1. Fundamental Payroll Certification 2010
Paycheck Fundamentals
Chapter 3
Paula Black CPP, PHR

2. Paycheck Fundamentals
Federal Withholding
Social Security & Medicare Withholding
Additional Deductions from Pay
Advanced Earned Income Credit
State Taxes
Deceased Employees
Gross to Net Calculations
Employer-Paid Taxes

3. Elements of a Pay Check Gross Amount vs Actual Pay Check Amount
ABC Manufacturing
1213 West Higgins Rd
Palatine, IL 60638
John I. Doe
234 Main St
Highland Park, IL 60035
Check #
814177
Period End
08/31/2010
EE # 5609
DEPT 33456
Hours
Rate/Amt
Current
Year to Date
Total Gross
80.00
Regular
Group Term Life
17.71
283.36
Floating Holiday
736.90
Flex Time Off
Company Holiday
Bonus
Fed W/H
561.87
Social Security W/H
255.96
Medicare W/H
59.86
IL State W/H
118.24
High Opt Health PreT
98.00
Delta Dental Hg Pre T
14.00
224.00
Vision Plan Pre T
6.52
104.32
401(k)
169.17
401(k) Co Match
84.59
Net Pay
Routing
Account
Description
Amount
Direct Deposit #1
JP Morgan Chase
Direct Deposit #2
Gross Amount vs Actual Pay Check Amount
Additions
Deductions
Net Pay

4. Withholding Federal Taxes
Taxable wages = all remuneration for services (includes Non-Cash Benefits)
Federal taxation is FIT, SS, MED
Some benefits are fully taxable, partially taxable and some are non- taxable

5. Taxable Compensation Back Pay Bonus Commission
Company Car (personal use)
Dismissal (severance)
ER pd commuter fees in excess of $230/month
ER pd parking greater than $230/month
Fringe Benefits (unless excluded)
Gifts, gift cards, prizes
Group legal services
Group term life greater than $50,000
Non-acountable reimbursed business expense
Noncash Fringe benefits unless excluded by IRC
Sick pay and Disability Benefits (portion attributable by employer contribution)
Non qualified moving expense
Overtime pay
Regular wages
Tips

6. Nontaxable Compensation
Dependent child care up to $5000 under section 129 plan
Company vehicle (business only)
De minimus Fringes
Disability benefits (employee contribution)
Educational assistance (job related /no limit)
Group term life up to $50,000
Med/Dent health plans (employer contribution)
No-additional cost fringe benefits
Qualified ee discounts on ER goods/services
Qualified moving expenses
Qualified transportation fringe benefit
Reimbursed business expense
Working condition fringe if can be deductible if paid by ee
Non-job related education up to $5250
Long term care insurance
Workers compensation benefits
Health Savings Accounts

7. Wages / Taxability Period Ending – is the time wages are earned
Pay Date - is the date wages are paid and dictates the taxability, as well as structure for depositing and reporting of taxes to agencies
Constructive Receipt is the date the funds are available to the employee
Overpayments / Repayments
in same calendar year, repayment requested is the employee’s net overpayments; OP and RP can be netted together for W2; Employer claim refund of taxes from IRS
in subsequent year, repayment requested is Gross OP minus EE and ER SS and Med taxes – ER can claim refund from IRS; OP and RP cannot be netted together for W2; EE claims refund of Federal tax on 1040.

8. Factors Affecting Withholding
Form W-4 Withholding Certificate
Employees marital status
Number of withholding allowances
Pay Frequency
Whether regular or supplemental wages
Pretax Deductions

9. Withholding Methods Three main acceptable calculating means:
Wage Bracket Method (Pub 15 - Circular E)
*Percentage Method (Pub 15 – Circular E)
*Optional Flat Tax/Supplemental Rate of 25% or in some instances 35%
* Methods Used Most Often

10. Withholding Methods
Wage Bracket Method — simplest

11. Withholding Methods Percentage Method
most common especially with computerized payroll
Step 1:

12. Withholding Methods
Percentage Method – Step 2

13. Withholding Methods Optional Flat Tax/Supplemental Rate
Supplemental Wages compensation paid in addition to employee’s regular wages.
Examples: bonuses, commissions, overtime pay, payments paid during the payroll period with the regular bonuses, commissions, overtime pay, backpay, payments for nondeductible moving expenses.
Does not take into account Form W-4 elections
Can result in under or over withholding
Supplemental Rate 25%
Mandatory Flat Rate 35%
Supplemental Wages also subject to Social Security, Medicare & FUTA
IRS allows employers to decide if Overtime and tips are considered supplemental wages

