CH 12 Financial Management
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General supplies
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Items used by both patients and staff, such as paper towels, soap, and toilet tissue.
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Vital supplies
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Can be both clinical and administrative in nature. Examples include prescription pads and paper for examinations. To help keep track of supplies, categorize them according to the urgency of need, making sure that vital supplies are readily available.
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Incidental supplies
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Can be clinical, administrative, or general in nature. The efficiency of the office is not threatened if these supplies run low. Incidental supplies include rubber bands and staples.
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Durable items
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Pieces of equipment that are used indefinitely, such as telephones or computers, that are not considered supplies.
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Expendable items
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Items that are used and then must be restocked, also known as consumables. Expendable items are used up within a short period of time, and they are relatively inexpensive.
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Capital equipment
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Items that are considered major and involve expenditures above a predetermined dollar value. Capital equipment includes general, large lab, administrative, and clinical equipment.
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Vendors
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The medical assistant should obtain recommendations from other medical offices, gather competitive prices, and compare vendors on the basis of price, quality, service, and payment policies. It takes multiple vendors to provide all the supplies for a medical practice.
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Local vendors
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It is a good idea to establish good credit and business relationships with local vendors, even if they cost a little more. Local vendors may offer special discounts, emergency service, information about sales and specials, and personal assistance.
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Catalog services
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Can provide ease of availability, competitive pricing, and fast delivery. Many vendors accept telephone, fax, and e-mail orders as well as traditional order forms.
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Ordering supplies
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Expendable supplies and equipment must be replaced and reordered in time. A copy of the order form should be retained to check against the order when it arrives.
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Purchase requisitions
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Some practices require approval of a formal request before supplies can be ordered.
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Receiving supplies
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Orders should be checked for completeness. One person should be responsible for receiving and signing for deliveries. This person must check invoices and/or packing slips against the items delivered, initial and date the invoices as items are received, and distribute goods to the storage room.
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Packing slip
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A list of supplies packed and shipped, supplied by the vendor in the package with the supplies.
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Statement
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The monthly bill summarizing invoices. It is a request for payment.
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Supply budget
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The average medical practice spends from 4% to 6% of its annual gross income on supplies. If costs exceed 6%, you might be required to reevaluate the office's spending practices.
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Storage room
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Should be arranged with the most commonly used items within easiest reach. Place new stock in the back of the storage area, and move the old supplies up front so that they will be used first. This practice is referred to as rotating stock. You must know the storage requirements for various kinds of supplies. You must maintain an adequate quantity of supplies in a well-organized storage space to run the office smoothly.
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Inventory
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A list of articles in stock, with the description and quantity of each. Inventory control requires constant supervision because a medical office cannot afford to run out of supplies. Most offices maintain an ongoing inventory system, which helps determine when to reorder supplies.
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Reminder cards
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Many offices develop color-coded reorder reminder cards, which are inserted into the stack of inventory items. When the card comes to the top of the stack, it is time to reorder.
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Invoice
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A paper describing a purchase and the amount due. Check the invoice against the original order and the packing slip, mark it to confirm that the order was received, and pay it. The check number, date, and payment amount should then be recorded on the invoice. Invoices should be placed in a special folder until paid.
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Payment terms
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Many vendors do not charge a handling fee if an order is prepaid. Others offer a discount for enclosing a check with an order. Some delay billing for 30 to 90 days. The vendor's invoice usually describes payment terms.
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Records
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Copies of all bills and order forms for supplies should be kept on file for 10 years in case the practice is audited by the IRS.
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Disbursement
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Payment of funds, whether in cash or by check. Usually, you will write a check to the vendor and have the physician sign it. At the time of payment, write the date and check number on the statement, and place it in the paid file. Disbursements can be entered into the accounting records in several ways, depending on the accounting system used.
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Purchasing procedure
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The purchasing procedure should follow certain standard practices: An authorized person should be in charge of purchasing. High-quality goods and services should be ordered at the lowest possible prices. Receipts of goods should be recorded. Shipments received should be checked against packing slips to verify that all goods have been received. Invoices should be paid in a timely manner. Paid invoices should be kept on file.
