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CHAPTER 9 Withholding, Estimated Payments & Payroll Taxes

CHAPTER 9 Withholding, Estimated Payments & Payroll Taxes. Income Tax Fundamentals 2010 Gerald E. Whittenburg Martha Altus-Buller. Withholding Methods. Employer calculates income tax withholding from employees’ paychecks based on their Form W-4

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CHAPTER 9 Withholding, Estimated Payments & Payroll Taxes

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  1. CHAPTER 9Withholding, Estimated Payments& Payroll Taxes Income Tax Fundamentals 2010 Gerald E. Whittenburg Martha Altus-Buller 2010 Cengage Learning

  2. Withholding Methods • Employer calculates income tax withholding from employees’ paychecks based on their Form W-4 • Pay includes salaries, bonuses, commissions • If no W-4 filed, employer must withhold at highest rate 2010 Cengage Learning

  3. Withholding Methods • W-4 completed by employee, tells employer: • Number of allowances claimed by employee • Single, married, or married but withhold tax at higher single rate • Exempt status – employee can only claim exempt if he/she had no income tax liability last year and expects none this year 2010 Cengage Learning

  4. Compute Withholding • To compute amount to withhold from pay using percentage method • Multiply number of allowances found on W-4 by allowance amounts • Subtract that amount from employee’s gross wages • Then, use IRS tables to calculate federal income tax based on wages after allowance amounts • Found in textbook in Appendix C • IRS also publishes Circular E – “Employer’s Tax Guide” 2010 Cengage Learning

  5. Pension & Deferred Income • Withholding is mandatory on pension and other deferred income payments • Rates used depend on nature of payment • Rates on periodic payments based on taxpayer’s W-4 • FIT withholding at either flat 10% (or 20% for certain distributions) 2010 Cengage Learning

  6. Withholding on Tips • If employee reports less than 8% of gross food/beverage sales in tips, then employer must allocate tips • However, employer is not required to withhold taxes based on allocated tips 2010 Cengage Learning

  7. Withholding on Tips • Employer must report employees’ tips to IRS and may allocate using one of four methods • Gross receipts per employee • Hours worked by each employee • Good faith agreement on Employer’s Annual Information Return of Tip Income & AllocatedTips (Form 8027) • Attributed Tip Income Program – any reasonable method for allocating tips is allowed • Elected by ‘checking a box’ on Form 8027 2010 Cengage Learning

  8. Backup Withholding • In some situations, individuals may be subject to flat 28% back-up withholding on interest and dividends (to assure that tax is paid on this income) • This backup withholding, applied to dividends and interest, is required when: • Taxpayer does not provide an identification number (SSN) or provides incorrect number • Taxpayer fails to certify that he/she is not subject to withholding • IRS informs payor that taxpayer gave incorrect identification number • IRS informs payor that withholding is mandatory because taxpayer hasn’t complied in the past 2010 Cengage Learning

  9. Estimated Payments • Self-employed taxpayers must make quarterly estimated tax payments if • Annual payment due for the year is ≥ $1000 (after withholding) • Quarterly payments due April 15, June 15, September 15, and January 15 of next year • Total annual estimated payments is lesser of • 90% of current year tax or • 100% of prior year tax or • 90% of current year TI, AMTI & annualized self employment (SE) income • Exception: if AGI > $150,000 for prior year, then annual required payment = 110% of prior year tax • For 2009 only, qualified small business owners get a break on amount required to be paid in for estimated tax payments 2010 Cengage Learning

  10. FICA Tax • Federal Insurance Contributions Act (FICA) was legislation intended to provide retirement and disability benefits for American workers and their families • FICA comprised of two taxes • Social Security - 6.2% of first $106,800 of gross wages • Medicare - 1.45% of total gross earnings, with no cap 2010 Cengage Learning

  11. FICA Example Example Shannon is employed at California SolarTech LLC where her annual salary = $115,000; what is her FICA tax for the current year? How much does her employer match? Solution $106,800 x 6.2% = Social Security tax $6,621.60 $115,000 x 1.45% = Medicare tax 1,667.50 Total FICA $8,289.10 Employer match is the same amount 2010 Cengage Learning