14. Supplemental Wages
When YTD Supplemental Wages exceed $1,000,000 use Supplemental Rate 35%
The remainder of the year all supplemental wages are subject to 35% withholding
When reaching limit can apply to all wages or tax using flat rate that applies:
YTD Supplemental Wages $900,000.00; Bonus of $200,000
($200,000 x 35% = $71,000) OR
(($100,000 x 25% = $25,000) + ($100,000 x 35% = $35,000) = $60,000)

15. Supplemental Wages Methods for Taxing Supplemental Wages
If paid separately must be 25%/35%
If paid with regular wages 2 Options:
Combine wages; calculate entire check at 25%/35% OR
Aggregate Method
1) calculate regular taxes on the combined wages
2) calculate taxes on regular wages only
3) subtract the regular taxes and remaining is considered supplemental wage tax portion

16. Supplemental Wages
$1,000 Bonus Paid Separately: $1,000 x 25% = Federal Tax $250 $1,000 Bonus Combined with Regular Wages: Regular Wages $ Bonus 1, $1, x 25% = $462.50

17. Supplemental Wages Aggregate Method:
(Optional; Must use this method if no FIT withheld in preceding year)
Bonus $ Regular Weekly Wages $645
W-4 Single with 5 allowances.
Wage-Bracket Method: Weekly Wage Federal Tax $22
($ $645 = $1,145.00)
Wage-Bracket Method: Federal Tax $108.00
($ $22 = $86) $86 would be attributed to Supplemental Wages
Also acceptable to use Wage-Bracket on Regular Wage $22 and flat rate on Supplemental Wages ($ x 25% = $125.00)

18. Federal Withholding Final Notes: Rounding up to next whole dollar
$.01 to $.49 Round Down $53.40 = $53
$.50 to $.99 Round Up $ = $354
Be consistent!!
Withholding Income Tax from Pensions and Annuities
Use Form W-4P Withholding Certificate for Pensions and Annuities

19. Social Security & Medicare Taxes
Federal Insurance Contributions Act (FICA)
Statutory deductions
2 Taxes: Social Security & Medicare
Combined: 7.65 % of taxable wages

20. Social Security & Medicare Taxes
Also known as OASDI- Old Age Survivors Disability Insurance
6.2 %
Maximum Salary $106,800
Maximum Contribution $6,621.60
Employer Matches EE contributions

21. Social Security & Medicare Taxes
Also know as HI—Health Insurance
1.45 %
No Maximum Salary
No Maximum Contribution
Employer Matches EE Contribution

22. Social Security & Medicare Taxes
When paying Federal Tax on $
Example
EE Tax
ER Tax
Totals
FICA 6.2%
$62.00
$124.00
Medicare 1.45%
$14.50
$ 29.00
Total Due
$153.00

23. Additional deductions from pay
Voluntary deductions
Charitable contributions
Retirement programs i.e. 401k
Credit union
Direct payments
Savings Bonds Purchase
Health Insurance Outside Section 125
Stock Purchase in employers company
Advances / loan repayments
Union dues and fees

24. Additional deductions from pay
Voluntary deductions
Require authorization (written or electronic)
Last Priority – Wage Assignments first
ER can set Priority
Substantiation of Charitable contributions requires 2 types of documentation
Pledge Card
Must be shown on pay statements and W2 for individual 1040 filing

25. Additional deductions from pay
Involuntary Deductions-Wage Attachments (in order; exceptions)
Child Support Orders
Chapter 13 Bankruptcy
Federal agency garnishments
Federal Tax Levies
State Tax Levies
Local Tax Levies
Creditor Garnishments
Student Loan Garnishments

26. Federal Tax Levies Take home pay less exempt amount proved by chart
IRS Instructions on form 668-W- Notice of Levy on Wages, Salary & Other Income
Deductions in effect prior to levy are ok
No new voluntary deductions allowed
Involuntary deductions mandated by company as condition of employment are ok

