CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 12-2 Determining Payroll Tax Withholding Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

CENTURY 21 ACCOUNTING © Thomson/South-Western PAYROLL TAXES Taxes based on the payroll of a business are called payroll taxes A business is required by law to withhold certain payroll taxes from employee salaries All payroll taxes are based on employee total earnings Payroll taxes withheld represent a liability for the employer until payment is made to the government Federal & state governments may charge a business a penalty for failure to pay correct payroll taxes when they are due 2 LESSON 12-2 page 345

CENTURY 21 ACCOUNTING © Thomson/South-Western EMPLOYEE INCOME TAX  A business must withhold federal income taxes from employee total earnings.  Federal income taxes withheld must be forwarded periodically to the federal government  Federal income tax is withheld from employee earnings in all 50 states  North Carolina also requires state income tax withholding 3 LESSON 12-2 page 345

CENTURY 21 ACCOUNTING © Thomson/South-Western EMPLOYEE’S WITHHOLDING ALLOWANCE CERTIFICATE The information used to determine the amount of income tax withheld is identified on Form W-4 (Employee’s Withholding Allowance Certificate) 4 LESSON 12-2 page 346 The amount of income tax withheld is based on employee marital status & number of withholding allowances Married employees have less income tax withheld than single employees The larger the number of withholding allowances claimed, the smaller the amount of income tax withheld A deduction from total earnings for each person legally supported by a taxpayer, including the employee, is called a withholding allowance

CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 12-2 EMPLOYEE’S WITHHOLDING ALLOWANCE CERTIFICATE page Write the employee’s name and address 2.Write the employee’s social security number. 3.Check the appropriate marital status block. 4.Write the total number of withholding allowances claimed. 5.The employee signs and dates the form.

CENTURY 21 ACCOUNTING © Thomson/South-Western EMPLOYEE’S INCOME TAX WITHHOLDING 6 LESSON 12-2  Withholding tables are revised each year  Tables are prepared for various payroll periods – monthly, semimonthly, biweekly, weekly, and daily as well as for single and married persons  The amount of federal income tax withheld from each employee’s total earnings is determined from withholding tables prepared by the Internal Revenue Service (IRS)

CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 12-2 EMPLOYEE’S INCOME TAX WITHHOLDING – MARRIED PERSONS page Select the appropriate table. 2.Locate the employee’s total earnings. 3.Intersection of wages and number of allowances column.

CENTURY 21 ACCOUNTING © Thomson/South-Western EMPLOYEE SOCIAL SECURITY & MEDICARE TAX The Federal Insurance Contributions Act (FICA) provides for a federal system of old-age, survivors, disability, and hospital insurance A federal tax paid for old-age, survivors, & disability insurance is called social security tax A federal tax paid for hospital insurance is called Medicare tax Social security & Medicare taxes are paid by both employees & employers Social security tax is calculated on employee earnings up to a maximum paid in a calendar year The maximum amount of earnings on which a tax is calculated is called a tax base 8 LESSON 12-2 page 349

CENTURY 21 ACCOUNTING © Thomson/South-Western EMPLOYEE SOCIAL SECURITY & MEDICARE TAX CALCULATIONS Total Earnings 9 LESSON 12-2 page 349 Total Earnings Medicare Tax Deduction Medicare Tax Rate Social Security Tax Rate Social Security Tax Deduction X X X X = = = = $1, Social Security Tax deduction Calculation Medicare Tax deduction Calculation 6.2%$70.49 $1, % $16.49

CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 12-2 TERMS REVIEW payroll taxes withholding allowance social security tax Medicare tax tax base page 350