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Accounting
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A system of recording, classifying, and summarizing financial transactions.
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Account
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In bookkeeping terms, a single financial record category or division. It is used to track debit and credit changes, by date, in reference to a specific matter.
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Account balance
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The debit or credit balance remaining in an account.
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Accounts payable
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Amounts charged with suppliers or creditors that remain unpaid.
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Accounts receivable
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Amounts owed to a business for services or goods supplied.
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Assets
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Possessions of value, which in a medical office are inventory, equipment, prepaid rent, and the amounts due from patients.
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Liabilities
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Amounts owed to creditors, such as a mortgage on the medical building and the accounts payable.
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Balance sheet
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A financial statement for a specific date or period that indicates the total assets, liabilities, and capital of the business.
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Auditing
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The review of financial data to verify accuracy and completeness. Medical assistants responsible for bookkeeping must provide required financial records and answer questions about accounting systems used.
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Bookkeeping
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The recording part of the accounting process. Bookkeeping records income, charges, and disbursements. There are three types of manual bookkeeping systems: single-entry, double-entry, and pegboard.
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Single-entry system
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The oldest bookkeeping system, requiring only one entry for each transaction. Because it is not self-balancing, however, it is the hardest system in which to spot errors. It includes several basic records, such as: • Daily log to record charges and payments. • Patient ledger cards • Payroll records • Cash payment journal • Petty cash records
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Double-entry system
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Based on the accounting equation assets = liabilities + owner equity. The materials required for a double-entry bookkeeping system are inexpensive, but the system requires more skill and knowledge of accounting procedures than the single-entry system. It is also more time-consuming to use. After each financial transaction, the medical office using a double-entry system must debit one account and credit another account.
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Pegboard system
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A system consisting of daysheets, ledger cards, patient charge slips, and receipt forms or superbills. A pegboard system usually includes a lightweight board with pegs on the left or right edges and is sometimes called a \"one-write\" system. It is the most commonly used manual medical accounts receivable system and the most expensive to maintain. It used to be the most widely used bookkeeping system in medical practices.
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A pegboard system has several main advantages
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• The system is efficient and time-saving. • The daysheet provides complete and up-to-date information about accounts receivable status at a glance. • The system is easy to learn.
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Charge slip
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The original record of the doctor's services and the charge for those services.
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General journal
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A record of the physician's practice. It includes records of services rendered, charges made, and monies received. The general journal is also known by the names daily log, daybook, daysheet, daily journal, and charge journal. This journal is also called the book of original entry because it is where all transactions are first recorded.
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Patient ledger card
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A card that contains the patient's name, address, home and work telephone numbers, and the name of the person who is responsible for the charges (if different from the patient). It also contains a record of charges, payment, and adjustments for individual patients or families.
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Accounts receivable ledger
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Includes all the individual patients' financial accounts on which there are balances.
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Posting
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The process of copying or recording an amount from one record, such as a journal, onto another record, such as a ledger—or from a daysheet onto a ledger card.
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Manual posting
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Facilitated by a section at the bottom of each daysheet and a check register page at the end of each month, plus monthly and annual summaries. Accounting records must show every amount paid out, date and check number, and purpose of payment.
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Computer posting
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Using a computer to keep track of and print accounts receivable and accounts payable. Computers are also used to print checks, as well as payment information.
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Accrual basis accounting
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Recording income when it is earned and expenses when they are incurred.
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Trial balance
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A method of checking the accuracy of accounts. It should be done once a month after all posting has been completed and before preparing the monthly statements. The purpose of a trial balance is to disclose any discrepancies between the journal and the ledger.
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Equity
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The net worth of the medical office. Equity equals the practice's total assets minus the total liabilities.
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Balance
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The difference between the debit and credit totals.
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Adjustment column
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An account column, sometimes included to the left of the balance column, used for entering discounts, debits, credits, refunds, and write-offs.
