Presentation on theme: "How does your employer know how much to take out of your paycheck for deductions?"— Presentation transcript:
How does your employer know how much to take out of your paycheck for deductions?
Take-Home Pay The deductions taken out of your paycheck help support schools, roads, national parks, and more. Why do you have to pay taxes?
Deductions – Memorize these 1.0% - Local 7.65%- Total Social Security and Medicare 6.2% - Social Security Normally 4.2% - Social Security currently (until January 1, 2013) 1.45%- Medicare 3.07% - PA State Tax.08%- PA Unemployment Tax Why isn’t Federal listed? Base on three things (W-4 form) Employees withholding allowance certificate. Marital Status, Earnings, Allowances you claim
Take heart, America. Even celebrities pay taxes on April 15. Well, sometimes. Nicolas Cage’s bookkeeping got a bit muddled, and now he has to shell out $13.3 million to the federal government. Joe Francis, founder of “Girls Gone Wild,” forgot, too. His tab? $29.4 million -- or roughly 5 million margaritas. Sinbad the Comedian? A very unfunny $8.15 million, which doesn't even include interest and legal fees. Other celebs who owe the taxman big bucks are Pamela Anderson ($1.7 million), the rapper Nas ($3.4 million), singer Dionne Warwick ($2.2 million) and actor Terrence Howard ($1.1 million). (Click here to see some of the celebs on the IRS’ hit list) Celebrity Tax Evaders Hit List
Tax RateSingle Married Filing Joint Head of Household 10%Up to $8,600Up to $17,200Up to $12,250 15%$8,601 – $34,900 $17,201 – $69,800 $12,251 – $46,750 25% $34,901 – $84,500 $69,801 – $140,850 $46,751 – $120,700 28% $84,501 – $195,950 $140,851 – $237,700 $120,701 – $216,800 36% $195,951 – $383,350 $237,701 – $383,350 $216,801 – $383,350 39.6%Over $383,350
Formula Gross Income - Deductions = Net Income (take home pay) Mandatory: –Federal – FIT (W-4: marital status, amount of income, exemptions) –PA state – 3.07% (.0307) –Local – 1.0% (.01) –Social Security – normally, 6.2% (.062) (first $110,100), currently 4.2% (.042) for employees. –Medicare – 1.45% (.0145) –PA Unemployment Tax -.08% (.0008) Voluntary: –Medical, savings, investing, scholarship, etc.
Starting a New Job To receive a paycheck, an employee must: –Complete a Form W-4 Employee’s Withholding Allowance Certificate –Complete a Form I-9 Employment Eligibility Verification
Personal exemptions in dollar amounts 2012: $3,800 2011: $3,700 2010: $3,650 2009: $3,650 2008: $3,500 2007: $3,400 2006: $3,300 Dependents Yourself Spouse Blood relatives Donations Mortgage interest Etc.
Form W-4 Employee’s Withholding Allowance Certificate –Determines the percentage of gross pay which will be withheld for taxes Withholding Allowances –The number of people an employee supports. –Used to determine the amount of federal taxes withheld from the paycheck –The more allowances you claim on Form W-4, the less income tax your employer will withhold. You will have the most tax withheld if you claim “0” allowances. Dependent – a person who relies on the taxpayer for financial support 2012 W-4 Form
Steps to Completing a Form W-4 1.Print or type legal name on Line 1 and home address directly below the name 2.Write Social Security number on Line 2 3.On Line 3, check the appropriate box to indicate marital status 4.Complete the “Personal Allowances Worksheet” above the form (A-H) 5.Enter a one or a zero on Line 5 6.Can you claim exempt on Line 7? See “Exemption from Withholding” handout.
Steps to Completing a Form W-4 continued 7. Sign name and date the form before giving it to the employer 8. Keep a copy for personal records Remember: The more allowances you claim on Form W-4, the less income tax your employer will withhold. You will have the most tax withheld (deducted) if you claim “0” allowances. **Exempt,….. 6, 5, 4, 3, 2, 1, 0 ( moving left to right, more money will be deducted, from zero to maximum) ** no federal taxes in last year, less than $5700 earned and $300 unearned income
Form I-9 (copy attached to W-4) Employment Eligibility Verification Form Used to verify the eligibility of individuals to avoid hiring undocumented workers or others who are not eligible to work in the United States Must provide documentation which establishes identity and employment eligibility –Examples include driver’s license, passport, Social Security card, and birth certificate
Paying Employees Three common methods employers may use to pay employees: 1.Paycheck- Employee responsible for handling the paycheck Immediately see payroll stub and deductions
Paying Employees continued 2.Direct Deposit- Employers directly deposit employee’s paycheck into the authorized employee’s depository institution account Employee receives the paycheck stub detailing the paycheck deductions Most secure because there is no direct handling of the check Employee knows exactly when paycheck will be deposited and available
Paying Employees continued 3. Payroll Card- A payroll card electronically carries the balance of the employee’s net pay Funds are directly deposited by an employer into an account at a depository institution that is linked to the payroll card Use the payroll card for ATM withdrawals or to make purchases
Paycheck Stub Do you understand everything you see on your paycheck stub?
