2 Federal Income Taxfederal income tax is the money withheld by an employer from an employer paycheck to pay federal government taxeswithholding allowances – the number of people an employee supports, which helps employers know how much money to withhold for federal income tax.
3 Example 1Carla Good is an actuary. Her gross pay for this week is $ She is married and claims 2 allowances for herself and her husband. What amount will Carla’s employer withhold from her pay for FIT? -step 1: find the income range from the table -step 2: find the column for 2 allowances -step 3: the amount of federal income tax to be withheld is $14.00
4 Find the federal income tax withheld each week using the weekly payroll tables. Dan Caine, a welder, is married, claims 1 allowance, and earns $390.50$18.00Angie Kim, executive assistant, is single, claims 2 allowances, and earns $435.95$31.00
5 Percentage MethodSome companies use percentage method instead of tax tables to compute the income tax withheld. With this method, you use taxable wages to find the withholding amount.Taxable wages depend on the number of allowances you claim.
6 Percentage method of withholding – single person Each weekly allowance is 63.46Weekly taxable wageThe amount of income tax to withhold is:OverBut not over$51.00$195.00$0.00 plus (10% of the excess over $51.00)$195$645.00$14.40 plus (15% of the excess over $195)$645$1482$81.90 plus (25% of the excess over $645)
7 Example 2Lance Hart’s gross pay for this week is $ He is a carpenter’s apprentice, is single, and claims 2 allowances. Using the percentage method, what amount will Lance’s employer withhold from his pay for federal income tax?Step 1- find the allowance amountAllowance amount = the # of allowances x 63.46$ = xStep 2 – find the taxable wagetaxable wage = gross pay – allowance amount$ = $ $126.92
8 Step 3 – find the amount withheld for FIT using the table A. find the taxable wage in the row over $195 but not over $645B. find the amount of income tax withheld by:Tax withheld for FIT = $14.40 plus 15% of the excess over $195= $ [0.15 x ($ $195)]= $ (0.15 x $71.31)= $ $10.70= $25.10
10 State Income Tax Most states require employers to withhold a certain amount of pay for income tax. In some states, the tax withheld is a percentage of taxable wagesExemptions – withholding allowances which allow for supporting yourself, your spouse, and others in your family who are your dependents.taxable wages = annual gross pay – exemptionsstate income tax = taxable wages x tax rate
11 Example 1Tony Raymond’s gross pay as a landscape designer is $44,750 a year. The state income tax rate is 3% of taxable wages. He takes an exemption for himself and 1 exemption for his child. How much does Tony’s employer withhold yearly from his gross earnings for state income tax?ExemptionsSingle$2,000Married$4,000Each dependent
12 Step 1- find the taxable wages annual gross pay – exemptions $44,750 – ( )$44,750 – 4000 = $40, 750 taxable wagesStep 2 – find the annual tax withheldtaxable wages x tax rate40, x 3% = $1,222.50
13 Example 2Andrea McReedy is a dispatcher for a local trucking company. She earns $52,600 per year. She is married and pays $2,430 in state income tax per year. She claims no other dependents. What is the state income tax rate for her state?
14 Step 1 – let r = state income tax rate for her state Step 2 – use the formula for state income tax, substituting for taxable wages and solve for rstate income tax = (taxable wages – exemptions) x tax rate= (52, ) x r= 48600r= 𝑟 48600= rThe state income tax rate for Andrea’s state is 5%
15 Graduated State Income Tax Lesson 2.3Graduated State Income Tax
16 Graduated income taxA system that increases the tax rate at different levels of incomeThe tax rate increases as income increasesMay be as low as 1% or as high as 10%Tax withheld per pay period = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑡𝑎𝑥 𝑤𝑖𝑡ℎℎ𝑒𝑙𝑑 # 𝑜𝑓 𝑝𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
17 ExampleLouise Main’s annual salary as a police officer is $34,500. She receives her pay semimonthly, or twice a month. Her exemptions total $2000. Use the table to determine how much her employer deducts for state income tax from each of her semimonthly paychecks.State TaxexemptionsTaxable wagesTax rateFirst $10001.5%Next $20003.0%4.5%Over $50005.0%Single$2000Married$4000Each dependent
18 Step 1 – find the taxable wages annual gross pay – exemptions$34, $2000 = $32,500Step 2 – find the annual state tax withhelda. first $1000: % of $1000 = $15.00b. next $2000: 3.0% of $2000 = $60.00c. next $2000: 4.5% of $2000 = $90.00d. over $5000: 5.0% of (32,500 – 5000) = 5% of 27,500 = $Total: $
19 Step 3 – find the tax withheld per pay period tax withheld per pay period = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑡𝑎𝑥 𝑤𝑖𝑡ℎ𝑒ℎ𝑙𝑑 # 𝑜𝑓 𝑝𝑎𝑦 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 $ = $59.23
20 Try on your own answer: $249.17 Eddie Black is single and receives his pay biweekly. His annual salary as a tailor for Whyte and Broom is $21, 350. What is the amount of tax withheld each pay period? answer: $33.94Lydia Robins’ annual salary from Dresler & Everhard is $67,500. She is married, has one dependent, and is paid monthly. What is the amount of tax withheld each pay period?answer: $249.17