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Balance column
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The account column on the far right that is used for recording the difference between the debit and credit columns.
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Debit
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An amount usually representing things acquired for the intended use or benefit of a business. It is recorded in the column to the left of the credit column. In each journal entry, the dollar amount of the debit must be equal to the dollar amount of the credit. A debit is also called a charge. Debits are incurred when the practice pays for something, such as medical supplies.
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Credit
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An amount constituting an addition to a revenue, net worth, or liability account. It is recorded in the column to the right of the debit column. Credits constitute payments received by the practice, such as from patients or third-party insurance providers.
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Credit balance
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Money owed to the patient that results when a patient has paid in advance and there has been an overpayment.
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Refunds
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Debit adjustments. If a patient wishes to have an overpayment refunded, write a check for the amount due and enter the transaction on the daysheet.
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Credit bureau
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A company that provides information about the creditworthiness of a person seeking credit. If a patient's credit history is in question, you may request a report from a credit bureau. A sample credit bureau report is shown in Figure 12-3 on the next spread.
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Equal Credit Opportunity Act
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An act that states that credit arrangements may not be denied on the basis of a patient's sex, race, religion, national origin, marital status, or age. Also, credit cannot be denied because the patient receives public assistance or has exercised rights under the Consumer Credit Protection Act, such as disputing a credit card bill or a credit bureau report. Under the Equal Credit Opportunity Act, the patient has a right to know the specific reason that credit was denied.
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Payables
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Amounts owed to others.
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In balance
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Accounts are in balance when the total ending balances of patient ledgers equals the total of accounts receivable.
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Receipts
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Money received.
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Petty cash fund
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A fund maintained to pay small, unpredictable cash expenses.
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Reconciliation of bank statement
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The process of verifying that the bank statement and the checkbook balances are in agreement. As you reconcile the bank statement with your accounts, be aware of outstanding checks, outstanding deposits, and any service fees the bank may have charged.
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Superbill
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A combination charge slip, statement, and insurance reporting form. A superbill includes the charges for services rendered on a day, an invoice for payment or insurance copayment, and all the information for submitting an insurance claim. It is also called an encounter form.
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Medical business
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A medical practice is a business that must produce a profit—that is, its income must exceed its expenses. Bookkeeping and banking are essential and must be 100% accurate.
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Absolute accuracy
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Necessary when working with bank deposits, reconciliation of statements, and all bookkeeping activities. The medical assistant acts as the agent for the physician.
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Banks
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Maintain checking and savings accounts for their customers.
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Banking functions: Basic bank-related activities carried out by a medical practice include
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• Depositing funds • Withdrawing funds • Reconciling statements • Using auxiliary services
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Types of bank accounts
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Medical practices typically use three types of bank account Regular checking account Interest-earning, or interest-bearing, checking account Savings account
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Regular checking account
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Most medical practices have a regular checking account for office expenses. This account does not pay interest but offers availability and flexibility.
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Interest
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Money paid to a depositor by a bank or other financial institution for the use of the depositor's money.
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Electronic banking
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Banking with the use of computers. Electronic banking has several advantages over traditional banking: It can improve productivity, cash flow, and accuracy. The computer screen can display all checks and deposits that were logged into the register in the order they were posted. In electronic banking, someone must still be responsible for recording and physically depositing checks.
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Bank statements: All contain certain basic information, including
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• Closing date • Caption • List of checks processed • List of deposits
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Caption
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A summary of the account activity that has taken place during the month up to the closing date. It includes the beginning balance, total value of checks processed, total amount of deposits made, service charges, and ending balance.
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Check
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A written order to a bank to pay or transfer money. It is payable on demand and is considered a negotiable instrument. The person who writes the check is called the payer or drawer.
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Types of checks
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Cashier's checks, certified checks, money orders, limited checks, traveler's checks, voucher checks, bank drafts, and warrants.
