2. Determining Payroll Deductions
Unit 5
Determining Payroll Deductions
McGraw-Hill/Irwin
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3. Deductions Mandatory deductions: Voluntary deductions:
Social Security and Medicare (OASDI and HI)
Federal Income Tax
State Income Tax
Garnishments
Child support payments
Union dues
Voluntary deductions:
Health insurance premiums
Retirement accounts contributions
Life insurance premiums
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4. Determining Federal Income Tax
Current Payment Act of 1943
Directed employers to withhold federal income tax from the earnings of their employees.
Two methods
Wage Bracket Method
Percentage method of withholdings (also in Chapter 6)
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5. Determining Federal Income Tax
Wage Bracket method:
uses the wage bracket tables provided by the IRS.
tables are included in Pub 15 Circular E , published by IRS
Four factors are used in designing these tables
Length of the payroll period
Employee's gross earnings for the period
Employee marital status
Number of withholding allowances claimed by the employee
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6. Determining Federal Income Tax
Wage Bracket method:
Form W-4 provides information about the employee’s marital status and number of withholding allowances
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7. Reading the Wage Bracket Tables
Marital status Allowances pay period
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8. Reading the Wage Bracket Tables
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9. Determining Federal Income Tax
Wage Bracket method example:
Lucinda Renne is single and has zero allowances. She is on a weekly payroll period. She earned $ 95 per week. How much you should withheld for Federal Income tax? $ 12.46
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10. Other Systems for Determining Income Tax
Percentage Method:
Occasionally an employee earns wages that are not shown on the wage-bracket tables. In these cases, the percentage method is used.
Federal Income Tax withholding calculations include:
number of allowances for the period
payroll period
marital status
gross earnings
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11. Other Systems for Determining Income Tax
Percentage Method tables:
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12. Income Tax Withholding
Percentage method Example:
Henry Biddle is married and lists two withholding allowances for the weekly pay period. His earnings were $ 1, How much should you withhold for Federal Income tax?
Step #1 - The first steps to computing his withholdings, is to determine the amount of earnings on which to compute withholding tax.
$59.62 x 2 = $119.24
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13. Income Tax Withholding
Step #2 –Subtract total allowances ($119.24) from total earnings ($1,410.40) to get the amount ($1,291.16) on which his withholding tax is computed for the week.
Step #3 – Determine the amount of income tax to withhold:
using the table Mr. Biddle must pay $ plus 25% of excess earnings over $1,245.
($ –$1,245) x $ =
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14. Determining Social Security (FICA) Tax
FICA ( Federal Insurance Contribution Act):
OASDI (Old, Age, Survivors and Disability Insurance) or Social security (6.2%)
Limit on taxable earnings for $87,900
Example # 1 :
Donald Zanka had gross earrings of $ 415.
Calculate his Social Security Tax withholdings:
$ 415 x 6.2% = $ 25.73
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15. Determining Medicare Tax
Medicare Tax rate: (1.45%)
NO Limit on taxable earnings for 2005
Example :
Herman Dostler earned $ 393 in a week.
Calculate his Medicare Tax withholdings:
$ 393 x 1.45% = $5.70
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16. State and Local Income Taxes
State income tax withholding:
Tax rates and procedures for payment vary from state to state.
state income tax laws require employers to deduct withholding tax from an employee’s earnings at the end of each payroll period.
cities and counties require individuals to pay local income tax as well as state income tax.
states provide wage-bracket tables or a percentage method for computing taxes.
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17. Other Taxes State Disability Insurance Tax
Most states withhold state disability insurance based on a specified tax rate.
Example: In California the state SDI rate is 1.18%
SDI = earnings x
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18. Other Taxes Example: Doris Kosta earned $560.
The deduction for Disability Insurance is:
$ 6.61 ($560 x SDI rate = $6.61)
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19. Other Taxes State Unemployment Tax:
provide income for employees who lose their jobs through no fault of their own
In most states State Unemployment Taxes are supported by employer contributions
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20. Taxes- CA
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21. Tips and Federal Withholdings
subject to Federal Income tax
Social security tax and
Medicare tax
Monthly Tips of $20 or more:
Must be reported to employer
Reported on the employee’s Federal Income Tax return
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22. Tips and Federal Withholdings
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23. Union Deductions Unions Deductions and contracts:
Required union dues are deducted from earnings
deductions are made on a monthly basis
Also known as “checkoff”
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24. Voluntary Deductions Voluntary deductions: Health insurance premiums
Pension Plan contributions
Tax Deferred:
401K plans
Simple IRA
Taxable:
ROTH IRA
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25. Voluntary Deductions Voluntary deductions: Life insurance premiums
Charitable contributions
Savings Bonds purchases
Stock purchases
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26. Net Pay
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27. Unit Summary
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28. Unit Summary
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29. Unit Summary
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30. Questions?
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