  12. Overpayment of FICA Taxes • If taxpayer has more than one source of income, possible to overpay Social Security taxes • For example: Renaldo works two jobs and receives wages = $49,000 and $65,000; • how much FICA has he overpaid? • Solution: ($114,000 – 106,800) x 6.2% = $446 overpaid. Taxpayer should then claim the excess against his/her tax liability. 2010 Cengage Learning

  13. Federal Tax Deposit System • Employer withholds both income tax and FICA from paychecks • Very small employers with federal payroll tax liabilities of $1,000 or less can file/pay annually by using a Form 944 2010 Cengage Learning

  14. Federal Tax Deposit System • Must deposit these taxes either monthly or semiweekly (IRS determines by analyzing deposits in lookback period) • Monthly depositors make deposit by 15th of following month • All new employers are automatically monthly • Semiweekly depositors make deposit either Wednesday and/or Friday (depending upon when payroll is run) 2010 Cengage Learning

  15. Federal Tax Deposit System • Deposits made either at authorized depository (select banks) with a Form 8109 coupon or may be electronically deposited via Electronic Federal Tax Payment System (EFTPS) • Some employers must deposit using EFTPS • Form 941 (Employer’s Quarterly Federal Tax Return) must be accompanied by payroll taxes not yet deposited for quarter Note that if liability is less than $2,500, employer may skip monthly deposits and pay with Form 941 2010 Cengage Learning

  16. Employer Reporting Requirements • Annually, employers must send Wage and Tax Statement (Form W-2) to each employee by 1/31 • Also, send to Social Security Administration by 2/28 with a Form W-3 transmittal • W-2 shows gross wages, income tax and FICA withholding and other items with tax ramifications • Note that not all amounts on W-2 are subject to income tax withholding • Special rules pertain to employer reimbursements for travel, if there is not an accountable plan in place • Form W-2G • Required for gambling winnings 2010 Cengage Learning

  17. Information Returns • Annually, employers must complete and send out various Form 1099s for various recipients of certain payments • Must be mailed to recipients by 1/31 • Exception: Stockbrokers have until 2/15 to mail 1099-B statements to recipients • Each kind of 1099 is transmitted by separate Form 1096 2010 Cengage Learning

  18. Self-Employment Tax • Self-employment tax is the same as FICA, except self-employed taxpayer pays both shares • Therefore, rates are: • Social Security (OASDI) is 12.4% of first $106,800 of net self-employment income • Medicare is 2.9% on total net self-employment income • If taxpayer has both W-2 wages and self-employment income, the $106,800 limit applies to the combined earnings • FICA is not required if net earnings < $400 • May take a Deduction for AGI for 1/2 of SE tax paid 2010 Cengage Learning

  19. FUTA Tax • Federal Unemployment Tax Act (FUTA) requires employers to pay tax to administer state unemployment programs • Employer pays 6.2% up to first $7,000 per employee per year • However credit of up to 5.4% for state unemployment tax is taken against the 6.2% • Therefore, net FUTA rate = .8% (6.2% - 5.4%) • Must deposit quarterly if over $500 • Must file annual report Form 940 2010 Cengage Learning

  20. The Nanny Tax • Provisions in place to simplify reporting process for employers of domestic household workers (full- and part-time) • Household worker is anyone working in taxpayer’s home, such as cook, housekeeper, etc. • Household employer must withhold and match FICA on any household worker who earns >= $1,700 in a calendar year • Must withhold and deposit income taxes for household employees if asked to do so by employee • Must pay FUTA if employee earns >= $1,000 2010 Cengage Learning

  21. The Nanny Tax • To report, household employer must • Complete Schedule H annually and attach to 1040 or • If have non-household workers, may report household employees on Forms 941 and 940 with regular employees • Must file W-2 for each household employee who earns $1,700 or more a year 2010 Cengage Learning

  22. The End 2010 Cengage Learning

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