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By David C. Gray, ACA Legislative Affairs
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.
Independent Contractors
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.
Part-Time Workers
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.
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