Determining Payroll Tax Withholding Lesson 12-2

Payroll Taxes Payroll Taxes: taxes based on the payroll of a business Payroll Taxes: taxes based on the payroll of a business A business is required by law to withhold certain payroll taxes from employee salaries A business is required by law to withhold certain payroll taxes from employee salaries Federal Income Tax Federal Income Tax FICA – Social Security & Medicare FICA – Social Security & Medicare State Income tax State Income tax Local Income tax Local Income tax

Payroll Taxes Federal and state governments may charge a business a penalty for failure to pay correct payroll taxes when they are due Federal and state governments may charge a business a penalty for failure to pay correct payroll taxes when they are due Payroll taxes withheld represent a liability for the employer until paid (ex. Social Security Tax Payable) Payroll taxes withheld represent a liability for the employer until paid (ex. Social Security Tax Payable)

Employee’s Withholding Allowance Certificate Completed when hired Purpose: to inform the employer the number of marital status and withholding allowances to calculate federal income tax Withholding allowance = exemptions (examples: yourself, children, spouses)

Employee’s Income Tax Withholding- Married Persons 1.Select the appropriate table (single or married). 2.Locate the employee’s total earnings. 3.Intersection of wages and number of allowances column. 1 23

Medicare and Social Security Tax Federal Insurance Contributions Act (FICA) Federal Insurance Contributions Act (FICA) Provides for a federal system of old-age, survivors, disability, and hospital insurance Provides for a federal system of old-age, survivors, disability, and hospital insurance Paid by both employees and employer Paid by both employees and employer Employees are required to withhold and deposit the employers part of the taxes and pay a matching amount of these taxes Employees are required to withhold and deposit the employers part of the taxes and pay a matching amount of these taxes

Medicare and Social Security Tax Social Security Tax: Federal tax paid for old-age, survivors, and disability insurance Social Security Tax: Federal tax paid for old-age, survivors, and disability insurance 6.2% 6.2% up to $118,500 for up to $118,500 for Medicare Tax: Federal tax paid for hospital insurance Medicare Tax: Federal tax paid for hospital insurance 1.45% 1.45%

Social Security and Medicare Tax Social Security tax rate and base- 6.2% of earnings up to a max of $87,000 in each calendar year Social Security tax rate and base- 6.2% of earnings up to a max of $87,000 in each calendar year Medicare tax rate- 1.45% Medicare tax rate- 1.45%

Questions Where does an employer get the information used to determine the amount of federal income tax to withhold from employees’ earnings? Where does an employer get the information used to determine the amount of federal income tax to withhold from employees’ earnings? Employee federal income tax withholdings are based on what two factors? Employee federal income tax withholdings are based on what two factors? Who pays social security and Medicare taxes? Who pays social security and Medicare taxes?