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Cashier's check
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Written using the bank's own check form and signed by a bank representative. The funds for payment of the check are debited from the payer's account at the time the check is written. A service charge is usually added. Another term for a cashier's check is treasurer's check.
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Certified check
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Written on the payer's own check form and verified by the bank with an official stamp. The bank withdraws the money from the payer's account when it certifies the check. The stamp indicates that the bank certifies the availability of the funds.
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Money order
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A certificate of guaranteed payment. It is purchased for the cash value printed on the certificate plus a nominal handling fee. Money orders may be purchased from banks, post offices, and some convenience stores. International money orders can be acquired in U.S. dollars to be cashed in foreign countries.
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Limited check
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Issued on a special check form that displays a preprinted maximum dollar amount for which the check can be written. This type of check often is used for payroll or insurance payments.
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Traveler's check
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A check purchased for a small fee for a specified amount of money. It is designed for people who are traveling where personal checks may not be accepted and for people who do not want to carry large amounts of cash. Traveler's checks are also available in foreign currencies. They can be purchased at a bank.
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Voucher check
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Contains a detachable voucher form. It is frequently used for payroll checks because additional information about the transaction can be supplied to the payee. The voucher portion is used to itemize the purpose of the check, deductions, or other information.
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Bank draft
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A check written by a bank against its funds in another bank.
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Warrant
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A nonnegotiable check. It is a statement issued to indicate that a debt should be paid, for example, by an insurance company.
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ABA number
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Part of a coding system originated by the American Bankers Association (ABA). It is always located in the upper-right corner of a printed check to identify the location of the bank at which the check is to be redeemed.
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MICR code
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Stands for magnetic ink character recognition code, which appears along the bottom of a check and consists of numbers and characters printed in magnetic ink.
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Accepting checks
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The majority of bills are paid by personal checks drawn on patients' bank accounts. Some checks may be considered risky, such as third-party checks, postdated checks, checks drawn on an out-of-town bank, and checks marked Paid in full that do not represent the total due.
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Power of attorney
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A directive that grants a person the legal right to handle financial matters for another person who is unable to do so.
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Postdated check
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A check that bears a date in the future and cannot be cashed until then.
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Predated or backdated check
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A check made out with a date in the past. Predated checks can be accepted as long as the date shown is no more than 6 months before the date on which it is cashed.
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Third-party check
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A check written by an unknown party to a payee (e.g., your patient) who wishes to release the check to you for payment of an outstanding balance. Government and payroll checks used in this way are also third-party checks.
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Canceled check
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A check that has been cashed and thus cannot be issued again.
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Deposits:
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Cash or checks placed into a bank account. They can be made to either checking or savings accounts. Checks should be deposited promptly for the following reasons: They may be lost, misplaced, or stolen. There is the possibility of a stop-payment order. They may have a restricted time for cashing.
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Endorsement
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A check must be endorsed to transfer the funds from one person to another. Endorsement is accomplished by signing or rubber-stamping the back of the check, in ink, at the left end. When you accept a check, immediately endorse it and write the words For deposit only on the back.
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Types of endorsement
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There are four principal kinds of endorsement: blank, restrictive, special, and qualified. Blank and restrictive endorsements are the most commonly used.
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Blank endorsement
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A signature only. Also known as an open endorsement, it is the simplest and most common type of endorsement on personal checks.
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Restrictive endorsement
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The words For deposit only followed by the account number and signature.
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Limited endorsement
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The words Pay to the order of and the name, followed by a signature. A check with a limited endorsement functions as a third-party check.
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Qualified endorsement
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Used to disclaim future liability of the endorser, generally consisting of the words Without recourse above the signature. It is most commonly used by lawyers who accept checks on behalf of clients.
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Deposit slip
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After endorsing the check, fill out a deposit slip as shown in Figure 12-6 on the next spread.
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Methods of deposit
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There are three different ways to deposit funds: in person, by mail, or at commercial night depositories. Making deposits in person is the most direct method, and banks immediately provide a receipt to verify transactions.
