Payroll for Small Business

1
Payroll for Small Business
2
Federal Insurance Contributions Act (FICA)

• FICA administered by SSA (Social Security
  Administration)
• Comprised of two taxes paid by employers (ER) and
  employees (EE)
• OASDI (Old Age, Survivors Disability)
• 6.2 of first 89,700
• ER and EE pay
• HI (Hospital Insurance, part of Medicare)
• 1.45 with no ceiling
• ER and EE pay
• Medicare consists of HI and optional
  supplemental medical paid by individual matched
  by federal government

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Income Tax Withholding Laws

• Federal income tax
• 16th amendment in 1913 authorized income tax
• Current Tax Payment Act in 1943 authorized
  withholding from wages
• State and local income tax
• Withholding from paychecks
• Different in each state

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Unemployment Tax Acts

• FUTA (Federal Unemployment Tax Act)
• Passed in 1935
• Incorporated in Internal Revenue Code (IRC)
• ER tax - Paid on 7,000 per EE per year
• ER gets credit for SUTA paid against FUTA
• Taxes used to pay state and federal
  administrative expenses, not used to pay
  unemployment benefits

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Unemployment Tax Acts (continued)

• SUTA (State Unemployment Tax Act)
• Mandatory unemployment insurance - each state has
  different laws
• SSA outlines what kinds of standards each states
  unemployment compensation law must follow
• Generally an ER tax
• in some states, EE also pay
• Used to pay unemployment benefits

6
Other Federal LawsPersonal Responsibility
Work Opportunity Reconciliation Act

• Requires employers to report all new hires
• Records coordinated through Office of Child
  Support Enforcement (OCSE)
• 5 states now require same from independent
  contractors

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Other Federal Laws Immigration Reform and
Control Act

• Known as IRCA
• Bars hiring and retaining aliens unauthorized to
  work in U.S.
• INS (Immigration and Naturalization Services)
  requires proof of citizenship
• Accomplished by employee completing I-9 within 3
  days of employment
• Hefty civil penalties for noncompliance

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Human Resource System

• FLSA requires stringent personnel record- keeping
• Application/screening document design and
  retention also critical
• No questions alluding to religion, gender, race
  or national origin
• unless implicates ability to perform job (for
  example, bilingual capabilities) as may violate
  EEOC
• If application asks age/birth date, should
  contain ADEA language notifying candidate of
  anti-discriminatory provisions

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Human Resource System (continued)

• Reference Checks
• Due to amount of litigation in this area,
  respondents should only verify facts (not offer
  subjective information)
• Really diminishes credibility of reference
  inquiries
• Or prospective ER may require applicant to sign
  Employment Reference Release form
• Interview records should be written/retained
• Employment offer
• Provides employee with written notice outlining
  starting wage and written job description
• Critical area employment related litigation is
  very expensive and often times avoidable

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Human Resource System (continued)

• Employee history record contains performance
  evaluations, compensation adjustments,
  disciplinary issues, etc.
• Payroll Department documentation
• Hiring Notice (from hiring department) states
  rate of pay, W-4 information, etc.
• Payroll Register compiles data per paycheck
• EE Earnings Record outlines earnings per period,
  quarter-to-date and year-to-date for each EE

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Compensable vs. Noncompensable Time

• Travel (when part of principal workday) is
  considered work time
• Training (when for ER benefit/required) is
  compensable
• Rest periods under 20 minutes are compensable
  (cant make EE check out)
• Prep at work station (but not clothes changing,
  shower) is compensable
• Meal periods are not considered compensable
  unless employee must perform some tasks while
  eating
• On call time is not compensable if employee can
  spend time as he/she chooses
• Work at home is compensable if nonexempt employee
• Sleep time is compensable if required to be on
  duty less than 24 hours

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Child Labor Laws

• Under age 16 cannot work in construction, mining,
  manufacturing, etc.
• Under age 18 cannot work in hazardous jobs
• Under 16 years old limited to employment in
  retail and food/gas service
• only 7 a.m. - 7 p.m. (until 9 p.m. allowed in
  summer)
• 3 hours per day - 18 hours per week school
  year
• 8 hours per day - 40 hours per week summer
• In agricultural occupations an employee as young
  as 10 can work
• only from 6/1 - 10/15
• Hand harvest laborers outside school hours only
• subject to many strict limitations
• ER needs to have certificate of age on file
• Violations can result in up to 10,000/offense

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Steps to Follow when Calculating Gross Pay

• Annualize Salary
• Calculate regular gross
• Calculate hourly pay
• Calculate OT rate (1.5 x hourly rate)
• Add overtime pay to regular gross

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How to Get Set Up with SSA

• One Federal Employer Identification Number (EIN)
  per employer
• File Form SS-4 with IRS office where tax returns
  will be filed
• TELE-TIN to obtain (EIN) immediately
  (1-866-816-2065)
• 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)

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FICA Taxable Wage Base

• OASDI caps at 90,000 for 2005
• HI never caps
• Facts Earn 95,000/year - paid semimonthly on
  the 15th and 30th the calculations for 12/15
  payroll are
• First must find prior payroll YTD gross
  95,000/24 3,958.33
• 3,958.33 x 22 87,083.26
• How much will be taxed for OASDI?
• 90,000.00 87,083.26 2916.74
• OASDI tax is 2,916.74 x 6.2 180.84
• HI tax is 3,958.33 x 1.45 57.40
• Total FICA is 180.84 57.40 238.24
• Is this EE withholding or ER payroll tax expense?
• Answer - both!!

