income taxes federal income taxes therefore, using total wages (income) to calculate federal...
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Income Taxes
Federal Income Taxes
Therefore, using total wages (income) to calculate federal withholding taxes would overstate the amount of taxes.
CALCULATING FEDERAL INCOME TAX on FORM 1040 (2014)
(Married, 2 Exemptions)
Income (Adjusted Gross Income): $25,000
Standard Deduction: ($12,400) (Married)
------------Taxable Income: $ 4,700
Exemptions: ($7,900) [2 x $3,950]People
Dollars
see Form 1040 pdf document
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
(FIT or FWT)
Taxable Wages
Definition: Wages total compensation paid to employees.
wages/salaryvacation paybonuses tips
Compensation includes:
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
tips
Tips
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Tips
employee reports tips for the month, if over $20.
the report includes tips from charge cards, as well as cash tips.
employer collects FIT, FICA-SS and FICA-HI from employee.
the report is due from employee by the 10th of the following month.
see Form 4070 pdf document
employer also pays FICA-SS and FICA-HI.
large food or beverage establishment (10+ EE’s) must allocated tips if the total tips reported during any payroll period are less than 8% of the establishment’s gross receipts for that period.
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
(FIT or FWT)
Taxable Wages
Definition: Wages total compensation paid to employees.
wages/salaryvacation paybonuses tips fringe benefits
Compensation includes:
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
fringe benefits
Fringe Benefits
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Fringe Benefits
Taxable Fringe Benefits examples personal use of company car
vacations (company-paid)
tickets for entertainment / sporting events
athletic club membership
frequent flier miles (not yet, but maybe in the future?)
Non-Taxable Fringe Benefits employee discounts
meals at employer-run eating establishments
Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically.
WSJ Article
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Wages Exempt from FIT (examples)
Educational Assistance, if it maintains/improves job status. Up to $5,250 per year for non-job-related educational expenses.
Dependent Care Assistance – up to $5,000 per year.• employer must have a written plan that does not
discriminate in favor of the most highly paid workers.
Employer contribution to a Health Reimbursement Account (HRA)
Employer contribution to a 401(k) program.
De Minimus Fringe Benefits – benefits of little value (e.g., Holiday Turkey/Ham).
Employer-Provided Parking – up to $245 per month.
Exclusion from wages. You can generally exclude the value of transportation benefits that you provide to an employee during 2014 from the employee's wages up to the following limits.• $130 per month for combined commuter highway vehicle
transportation and transit passes.• $250 per month for qualified parking.• For a calendar year, $20 multiplied by the number of
qualified bicycle commuting months during that year for qualified bicycle commuting reimbursement of expenses incurred during the year.
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Wage Deductions Deductions that reduce Wages prior to calculating FIT
deferred arrangements (e.g., 401(k), SEP, IRA)
cafeteria plans (section 125)
• allows EE’s to contribute income to a “plan” and avoid FIT at the time of contribution… but FIT is due when the funds are withdrawn at a later time (retirement).
• allows EE’s to pay for medical, dental and dependent care with “pre-tax” dollars.
• NOTE: this is also exempt from FICA
• NOTE: this is NOT exempt from FICA
Federal Income Taxes
Example of Section 125 Deduction: Assume a 30% Total Tax Rate (FIT, SIT, FICA) and
$1,000 of Medical Expenses.
As you can see, you are $300 better off to have the medical expenses deducted prior to calculating payroll taxes.
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Wage Deductions Deductions that reduce Wages prior to calculating FIT
deferred arrangements (e.g., 401(k), SEP, IRA)
cafeteria plans (section 125)
(this is NOT exempt from FICA)
(this is also exempt from FICA)
Deductions that do NOT reduce Wages prior to calculating FIT union dues wage garnishments loan payments credit union, United Way donation, etc.
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Form W-4
employee may claim “exemption” from income tax withholding if no income tax liability last year and none expected this year
to be completed by the employee
employee can change anytime – existing W-4 becomes invalid
employee can additionally have more tax withheld by claiming fewer exemptions and/or additional dollars
(Employee’s Withholding Allowance Certificate)
employer must maintain the W-4 and use it to calculate income tax to be withheld
employer is to implement within 30 days from receipt of W-4 (no reimbursement of taxes if implemented within 30 days)
employer must withhold at single, no allowance rate (i.e., highest taxes) if
no W-4 is received from employee
see Form W-4 pdf document
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
FYI… Fictitious World Example of How to Use Tax Tables
EXEMPTION = $15 (make-believe)
Taxable Wages Tax of the Amount Over
$0 - $100 $0 plus 10% $0
$101 - $200 $10 plus 20% $100
$201 - $300 $30 plus 30% $200
$301 - $60 plus 40% $300
MARRIED TAX TABLE (make-believe)
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Withholding Methods Percentage Method
1. Start with Taxable Wages.
2. Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.
