10-2 LO # 1 Payroll and Form 1040 Withholding taxes are imposed on taxpayers to help fund government operations using a “pay as you go” system At the end of the year, the employer is required to summarize an employee’s earnings and taxes withheld on a Form W-2 Form 1040 compares tax liability with tax payments to determine whether a taxpayer will receive a refund or own more money.
LO # 1 Payroll and Form 1040 Concept Check 10-1 1.The payroll tax withholding system was established to produce a stream of revenue for governmental operations. True 2. Forms W-2 and 1040 are forms used to match tax liability with tax payments. True 14-3
10-4 LO # 2 Federal Tax Calculations Withholding taxes are an approximation of the proportionate share of total tax liability the employee will owe to the federal government. Form W-4 is completed by the employee to claim withholding allowances.
10-5 LO # 2 Federal Tax Calculations Two withholding methods: –Percentage Method Uses a range of percentages to calculate taxes Used in computerized systems –Wage Bracket Method Uses a table of wage brackets and allowances
10-6 LO # 2 Federal Tax Calculations Federal Insurance Contributions Act (FICA) –Old age, survivors, and disability insurance (OASDI or social security) = 6.2% up to a maximum of $117,000 for 2014 –Hospital insurance (Medicare) = 1.45% on all wages (no maximum) There is a matching tax for FICA (both OASDI and Medicare) on employers. An additional 0.9% for Medicare is withheld from the employee for wages in excess of $200,000. There is no employer match for this additional tax.
10-7 LO # 2 Federal Tax Calculations Employees are required to report cash tips (in excess of $20) to their employer by the 10th of the month after the month in which the employee receives the tips using Form 4070. Employers must withhold income tax and FICA taxes on employee tips.
10-8 LO # 2 Federal Tax Calculations Large food and beverage establishment may be required to “allocate” tips to employees. If tipped employees do not report tips in an amount of at least 8% of gross receipts, the employer must allocate the difference to the employees using Form 8027. Employers are not required to withhold federal taxes on allocated tips. They are reported on Form W-2.
14-9 1. Withholding and other employment taxes are levied only on cash wages and/or salaries paid to the employee. False 2. The employer fills out Form W-4 to determine how many withholding allowances the employee is entitled to take. False
LO # 2 Federal Tax Calculations Concept Check 10-2 3. Jim is single and earns $600 per week. He claimed two allowances on his W-4 form provided to the employer. What amount of federal withholding tax will be deducted from his gross compensation? $52 when the wage bracket method or $52.00 when percentage method is used. 4. Jenny earns $118,475 in 2014. How much social security tax will be withheld from her compensation? How much Medicare taxes will be withheld from her compensation? $7,254.00 in social security taxes and $1,717.89 in Medicare taxes. 14-10
LO # 2 Federal Tax Calculations Concept Check 10-2 5. Form 4070 is completed by tipped employees for any and all tips earned for the period. False 14-11
10-12 LO # 3 Reporting and Paying Payroll Taxes Employers must make payroll tax deposits of amounts withheld from employees’ wages A “lookback” period determines whether an employer is a monthly or semiweekly schedule depositor. –4 quarters starting with July 1, 2012 – June 30, 2013 for wages paid in 2014. –Monthly - $50,000 or less in tax liability –Semiweekly – more than $50,000 in tax liability
10-13 LO # 3 Reporting and Paying Payroll Taxes Semiweekly deposit schedule: –Taxes associated with payrolls paid on a Wednesday, Thursday, or Friday are due the following Wednesday. –Taxes associated with payrolls paid on a Saturday, Sunday, Monday, or Tuesday are due the following Friday.
10-14 LO # 3 Reporting and Paying Payroll Taxes All employers are now required to use the Electronic Funds Transfer Payments System (EFTPS) to make deposits
10-15 LO # 3 Reporting and Paying Payroll Taxes An employer who accumulates $100,000 or more in taxes on any day during a deposit period, must deposit the tax by the next banking day, regardless of the type of depositor. The employer becomes a semiweekly schedule depositor for the remainder of the calendar year and for the following year.
10-16 LO # 3 Reporting and Paying Payroll Taxes Form 941 – is a reconciliation of the amount of payroll tax liability and the payments made by the employer to cover the liability. It is due by the end of the month following the close of the quarter. If there is a tax liability of less than $2,500 at the end of the quarter, this amount can be paid when the Form 941 is filed. Form 944 is for very small employers.
LO # 3 Reporting and Paying Payroll Taxes - Concept Check 10-3 1.All new employers must use the semiweekly schedule deposit system. False 2. The deposit schedule for an employer is based on the total tax liability that the employer reported on Form 941 during the prior four quarters starting on July 1 and ending on June 30 of the next year. True 14-17
LO # 3 Reporting and Paying Payroll Taxes - Concept Check 10-3 14-18
10-19 LO # 4 Self-Employment Taxes Self-employment taxes are based on net earnings in excess of $400 generated by a sole proprietor taxpayer (remember Chapter 6) For 2014, refer to Schedule SE (Section A or B) to determine the for AGI deduction on Form 1040. The self-employed taxpayer is responsible for all parts of FICA (15.3%)
10-20 LO # 4 Unemployment Taxes and Form 940 Federal Unemployment Tax Act (FUTA) is 6.0% of wages up to $7,000. There is a maximum credit for state employment taxes (SUTA) of 5.4%, reducing the amount due to the IRS to 0.6%. Form 940 is filed annually by the employer to report and reconcile FUTA liabilities and payments.
