Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 1 Chapter 6 Payroll Section 4 Income Tax Withholding

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 2 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 3 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 4 Personal Income Tax Is largest single source of money for the federal government Law requires that the bulk of the tax owed by an individual be paid as the income is earned Employers must deduct money from the gross earnings of almost every employee Called income tax withholdings Sent periodically to the IRS

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 5 Personal Income Tax The IRS has an electronic funds transfer payment system called EFTPS that allows employers to transfer these funds electronically The amount of money withheld from each employee depends on several factors, including marital status, number of withholding allowances, and income.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 6 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 7 Understand the Employee’s Withholding Allowance Certificate Employee must file W-4 form with employer States the number of withholding allowances being claimed Additional information so employer can withhold proper amount for income tax

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9 Understand the Employee’s Withholding Allowance 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 10 Understand the Employee’s Withholding Allowance Certificate Number of allowances may be raised if an employee has been receiving a refund of income taxes Number may be lowered if the employee has had a balance due in previous tax years W-4 form has instructions to help determine proper number of allowances

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 11 Understand the Employee’s Withholding Allowance 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 12 Understand the Employee’s Withholding Allowance 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 13 Understand the Employee’s Withholding Allowance 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 14 Find the Federal Withholding Tax Using the Wage Bracket Method Internal Revenue Service supplies withholding tax tables to be used with the wage bracket method Tables are extensive, covering weekly, biweekly, semimonthly, monthly, and daily pay periods

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 15 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 16 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 17 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 18 Find the Amount of Withholding Using the Percentage Method Step 1Multiply the number of withholding allowances by the amount for one withholding allowance from the table. Step 2Subtract the amount found in step 1 from gross earnings. Step 3Find the appropriate table for percentage method of withholding and then the row. Step 4Follow the directions in the table to find the tax to be withheld.

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Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 20 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 21 Example Step 1From the table, the amount for one withholding allowance, weekly payroll is $ Number of allowances × Amount for one allowance = 2 × $73.08 = $146.16

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 22 Example Step 2Gross earnings – Amount from Step 1 = $690 – $ = $ Step 3Use Table 1(b) for weekly payroll period, married person Step 4Go to row of over $490 but not over $1515. Withholding = $ % of excess = $ × ($ – $490) = $ $8.08 = $41.48

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 23 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%

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Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 25 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

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 26 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 deductions Net Pay

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 27 Page 239 Exercise 24.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 28 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 29 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.

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 30 Page 240 Exercise 36

Copyright © 2015, 2011, and 2007 Pearson Education, Inc. 31 Understand Additional Employer 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 earnings the income taxes withheld from employees the FICA taxes withheld from employees the FICA taxes paid by the employer