27. Federal Tax Levies Amount of Exempt Wages based on Marital Status
Number of exemptions
Part 3 of Form 668-W
Payroll frequency needed for number of annual Pay Periods
Chart to show exempt amount from Levy Publication 1494
Do not stop withholding until 668-D - Release of Levy is received
Look at chart . . .
Demonstrate Using chart from Levy Publication 1494

28. Child Support
All orders since are considered immediate unless stated
Welfare Reform Reconciliation Act of 1996 all orders in arrears are immediate
Consumer Credit Protection Act (CCPA) governs amount that can be taken
Based on a percentage of Disposable Earnings
Gross wages less taxes (generally not including tips)

29. Child Support Maximum %
If the employee supports a second family –cannot exceed 50% of disposable earnings (55% if arrearage)
If employee does not support a second family –cannot exceed 60% of disposable earnings (65% if arrearage)
State max withholding may be lower but cannot be higher than these limits

30. Uniform Interstate Family Support Act-- UIFSA
Clarifies the rules for processing out of state wage orders
Duration and specific amts of payments
Person or agency to receive the payment
Medical support –specific amt / mandatory coverage
Amt of payment if arrears and interest states as a sum

31. UIFSA—Continued Employers must:
Withhold employers fee for processing order
Determine the maximum amt permitted to be withheld
Determine the time frame for withholding and disbursement to agency
Handle multiple orders

32. Multiple Order Handling
State law governs the handling of multiple orders
Multiple state orders default to ee ”worked in state”

33. States resolve multiple order challenges- - - 1 of 3 ways
Allocate the available funds to each order on a percentage basis
Allocate available funds equally to all orders
Prioritize based on receipt of order
Current support calculated before arrearages

34. APA & Office of Child Support Enforcement
Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states and must have payment amount based on pay cycle, arrears, medical support, obligations, payee, obligee and appropriate address

35. Centralized Support Collections Disbursement Units
Welfare Law of 1996 mandated all states develop one unit to disburse payments
All states but South Carolina currently participate in central collections location in their state

36. State law takes priority –Federal law limitations
State can allow fee for processing
Payment must be made within 7 days of withholding from wages
1st payment must be made within 14 days of mailing date of order

37. Garnishments Consumer Credit Protection Act
Federal Limit
25% or
Amt of disposable pay that exceeds 30 x minimum wage
Multiple types of orders are prioritized and will affect lower priority attachments
Garnishment Limits Table (Page 3-27)
Watch for Changes in Federal Minimum Wage

38. Advanced Earned Income Credit --AEIC
Qualifications
Expected Gross income if single/ HOH be less than $35,535
Expected Gross income if Married/ jointly be less than $40,545
Must have dependent child living with them at least 6 months of the year
Principal home is US
Must file a W5 form annually

39. AEIC cont. Gross remains same-net increases
Special tax tables are utilized
Maximum entitlement is $1,830.00
If employee exceeds the salary limit-AEIC is automatically stopped
W5 must be done annually

40. State Tax Calculated by No state tax: wage bracket
% or flat percentage
Percentage of federal
No state tax:
Alaska
Tennessee
Florida
Texas
Nevada
Washington
New Hampshire
Wyoming
South Dakota

41. Local Income Taxes
Each local taxing authority has its own requirements. Must verify with the locality for compliance

42. State Disability Tax
Six jurisdictions have employee/employer funded programs for illness and disability
Employers must report, pay and record payments—failure to pay is employers liability
California
New York
Hawaii
Puerto Rico
New Jersey
Rhode Island

43. State Unemployment Tax
Three states have provisions to withhold SUI from employees:
Up to the unemployment wage base
All other states unemployment tax is the employers expense
Alaska
New Jersey
Pennsylvania

44. Local tax, City tax, School Districts and head taxes
Most common states for local taxation are Ohio and Pennsylvania
Many variances and local government regulations on these taxes –verify if necessary with the agency which is applicable to the circumstance, i.e. residency vs. place of work

