©the mcgraw-hill companies, inc. 2008mcgraw-hill/irwin chapter 10 payroll taxes “i want to find...

©The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin

Chapter 10

Payroll Taxes

“I want to find out who this FICA guy is and how come he’s taking so much of

my money.”

-- Nick Kypreos

10-2

LO # 1 Payroll and Form 1040LO # 1 Payroll and Form 1040

• Withholding taxes are imposed on taxpayers to help fund government operations using a “pay as you go” system

• At the end of the year, the employer is required to summarize an employee’s earnings and taxes withheld on a Form W-2

• Form 1040 compares tax liability with tax payments to determine whether a taxpayer will receive a refund or own more money.

10-3

LO # 1 Payroll and Form 1040 Concept Check 10-1

LO # 1 Payroll and Form 1040 Concept Check 10-1

1. The payroll tax withholding system was established to produce a stream of revenue for governmental operations.

True

2. Forms W-2 and 1040 are forms used to match tax liability with tax payments.

True

10-4

LO # 2 Federal Tax CalculationsLO # 2 Federal Tax Calculations

• Withholding taxes are an approximation of the proportionate share of total tax liability the employee will owe to the federal government.

• Form W4 is completed by the employee to claim withholding allowances.

10-5


• Two withholding methods:– Wage Bracket Method

• Uses a table of wage brackets and allowances

– Percentage Method• Uses a range of percentages to calculate taxes• Used in computerized systems

10-6


• Federal Insurance Contributions Act (FICA)– Old age, survivors, and disability insurance

(OASDI or social security) = 6.2% up to a maximum of $94,200 for 2006

– Hospital insurance (Medicare) = 1.45% on all wages (no maximum)

• There is a matching tax for both OASDI and Medicare (FICA) on employers.

10-7


• Employees are required to report cash tips to their employer by the 10th of the month after the month in which the employee receives the tips using Form 4070.

• Employers must withhold income tax and FICA taxes on employee tips.

10-8


• Large food and beverage establishment may be required to “allocate” tips to employees.

• If an employee does not report tips in an amount of at least 8% of gross receipts, the employer must allocate the difference to the employee using Form 8027.

• Employers are not required to withhold federal taxes on allocated tips. They are reported on Form W-2.

10-9

LO # 2 Federal Tax Calculations Concept Check 10-2


1.Withholding and other employment taxes are levied only on cash wages and/or salary paid to the employee.

False

2. The employer fills out Form W-4 to determine how many withholding allowances the employee is entitled to take.

False

10-10



3. Jim is single and earns $600 per week. He claimed two allowances on his W-4 form provided to the employer. What amount of federal withholding tax will be deducted from his gross compensation?

$57 when the wage bracket method is used or $56.26 when the percentage method is used.

4. If an employee claims more than 10 withholding allowances, the employer is required to send the form to the IRS for inspection

False

10-11



5. Jenny earns $98,475 in 2006. How much Social Security taxes will be withheld from her compensation?

$5,840.40

Jenny earns $98,475 in 2006. How much Medicare taxes will be withheld from her compensation?

$1,427.89

10-12



6. Form 4070 is completed by “tipped” employees for any and all tips earned for the period.

False

10-13

LO # 3 Reporting and Paying Payroll TaxesLO # 3 Reporting and Paying Payroll Taxes

• Employers must make payroll tax deposits of amounts withheld from employees’ wages

• A “lookback” period determines the whether an employer is a monthly or semiweekly depositor.– 4 quarters starting with July 1, 2004 – June 30,

2005 for wages paid in 2006.– Monthly - less than $50,000 in tax liability– Semiweekly – more than $50,000 in tax liability

10-14


• Semiweekly deposit schedule:– Taxes associated with payrolls paid on a

Wednesday, Thursday, or Friday are due the following Wednesday.

– Taxes associated with payrolls paid on a Saturday, Sunday, Monday, or Tuesday are due the following Wednesday.

