CHAPTER 3
Learning Objectives
After studying this chapter, students should be able to:
1. Identify, for social security purposes, those persons covered under the law and those
services that make up employment.
2. Identify the types of compensation that are defined as wages.
3. Apply the current tax rates and wage base for FICA and SECA purposes.
4. Describe the different requirements and procedures for depositing FICA taxes and
income taxes withheld from employees’ wages.
5. Complete Form 941, Employer’s Quarterly Federal Tax Return.
Contents
Chapter 3 outline:
LEARNING OBJECTIVES
COVERAGE UNDER FICA
Employer
Employee
Occupations Specifically Covered by FICA
Government Employees
International Agreements
Family Employment
Household Employee
Exempt Employees
Voluntary Coverage
Independent Contractor
Taxable Wages
Tips
Exempt Payments
Meals and Lodging
Sick Pay
Makeup Pay for Military Duty
Contributions to Deferred Compensation Plans
Payments for Educational Assistance
Tax Rates
3–2 Payroll Accounting
A SELF-EMPLOYED PERSON
Self-Employment Income
Self-Employment OASDI/HI Taxes
Taxable Year
Reporting Self-Employment Income
EMPLOYER IDENTIFICATION NUMBER
EMPLOYEE’S APPLICATION FOR SOCIAL SECURITY CARD (FORM SS-5)
Verifying Social Security Numbers
RETURNS REQUIRED FOR SOCIAL SECURITY PURPOSES
Deposit Requirements (Nonagricultural Workers)
Monthly
Semiweekly
One-Day
The Safe Harbor Rule (98 Percent Rule)
Deposit Requirements for Employers of Agricultural Workers
Deposit Requirements for Employers of Household Employees
Deposit Requirements for State and Local Government Employers
Procedures for Making Deposits
Electronic Deposits
Form 941-X
Form 944
FAILURE-TO-COMPLY PENALTIES
Failure to File Employment Tax Returns
Failure to Fully Pay Employment Taxes
Failure to Make Timely Deposits
Failure to Furnish Payee Statements
Failure to Furnish Information Returns
Bad Checks
KEY TERMS
ANSWERS TO SELF-STUDY QUIZZES
KEY POINTS SUMMARY
Chapter 3 3–3
Matching Quiz (p. 3–35)
Questions for Review (p. 3–35)
1. To be classified as a “covered” employer, the person must employ one or more
law relationship of employer and employee exists, the employer is covered.
2. To be classified as a “covered” employee, an individual must perform services in a
4. Refer to Figure 3.2, which lists the Test for Independent Contractor Status. By
5. a. Employers must collect the employee’s FICA taxes on tips reported by each
employee. The employee’s FICA taxes are deducted from the wages due
6. Payments of sick pay made after the expiration of six calendar months following the
last month in which the employee worked for the employer are not taxed. The first
8. Yes. If individuals such as Luis paid OASDI taxes on wages in excess of $127,200
because of having worked for more than one employer, they are entitled to a refund
3–4 Payroll Accounting
9. For 2017, the SECA tax rates for self-employed persons are OASDI—12.4 percent
11. The deposit rules for nonagricultural employers are:
13. There are two electronic methods of deposit:
to the Treasury’s account at the Federal Reserve Bank.
14. Generally, an employer must file Form 941 each calendar quarter. Form 941 is due
on or before the last day of the month following the close of the calendar quarter for
15. The following penalties may be imposed:
a. If the employer does not file Form 941 by the due date, a percentage of the tax
Chapter 3 3–5
If, however, the employer shows to the satisfaction of the IRS that the failure to
Questions for Discussion (p. 3–35)
1. Sean Matthew’s entire salary of $250,000 will be taxed at the Employee HI rate of
1.45 percent with an additional 0.9 percent on wages in excess of $200,000. The
2. By diverting his payroll tax money to business uses, Emerald faces a penalty. It
may take the IRS as much as a year to do anything more than send overdue tax
3. If correctly treated as an employee, the employer would incur the employer OASDI
and HI tax on McGinnis’s wages. The penalty for misclassifying an employee as an
Independent Contractor will be the employer’s share of FICA taxes plus the income
4. Under FICA (as well as under FUTA and for purposes of federal income tax
withholding), amounts paid to employees that represent the difference between the
3–6 Payroll Accounting
Problem Sets (p. 3–37)
The principles and practices of payroll accounting discussed in Chapter 3 are applied in
the Problem Sets as shown below.
Principle or Practice Problem Set No. (A and B)
1. Calculating employee’s FICA taxes to 3–1 through 3–7, 3–9
be withheld through 3–10, 3–17
2. Calculating employer’s FICA taxes 3–1, 3–3, 3–6, 3–7,
3–9 through 3–10,
3–17
3. FICA taxes on regular earnings and 3–8
self-employment income
4. Computing monthly gross earnings, 3–10
deductions for FICA, and net earnings
5. Completing Form 941 3–11 through 3–15
6. Calculating penalty for failure to make 3–16
timely deposit
Chapter 3 3–7
Solutions—Problem Set A
3–1A.
Biweekly
Employee Taxable FICA Taxes
No. Employee Name Wages OASDI HI
711 Castro, Manny $ 1,000.00 $ 62.00 $ 14.50
512 Corrales, Pat 968.00 60.02 14.04
3–2A.
OASDI HI
3–3A.
OASDI HI
3–4A.
3–8 Payroll Accounting
3–5A.
November 15
Name and Title
Annual
Salary
OASDI
Taxable
Earnings
OASDI
Tax
HI
Taxable
Earnings
HI
Tax
Hanks, Timothy, President $151,200 $1,200.00* $ 74.40 $6,300.00 $91.35
December 31
Name and Title
Annual
Salary
OASDI
Taxable
Earnings
OASDI
Tax
HI
Taxable
Earnings
HI
Tax
Hanks, Timothy, President $151,200 $ 0.00 $ 0.00 $6,300.00 $91.35
3–6A.
Name and Position
Salary
OASDI
Taxable
Earnings
OASDI
Tax
HI
Taxable
Earnings
HI
Tax
Zena Vertin, Office $ 700 per week $ 700.00 $ 43.40 $ 700.00 $10.15
Chapter 3 3–9
3–7A.
3–8A.
3–9A.
Employee
Annual
Salary
OASDI
Taxable
Wages
OASDI
Tax
HI
Taxable
Wages
HI
Tax
Utley, Genna $ 37,040 $ 3,086.67 $ 191.37 $ 3,086.67 $ 44.76
Werth, Norm 48,900 4,075.00 252.65 4,075.00 59.09
3–10A.
Employees
Total
Monthly
Payroll
OASDI
Taxable
Wages
OASDI
Tax
HI
Taxable
Wages
HI
Tax
Full-Time Office:
Adaiar, Gene ……………………………………………………………………. $ 2,450.00 $ 2,450.00 $ 151.90 $ 2,450.00 $ 35.53
Crup, Jason ……………………………………………………………………… 2,300.00 2,300.00 142.60 2,300.00 33.35
3–10 Payroll Accounting
Chapter 3 3–11
3–11A.
3–12 Payroll Accounting
3–12A.
Chapter 3 3–13
3–13A.
3–13A. Concluded
Source: Internal Revenue Service.
Chapter 3 3–15
3–14A.
3–14A. Concluded
3–15A. (a)
Source: Internal Revenue Service.