Page 61 - Account for Ag - 2019

CH 10] Payroll Accounting & Payroll Taxes 10-3

Funds for the payment of old-age, survivors', and medical benefits under the social security act come from
payroll taxation. These taxes are imposed under a law called the Federal Insurance Contributions Act and are often
referred to as "F.I.C.A taxes." These taxes are imposed similarly on both employers and employees. Unless
specifically exempted, every employer is required to withhold the tax. At the present time the rate is 6.2% on the
first $57,600 paid to each employee in the calendar year and the total tax collected on an employee and employer is
not to exceed $3,571.20. There is no tax on individual earnings above this amount. Although the tax rate may
change and the maximum amount subject to the tax, such changes will not affect the accounting principles or the 10
method of recording the transactions.

The Federal Insurance Contribution Act also requires that an employer:

1) Pay a payroll tax equal to the amount FICA tax withheld from the wages of all employees. Since the employee and the
employer must each pay the tax, the total maximum paid by both is $7,142.40.
2) Periodically remit both the amounts withheld from the employees' wages and the employer's tax to the Director of
Internal Revenue.
3) Within one month after the end of each calendar quarter, file a tax information return known as Employer's Quarterly
Federal Tax Return.
4) Furnish each employee before January 31 following each year a Withholding Tax Statement, Form W-2, which tells
the employee the amounts of his wages that were subject to F.I.C.A. and federal income taxes and the amounts of
such taxes withheld.
5) Furnish the Director of Internal Revenue copies of all the W-2 Forms given the employees.
6) Keep a record for four years for each employee that shows among other things wages subject to F.I.C.A. taxes and the
taxes withheld.

FEDERAL UNEMPLOYMENT TAX.
The federal unemployment tax system, along with the state systems, provide unemployment payments to
workers who have lost their jobs. This tax applies to all wages you pay to employees, unless an exception applies.
Most employers pay both a state and the federal unemployment tax. However, even if an employer is exempt from
state tax, the employer may be required to pay the federal tax.

The Internal Revenue Service specifies three tests to determine whether an employer must pay federal
Unemployment (FUTA) tax. Each tax applies to a different category of employee, and each is independent of the
others. It is possible to be liable for the tax in one category, but not in another. If a test describes the employer's
situation, the employer is subject to FUTA tax on the wages paid to employees in that category during the current
calendar year.
1) In general, the employer is subject to federal unemployment tax on the wages paid to employees who are not farm
workers or household workers if, in the current or preceding calendar year:
a) The wages paid to employees in this category totaled $1,500 or more in any calendar quarter, or
b) There was at least a part of a day in which the employer had the employee in this category in each of 20 different
calendar weeks. The 20 weeks do not have to be consecutive. It does not matter whether the employer had the
same employee each week. Individuals on sick leave or vacation are counted as employees.

2) Household workers. Employers are subject to federal unemployment tax on the cash in the current or preceding
calendar year, the cash wages paid to employees in this category totaled $1,000 or more in any calendar quarter. A
household worker is an employee who performs domestic services in a private home, local college club, or local
college fraternity or sorority chapter.
3) Farm workers. Employers are subject to federal unemployment tax on the wages paid to farm workers if, in the
current or preceding calendar year:
a) The cash wages paid for farm labor totaled $20,000 or more in any calendar quarter,
or
b) In each of 20 different calendar weeks, there was at least one day in which the employer had 10 or more farm
worker employees. The 20 weeks do not have to be consecutive. It does not matter whether the employer had the
same 10 employees each week. nor do all 10 employees have to work a full day or the same part of the day.
Individuals on sick leave or vacation are counted as employees.

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