10-15


• Form 8109 (Federal Tax Deposit (FTD) Coupon) is used to make the required tax deposit to an authorized financial institution.

• Some employers are required to use the Electronic Funds Transfer Payments System (EFTPS) to make deposits– If made more than $200,000 in total tax

deposits in 2004 or if the employer was required to use the EFTPS in 2005.

10-16


• An employer who accumulates $100,000 or more in taxes on any day during a deposit period, must deposit the tax by the next banking day, regardless of the type of depositor.

• The employer becomes a semiweekly depositor for the remainder of the calendar year and for the following year.

10-17


• Form 941 – is a reconciliation of the amount of payroll tax liability and the payments made by the employer to cover the liability. It is due by the end of the month following the close of the quarter.

• If there is a tax liability of $2,500 or less at the end of the quarter, this amount can be paid when the Form 941 is filed.

10-18

LO # 3 Reporting and Paying Payroll Taxes - Concept Check 10-3


1. All new employers must use the semiweekly deposit system.

False

2. The deposit schedule for an employer is based on the total tax liability that the employer reported on Form 941 during the prior four quarters starting on July 1 and ending on March 31 of the next year.

True

10-19



3. Semi-weekly depositors remit taxes on the following Wednesday if the payroll is paid on a Wednesday, Thursday, or Friday.

True

4. The penalty for not paying the appropriate federal taxes on time is based on the total amount of the tax liability whether or not a partial payment was made on time.

False

5. Form 941 is prepared by the employer to record all federal taxes withheld including federal withholding, social security, and Medicare taxes and amounts paid for these taxes.

True

10-20

LO # 4 Self-Employment TaxesLO # 4 Self-Employment Taxes

• Self-employment taxes are based on net earnings in excess of $400 generated by a sole proprietor taxpayer (remember Chapter 6)

• 50% of self-employment taxes are permitted as a for AGI deduction on Form 1040.

10-21

LO # 4 Unemployment Taxes and Form 940 LO # 4 Unemployment Taxes and Form 940

• Federal Unemployment Tax Act (FUTA) is 6.2% of wages up to $7,000. There is a maximum credit for state employment taxes (SUTA) of 5.4%, reducing the amount due to the IRS to 0.8%.

• Form 940 (or Form 940 EZ) is filed annually by the employer to report and reconcile FUTA liabilities and payments.

10-22

LO # 4 Household Workers and Schedule H


• Household workers are considered employees subject to federal income, FICA, and FUTA taxes if:– Paid wages of $1,400 or more in 2006– Federal withholding taxes were withheld

from these workers– Wages of at least $1,000 were paid to all

household workers combined in any calendar quarter in 2005 or 2006.

10-23



• Schedule H is completed by the employer taxpayer and submitted with Form 1040.– Taxes are due for household employees

and paid when the employer taxpayer files Form 1040.

10-24

LO # 4 Concept Check 10-4LO # 4 Concept Check 10-4

1. A self-employed taxpayer is treated as an employee and employer and pays a combined total of 15.3% for FICA taxes.

True

2. What is the effective tax rate for FUTA providing employers pay into their state SUTA programs on a timely basis?a. 0.8%b. 6.2%c. 5.4%d. 10%

Answer: a

10-25


3. Who can use Form 940-EZ?An employer who pays SUTA to one state and remits

all payments on time.

4. Taxpayers who employ household workers are subject to payroll taxes under what conditions?

They paid any one household employee wages of $1,400 or more in 2006, federal income taxes were withheld from employee wages, and household wages of at least $1,000 were paid to all household workers combined in any calendar quarter in 2005 or 2006.

10-26

LO # 5 Forms W2 andW3LO # 5 Forms W2 andW3• Employers report wages earned and taxes withheld to

employees on Form W-2.– W-2’s are due to employees by January 31 of the

next year (1/31/07)– Copy A is remitted to the Social Security

Administration by February 28th (2/28/07)

• Form W-3 is a transmittal form that summarizes all employee W2’s prepared by the company. – It is sent with Copy A of all W-2’s

10-27

LO # 5 Forms W2 andW3LO # 5 Forms W2 andW3

• Form W-2c (Statement of Corrected Income and Tax Amounts) is used to correct a W-2 that was incorrectly prepared.

