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Chapter 11: Q1EI (page 618)

Many small businesses have to squeeze down costs any way they can just to survive. One way many businesses do this is by hiring workers as 鈥渋ndependent contractors鈥� rather than as regular employees. Unlike rules for regular employees, a business does not have to pay Social Security (FICA) taxes and unemployment insurance payments for independent contractors. Similarly, it does not have to withhold federal, state, or local income taxes or the employee鈥檚 share of FICA taxes. The IRS has a 鈥�20-factor test鈥� that determines whether a worker should be considered an employee or a contractor, but many businesses ignore those rules or interpret them loosely in their favor. When workers are treated as independent contractors, they do not get a W-2 form at tax time (they get a 1099 instead), they do not have any income taxes withheld, and they find themselves subject to 鈥渟elf-employment鈥� taxes, by which they bear the brunt of both the employee鈥檚 and the employer鈥檚 shares of FICA taxes.

Requirements

  1. When a business abuses this issue, how is the independent contractor hurt?

If a business takes an aggressive position鈥攖hat is, interprets the law in a very slanted way鈥攊s there an ethical issue involved? Who is hurt?

Short Answer

Expert verified
  1. The contractor must pay 鈥渟elf-employment tax,鈥� representing the employer鈥檚 and the employee鈥檚 share of normal FICA taxes.
  2. It is unethical if a business knowingly treats workers as contractors. Contractors are hurt because they pay a heavier share of taxes.

Step by step solution

01

Meaning of FICA

All employees within the United States are required by law to contribute a portion of their compensation to the Social Security and Medicare frameworks of the nation. This regulation is known as FICA. That proportion coordinates employer commitments to the same programs.

02

(1) Explaining how is the independent contractor hurt

By law, every employee in the United States must pay into the nation's Social Security and Medicare systems a percentage of their salary. FICA is the name of this regulation. That fraction coordinates employer commitments to the same initiatives.

03

(2) Explaining any ethical issue involved

Businesses could adopt strong stances on tax matters, which might challenge in court. When a company knows that some of its employees should be considered employees but chooses to treat them as contractors, such action is unethical. It is similar to lying morally. Contractors suffer due to paying a higher proportion of taxes and not having access to employee benefits like health insurance.

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Most popular questions from this chapter

What are the three main characteristics of liabilities?

Liam Wallace is general manager of Moonwalk Salons. During 2018, Wallace worked for the company all year at a \(13,400 monthly salary. He also earned a year-end bonus equal to 5% of his annual salary.

Wallace鈥檚 federal income tax withheld during 2018 was \)2,010 per month, plus \(1,608 on his bonus check. State income tax withheld came to \)110 per month, plus \(80 on the bonus. FICA tax was withheld on the annual earnings. Wallace authorized the following payroll deductions: Charity Fund contribution of 2% of total earnings and life insurance of \)15 per month.

Moonwalk incurred payroll tax expense on Wallace for FICA tax. The company also paid state unemployment tax and federal unemployment tax.

Requirements

1. Compute Wallace鈥檚 gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.

2. Compute Moonwalk鈥檚 total 2018 payroll tax expense for Wallace.

3. Make the journal entry to record Moonwalk鈥檚 expense for Wallace鈥檚 total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.

4. Make the journal entry to record the accrual of Moonwalk鈥檚 payroll tax expense for Wallace鈥檚 total earnings.

5. Make the journal entry for the payment of the payroll withholdings and taxes.

Question:Abernathy Electronics reported the following amounts on its 2018 income statement: Year Ended December 31, 2018 Net income $ 45,000 Income tax expense 6,750 Interest expense 3,750 What is Abernathy鈥檚 times-interest-earned ratio for 2018? (Round to two decimals.)

The general ledger of Prompt Ship at June 30, 2018, the end of the company鈥檚 fiscal year, includes the following account balances before payroll and adjusting entries.

Accounts Payable \( 118,000

Interest Payable 0

Salaries Payable 0

Employee Income Taxes Payable 0

FICA鈥擮ASDI Taxes Payable 0

FICA鈥擬edicare Taxes Payable 0

Federal Unemployment Taxes Payable 0

State Unemployment Taxes Payable 0

Unearned Rent Revenue 5,400

Long-term Notes Payable 198,000

The additional data needed to develop the payroll and adjusting entries at June 30 areas follows:

a. The long-term debt is payable in annual installments of \)39,600, with the next installment due on July 31. On that date, Prompt Ship will also pay one year鈥檚 interest at 10%. Interest was paid on July 31 of the preceding year. Make the adjusting entry to accrue interest expense at year-end.

b. Gross unpaid salaries for the last payroll of the fiscal year were \(4,800. Assume that employee income taxes withheld are \)920 and that all earnings are subject to OASDI.

c. Record the associated employer taxes payable for the last payroll of the fiscal year,\(4,800. Assume that the earnings are not subject to unemployment compensation taxes

d. On February 1, the company collected one year鈥檚 rent of \)5,400 in advance.

Requirements

1. Using T-accounts, open the listed accounts and insert the unadjusted June 30balances.

2. Journalize and post the June 30 payroll and adjusting entries to the accounts thatyou opened. Identify each adjusting entry by letter. Round to the nearest dollar.

3. Prepare the current liabilities section of the balance sheet at June 30, 2018.

Watson Publishing completed the following transactions during 2018: Oct. 1 Sold a six-month subscription (starting on November 1), collecting cash of $240, plus sales tax of 8%. Nov. 15 Remitted (paid) the sales tax to the state of Tennessee. Dec. 31 Made the necessary adjustment at year-end to record the amount of subscription revenue earned during the year. Journalize the transactions (explanations are not required). Round to the nearest dollar.
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