Paycheck Stub –A document included each pay period which outlines paycheck deductions On-The-Go Employee Beakens, Joe SSN 201-92-4856 Check # 164 Check Amount $1,102.98 Employee Address 293 Michael Grove Billings, MT 59102 Pay Type- Gross Pay DeductionsCurrentYear-to-date $1,353.33Federal Withholding State Withholding Fed OASDI/EE or Social Security Fed MED/EE or Medicare Medical 401K $106.00 $40.82 $83.91 $19.62 $0.00 $0.00 $503.46 $117.72 $636.00 $244.92 $0.00 $0.00 Totals$250.35$1,502.10 Pay Period 6/11/2009-7/11/2009
Personal Information –States the employee’s full name, address, and Social Security number –Always check to ensure this information is correct
Pay Period –The length of time for which an employee’s wages are calculated; most are weekly, bi-weekly, twice a month, or monthly –The last day of the pay period is not always your payday to allow a business to accurately compute wages
Deductions –The amount of money subtracted from the gross pay earned for mandatory systematic taxes, employee sponsored medical benefits, and/or retirement benefits
Lesson Objective Determine the amount withheld for federal income tax. Who collects the taxes?
Taxes Internal Revenue Service (IRS) – Collects federal taxes, issues regulations, and enforces tax laws written by the United States Congress.
1992 1993 - 2000 2001 2002 2003 - 2009 2011 15% 10% 15% 28% 27.5%27%25% 31% 30.5%30%28% 36%35.5%35%33% 39.6%39.1%38.6%35% Your tax bracket depends on your income and your filing status. 1993 saw a tax hike on the wealthy (via two new brackets), and then 2001 through 2003 saw a series of tax cuts that lowered some of the tax brackets. Federal Tax Brackets
If Taxable Income Is:The Tax Is: over $8,50010% of the taxable income Over $8,500 but not over $34,500 $850 plus 15% of the excess over $8,500 Over $34,500 but not over $82,250 $4,750 plus 25% of the excess over $34,500 Over $82,250 but not over $174,400 $17,025 plus 28% of the excess over $83,600 Over $174,400 but not over $379,150 $42,449 plus 33% of the excess over $174,400 Over $379,150 $110,016.50 plus 35% of the excess over $379,150 Standard deduction$5,800
To take an example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2011 and your status was Single, then your tax would be calculated like this: ($ 8,500 minus 0 ) x.10 : $ 850.00 (you are taxed 10% on the first $8,350 of your earnings) (34,500 minus 8,500 ) x.15 : $3,900.00 (you are taxed 15% on earnings between $34,500 and $8,500) (82,250 minus 34,500 ) x.25 :$11,938.00 (100,000 minus 82,250 ) x.28 :$4,970.00 Total: $ 21,703.00 This puts you in the 28% tax bracket since that's the highest rate applied to any of your income. Even though you are in the 28% tax bracket, you did not have all your income taxed at 28%, as you can see by this example.
Federal Income (Withholding) Tax –The amount required by law for employers to withhold from earned wages to pay taxes –The amount of money deducted depends on the amount earned and information provided on the Form W-4
Question: How does my employer figure out how much to take out of each of my paychecks for Federal taxes? Answer: There are two main methods: 1. Tax charts 2. Percentage method
Using Tax Charts to Calculate Federal Withholding You have a copy of tax charts in the back of your book on pages A4 and A5 These may not be exact so please do not use them to calculate your own federal taxes I will give you a handout also to eliminate flipping to the back of your book while doing your class work Use the tax charts given to you to find the answers to the following examples. Be sure to note that there are different charts for single and married persons
Example 1: Carla’s gross pay for this week is $425.88. She is married and claims 2 allowances—herself and her husband. What amount will be withheld from her pay for Federal Income Taxes? Find the income range from the table for Married Persons weekly payroll period. (Appendix A4-A5 or handout) Income range:420-430 Find the column for 2 allowances. The amount of income to be withheld is $14.
Example 2: Lance’s gross pay for this week is $460.00. He is single and claims one allowance. What amount will be withheld from Lance’s pay for FIT? Find the income range from the table for Single Persons weekly payroll period. Income range: 460-470 Find the column for 1 allowance. The amount of income to be withheld is $45
Complete the examples on your notes. How much is withheld from the weekly wage of a married person earning $297 with 1 withholding allowance? $8 How much is withheld from the weekly wage of a married person earning $379 with 2 allowances? $9 How much is withheld from the weekly wage of a single person earning $238 with no allowances? $20 How much is withheld from the weekly wage of a single person earning $318 with 5 allowances? $0