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Returned checks
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Occasionally, the bank returns a deposited check because of problems such as a missing signature or missing endorsement. A check is also returned if the payer has insufficient funds on deposit to cover it.
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NSF
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Abbreviation for not sufficient funds, meaning that there is not enough money in the account on which a check has been drawn to cover the amount of the check.
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Handling returned checks
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If a check is returned, begin by contacting the person who gave you the check. If payment is not made, or if you cannot track down the person, turn the account over to a collection agency.
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Bills
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All bills should be paid by check for documentation and control purposes. For small payments, such as public transportation costs, petty cash may be used.
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Office banking policy
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Should indicate who is responsible for writing and signing all checks. For good control, one person should write the checks, and another person should be authorized to sign them. Sometimes two authorized signatures are required in order to transfer funds from one account to another or to write checks over a certain amount, such as $1,000.
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Check writing
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Checks are printed on sensitized paper so that erasures are easily noticeable. The bank has the right to refuse payment on any check that has been altered. You must not cross out, erase, or change any part of a check.
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Check stub
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The part of a check that remains in the checkbook after the check has been written and removed.
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Payee
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The person to whom the check is payable.
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Payer
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The person who signs the check to release the funds to the payee.
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Lost and stolen checks
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Occasionally, an outgoing check may be lost or stolen after it has been issued. You must report this situation to the bank promptly. The bank will place a warning on the account, and signatures on cashed checks will be carefully inspected to detect possible forgeries. A stop-payment order should be issued, and the stop-payment notice should be attached to the check stub. The amount of the check should be added to the current checkbook balance. A new check can be issued to replace the one lost.
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Billing duties of a medical assistant: To be an effective account manager, follow these rules
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• Do not be embarrassed to ask for payment for services. The physician or facility has the right to charge for the care and services provided. • Practice good judgment. • Give personal attention and consideration to each patient. • Show a desire to help patients with financial difficulties.
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Payment at the time of service
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Every practice should encourage time-of-service collection. There will be no further billing and bookkeeping expenses if patients get into the habit of paying their current charges before they leave the office.
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Payment plans and extensions of credit: For procedures and services involving large fees, such as surgery and long-term care, inform patients of:
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• What the charges will be • What services these charges cover • Credit policies of the facility • When payment is due • Circumstances in which the practice requires payment at the time of service • When or whether assignment of insurance benefits is accepted • Whether insurance forms will be completed by the office staff • Collection procedures, including circumstances in which accounts will be sent to a collection agency
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Balance billing
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Billing the patient for the difference between the fee and the amount the insurance company allows. Whether balance billing is acceptable depends on the contract with the insurance company.
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Exceptions and rules
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Although there will be exceptions, there must be rules, which should be conveyed in writing to the patient at the outset of the relationship. Any patient who needs special consideration can be counseled individually.
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Internal billing
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In a practice with only a moderate number of accounts, the medical assistant handles the preparation and mailing of statements. A printed statement may be computer-generated, based on a superbill, typewritten, or photocopied from the ledger card.
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Statement
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Should show the service rendered on each date, the charge for each service, the date on which a claim was submitted to the insurance company, the date of payment, and the balance due from the patient. A regular system of mailing statements should be put into operation. Time limits also must be observed in billing third-party payers. Bills for minors must be addressed to parents or legal guardians.
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Cycle billing
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A common billing system that bills each patient once a month but spreads the work of billing over the month. In this system, invoices are sent to patients whose names begin with A-D on one day, those whose names begin with E-H on another day, and so on.
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Fair Credit Billing Act
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A federal law mandating that billing for a balance due or reporting a credit balance of $1 or more must occur every 30 days.
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Standard payment period
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Normally, people are expected to pay bills within 30 days.
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Open-book account
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The most typical account for patients of a medical practice, in which the account is open to charges made occasionally. It uses the last date of payment or charge for each illness as the starting date for determining the time limit on that debt.
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Written-contract account
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An account in which the physician and patient sign an agreement stating that the patient will pay the bill in more than four installments.
