Determining Payroll Deductions Unit 5 Determining Payroll Deductions McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Deductions Mandatory deductions: Voluntary deductions: Social Security and Medicare (OASDI and HI) Federal Income Tax State Income Tax Garnishments Child support payments Union dues Voluntary deductions: Health insurance premiums Retirement accounts contributions Life insurance premiums 5-3 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Determining Federal Income Tax Current Payment Act of 1943 Directed employers to withhold federal income tax from the earnings of their employees. Two methods Wage Bracket Method Percentage method of withholdings (also in Chapter 6) 5-4

Determining Federal Income Tax Wage Bracket method: uses the wage bracket tables provided by the IRS. tables are included in Pub 15 Circular E , published by IRS Four factors are used in designing these tables Length of the payroll period Employee's gross earnings for the period Employee marital status Number of withholding allowances claimed by the employee 5-5 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Determining Federal Income Tax Wage Bracket method: Form W-4 provides information about the employee’s marital status and number of withholding allowances 5-6

Reading the Wage Bracket Tables Marital status Allowances pay period 5-7

Reading the Wage Bracket Tables 5-8

Determining Federal Income Tax Wage Bracket method example: Lucinda Renne is single and has zero allowances. She is on a weekly payroll period. She earned $ 95 per week. How much you should withheld for Federal Income tax? $ 12.46 5-9

Other Systems for Determining Income Tax Percentage Method: Occasionally an employee earns wages that are not shown on the wage-bracket tables. In these cases, the percentage method is used. Federal Income Tax withholding calculations include: number of allowances for the period payroll period marital status gross earnings 5-10 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Other Systems for Determining Income Tax Percentage Method tables: 5-11

Income Tax Withholding Percentage method Example: Henry Biddle is married and lists two withholding allowances for the weekly pay period. His earnings were $ 1,410.40. How much should you withhold for Federal Income tax? Step #1 - The first steps to computing his withholdings, is to determine the amount of earnings on which to compute withholding tax. $59.62 x 2 = $119.24 5-13

Income Tax Withholding Step #2 –Subtract total allowances ($119.24) from total earnings ($1,410.40) to get the amount ($1,291.16) on which his withholding tax is computed for the week. Step #3 – Determine the amount of income tax to withhold: using the table Mr. Biddle must pay $149.90 plus 25% of excess earnings over $1,245. ($1291.16–$1,245) x .25 + $149.90 = 161.44 5-12

Determining Social Security (FICA) Tax FICA ( Federal Insurance Contribution Act): OASDI (Old, Age, Survivors and Disability Insurance) or Social security - .062 (6.2%) Limit on taxable earnings for 2005 - $87,900 Example # 1 : Donald Zanka had gross earrings of $ 415. Calculate his Social Security Tax withholdings: $ 415 x 6.2% = $ 25.73 5-14 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Determining Medicare Tax Medicare Tax rate: .0145 (1.45%) NO Limit on taxable earnings for 2005 Example : Herman Dostler earned $ 393 in a week. Calculate his Medicare Tax withholdings: $ 393 x 1.45% = $5.70 5-15 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

State and Local Income Taxes State income tax withholding: Tax rates and procedures for payment vary from state to state. state income tax laws require employers to deduct withholding tax from an employee’s earnings at the end of each payroll period. cities and counties require individuals to pay local income tax as well as state income tax. states provide wage-bracket tables or a percentage method for computing taxes. 5-16

Other Taxes State Disability Insurance Tax Most states withhold state disability insurance based on a specified tax rate. Example: In California the state SDI rate is 1.18% SDI = earnings x .0118 5-17

Other Taxes Example: Doris Kosta earned $560. The deduction for Disability Insurance is: $ 6.61 ($560 x .0118 SDI rate = $6.61) 5-18

Other Taxes State Unemployment Tax: provide income for employees who lose their jobs through no fault of their own In most states State Unemployment Taxes are supported by employer contributions 5-19

Taxes- CA 5-20

Tips and Federal Withholdings subject to Federal Income tax Social security tax and Medicare tax Monthly Tips of $20 or more: Must be reported to employer Reported on the employee’s Federal Income Tax return 5-21 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Tips and Federal Withholdings 5-22 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Union Deductions Unions Deductions and contracts: Required union dues are deducted from earnings deductions are made on a monthly basis Also known as “checkoff” 5-23 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Voluntary Deductions Voluntary deductions: Health insurance premiums Pension Plan contributions Tax Deferred: 401K plans Simple IRA Taxable: ROTH IRA 5-24 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Voluntary Deductions Voluntary deductions: Life insurance premiums Charitable contributions Savings Bonds purchases Stock purchases 5-25 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Net Pay 5-26 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Unit Summary 5-27 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Unit Summary 5-28 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Unit Summary 5-29 Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Questions? 5-30