• Form W-3c (Transmittal of Corrected Income and Tax Statements) accompanies Copy A of the W-2c to the Social Security Administration

10-28


1. The employee uses the information from a W-2 to prepare his/her federal, state, and local (if applicable) tax returns.

True

2. Where and when must the employer send Copy A of the W-2 form?

Copy A is sent to the Social Security Administration along with Form W-3 which is the transmittal form. It is due by 2/28.

10-29


3. Explain the process if an employer must correct an employee’s W2.

An employer who must correct an employee’s W-2 must file Form W-2c and W-3c as soon as possible.

10-30


4. What are the maximum penalty amounts per return imposed on a company that prepares incorrect W-2’s?

Penalties range from $15 per return to $50 per return, with a maximum of $250,000/$100,000 for small businesses. Also a penalty of $100 per return or if grater 10% of the amount to be reported correctly for intentional disregard for filing requirements, providing payees with incorrect statements, and reporting incorrect information. $50 per return for W-2’s containing mismatched names and TIN.

10-31

LO # 6 Supplemental Wage PaymentsLO # 6 Supplemental Wage Payments

• Supplemental wages are compensation paid in addition to an employee’s regular wages

• Withholding on supplemental wages can be calculated using one of two methods:– Flat tax of 25%– Combine the supplemental payments with

regular wages and calculate the withholding tax.

10-32

LO # 6 Backup WithholdingLO # 6 Backup Withholding

• Generally, an employer must withhold 28% of certain payments if the payee fails to furnish them with a correct taxpayer identification number (TIN)

• Payments include interest, dividends, rents, royalties, commissions, non-employee compensation and certain other payments made in the course of a trade or business

10-33

LO # 6 Form W-9 LO # 6 Form W-9

• Form W-9 is form is prepared by the recipient and given to the requester. Failure to furnish a correct TIN can result in a $50 penalty. The penalty for willful neglect in correctly completing the form can be $500.

• Form is used to:– Certify the TIN the taxpayer is giving is correct– Certify the taxpayer is not subject to backup

withholding or– Claim exemption from backup withholding if the

taxpayer is a U.S. exempt payee.

10-34

LO # 6 Estimated Tax Payments and Form 1040-ES

LO # 6 Estimated Tax Payments and Form 1040-ES

• Form 1040-ES is used when a taxpayer must make tax payments for estimated taxes due.

• Estimated payments are required if unpaid tax liability > $1,000 and withholding and credits do not meet certain “safe harbor” thresholds.

• Estimated taxes are due April 15, June 15, September 15, and January 15 (of the next year)

10-35


1. Describe the two methods that are available to calculate the withholding from supplemental payments.

Method 1a: Withhold at a flat rate of 25%Method 1b:If taxes have already been withheld from

regular wages, add the two payments together, calculate the tax as if they are one payment and subtract the amount already paid.

Method 2: If taxes are not already withheld from regular wages, add the two amounts together and calculate the tax as if they are one payment.

10-36


2.Payments subject to backup withholding are withheld at a flat tax rate of 28% if the payee fails to furnish the payer with a correct TIN

True

3. What is a Form W-9?It is used for U.S. persons (including resident

aliens) to document their taxpayer identification number (TIN). This form must be on file by the payer.

10-37


4. What is the penalty for failing to furnish a correct TIN to a requester?

$50 for each failure unless the failure is due to reasonable cause and not to willful neglect. If the taxpayer makes false statements with no reasonable basis that results in backup withholding, a penalty of $500 is assessed. There can also be criminal penalties including fines and imprisonment.

10-38

LO # 6 Concept Check 10-6 LO # 6 Concept Check 10-6

5. Taxpayers use Form 1040-ES to remit additional amounts to the IRS so that they receive a refund when he/she files Form 1040.

False