|Revision Date||November 1, 2011|
Fringe benefits are allowances and services that the contractor provides to employees as additional compensation. Employer contributions for employee's health insurance, life insurance, and retirement plans are examples of fringe benefits. Also included are items required by law for the benefit of employees, the employer's portion of FICA (Social Security), workers' compensation insurance, and unemployment insurance.
A contractor must determine its responsibilities and comply with applicable state and federal laws and regulations to include the following:
- Workers' compensation--questions may be addressed to a qualified local insurance agency, the State Board of Insurance, or the State Industrial Accident Board
- F.I.C.A.--questions may be addressed to IRS
- Federal unemployment taxes--questions may be addressed to IRS
- State unemployment taxes--questions may be addressed to the Texas Workforce Commission
Some contractors may be exempt from some of the FICA requirements under Section 501(c)(3) of the Internal Revenue Code. Contractors who believe they may be exempt should request Form L178 from the district director of the Internal Revenue Service specifying the exemption. Some types of wages may not be subject to FICA. Exemptions to the general rule can be found in Publication 15, Circular E, Employee Tax Guide at http://www.irs.gov/pub/irs-pdf/p15.pdf.
Federal Insurance Contributions Act (FICA)
FICA is an act of the federal government that requires employers and employees to pay taxes for the Social Security and Medicare benefits programs according to rates set by the federal government. Social Security is comprised of Old Age and Survivor's Disability Insurance (OASDI), and Medicare benefits are provided by the Health Insurance (HI) Program. The employee's share of Social Security and Medicare taxes is withheld from wages and matched by the employer. These funds are forwarded to the federal government.
The taxes are due quarterly. Employers are required to file Form 941, Employer's Quarterly Federal Tax Return, starting with the first quarter in which they are required to withhold income tax or pay wages subject to Social Security and Medicare taxes:
|Quarter||Ending||Due Date for Filing|
|January-February-March||March 31||April 30|
|April-May-June||June 30||July 31|
|July-August-September||September 30||October 31|
|October-November-December||December 31||January 31|
Employers who are late paying the taxes are subject to interest penalties. Failure to pay taxes may result in a lien on an employer's property. Employers must keep records for at least four years.
Verifying FICA Payment
If net tax liability (Line 13 of Form 941) is $1,000 or more for the quarter, the employer must deposit the net taxes at an authorized financial institution using Form 8109, Federal Tax Deposit Coupon, or by using the Electronic Federal Tax Payment System (EFTPS).
If the employer completes Form 8109, it sends the completed form to the bank or other authorized financial institution. The bank then withdraws the funds from the employer's account and forwards these funds to the federal government.
To verify that the employer has paid its FICA taxes, the contract manager should review the completed Form 8109, as well as the bank statement that shows the transaction from the account. If the employer completes the transaction electronically using the EFTPS, there should be a corresponding bank statement that would allow verification of the transaction.
Determining allowable and allocable Fringe Benefits
FICA, Federal Unemployment Tax Act (FUTA), and State Unemployment Tax Act (SUTA) are taxes that are computed on a maximum base salary; therefore, not all of the salary may be taxable. These maximum bases may vary from year to year and should be verified through the IRS and the Texas Workforce Commission.
If fringe benefits unreasonably affect the service cost, the contract manager is responsible for negotiating with the contractor to lower this cost, including changes in leave and holiday benefits, if indicated. Vacation and sick leave are not budgeted separately but are also fringe benefits. The contractor's personnel policies should be examined to ensure that vacation and sick leave are not excessive.
Costs for fringe benefits must be absorbed by all organization activities in proportion to the relative amount of time or effort actually devoted to each. In other words, the percentage of the costs for an employee's fringe benefits charged to the contract must not exceed the percentage of time or effort the employee actually devoted to the contract.