1. Chapter 4: FICA Taxes and Voluntary Deductions

2. Learning Objectives After studying this chapter, you will be able to:
Review Withholding Tax
Calculate Social Security tax
Calculate Medicare tax
Identify states in which State Disability Insurance is withheld
Apply various voluntary deductions
Record employee payroll journal entries

3. Mandatory Deductions Federal Income Tax Withholding
State Income Tax Withholding
Local Income Withholding
Social Security (OASDI) Tax
Medicare (HI) Tax
State Disability Insurance Tax
5 States require disability to be withheld from employee pay (California, Hawaii, New Jersey, New York, and Rhode Island)

4. Voluntary Deductions Union Dues Retirement Plans Medical Plans
Cafeteria Plans
Flexible Spending Accounts

5. Gross Pay and Taxable Pay
Gross Pay encompasses all earnings in a given period
Taxable Pay
Must subtract tax-deferred contributions from gross pay to arrive at taxable pay
Taxable pay is used for calculating mandatory deductions
State and local regulations may differ from federal withholding

6. Taxable Pay
An employee works 37 hours the first week of the year, earns $8.25/hour, 8% of gross pay is contributed to his 401k plan.
Gross pay?
Taxable pay for Federal Withholding?
Taxable pay for Social Security?
Tax amount?
Taxable pay for Medicare tax?

7. Taxable Pay
An employee works 37 hours the first week of the year, earns $8.25/hour, 8% of gross pay to his 401k plan.
Gross pay? (37 hrs * $8.25 = $305.25)
Taxable pay for Federal Withholding?
8% * $ = $24.42 (401k contribution)
$ – = $ (taxable pay for withholding)
Taxable pay for Social Security? $305.25
Tax amount? 6.2% * $ = $18.93
Taxable pay for Medicare tax? $305.25
Tax amount? 1.45% * $ = $4.43

8. Taxable Pay
An employee works 43 hours, 3 of which are overtime, earns $37.50/hour, plus 1.5 times rate for OT. YTD gross earnings are 117,900. He has 10% withheld for his 403(b) plan.
What is his gross pay?
What is the taxable pay for withholding?
What is the taxable pay for social security?
What is the taxable pay for Medicare tax?

9. Taxable Pay
An employee works 43 hours, 3 of which are overtime, earns $37.50/hour, plus 1.5 times rate for OT. YTD gross earnings are 117,900. He has 10% withheld for his 403(b) plan.
What is his gross pay? $
What is the taxable pay for withholding? $
What is the taxable pay for social security? $600
What is the taxable pay for Medicare tax? $

10. Collecting Federal Withholdings
Pay-as-you-go system
Established as a result of the Current Tax Payment Act of 1943
Employers withhold income tax from employees and remit to the federal government
Certain employees may be exempt

11. The Wage-Bracket Method
Determine pay period type
Determine marital status
Identify number of withholding allowances (from W-4 Form)
Determine taxable pay
Circular E provides tables & method for calculating if more than 10 allowances

12. The Percentage Method Three-step process
Multiply allowances by figure in allowance table
Subtract from taxable pay
Use percentage method table to calculate tax

13. Percentage Method 1 allowance, gross pay of $900, paid weekly
1 x $76.90
$900 – = $823.10
$ (25% x ( – 764)) = $113.88

14. Other Federal Tax Withholdings
Dealing with deceased & terminated employees
After death, a portion of the employee’s earnings may be paid; payments not subject to federal tax withholding
Terminated employee is entitled to all compensation earned; earnings are subject to federal tax withholding

15. Changing the W-4 Form Reasons for changing
Marriage
Divorce
Child’s birth
Job status change
Changes result in adjusting the federal income tax withholding

16. State Income Tax Withholding
Calculated based on state taxable income (may be same as federal)
Nine states do not collect state income tax
Some states levy a flat tax
Some states levy a graduated tax

