ATC 9-6 Writing Assignment Payroll Tax Costs
Nancy, who graduated from State University in June Year 1, has just landed her first real job. She is excited because her salary is $4,000 per month. Nancy is single and has been planning all month about how she will spend her $4,000. When she received her first paycheck on June 30, Year 1, she was very disappointed. The amount of her check was only $3,100. Explain to Nancy why (generally) her check will not be for $4,000.
ATC 9-7 Ethical Dilemma Who Pays FICA Taxes?
Scott Putman owns and operates a lawn care company. Like most companies in the lawn care business, his company experiences a high level of employee turnover. However, he finds it relatively easy to replace employees because he pays above-market wages. He attributes his ability to pay high wages to a little accounting trick he discovered several years ago. Instead of paying his half of each employee’s FICA taxes to the government, he decided to pay that money to the employees in the form of higher wages.
He then doubles their FICA tax payroll deduction and uses half of the deduction to pay his share of the Social Security tax. For example, suppose he plans to pay an employee $2,000 per month. Technically, the employee would have to pay 7.5 percent FICA and Medicare tax ($2,000 × .075 = $150) and Mr. Putman’s company would have to make a $150 matching payment. Instead of doing it this way, he devised the following plan. He pays the employee $2,150 and then deducts $300 for FICA and Medicare tax from the employee’s salary. The end result is the same.
Either way, the employee ends up with net pay of $1,850 ($2,000 − $150 = $1,850 or $2,150 − $300 = $1,850). Also, the government gets $300 FICA tax, regardless of how it gets divided between the employee and the employer. Mr. Putman is convinced that he is right in what he is doing. Certainly, it benefits his company by allowing him to offer higher starting salaries. Further, he believes it is a more honest way of showing the real cost of Social Security and Medicare.
Required
a. Is Mr. Putnam right in his assumption that the total tax paid is the same under his approach as it would be if proper accounting procedures were applied? Explain.
b. Assuming that Mr. Putman is a CPA, do his actions violate any of the articles of the AICPA Code of Professional Conduct shown in Chapter 2 (Exhibit 2.9)? If so, discuss some of the articles that are violated.
c. Discuss Mr. Putman’s actions within the context of the fraud triangle’s elements of ethical misconduct that were outlined in Chapter 2.
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