3. Subtract the result from #2 from #1.
4. Compute tax from “Percentage Method” tables, using the correct pay period and marital status.
Percentage Method Examples
Federal Income Taxes
Joe, Single, 2 Allowances, earning $280.30 Weekly(Joe, S/2, $280.30, Weekly)
1. Taxable Wages: $280.30
2. Allowances: $76.90 x 2 = $153.80
3. Excess Wages: $280.30 - $153.80 = $126.50
4. W/H Taxes: ($126.50 - $44.00) x 10% = $8.25
Percentage Method Examples (cont.)
Federal Income Taxes
Mary, Married, 3 Allowances, earning $1,552.73 Bi-Weekly(Mary, M/3, $1,552.73, Bi-Weekly)
1. Taxable Wages: $1,552.73
2. Allowances: $153.80 x 3 = $461.4
3. Excess Wages: $1,552.73 - $461.40 = $1,091.33
4. W/H Taxes: [ ($1,091.33 - $1,040.00) x 15% ] + $70.90 = $78.60
Percentage Method Examples (cont.)
Federal Income Taxes
Steve, Single, 3 Allowances, earning $2,000.00 Bi-Weekly(Steve, S/3, $2,000.00, Bi-Weekly)
1. Taxable Wages: $2,000.00
2. Allowances: $153.80 x 3 = $ 461.40
3. Excess Wages: $2,000.00 - $ 461.40 = $1,538.60
4. W/H Taxes: [ ($1,538.60 - $1,529.00) x 25% ] + $198.40 = $200.08
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Withholding Methods (cont.) Percentage Method
Wage-Bracket Method
1. Start with Taxable Wages.
2. Locate the correct withholding table, using the correct pay period and marital status.
3. Locate the proper wage bracket.
4. Move across to tax amount, which is located in the appropriate allowance column.
1. Start with Taxable Wages.
2. Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.
3. Subtract the result from #2 from #1.
4. Compute tax from “Percentage Method” tables, using the correct pay period and marital status.
Wage-Bracket Method Examples
Federal Income Taxes
Jenny, Married, 3 Allowances, earning $750.00 Weekly(Jenny, M/3, $750.00, Weekly)
1. Select Table: Married - Weekly
2. Find Wage Bracket: $750 - $760
3. Move across to proper allowance column: (3) $36.00
Let’s Calculate using Percentage Method:
1. Taxable Wages: $750.00
2. Allowances: $76.90 x 3 = $230.70
3. Excess Wages: $750.00 - $230.70 = $519.30
4. W/H Taxes: [ ($519.30 - $165.00) x 10% ] + $0.00 = $35.43
Wage-Bracket Method Examples (cont.)
Federal Income Taxes
Chris, Single, 0 Allowances, earning $2,130.00 Semi-Monthly(Chris, S/0, $2,130.00, Semi-Monthly)
1. Select Table: Single – Semi-Monthly
2. Find Wage Bracket: $2,120 - $2,140
3. Move across to proper allowance column: (0) $333.00
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Withholding Methods (cont.) (FYI…) Quarterly and Yearly Averaging
used with fluctuating, but “estimate-able” income based on income estimate for Quarter or Year divide estimate by number of pay periods - then determine tax
withholding withhold average tax amount every pay period
Quarterly Averaging Example
Federal Income Taxes
Bill is expected to earn $8,000 during the 2nd quarter, but his pay may vary dramatically between pay periods. Pay periods are semi-monthly and Bill claims 2 allowances and married.
1. Divide the estimated wages by the number of pay periods:
$8,000 / 6 semi-monthly pay periods = $1,333.33
2. Using Wage-Bracket Table, find withholding amount for each pay period:
$64 per pay period should be withheld
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Supplemental Wages
If Paid with Regular Wages (on same check)
If both wages are combined together, then compute tax on entire payment as we have done previously
If shown separately, can have two different rates for each payment one for the regular wages and, say, 25% for the supplemental wages
vacation pay bonuses commissions severance
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Supplemental Wages (cont.)