10-21 LO # 4 Household Workers and Schedule H Household workers are considered employees subject to federal income, FICA, and FUTA taxes if: –Paid wages of $1,900 or more in 2014 –Federal withholding taxes were withheld from these workers –Wages of at least $1,000 were paid to all household workers combined in any calendar quarter in 2013 or 2014.
10-22 LO # 4 Household Workers and Schedule H Schedule H is completed by the employer/taxpayer and submitted with Form 1040. –Taxes are due for household employees and paid when the employer taxpayer files Form 1040.
LO # 4 Concept Check 10-4 1.A self-employed taxpayer is treated both as an employee and employer, thus, pays a combined total of 15.3% for FICA taxes. True 2. What is the effective tax rate for FUTA provided employers pay into their state SUTA programs on a timely basis? a. 0.6% b. 6.2% c. 5.4% d. 10% Answer: a 14-23
LO # 4 Concept Check 10-4 3. Who can use Schedule H? Individuals who employ household workers and pay wages of $1,900 or more in 2014, or who pay $1,000 to all workers combined in any of the prior two years. 4. Taxpayers who employ household workers are subject to payroll taxes under what conditions? They paid any one household employee wages of $1,900 or more in 2014, federal income taxes were withheld from employee wages, and household wages of at least $1,000 were paid to all household workers combined in any calendar quarter in 2013 or 2014. 14-24
10-25 LO # 5 Forms W2 andW3 Employers report wages earned and taxes withheld to employees on Form W-2. –W-2s are due to employees by January 31 of the next year –Copy A is remitted to the Social Security Administration by February 28 th or 29 th in a leap year or the next business day if it falls on a weekend. Form W-3 is a transmittal form that summarizes all employee W2’s prepared by the company. –It is sent with Copy A of all W-2’s
10-26 LO # 5 Forms W2 andW3 Form W-2C (Statement of Corrected Income and Tax Amounts) is used to correct a W-2 that was incorrectly prepared. Form W-3C (Transmittal of Corrected Income and Tax Statements) accompanies Copy A of the W-2C to the Social Security Administration
LO # 5 Concept Check 10-5 1.The employee uses the information from a W-2 to prepare his/her federal, state, and local (if applicable) tax returns. True 2. Where and when must the employer send Copy A of the W-2 form? Copy A is sent to the Social Security Administration along with Form W-3 which is the transmittal form. It is due by 2/28 or 2/29 in a leap year or the next business day if it falls on a weekend. 14-27
LO # 5 Concept Check 10-5 3. Explain the process if an employer must correct an employee’s W-2. An employer who must correct an employee’s W-2 must file Form W-2C and W-3C as soon as possible. 14-28
LO # 5 Concept Check 10-5 4. What are the maximum penalty amounts per return imposed on a company that prepares incorrect W-2s? Penalties range from $15 per return to $50 per return, with a maximum of $250,000/$100,000 for small businesses. Also a penalty of $100 per return or if greater 10% of the amount to be reported correctly for intentional disregard of filing requirements, providing payees with incorrect statements, or reporting incorrect information. $50 per return for W-2s containing mismatched names and TINs. 14-29
10-30 LO # 6 Supplemental Wage Payments Supplemental wages are compensation paid in addition to an employee’s regular wages Withholding on supplemental wages can be calculated using one of two methods: –Flat tax of 25% –Combine the supplemental payments with regular wages and calculate the withholding tax.
10-31 LO # 6 Backup Withholding Generally, an employer or vendor must withhold 28% of certain taxable payments if the payee fails to furnish a correct taxpayer identification number (TIN) Payments include interest, dividends, rents, royalties, commissions, non- employee compensation and certain other payments made in the course of a trade or business
10-32 LO # 6 Form W-9 Form W-9 is prepared by the recipient and given to the requester. Failure to furnish a correct TIN can result in a $50 penalty. The penalty for willful neglect in completing the form is $500. Form is used to: –Certify the TIN the taxpayer is giving is correct –Certify the taxpayer is not subject to backup withholding or –Claim exemption from backup withholding if the taxpayer is a U.S. exempt payee.
10-33 LO # 6 Estimated Tax Payments and Form 1040-ES Form 1040-ES is used when a taxpayer must make tax payments for estimated taxes due. Estimated payments are required if unpaid tax liability > $1,000 and withholding and credits do not meet certain “safe harbor” thresholds. Estimated taxes are due April 15, June 15, September 15, and January 15 (of the next year) or the next business day if they fall on a holiday or weekend.
LO # 6 Concept Check 10-6 1. Describe the two methods that are available to calculate the withholding from supplemental payments. Method 1a: Withhold at a flat rate of 25% Method 1b:If taxes have already been withheld from regular wages, add the two payments together, calculate the tax as if they are one payment and subtract the tax already paid. Withhold the remaining tax from the supplemental wages. Method 2: If taxes are not already withheld from regular wages, add the two amounts together and calculate the tax as if they are one payment. 14-34
LO # 6 Concept Check 10-6 2.Payments subject to backup withholding are withheld at a flat tax rate of 28% if the payee fails to furnish the payer with a correct TIN True 3. What is a Form W-9? It is used for U.S. persons (including resident aliens) to document their taxpayer identification number (TIN). This form must be on file with the payer. 14-35
LO # 6 Concept Check 10-6 4. What is the penalty for failing to furnish a correct TIN to a requester? $50 for each failure unless the failure is due to reasonable cause and not to willful neglect. If the taxpayer makes false statements with no reasonable basis that results in backup withholding, a penalty of $500 is assessed. There can also be criminal penalties including fines and imprisonment. 14-36
LO # 6 Concept Check 10-6 5. Taxpayers use Form 1040-ES to remit additional amounts to the IRS so that they receive a refund when they file Form 1040. False 14-37