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Single-entry account
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An account with only one charge, as is created, for example, when an out-of-town vacationer consults a local physician for an illness.
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Delinquent accounts
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Accounts in which payment is overdue. Payment is the most difficult to collect from two groups of patients: those with hardship cases and those who have moved and have not received an invoice.
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Hardship cases
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Accounts of patients who are poor, uninsured, underinsured, or elderly and on a limited income. Physicians may decide to treat such patients at a deep discount or for free.
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Payment collection
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Evaluation of the success of collections is based on (1) the collection ratio and (2) the accounts receivable ratio.
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Collection ratio
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Measures the effectiveness of the billing system. The basic formula for figuring the collection ratio is to divide the total collections by the net charges (gross charges minus any discounts) to reach the percentage figure.
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Accounts receivable ratio
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Measures how fast outstanding accounts are being paid. The formula for figuring the accounts receivable ratio is to divide the current accounts receivable balance by the average gross monthly charges.
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Age analysis
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The process of classifying and reviewing delinquent accounts by age from the first date of billing. It should list all patient account balances, when charges were incurred, the most recent payment date, and any notes regarding the account. The age analysis is a tool to show, at a glance, the status of each account.
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Reasons for collecting delinquent accounts: The main reasons to try to collect all delinquent accounts are
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Physicians must be paid for services so that they can pay expenses and continue to treat patients. Although a patient cannot be \"fired\" for nonpayment, failure to collect payment can result in the termination of the established patient-physician relationship. Noncollection of medical bills may imply guilt, and a malpractice suit may result.
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Collection techniques
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Include telephone collection calls, collection letters or statements, and personal interviews. Send the first letter or statement when the account is 30 days past due, then follow up at 60 days, at 90 days, and again at 120 days. If you call the patient, make sure that you do so in private and during reasonable hours. Always be respectful and professional, and demonstrate your willingness to help the patient meet his or her financial obligation.
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Equal Credit Opportunity Act (ECOA)
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Creditors may not discriminate against applicants on the basis of sex, marital status, race, national origin, religion, or age. Creditors may not discriminate because an applicant receives public assistance income or has exercised rights under the Consumer Credit Protection Act.
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Fair Credit Reporting Act (FCRA)
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Credit bureaus are required to supply correct and complete information to businesses to use in evaluating a person's application for credit, insurance, or a job.
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Fair Debt Collection Practices Act (FDCPA)
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Debt collectors are required to treat debtors fairly. Certain collection tactics are also prohibited, such as harassment, false statements, threats, and unfair practices.
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Truth in Lending Act (TLA)
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Creditors are required to provide applicants with accurate and complete credit costs and terms, in clear and understandable language.
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Illegal collection techniques
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It is illegal to harass a debtor. Harassment includes making threats or calls late at night (after 9 p.m.). It is also illegal to threaten action that cannot be legally taken or that is not intended to be taken.
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Statute of limitations
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A statute that limits the time in which rights can be enforced by action. After the statute of limitations expires, no legal collection suit may be brought against a debtor. This time limit depends on the state in which the debt was incurred.
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Outside collection assistance
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When you have done everything possible internally to follow up on an outstanding account and have not received payment, there are still steps you can take: Use a collection agency. If the patient has failed to respond to your final letter or has failed to fulfill a second promise on payment, send the account to the collector without delay.
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Collection agencies
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Medical practices should be careful to avoid collection agencies that use harsh collection practices. Once an account has been turned over to an agency, do not send bills or discuss the account with the patient.
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Accounts payable
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Amounts the physician owes to others for equipment and services, including: Office supplies; Medical supplies and equipment; Equipment repair and maintenance; Utilities; Taxes; Payroll; Rent
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Accounts payable records
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Include purchase orders, packing slips, and invoices.
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Payroll
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The total direct and indirect earning of all employees. Federal, state, and local laws require records to be kept of all salaries and wages paid to employees.
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Payroll tasks
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Include calculating the amount of wages or salaries paid and amounts deducted from employees' earnings. Other payroll tasks involve writing checks, tracking data for payroll taxes, and filling out payroll tax forms.