17. Local Income Tax Withholding
Tax rates and how they are levied vary widely
May be different for residents and non-residents

18. Social Security Tax Also known as OASDI
Provides retirement benefits and financial support to employee’s survivors and disabled employees
Rate began at 1% - steadily increasing to current rate of 6.20%

19. Social Security Taxable Wage Base
Maximum threshold of year-to-date earnings on which Social Security tax is levied
First taxable wage base $3,000 – current $117,000
Only first $117,000 earnings will be taxed for Social Security
Wage base is 118,500 for 2015

20. Taxable Earnings for Social Security
Certain expenses are deducted from gross pay to arrive at taxable earnings
Three-step process to calculate Social Security tax
Determine current period taxable earnings
Add current earnings to year-to-date taxable earnings
If result not above threshold, multiply by current rate

21. Medicare Tax
Taxable earnings for Medicare tax are same as Social Security tax
Initial Medicare rate was 0.35% - current is 1.45%
No upper earnings limit on Medicare Tax

22. The Additional Medicare Tax
2013 – additional 0.9% Medicare tax imposed on certain earnings
Result of Patient Protection and Affordable Care Act
Threshold based on filing status
Additional Medicare Tax is only imposed on the employee.
There is no employer share of Additional Medicare Tax.

23. Additional Tax Considerations
Other amounts may be withheld from gross pay
State disability insurance
Wage garnishment
Retirement plans
Cafeteria plans
Union dues
Charitable contributions

24. State Disability Insurance
Short-term benefits for those unable to work due to off-the-job circumstances
Certain states do not require disability insurance
California, Hawaii, New Jersey, New York, Rhode Island
Employees may be required to contribute toward insurance coverage

25. Wage Garnishments
Compliance with court order or other legal proceeding
Amount of wage garnishments are limited
Lesser of 25% of disposable earnings (gross pay – mandatory deductions) or
30 times federal minimum wage
Note! Wage garnishment state regulations take precedence over federal regulations

26. Contributing to Retirement Plans
401(k) Plan
Tax-deferred
Employer contribution optional
403(b) Plan
Available to certain employees at public education institutions and certain tax-exempt organizations
Tip! Both plans allow for catch-up withholdings (additional withholdings based on age and/or years of service).

27. Contributing to Retirement Plans
SIMPLE IRA
For employees of small businesses (fewer than 100)
Contribution limit is lower
Employer contribution required
Deductions exempt from federal income tax withholding
Payroll Deduction IRA
Usually used by self-employed
Not exempt from federal income tax withholding
Receives tax deduction on year-end return

28. ERISA of 1974
Employee Retirement Income Security Act of 1974 (ERISA) regulates plans employers offer
Requirements set forth by ERISA for retirement plans
How plan is funded
Fiduciaries may be held accountable for breaches
Plan participation
Accumulation of benefits
Timeframe for when benefits become non-forfeitable

29. Cafeteria Plans
Choice of at least one taxable and one non-taxable option
Non-taxable deductions can include:
Medical Care Reimbursements
Adoption Assistance
Group Term Life Insurance
Health Savings Account
Flexible Spending Account (funds set aside for health care during the year)
Nontaxable for Income Tax & FICA

30. Charity, Union Dues, & Insurance
Charitable contributions are deducted from gross earnings, then remitted directly to charity
Certain employees eligible to join a union; dues withheld from gross earnings
Insurance premiums may be withheld, then remitted to insurance company

31. Completing the Payroll Register
Completed payroll register includes
Identified and calculated withholding amounts
Net pay (final figure)
Check number for each pay period
Net Pay
Check Number
Withholdings

32. Accounting for Payroll
Employer must record a journal entry for each element in payroll register
Each payroll deduction is owed to a corresponding entity; for example:
Federal income tax withheld is immediately owed to U.S. Government
Charitable contribution withheld is immediately owed to the intended charity

33. Accounting for Payroll