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CHAPTER 9 Withholding, Estimated Payments & Payroll Taxes Income Tax Fundamentals 2008 Gerald E. Whittenburg Martha Altus-Buller Student’s Copy
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 2 Withholding Methods 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, ER must withhold at highest rate
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 3 Compute Withholding 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
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 4 Pension & Deferred Income 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]
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 5 Estimated Payments 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
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 6 FICA Tax 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 $97,500 of gross wages Medicare % of total gross earnings [no cap]
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 7 Federal Tax Deposit System 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
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 8 Federal Tax Deposit System 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 be accompanied by any payroll taxes not yet deposited for quarter Can use Form 941 e-file program
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 9 Self-Employment Tax 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 $97,500 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 $97,500 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
©2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 10 FUTA Tax 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% [if all state unemployment taxes paid timely] Therefore, net FUTA rate =.8% [6.2% - 5.4%] Must deposit quarterly if over $500 Must file annual report Form 940
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