Refund Over-Collected FICA to Workers and Employers (or the State Client)

Submitted by admin on Tue, 05/04/2021 - 15:24
Policy: 

Per IRS regulation, household employees are only liable to pay Social Security and Medicare taxes (commonly referred to as FICA) if they earn wages from a single employer over a certain amount in the calendar year. Per IRS Publication 15, Circular E, in 2019, that amount is $2,100. 

F/EA must withhold the employee’s portion and calculate the employer’s portion of Social Security and Medicare from every paycheck made because F/EA will not know in advance if the employee will meet the threshold to be liable for FICA taxes for the calendar year. At year-end, prior to issuing forms W-2 and filing the fourth quarter Form 941, F/EA reviews employer/employee wages for the calendar year. Any employees who earned less than the FICA threshold in gross wages from a single employer are identified. 
 

All adjustments for refunded FICA must be made using Form 941-X.  A separate Form 941-X must be filed for each quarter in which FICA was withheld that is ultimately refunded.  A Schedule R for Form 941 must accompany each Form 941-X showing the corrected wages and taxes only for those employers impacted by FICA refunding for the quarter.

Procedure: 

 

  1. Immediately after the final payroll of a calendar year, F/EA identifies any employees who earned less than the FICA threshold for the calendar year in any employer/workers relationship
  2. Remember that the FICA threshold must be tested for each employer for which an workers works
  3. <<Insert process to create this report>>
  4. Run a report of gross wages paid by employer to each workers for the calendar year working for an employer in a calendar year
  5. For those employees who earned less than the FICA threshhold for a single employer, run a detailed payroll report showing their gross wages and FICA liabilities by quarter
  6. Collect the information for affected employees for Quarter 1
  7. Complete Form 941-X as follows:

Date discovered errors: 12/31/YYYY
Part 1, check Box 1 to apply the overdeposit to a future return (fastest way to get money)
Check Box 2 to get a check from the US Treasury (slow way to get money)
        If you choose this method, F/EA can only correct overreported amounts on this 941-X and F/EA must complete a     separate 941-X if F/EA is also correcting overreported amounts.
Part 2, check Box 3 and 3.a
Column 1 = F/EA's originally filed Form 941 less amounts for employees impacted by FICA Refunding

Column 2 = the amount originally filed on Form 941 for the quarter

Line 6: F/EA gross wages stay the same.  The workers were still paid.  It’s the Social Security and Medicare wages that will be adjusted.  Yes, workers were paid, but the wages were not Social Security or Medicare Taxable.
Column 3 = the difference.  This will also be F/EA's total amount for employees impacted by FICA refunding.
Line 8 – take it through like the other lines. 

Column 4 is the sum of F/EA total workers and employer refunded SS tax for the quarter

Line 10 – take it through like the other lines. 

Column 4 will also be the sum of F/EA total workers and employer refunded Medicare tax for the quarter
Lines 10 – 18 follow the remaining instructions on Form
The amount in line 18 is the amount of FICA refunded for the quarter
Half of this amount will be sent as a refund to the individual employees (their share of FICA)
Half of this amount will be refunded to the employer (almost always, this means refunding to the state)

Complete Section 21 to explain how you find the errors. 

  1. <<Staff Title>> makes appropriate corrections in payroll system for each employer/workers budget and in  F/EA general ledger.
  2. Participant budgets may be affected for the employer portion of FICA.
  3. This complete 941-X process is completed for each quarter in the calendar year.

 

Also complete a Schedule R to accompany each Form 941-X.  The Schedule R should include ONLY those employers affected by refunded FICA in the quarter for which the Form 941-X is filed.  

  1. List each employer that had an employee for whom refunded FICA applies for the quarter.
  2. The Schedule R should list the employer's EIN and the wages paid and tax liabilities assuming FICA refunding has already taken place - that is show the wages and taxes on the Schedule R as though the employer did not pay the wages or have the liability for the taxes for which a FICA refund is now do.
  3. Attach the Schedule R to the 941-X for the quarter and submit to the IRS.

 

Internal Controls: 

The internal controls used by F/EA to monitor this process establish responsibility, segregate duties, document procedures and ensure independent internal verification.

  1. This process is performed by the F/EA Accounting department. Payroll Department staff are not authorized to record FICA refund values.
  2. Using a detailed report, the F/EA Accountant records employer and workers FICA refund amounts in <<control document>>
    1. These values are used to reconcile to the applicable tax forms
  3. The F/EA Accountant reconciles FICA refund payments that are sent to workers per the normal bank reconciliation process
    1. Any uncashed checks are processed per the uncashed check process
  4. All control documents are password protected and access is restricted to F/EA Assigned staff with responsibility for reconciliations.
  5. The reconciliation and supporting documents are scanned and saved for a minimum of 7 years per the File Retention Policy.