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Camp Employment Taxation: The ABC's of Social Security, Medicare, Unemployment, and Income Taxation of Employees at Camp
Updated Version of This Article - Jan 2001
Employers in the United States, including camps, are required to pay Social Security, and state and federal unemployment and income taxes on most employees. How these taxes are calculated, collected, to whom they are paid, and the nuances of special camp-related laws are some of the issues addressed in this article.
In 1935 the Congress of the United States passed a single law creating the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). FICA imposes Social Security and Medicare taxes, and FUTA imposes federal unemployment taxes. States also impose separate State Unemployment taxes (SUTA), and have worker's compensation insurance requirements.
Social Security and Medicare (FICA)
Except as noted below, all camp employees are subject to FICA taxation. As a general rule, social security and Medicare taxes are shared by the camp and the employee. In 1997, each pay a 6.2% Social Security tax, and a 1.45% Medicare tax, on the first $65,400 earned by each employee. The combined tax is 15.3% of gross pay, half paid directly by the camp, and half withheld by the camp from the employee's paycheck, to be forwarded to the Internal Revenue Service (IRS). These taxes are reported to the IRS on Form 941, due April 30, July 31, October 31, and January 31 of each year. The taxes are paid quarterly if less than $500 per quarter, or monthly or semi-weekly dependent upon the amount owed.
The fair market value of meals and lodging are not subject to withholding as long as they are provided "for the convenience of the employer." Convenience of the employer is defined as some legitimate employer interest beyond the providing of compensation. Most camps offer food and lodging as an integral component of the employment relationship, which in most cases will meet the test.
International staff holding the J-1 (cultural exchange) or F (student) visa are exempt from FICA withholding. The American Camping Association is actively advocating an exemption from FICA for seasonal employment of all camp counselors who are full-time students. The United States Senate and United States House of Representatives both passed an ACA-sponsored FICA amendment in 1992, but the amendment was not enacted into law. Continued efforts are being made to secure this beneficial change in the law.
Federal Unemployment Tax (FUTA)
This tax is paid entirely by the employer, and is NOT withheld from the camp employee's paycheck. The federal unemployment tax is 6.2% through 1998 and is applied against the first $7,000 in wages of each employee. Camps may be entitled to a offsetting credit, of up to 5.4% against the federal tax, dependent upon state unemployment experience. Taxes are reported on IRS form 940 due January 31 of each year. The tax is due quarterly on April 30, July 31, October 31, and January 31 of each year if less than $100 per quarter, or monthly or semi-weekly dependent upon the amount owed.
There are three factors determining exemptions to FUTA. First, nonprofit charitable, religious, and educational camps qualifying under section 501(c)(3) of the Internal Revenue Code are generally exempt from FUTA.
Secondly, international staff holding the J-1 (cultural exchange) or F (student) visa are also exempt from FUTA.
Thirdly, the American Camping Association secured an exemption from FUTA for seasonal employment of all full-time students who work at camp for less than 13 weeks per year. This applies to camps whether they are nonprofit or for-profit, as long as the camp meets the definition as "seasonal". Seasonal is defined as operating less than 7 months per year, or having gross revenues in any six months of the preceding year not greater than 25% of that year's total gross revenue. A qualifying student must have a bona fide intention to return to a full course of study after leaving camp employment.
State Unemployment Tax (SUTA)
States impose unemployment taxes independent of the federal government. As a general rule, states follow the federal lead in granting exemptions, though they are not required to do so. Those that do often have laws which provide for blanket adoption of federal exemptions. Accordingly, camps will find that the vast majority of states do not impose SUTA on camps already exempt from FUTA.
Since there are some exceptions, camps should contact their state labor department to ascertain SUTA tax liability. Don't hesitate to question your state labor department if they do impose SUTA liability, as the Association has discovered state tax officials to be frequently unaware of the federal exemption for camps.
Withholding of Federal Income Taxes
Except as noted below, most camp employees are subject to withholding of federal income taxes. Every camp must obtain IRS form W-4 from each employee to determine the appropriate withholding amount. Most summer camp counselors will have insufficient earnings to trigger federal income tax withholding. Full-time employees, and part-time summer staff with other full-time positions, will likely be subject to withholding.