If Paid Separately from Regular Wages (two separate checks)
Method B
(1) add supplemental wages to the previous-paid regular wages (2) then calculate tax on entire amount (3) then subtract previously-held tax to arrive at tax amount to
withhold for supplemental wages
(use this method if no income tax withheld from regular wages)
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Method B (example) June 15th: Louis, married, 1 allowances earns $985 semi-monthly.
FIT Withholding is $47.00 (from wage bracket table)
June 18th: Bonus of $500 is paid to Louis.
Method B: Add $500 bonus to previous-paid wages of $985, which equals $1,485. FIT withholding based on $1,485 is $106 (from wage bracket table). Since $47 previously withheld on 6/15, need to withhold ($106 - $47 = ) $59 when paying the $500 bonus.
Analysis: Tax is based on the 15% “marginal” tax rate for this example.
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Supplemental Wages (cont.)
If Paid Separately from Regular Wages (two separate checks)
Method B
(1) add supplemental wages to the previous-paid regular wages (2) then calculate tax on entire amount (3) then subtract previously-held tax to arrive at tax amount to
withhold for supplemental wages
(use this method if no income tax withheld from regular wages)
Method A
withhold a flat 25% on the supplemental pay
FEDERAL INCOME TAX WITHHOLDING
Federal Income Taxes
Supplemental Wages (cont.)
Vacation
Treat as if it’s a regular payment for the vacation pay period(s)
If paid in lieu of time, combine with regular pay
WEEK 1$1,000
Calculate W/H
Example Lump sum payment of 2 weeks vacation to an employee who earns $1,000 per week and who’s taking their two week vacation:
Income tax withholding is calculated as follows:
Add the total W/H and deduct from the $2,000 payment.
WEEK 2$1,000
Calculate W/H
+ =
Wage & Tax Statements
Form W-2 (Wage & Tax Statement)
income tax or FICA taxes were withheld income tax would have been withheld if employee had claimed one
withholding allowance or had not claimed exemption from withholding any amount paid to the employee for services, if the employer was a
trade or business
Prepared by Employer if employee had any of the following:
Must be given to employees on or before January 31st
Wage & Tax Statements
Form W-3 (Transmittal of Wage & Tax Statements)
The form is automatically sent to employers during the 4th quarter Used as a “cover form” for filing all W-2’s Copy A Form W-3 and all the W-2’s are sent to the Social Security
Administration by the end of February Must file electronically instead of Form W-3 if W-2’s number 250 or
more – due date extended to March 31st
Form W-2c and Form W-3c (Corrected Statements)
Use Form W-3c if more than one Form W-2c; otherwise just file W-2c
Wage & Tax Statements
Wage & Tax Statements
Wage & Tax Statements
Form 1099 (Miscellaneous Income)
Form 1099-MISC used to report payments such as rents, legal fees, payments to independent contractors, royalties, and award
Form 1096 is used to transmit the 1099’s to the IRS
Wage & Tax Statements
Wage & Tax Statements
Illinois State Income Tax
Form IL-W-4
There are two different types of allowances – Basic allowances ($2,150 each) and Additional allowances ($1,000 each).
Employee may include an additional dollar amount of withholding, similar to FIT
Employees that are residents of Iowa, Kentucky, Michigan and Wisconsin (reciprocal agreements) must complete Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, to be exempt from Illinois Income Tax withholding
(Employee’s Illinois Withholding Allowance Certificate)
show IL-W-5-NR.pdf document
Illinois State Income Tax
Taxes
Straight, 3% 5% 3.75% rate after allowances Can use Percentage Method or Wage-Bracket Method (see handouts)
Deposit Requirements (based on a “lookback” period) If more than $12,000 Semi-Weekly depositor. Between $1,000 and $12,000 Monthly depositor (new taxpayers, as well) Less than $1,000 Annual depositor.
Use Form IL-501 to deposit (analogous to Form 8109) or electronic deposit.
Illinois State Income Tax
Form IL-941 If Annual depositor use Form IL-941 and it’s due by January 31st
If Monthly or Semi-Weekly depositor then file quarterly, even if $0 for quarter - form is due by end of the following month.