copyright © 2015, 2011, and 2007 pearson education, inc. 1 chapter 6 payroll section 4 income tax...

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 1

Chapter 6Payroll

Section 4Income Tax Withholding


Objectives

1. Understand the Employee’s Withholding Allowance Certificate.

2. Find the federal withholding tax using the wage bracket method.

3. Find the federal withholding tax using the percentage method.

4. Find the state withholding tax using the state income tax rate.


Objectives

5. Find net pay when given gross wages, taxes, and other deductions.

6. Find the quarterly amount owed to the Internal Revenue Service.

7. Understand additional employer responsibilities and employee benefits.


Personal Income Tax

Is largest single source of money for the federal governmentLaw requires that the bulk of the tax owed by an individual be paid as the income is earnedEmployers must deduct money from the gross earnings of almost every employeeCalled income tax withholdingsSent periodically to the IRS


Personal Income Tax

The IRS has an electronic funds transfer payment system called EFTPS that allows employers to transfer these funds electronicallyThe amount of money withheld from each employee depends on several factors, including marital status, number of withholding allowances, and income.


Personal Income Tax

Marital status. Generally, the withholding tax for a married person is less than the withholding tax for a single person making the same income.


Understand the Employee’s Withholding Allowance

Certificate

Employee must file W-4 form with employerStates the number of withholding allowances being claimedAdditional information so employer can withhold proper amount for income tax



Certificate

A W-4 form is usually completed when a person starts a new job.A married person with three children normally claims five allowances (one each for the employee and spouse and one for each child).However, if both spouses are employed, each may claim himself or herself.



Certificate

Number of allowances may be raised if an employee has been receiving a refund of income taxesNumber may be lowered if the employee has had a balance due in previous tax yearsW-4 form has instructions to help determine proper number of allowances



Certificate

Some people enjoy receiving a tax refund when filing their income tax return, so they claim fewer allowances, having more withheld from each check.Other individuals prefer to receive more of their income each pay period, so they claim the maximum number of allowances to which they are entitled.



Certificate

The exact number of allowances must be claimed when the income tax return is filed.Amount of gross earnings: withholding tax is found on the basis of the gross earnings per pay period.



Certificate

Income tax withholding is applied to all earnings—not just earnings up to a certain amount as with Social Security.Generally, the higher a person’s gross earnings, the more withholding tax paid.


Find the Federal Withholding Tax Using the

Wage Bracket Method

Internal Revenue Service supplies withholding tax tables to be used with the wage bracket methodTables are extensive, covering weekly, biweekly, semimonthly, monthly, and daily pay periods


Example

Chris Laker works for Hy-Vee. He is single and claims no withholding allowances since he prefers to get money back from the government when filing his income tax return. This choice will increase the amount withheld from his paycheck every week. Use the wage bracket method to find his withholding tax for a regular workweek in which his gross earnings were $428.


Example

Use the table for single person, weekly payroll period. The earnings of $428 are found in the row for at least $320 but less than $430 and the column for 0 withholding allowances. The amount to be withheld for federal income taxes is $49. So, Chris’s gross income for the week will be reduced by $49.


Find the Federal Withholding Tax Using the

Percentage Method

Many companies today prefer to use the percentage method to determine federal withholding tax

Percentage method does not require the several pages of tables needed with the wage bracket method

More easily adapted to computer applications in the processing of payrolls.


Find the Amount of Withholding Using the Percentage Method

Step 1 Multiply the number of withholding allowances by the amount for one withholding allowance from the table.

Step 2 Subtract the amount found in step 1 from gross earnings.

Step 3 Find the appropriate table for percentage method of withholding and then the row.

Step 4 Follow the directions in the table to find the tax to be withheld.


Example

Sarah Brynski at Starbucks is married, claims two withholding allowances, and had weekly gross earnings of $690 one week. Use the percentage method to find the withholding tax.


Example

Step 1 From the table, the amount for one withholding allowance, weekly payroll is $73.08.Number of allowances ×

Amount for one allowance= 2 × $73.08 = $146.16


Example

Step 2 Gross earnings – Amount from Step 1= $690 – $146.16 = $534.84

Step 3 Use Table 1(b) for weekly payroll period, married person

Step 4 Go to row of over $490 but not over $1515.

Withholding = $33.40 + 15% of excess = $33.40 + .15 × ($543.84 –

$490) = $33.40 + $8.08 = $41.48


Find State Withholding Tax Using the State Income Tax

Rate• Many states and cities have income tax

• Vary from state to state• No state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming

• Some have flat tax rate (% of income)

• Others use tables with rates as high as 10%


Example

Martha Swanson works as a nurse in Michigan and earns $4150 for the month. The tax rate for Michigan is 4.35%. Calculate the state withholding tax.

Tax = $4150 × .0435 = $180.53


Find Net Pay when given Gross Wages, Taxes, and other

Deductions

Gross Earnings– FICA tax (Social Security)

– Medicare tax– Federal withholding tax– State withholding tax– Other deductionsNet Pay


Page 239

Exercise 24.


Find the Quarterly Amount Owed to the Internal Revenue

Service

An employee’s contribution to Social Security and Medicare must be matched by the employer.


Find the Quarterly Amount Owed to the Internal Revenue

Service

In addition to withholding the employee’s Social Security tax and a matching amount paid by the employer, the employer must also send the amount withheld for income tax to the Internal Revenue Service on a quarterly basis.


Page 240

Exercise 36


Understand AdditionalEmployer Responsibilities and

Employee Benefits

Each quarter, employers must file Form 941, the Employer’s Quarterly Federal Tax Return. This Form itemizes:total employee wages and earningsthe income taxes withheld from employeesthe FICA taxes withheld from employeesthe FICA taxes paid by the employer

copyright © 2015, 2011, and 2007 pearson education, inc. 1 chapter 6 payroll section 4 income tax...

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