03 by liwenting


									    CHAPTER 3


           Developed by Lisa Swallow, CPA CMA MS
               Social Security Taxes

 FICA (1935)
   Federal Insurance Contribution Act
   for employees
   6.2% OASDI plus 1.45% HI

 SECA (1951)
    Self Employed Contribution Act
    for self employed folks
    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)
    20-point list 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.ustreas.gov/prod/forms-pubs/pubs/p15a02.htm
    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)
 State/local EE (begin 1991 covered even if in PERS)
 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
           Unless already files 941 - then put on there
       Doesn’t apply to under 18 unless that’s their occupation
       Must pay if he/she under your control (gardener/nanny/cook)
       ER has to send W-2 even if EE earns under $1000/year
 Corporation
       Officer are EE
       Board of director members are not EE
 Partnership
       Partners are not EE
Employment Specifically
  Exempt from FICA
 Kids under 18 working for folk’s sole
  proprietorship or partnership (but not corp)
 Farm workers if all workers annual
  compensation < $2500
 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 > $50,000 group life
            Taxable Wages
 Tips greater than $20/month
      EE must file form 4070 by 10th of following month with ER
      50% penalties 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]
         But don’t have to withhold FICA on allocated tips, only
          reported tips
         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 $5250
    Education must maintain/improve skills required
      by employment
 FICA Taxable Wage Base

 OASDI caps at $84,600 for 2002 (estimated)
 HI never caps
 Facts: Earn $90,000/year - paid semimonthly beginning
  on 1/15 - running 12/15 payroll
   First must find prior payroll YTD gross $90,000/24 = 3750.00
   3750.00 x 22 = 82,500.00
   How much will be taxed for OASDI?
      84,600.00 - 82,500.00 = 2100.00
      OASDI tax is 2100.00 x 6.2% = 130.20
   HI tax is 3750.00 x 1.45% = 54.38
   Total FICA is 130.20 + 54.38 = $184.58
   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;
 running 6/1/00 payroll - determine FICA

  What do we calculate first?
  178,000/12 = $14,833.33 per paycheck
  YTD gross prior to current payroll = 14,833.33 x 5 = 74,166.65
  84,600 - 74166.65 = 10,433.35 taxed for OASDI
  10,433.35 x 6.2% = 646.87 OASDI tax
  14,833.33 x 1.45% = 215.08 HI tax (remember - no cap!)
  Total FICA = 646.87 + 215.08 = 861.95

  Remember - the ER has withheld $861.95 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 = $89,000 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 = $68,000 and self employment income = $21,000; how
      much is FICA on $21,000?
        Answer: (84,600 - 68,000) = 16,600 OASDI wages x 12.4% = $2058.40 +
         21,000 x 2.9%=$609.00
         Total FICA = ($2058.40 + 609.00 = $2667.40)
     How to Get Set Up
         with SSA
 One EIN per employer
  File SS-4 with IRS office where tax returns will be filed
  TELE-TIN to obtain Federal Employer Identification Number
  When purchasing an existing business, the new owner
    needs a new EIN
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)

EBES (Earnings Benefit Estimate Statement)
  To see projection of benefits and ensure correct amounts
   posted as earnings (call 1-800-772-1213 for SSA-7004)
  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 business day
   If really small (quarterly owe less than $2500), wait and pay when
    941 report is filed
  How to Deposit FIT/FICA

 Fill out an 8109 coupon
   These are sent to you when apply for FEIN and then
   Take to an authorized financial institution (depository for federal
 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
 If mailing, must postmark 2 days before due date
 Penalties for late deposits
  How to Report FIT/FICA

File form 941 (Employer’s Quarterly Federal Tax
Due on last day of month following close of
     1/31   4/30   7/30   10/31
941E-file for Reporting Agents who file 10+
 returns per quarter
941 TELEFILE - for monthly 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 TIN #s

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