University of New Haven Professional Enrichment Program

1. University of New HavenProfessional Enrichment Program Who's FICA, and How Come He Gets Part of My Paycheck? Paul A. Caiafa, CPA, MST April 26, 2007

2. My Objectives • Explain a progressive tax system. • Identify and explain the withholding of federal income tax, state income tax, Social Security tax, and Medicare tax. • Explain the meaning of deductions, exemptions, and allowances, and the purpose of Form W-4. • Explain the meaning and purpose of Form W-2. • Identify the forms used to complete a federal income tax return and Connecticut state income tax return. • Calculate federal income tax, state income tax, Social Security tax, and Medicare tax withheld, exemption amounts, itemized deductions, and federal and state income tax due.

3. Your Paycheck • Federal Income Taxes • Social Security Taxes • Medicare Taxes • State Income Taxes

4. Tax Filing Forms • Federal W-4 • CT W-4 • Federal Form 1040-EZ • Federal Form 1040 and Schedule A • Connecticut Form CT-1040

14. Ray is single and lives in Connecticut. He earned $95,000 during 2006 working for a CPA firm. 1. Determine the amount reported on Ray’s W-2 that was withheld for Social Security and Medicare. Social Security: $94,200 x 6.2% = $5,840.40 Medicare: $95,000 x 1.45% = $1,377.50 2. Determine the amount of Social Security tax and Medicare tax paid by Ray’s employer on his behalf. Social Security: $94,200 x 6.2% = $5,840.40 Medicare: $95,000 x 1.45% = $1,377.50

15. 3. Determine the number of exemptions Ray can claim by completing Form W-4, and the amount Ray can deduct from his gross income. 1 exemption (himself) x $3,300 = $3,300 4. Based on the number of exemptions Ray can claim, and the amount he can deduct from gross income in arriving at taxable income, what amount will be used to determine the amount of federal income taxes to be withheld? ($95,000 - $3,300) = $91,700

16. 5. Determine the amount reported on Ray’s W-2 that was withheld for federal income taxes. From - To Taxable Amount Tax Rate Tax $ – $7,300 $7,300 10% $730 $7,301 - $29,700 $22,400 15% $3,360 $29,701 - $71,950 $42,250 25% $10,562 $71,951 - $91,700 $19,749 28% $5,530 Total $20,182 $20,182 (based on taxable income of $91,700)

17. 6. If Ray claimed zero exemptions on his W-4 – versus one – what amount would have been reported on his W-2 for federal income taxes withheld? From - To Taxable Amount Tax Rate Tax $ – $7,300 $7,300 10% $730 $7,301 - $29,700 $22,400 15% $3,360 $29,701 - $71,950 $42,250 25% $10,562 $71,951 - $95,000 $23,050 28% $6,454 Total $21,106 $21,106 (based on taxable income of $95,000)

18. 7. Ray works in Connecticut, which calculates state income tax using gross income. Determine the amount reported on his W-2 that was withheld for Connecticut state income taxes. $95,000 x 5% = $4,750 8. If Ray paid $10,000 in interest on his home mortgage, what amount could he deduct from income by completing Schedule A? $10,000 interest expense + $4,750 state income tax = $14,750

19. 9. If Ray did not pay interest on his home mortgage, what amount could he deduct from income? The standard amount for single taxpayers: $5,150 10. Calculate Ray’s taxable income, assuming his itemized deductions on Schedule A total $14,750, and he claims one exemption. $95,000 salary - $3,300 exemption - $14,750 itemized deductions = $76,950

20. 11. Calculate Ray’s federal income tax. From - To Taxable Amount Tax Rate Tax $ – $7,300 $7,300 10% $730 $7,301 - $29,700 $22,400 15% $3,360 $29,701 - $71,950 $42,250 25% $10,562 $71,951 - $76,950 $4,999 28% $1,400 Total $16,052 $16,052 (based on taxable income of $76,950)

21. 12. Does Ray owe additional taxes or is he entitled to a refund? Ray will receive a refund of $4,130: Tax withheld $20,182 (#5), less tax owed $16,052 (#11).

22. Who's FICA, and How Come He Gets Part of My Paycheck? Thank You