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How does ER know how much to withhold

• Best for EE if FIT withholding tax liability
  (goal is no refund and no tax due)
• W-4 (look at page 4-11)
• How many withholding allowances
• One allowance for self (if not claimed by other
  person)
• One for each dependent
• Special allowances (itemized deduction, other
  compensation, tax credits, etc. use worksheet
  on back of W-4 to calculate)

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Other Situations on W-4

• If EE doesnt provide a completed W-4, ER
  withholds at single rate, 0 allowances (highest
  amount withheld)
• EE can change W-4
• When ER receives new W-4, has 30 days
• EE must change within 10 days for decrease in
  of allowances
• Lose child as an allowance (custody)
• Become single
• Dont have to do if lose allowance due to death
• Unauthorized changes/additions invalidate W-4
• File in personnel file only send to IRS if
• EE claims 11 withholding allowances
• Claims exempt and is earning more than 200/week

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ER needs to calculate FIT withholding

• Use Circular E and find correct withholding
• Either Wage-Bracket Method (easiest) or
• Percentage Method, only use if
• highly compensated or
• 10 allowances or
• compensated annually, semiannually or daily
• Need to know
• Single/married
• How often paid
• Gross pay
• Number of allowances

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Advanced EIC

• To get part of this on each paycheck, file Form
  W-5 (Earned Income Credit Advance Payment
  Certificate)
• Can only get advanced earned income credit if
  have at least one qualifying child
• Can get up to 4,300/year with 2 qualified
  children
• Advanced EIC does not change amount employers
  must withhold from wages
• This amount is treated as having been paid to the
  IRS (on Form 941 shows up as a payment)
• Only one certificate on file at a time
• If married, both spouses can have certificate
• Have to refile each year and have to revoke in 10
  days if ineligible

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Information Returns

• Statements Required at Year End
• W-2
• Hard copy to EE by 1/31 (or can post on secure
  web site so EE can access individual W-2) to
  SSA by 2/28
• W-3 is transmittal form
• W-2c and W-3c (if correcting)
• if issuing 250 W-2s must use magnetic media and
  have until 3/31 to electronically file
• 941s must tie to W-3
• 1099-MISC with 1096 as transmittal
• 1099-DIV with 1096 as transmittal
• 1099-INT with 1096 as transmittal
• See figure 4-16, p. 4-32

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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
• Monthly depositor - pay FICA and FIT by 15th of
  following month OR
• 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
  banking day
• If really small (quarterly owe less than 2500),
  wait and pay when 941 report is filed

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How to Report FIT/FICA

• File Form 941 (Employers Quarterly Federal Tax
  Return)
• Download at www.irs.ustreas.gov
• Due on last day of month following close of
  quarter
• 1/31 4/30 7/30 10/31
• 941E-file are for reporting agents who file 10
  returns per quarter
• 941 TeleFile are for certain depositors sent
  TeleFile kits

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Withholding State and Local Income Taxes

• In states with state income tax and localities
  with local income tax, generally, payroll
  department must
• Withhold and deposit accordingly
• Periodically report tax withheld
• Reconcile withholding to deposits
• Complete annual statements showing wages and
  withholding
• Can find Iowa forms at http//www.state.ia.us/tax/
  forms/loadform.html

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FUTA and SUTA

• FUTA
• Federal Unemployment Tax Act
• Employer tax required for administration of
  federal and state unemployment insurance programs
• SUTA
• State Unemployment Tax Acts
• Different for each state
• Funds used to pay benefits and administer program
  at individual states level

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FUTA Rates

• FUTA 6.2 of first 7,000 of gross wages for
  each employee per year
• 5.4 credit against FUTA made for SUTA
• Therefore gross 6.2 - 5.4 credit .8 net
• To get 5.4 credit must have
• Made SUTA contributions on timely basis
• Been located in a state that is not in default on
  their Title XII advances (credit is reduced .3
  per year beginning the second year after the
  advance)
• Title XII is the act that allows states to borrow
  unemployment compensation funds from federal
  government

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FUTA Reporting Requirements

• Form 940 or Form 940-EZ, due by 1/31 next year
• Except if only household employees, file Schedule
  H with individual 1040 tax return
• Can file 940-EZ if
• Paid SUTA timely
• Paid SUTA to one state
• State is not in Title XII default
• SUTA taxable wages FUTA taxable wages
• Can amend (check appropriate box above Part I)
• Upon cessation of business, check final return
  box

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SUTA Deposit and Reporting Overview

• SUTA requirements vary widely by state
• In Iowa, report to Iowa Workforce Developmnet
• SUTA quarterly contribution report generally
  shows
• each employees gross wages and taxable SUTA
  wages (wage information)
• contribution rate x taxable SUTA wages
• amount of required payment