45. Deceased Employees Payments after date of death are taxable
Federal income tax is responsibility whom ever receives the payment
If the payment is made in same year as the employee’s death
Tax payment for Social Security and Medicare Taxes
On W2, post in Amount paid in box 3 & 5 and Social Security and Medicare in box 4 & 6
Amount not reported as Federal Taxable Wages in box 1 of W2
Also provide 1099 MISC with Federal Taxable Wages reported in box 3 and give 1099 to the Estate or Beneficiary (use TIN not SSN)
If payment is paid in year after death
Do Not withhold Social Security and Medicare
Do Not issue a W2
Do issue a 1099 and report amount of payment in box 3 of 1099 MISC

46. Paying the Employee Gross to Net Calcuation
ABC Manufacturing
1213 West Higgins Rd
Palatine, IL 60638
John I. Doe
234 Main St
Highland Park, IL 60035
Check #
814177
Period End
08/31/2010
EE # 5609
DEPT 33456
Hours
Rate/Amt
Current
Year to Date
Total Gross
80.00
Regular
Group Term Life
17.71
283.36
Floating Holiday
736.90
Flex Time Off
Company Holiday
Bonus
Fed W/H
561.87
Social Security W/H
255.96
Medicare W/H
59.86
IL State W/H
118.24
High Opt Health PreT
98.00
Delta Dental Hg Pre T
14.00
224.00
Vision Plan Pre T
6.52
104.32
401(k)
169.17
401(k) Co Match
84.59
Net Pay
Routing
Account
Description
Amount
Direct Deposit #1
JP Morgan Chase
Direct Deposit #2
Calculate Total Wages
Determine Pretax Deduction Amounts (excluded from Disposable Earnings)
Tax Withholding Determined
Disposable Earnings
(Total Earnings – Taxes) for Child Support and Garnishments Deductions
Deductions
Levy deducted from Take Home Pay
Result = Net Pay

47. Grossed Up Payments (ADP –Net to Gross Calc)
Employer Pays the Taxes!
Typical situations for a Grossed Up Payments
Want a specific amount as net amount – bonus of $100
Employer decides to pay taxes on taxable relocation expense
GTL for a termed employee –SS/Med paid by employer
Employer failed to withhold taxes on an employee’s previous payment

48. Gross Up Calculation steps
100% - tax% = Net %
Payment / Net %= Gross Earnings
Check by calculating Gross to net
Need to Know for Exam !!!
Examples page 3-39 to 3/40

49. Test Your Knowledge
An employee is to be awarded a net bonus of $2,000 as supplemental wages. Year-to-date regular and supplemental earnings are $15,000. Using the current supplemental flat tax and Social Security and Medicare tax rates, what should be the gross amount of the payment if the employee lives and works in a state with not state income tax. A) $3, B) $2, C) $3, D) $2,969.56
Answer:
1. ($2,000 / (100% - (25% + 6.2% %)) =
2. $2,000 / 67.35% = $ 2, the answer is D
3. $2, – – = $2,000

50. Gross Up Special Circumstances
Employee meets or met SS tax limit
100% - Tax %(no SS %) = Net %
Payment + ((SS wage base-YTD payments) x 6.2%) / Net % = Gross Earnings
Need to know for Exam !!!

51. Test Your Knowledge
An employee is receiving a $500 net bonus. The employee is married with 3 allowances. The employee’s YTD gross pay is $115,640 and the employee is paid biweekly. The employee lives and works in a state where there is no income tax. Calculate the gross amount of the bonus. A) $ B) $ C) $ D) $777.00
Answer:
1. ($500 / (100% - (25% %)) =
2. $500/ 73.55% = $ the answer is B
3. $ – – 9.86 = $500

52. Test Your Knowledge
An employee is receiving a $500 net bonus. The employee is married with 3 allowances. The employee’s YTD gross pay is $106,640 and the employee is paid biweekly. The employee lives and works in a state where there is no income tax. Calculate the gross amount of the bonus. A) $ B) $ C) $ D) $693.30
Answer:
1. ($500 / (100% - (25% %)) =
2. $500 + ((106,800 – 106,640) x 6.2%)/ 73.55% = $500 + $9.92/ 73.55% = $ the answer is D
3. $ – – – 9.92 = $500

53. Questions? Paycheck Fundamentals Chapter 3 Thank You!!!!
Paula Black CPP, PHR