Employers in the United States, including camps, are required to pay Social Security, Medicare, and state and federal unemployment and income taxes on most employees. How these taxes are calculated and 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”).
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. For 2012, the camp must pay: (a) a 6.2 percent Social Security tax on the first $110,100 earned by the employee each year, and (b) a 1.45 percent Medicare tax on the employee’s entire annual gross pay. In 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Acts of 2010 provided a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This lower rate has been extended, but only through February 29, 2012. The tax rate for Medicare for employees is also 1.45 percent. The combined tax (through February 29, 2012) is therefore 13.3 percent of gross pay, 7.65 percent of which is paid directly by the camp, and 5.65 percent of which is withheld by the camp from the employee’s paycheck, to be forwarded to the Internal Revenue Service (IRS). If the payroll tax cut for employees is not extended, it will revert back to 6.2 percent in March 2012.
These taxes are reported on IRS Form 941, Employer’s Quarterly Federal Tax Return, due April 30, July 31, October 31, and January 31 of each year. The taxes are paid quarterly if less than $2,500 per quarter, or monthly or semi-weekly depending upon the amount owed. See IRS Publication 15,Employer’s Tax Guide, p. 24, for special provisions affecting seasonal employers and the filing of Form 941.
International staff who are nonresident aliens holding J-1 (cultural exchange) or F-1 (student) visas are exempt from FICA withholding, provided the services rendered are consistent with the purpose of their visa.
The American Camp Association supports 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. Efforts continue 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. For 2012, the FUTA tax rate is 6 percent and is applied against the first $7,000 in annual wages of each employee. Camps may take a credit against their FUTA tax liabilities for amounts paid into state unemployment funds. The maximum credit is 5.4 percent. Taxes are reported on IRS Form 940, Employer’s Annual Federal Unemployment Tax Return, or IRS Form 940-EZ due January 31 of the following year. Generally, if the total tax liability for the year is more than $500, the tax must be deposited quarterly on April 30, July 31, October 31, and January 31 of each year. If the tax due for a quarter is more than $500, the tax must be deposited for that quarter. If the tax due is less than $500 for a quarter, the tax is carried over to the next quarter until the cumulative tax is more than $500.
There are two exemptions to FUTA that may apply to camps or their employees. First, nonprofit charitable, religious, and educational camps described in Section 501(c)(3) of the Internal Revenue Code (the “Code”) and exempt from income tax under Code Section 501(a) are generally exempt from FUTA. Second, international staff who are nonresident aliens holding J-1 (cultural exchange) or F-1 (student) visas are also exempt from FUTA, provided the services rendered are consistent with the purpose of their visa.
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, although they are not required to do so. Those that do often have laws that 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 correctly ascertain SUTA tax liability. Don’t hesitate to question your state labor department if they do impose SUTA liability, as the American Camp 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 with¬holding of federal income taxes. Every camp must obtain IRS Form W-4, Employee’s Withholding Allowance Certificate, from each employee to determine the appropriate withholding amount. Most camp counselors will have insufficient earnings in the summer 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 a camp under a J-1 or F-1 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 (even though exempt from FICA and FUTA). In the event the personal exemptions claimed on a foreign national’s Form W-4 are not sufficient to avoid withholding at a given compensation level, camps should consult IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and IRS Publication 519, U.S. Tax Guide for Aliens, to determine eligibility for exemption pursuant to a treaty. The United States is party to many treaties which exempt varying levels of compensation. Students studying in the United States on an F-1 visa would be typical beneficiaries. An individual claiming exemption pursuant to a tax treaty should provide the employer with IRS Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.
IRS Forms W-2, Wage and Tax Statement, summarizing all withholding, must be delivered to all camp employees by January 31st of the following year. By February 29th, copies of the Forms W-2 together with forwarding IRS Form W-3, Transmittal of Wage and Tax Statements, must be delivered to the Social Security Administration by the camp. Withheld income taxes are reported on Form 941, and are payable to the federal government monthly or semi-weekly, depending upon the amount owed. See Publication 15, p. 20 et seq., for taxpayer specific rules regarding depositing taxes.
Withholding of State Income Taxes
Many states impose state income tax and withholding requirements. Camps should check with their state department of revenue to determine liability and compliance procedures.
No federal income tax withholding or FICA or FUTA taxes apply to a camp’s use of independent contractors. There are objective and stringent criteria by which the IRS determines who is and who is not a legitimate independent contractor and most camp employees do not meet the criteria. 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. See IRS Publication 15-A, Employer’s Supplemental Tax Guide, p.6, for additional information regarding the criteria the IRS uses to determine whether an individual is an independent contractor.
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.
The value of meals, if provided to an employee “for the conve¬nience of the employer” and on the employer’s premises, is not gross income to the employee and is therefore not subject to income tax withholding, FICA, and FUTA. Generally, meals are considered to be provided for the convenience of the employer if the employer has a substantial business reason for providing the meal other than as additional compensation to the employee (e.g., the employee’s duties require that the employee be available at all times). Meals that are furnished with lodging that is excludable from gross income, as discussed below, are generally also excludable from gross income. See IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, p.16, for additional information regarding meals provided to employees.
The value of lodging, if provided to an employee “for the convenience of the employer” on the employer’s premises and as a condition of employment, is not gross income to the employee and is therefore not subject to income tax withholding, FICA, and FUTA. Generally, lodging is considered to be provided for the convenience of the employer if the employer has a substantial business reason for doing so other than providing additional compensation to the employee (e.g., the employee’s duties require that the employee be available at all times). Lodging will not be considered to be provided for the convenience of the employer if the employee is permitted to choose between the lodging or additional compensation.
Lodging provided to a camp employee (including during off-season periods) will be gross income to the employee unless the employee has duties which justify the provision of lodging. The provision of lodging must be “integrally related” to the employee’s duties. Factors that the IRS has considered in determining whether lodging is provided for the convenience of the employer and integrally related to the employee’s duties include: (a) the employee’s duties require that he or she be available at all times (e.g., nurse, counselor, maintenance, etc.); (b) the employee is available to constantly monitor the property; (c) the premises are sufficiently isolated that lodging is not available within a distance that allows the employee to adequately perform his or her duties; (d) the employee performs significant work duties at the residence provided; etc.
See Publication 15-B, p. 16, for additional information regarding lodging provided to employees.
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. An independent corporation, a separate board of directors, employees, budgets, assets, liabilities, and bookkeeping staff are all objective criteria that have been used in the past to determine whether an entity is truly independent and therefore eligible for “seasonal” exemptions.
Operating Camp Year-Round
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 its 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 hour provisions, including overtime, apply to employees of most year-round camp operations. The same “seasonal camp” definition applies for purposes of the federal minimum wage and hour laws.
IRS Forms and Publications
Camps and foreign nationals may access and download IRS forms and publications through the Internet at www.irs.ustreas.gov or obtain them via fax at 703-368-9694. 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.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how the laws discussed herein apply to the reader’s specific circumstances.
James Betley is of counsel in Ice Miller LLP’s Tax Group. Betley focuses his practice on multi-state, federal, and international tax planning and compliance and advises tax-exempt clients (including nonprofit and governmental entities) on a broad range of issues.