1. Income Tax Fundamentals 2009 Gerald E. Whittenburg Martha Altus-Buller Student’s Copy 2009 Cengage Learning

2.  Employer calculates income tax withholding from employees’ paychecks based on their Form W-4 Pay includes salaries, bonuses, commissions W-4 completed by employee, tells employer:  Number of allowances claimed by employee  Single, married, or married but withhold tax at higher single rate  Exempt status – employee can only claim exempt if he/she had no income tax liability last year and expects none this year If no W-4 filed, employer must withhold at highest rate 2009 Cengage Learning

3.  To compute amount to withhold from pay Multiply number of allowances found on W-4 by allowance amounts [found on pp. 9-2, 9-5] Subtract that amount from employee’s gross wages Use IRS tables to calculate federal income tax based on wages after allowance amounts  Found in textbook in Appendix C  IRS also publishes Circular E each year - “Employer’s Tax Guide” 2009 Cengage Learning

4.  Withholding is mandatory on pension and other deferred income payments Rates used depend on nature of payment  Rates on periodic payments based on taxpayer’s W-4  Withhold at either flat 10% [or 20% for certain distributions] 2009 Cengage Learning

5.  Self-employed taxpayers must make quarterly estimated tax payments if Annual payment due for the year is ≥ $1000 (after withholding)  Quarterly payments due April 15, June 15, September 15, and January 15 of next year  Total annual estimated payments is lesser of 90% of current year tax or 100% of prior year tax or 90% of current year TI, AMT & annualized SE income  Exception: if AGI > $150,000 for prior year, then annual required payment = 110% of prior year tax 2009 Cengage Learning

6.  Federal Insurance Contributions Act (FICA) introduced to provide retirement and disability benefits for American workers and their families  FICA comprised of two taxes Social Security - 6.2% of first $102,000 of gross wages Medicare - 1.45% of total gross earnings [no cap] 2009 Cengage Learning

7.  Employers withhold both income tax and FICA from paychecks  Must deposit these taxes either monthly or semiweekly [as determined by lookback period] Monthly depositors make deposit by 15th of following month  All new employers are automatically monthly Semiweekly depositors make deposit either Wednesday and/or Friday depending upon when payroll is run  Very small employers with payroll tax liabilities of $1000 or less can file/pay annually by using a Form 944 2009 Cengage Learning

8.  To make deposit at commercial bank, fill out Form 8109 (coupon) and take to an authorized depository Or, if mailed, must be postmarked second day before due date  May be electronically deposited via Electronic Federal Tax Payment System [EFTPS] Some employers must deposit using EFTPS  Form 941 [Employer’s Quarterly Federal Tax Return] must include payroll taxes not yet deposited for quarter Can use Form 941 e-file program 2009 Cengage Learning

9.  Self-employment [SE] tax is the same as FICA, except self-employed taxpayer pays both shares  Therefore, rates are: Social Security [OASDI] is 12.4% of first $102,000 of net self-employment income Medicare is 2.9% on total net self-employment income  If taxpayer has both W-2 wages and self- employment income, the $102,000 limit applies to the combined earnings FICA is not required if SE income is < $400 May take a Deduction for AGI for 1/2 of SE tax paid 2009 Cengage Learning

10.  Federal Unemployment Tax Act [FUTA] requires employers to pay tax to administer state unemployment programs  Employer pays 6.2% up to first $7,000 per employee per year However credit of up to 5.4% for state unemployment tax is taken against the 6.2%  Therefore, net FUTA rate =.8% [6.2% - 5.4%] Must deposit quarterly if over $500 Must file annual report Form 940 2009 Cengage Learning