Foreign nationals working at camp under the J-1 or F visa are considered to be engaged in business in the United States, and are generally considered taxable at the same rates as U.S. citizens. The "exempt" status box on the W-4 should not be used solely because of visa status. Unless personal exemptions claimed on the W-4 coupled with a low level of compensation avoid withholding, or a tax treaty with the foreign national's country of citizenship exempt him or her from taxation, he or she is subject to income tax withholding.
In 1996, no withholding was required for a person claiming single status, compensated at $100 or less per week. In the event the W-4 does not provide sufficient personal exemptions to avoid withholding at a given compensation level, camps should consult IRS publications 515 and 519 for eligibility for treaty exemption. The United States is party to many treaties which exempt varying levels of compensation. Students studying in the United States on the F visa would be typical beneficiaries.
W-2 forms, summarizing all withholding, must be delivered to all camp employees by January 31st of each year. By February 28th, copies of the W-2's together with forwarding form W-3, must be delivered to the Social Security Administration by the camp. Withheld income taxes are reported on IRS form 941, and are payable to the federal government monthly or semi-weekly, dependent upon the amount owed. These taxes are typically deposited at a qualifying bank, in guaranteed form, accompanied by a Federal Tax Deposit (FTD) coupon.
Withholding of State Income Taxes
Many states impose state income tax, with independent withholding requirements. Camps should check with their state department of revenue to determine liability and compliance procedures.
No federal income tax withholding, FICA withholding, or FUTA payments apply to camp employment of independent contractors. There are objective and stringent criteria by which the IRS determines who is and who is not a legitimate independent contractor. Generally speaking, an independent contractor works under contract, provides his or her own equipment, and maintains total discretion in the details of how a particular service is provided. Independent contractors are typically in business for themselves. Examples in the camp environment might be pool service companies, construction contractors, or independent consultants.
When annual payments to an independent contractor (such as a consultant paid over several years) exceed $600 annually, camps are required to file IRS form 1099-MISC by February 28th of each year, together with IRS transmittal form 1096.
For purposes of federal income tax withholding, FUTA, and FICA, there is no difference between full-time, part-time, and employees hired only for short periods. It does not matter if an employee has another job, and the full limit of social security taxes was already withheld by that employer.
Electronic Deposits and Filings
New requirements for large employers are being phased in by the IRS which will require electronic payments of withheld sums. These requirements are currently triggered when the sum of ALL 1995 payments withheld exceeds $50,000. Likewise, there is a requirement for electronic filing of W-2's when they exceed 200 in number.
Seasonal Camps Operated by Year-Round Organizations
There is a serious question whether, upon audit, seasonal camps can avoid FUTA, SUTA, and minimum wage and hour liability if the camp is part of a larger year-round entity. Seasonal camps in this situation should strive to create true independence from the "parent" year-round organization. Independent incorporation, a separate board of directors, employees, budgets, assets, liabilities, and bookkeeping staff, are all objective criteria which have been used in the past to determine whether an entity is truly independent and therefore eligible for "seasonal" exemptions.
So You Want to Switch to Year-Round Camp?
There is a growing trend among camps to expand operations beyond the traditional summer season. One of many considerations a camp should review is the revenue impact that loss of seasonal exemptions can have on your camp operation. Those changes can be substantial offsets to anticipated revenue gains. Year-round for-profit camps must generally pay FUTA and SUTA on student counselors. Remember too, that federal and state minimum wage and hours provisions, including overtime, apply to employees of most year-round camp operations. For purposes of the federal minimum wage and hour laws, a seasonal camp is defined as one operating less than 7 months per year, or having gross revenues in any six months of the preceding year not greater than 25% of that year's total gross revenue.
IRS Forms and Publications
Camps and foreign nationals requiring access to IRS forms and publications may access and download them through the Internet at http://www.irs.ustreas.gov, or obtain them via fax at 703-487-4160. To use the fax service, you must use a fax that includes a handset so that after dialing the fax number you can respond to questions to get to the right menu options.
Originally published in the 1998 Winter issue of The CampLine.