945)

• Used to report backup withholding of federal income tax from nonwage income.
• Due January 31st for the previous year.

• IRC Section 3406 and federal income tax withheld under IRC Section 3402(q) and amounts paid as
retirement pay for services in Armed Forces under IRC Section 3402, certain annuities under IRC Section
3402(o)(1)(B) and pensions, annuities, IRAs and certain other deferred income under IRC Section 3405.

                                      Wage & Tax Statement (W-2)
• Annual summary of taxable wages and taxes withheld. Employees file a copy of W-2 with their federal
and state income tax returns.
• W-2 required even when taxes are not withheld and no matter how small the wage amount to report.
• Employees must receive Copy B, Copy C and Copy 2 of W-2 by January 31.
• Terminated employees must be given their W-2’s 30 days from day they request it, or 1/31 whichever
comes first.
• The social security administration (SSA) must receive copies of Form W-2, Copy A, and Form W-3 by
the last day of February (3/31 if file electronically).

                              Transmittal of Wage and Tax Statements
                                               (Form W-3)
• Annual reconciliation of wage and tax information and transmittal form for sending W-2’s to SSA.
• W-3 data must equal the total of attached Forms W-2 with respect to wages, tips, and other
compensation, FICA wages, FICA tax withheld, FIT withheld, and qualified retirement plan benefits.
• Due last day of February (3/31 if file electronically).

                                  When Wages Become Taxable
• Often a lapse between when wage earned and time they are paid.
• Wages are taxable per IRS when constructively received by employees regardless of when earned.
      • YourCo pays employees on January 5th 2009 for wages earned from December 16-31, 2008.
      When are these wages subject to federal income tax withholding and FICA withholding?
      • Jan. 5th 2009 – Taxes aren’t withheld until then.

                                        Unclaimed checks
• Paychecks are prepared 12/26/08 but some employees are on vacation and don’t pick up checks until
2009. Are wages taxable in 2008 or 2009?
• 2008 (it was available in 2008)
• Wages considered constructively received when available to employees without substantial limitation.

• An employee’s paycheck dated 12/26/08 is mailed to an out-of-state employee. Due to mail delays the
employee receives the check in 2009. When are the wages taxable?
• 2009 (it wasn’t available to employee until 2009).

                                   Postdating & Backdating Checks
• Employers or employees may request checks be postdated or backdated for income tax reasons.
• Rule of constructive receipt says that wages are taxable when made available regardless of date of the
• IRS can easily detect postdating by reviewing employer’s canceled checks.

                                     Postponing Payment of Wages
• Rich is in a high income tax bracket in 2008 and expects to be in lower tax bracket in 2009. Rich asks
his employer to pay December 2008 wages January 2009. What should employer do?
• Unless formal deferred compensation plan, taxes should not arbitrarily be deferred by postpointing wage
                                   Salary Advances & Overpayments
• Advance or overpayment is taxable when paid even though it hasn’t yet been earned.
• When an employee repays an overpayment or advance, his or her gross taxable wages will be reduced
by the amount of the repayment
• (Provided the repayment occurs in the same tax year as the advance. If payment is in the year after then
“claim-of-right rules” apply).
• On December 16th Tom gets a $500 advance on his paycheck from which FIT & FICA are withheld. He
repays it in full by having it deducted from his 12/31 paycheck of $1,500. How much FICA should be
withheld from the 12/31 check?
       • $1,500 – 500 = $1,000 x .0765 = $76.5

                                             Sections 9-10

                                     State Unemployment (SUTA)
• Each state imposes an unemployment tax on employers.
• State unemployment returns are generally filed quarterly and due the end of the month following the end
of the quarter.
• Tax rate varies by employer and is generally based on the benefits claimed against the employer’s
• Employers generally receive annual notice of rate.
• Failure to pay timely correct state unemployment may result in loss of FUTA credit (up to 5.4%).

                                  Annual State & Wage Tax Returns
• Most states require a transmittal form similar to the W-3 and copies of the state W-2’s.
• Most states require copy of state W-2 by last day of February.
• Multiple exceptions including California where it annual reconciliation is due 1/31 but don’t need to
submit copies of W-2’s.

                        State Due Dates for Employee Copies of State W-2
• Most states require copies of state W-2 by 1/31 (same as federal requirement)
     • 2/15 due date: NE, NJ, NY, WV
     • No due date (no state income tax): AK, FL, NV, NH, SD, TN, TX, WA, WY

                                        Form 1099 Reporting
• Generally must be submitted to IRS and the payee whenever payments total $600 +
• For interest, fees, commissions, dividends, rents, royalties, annuities, pensions, profits, or other kinds of
nonemployee compensation.
• IRS must receive a copy of each 1099 by 2/28 of following year.
• Form 1096 used to summarize and transmit copies of Forms 1099 to the IRS. Separate 1096 should be
used for each kind of 1099

                                           Form 1099-MISC
• Used to report payments of $600 + for rents commissions, fees, prizes, awards, royalties, and other
nonemployee compensation.
• Also used to report wages and/or accrued vacation pay to the estate of a deceased employee and “golden
parachute” payments made to nonemployees.
• Don’t need to issue to Corporations!! (largely intended for self-employed)
                                  1099-INT , 1099-DIV , and 1099-R
• 1099-INT: used by all corporations and regulated investment companies to report distributions of $10 +
in dividends or other distributions of stock.
• 1099-INT: Used to report interest payments of $10 + by S&L, credit units, banks, corporate bonds,
CD’s, etc.
• 1099-R: Used to report all distributions from profit-sharing retirement plans and IRAs.

                                        Electronic Media
                                      Reporting W-2 & 1099

• If employer issues 250 or more W-2s need to submit to SSA electronically.

                                     Journal Entries for Payroll
• Two entries required every payday:
     • “Payroll distribution” –employees’ wages & deductions
     • Employer’s payroll tax expense (for FICA, FUTA, etc.)

Date      Account                           Dr.        Cr.
12/31     Salary Expense                    100
                FICA Employee                          7.65
                FITW Payable                           9.00
                SIT Payable                            3.35
                Health Ins. EE Contrib.                8
                Pension Plan Trustee                   7
                Cash                                   65
              (Record payroll distribution)

12/31     Payroll Tax Expense               11.45
                FICA Employer                          7.65
                FUTA Payable                           0.80
                SUI Payable                            3.00
              (Record employer tax)

                              Remitting Taxes & Other Payments
Date      Account                         Dr.      Cr.
1/5           Pension Plan Trustee        7
                Cash                               7
              (401k contributions)
1/15      FICA Employee                     7.65
             FICA Employer                  7.65
           FITW                              9.00
             Cash                            24.30
           (Remit 941 taxes)
1/31   FUTA Payable                   3.20
            Cash                             3.20
          (Remit Annual FUTA)
1/31   SUI Payable                    3.00
             Cash                            3.00
           (Remit SUTA)
1/31   Health Ins. EE Contributions   8.00
           Health Insurance Expense   8.00
             Cash                            16.00
           (Pay insurance premium)

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Description: 1099 Difference in Nonemployee Compensation and Other Income document sample