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Retention of payroll records
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The physician is required by law to keep payroll data for 4 years. The records should include the following information: • Employee's Social Security number • Number of withholding allowances claimed • Gross salary • Deductions for Social Security tax; Medicare tax; federal, state, and other tax withholding; state disability insurance; and state unemployment tax
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Employer tax identification number (EIN)
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Every employer, no matter how small, must have an EIN for reporting federal taxes. It is obtained by completing Form SS-4, Application for Employer Identification Number.
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Employee identification
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Employees are identified for tax purposes by their Social Security numbers.
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Payroll register
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A list of all employees and their earnings, deductions, and other information.
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Employee earnings
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Either salaries or wages, plus indirect forms of payment, such as paid time off and employee benefit and service programs.
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Salary
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A fixed amount paid to an employee on a regular basis regardless of the number of hours worked.
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Wages
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Pay based on a specific rate per hour, day, or week.
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Payroll deductions
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Amounts regularly withheld from a paycheck, such as those for federal, state, and local taxes, as well as those for such options as a 401(k) plan, life insurance, or savings bonds.
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Methods for calculating payroll checks
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Include the manual, the pegboard, and the computer system. Regardless of the accounting system used, attention to accuracy in bookkeeping is necessary. In addition, it is necessary to maintain confidentiality in matters related to employees' wages and salaries.
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Net earnings
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Gross earnings minus total deductions.
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Payroll services
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Some offices hire an outside payroll service to process all payroll checks and withholding payments, as well as to keep records.
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Types of tax
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The federal government mandates payment of the following taxes through withholding: • Social Security • Medicare • Federal income tax
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Withholding
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Amounts of salary held out of payroll checks for the purpose of paying government taxes or for employee benefits.
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Form W-4
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In order to determine the amount of money to be withheld from each paycheck, each new employee must complete a Form W-4, and each employee should update the W-4 regularly.
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Social Security (FICA)
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The Federal Insurance Contribution Act governs the Social Security system. The employee pays half of the contribution, and the employer pays the other half. IRS Circular E lists the FICA tax percentages that should be applied, based on the level of taxable earnings, length of the payroll period, marital status, and number of withholding allowances claimed.
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Federal Unemployment Tax Act (FUTA)
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Requires employers to pay a percentage of each employee's income, up to a specified dollar amount, to fund an account used to pay employees who have been laid off for a specified time while they are seeking new employment. Although FUTA is based on employees' gross income, it must not be deducted from employees' wages. Payments into a state unemployment fund can generally be applied as credit against the FUTA tax amount.
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State unemployment tax
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All states have unemployment compensation laws. Most states require only the employer to make payments to the unemployment insurance fund. However, a few states require both the employer and employee to make a payment. In some states, the employer does not have to make unemployment compensation payments if there are very few employees (four or fewer).
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State disability insurance
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Some states require a certain amount of money to be withheld from the employee's check to cover a disability insurance plan. This plan covers employees in the event of injury or disability.
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Insurance withholding
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Money also may be withheld, as requested by the employee, for health insurance, life insurance, and disability insurance that are available from the employer as employee benefits.
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Form W-2
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Must be completed at the end of each year and given to each employee, with copies to the federal and state governments. The W-2 lists the total gross income; total federal, state, and local taxes withheld; taxable fringe benefits; tips; and the employee's total net income. The amount of wages taxable under Social Security and Medicare must be listed separately on the W-2.
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Deposit requirements
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Federal tax withholding and FICA payments must be made to a federal deposit account in a Federal Reserve Bank or authorized banking institution at regular intervals, at least monthly. The IRS imposes a severe penalty for failure to deposit this money.
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Employer's quarterly federal tax return
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Form 941 (see Figure 12-12) must be filed quarterly to report federal income and FICA taxes withheld from employees' paychecks. It is due before the last day of the first month after the end of a quarter: April 30, July 31, October 31, and January 31.
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