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Section 6.4. Income Tax Withholding. Employee’s Withholding Allowance Certificate (IRS W-4 form). Form on which employee states marital status and number of withholding allowances being claimed.
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Section 6.4 Income Tax Withholding
Employee’s Withholding Allowance Certificate (IRS W-4 form) • Form on which employee states marital status and number of withholding allowances being claimed. • This information is used to determine the amount of federal withholding tax. This is done using one of two methods…
1. The Wage Bracket Method • Uses the tables found on p 231-232 • Look at the correct table: • Weekly or Monthly earnings? • Married or Single? • Find the correct wage range along the left columns. • Cross-match to the correct # of allowances along the top.
Examples: Wage Bracket Method • Rachel Leach is single and claims 2 withholding allowances. Use the wage bracket method to find her withholding tax if her weekly gross earnings are $308.10. • Bob has monthly earnings of $2,439.78. He is married and claims 4 withholding allowances. Find his withholding tax using the wage bracket method.
2. The Percentage Method • Uses the table on p 233. • Find the correct table. • Weekly, Biweekly, Semimonthly, or Monthly? • Married or Single? • Find the withholding allowance for one person. • Multiply by the # of allowances being claimed. • Subtract that value from the gross earnings. • Find the range (Married or Single?) that includes that value. • Subtract the ‘of excess over’ amount before you multiply by the %, then add.
Percentage Method Examples • Sadie is married and claims 3 withholding allowances. Use the percentage method to find her withholding tax in a week when she has earnings of $1263. • Howard has earnings of $5735 for the month. He is married and claims 4 withholding allowances. Use the percentage method to find his tax.
Carol has weekly earnings of $2175, is single, and claims 2 withholding allowances. Use the percentage method to find her withholding tax.
State Withholding Tax • Uses the state’s tax rate… varies by state! • Tax = state’s percent rate x gross earnings • EX: An employee has gross earnings of $3786 for the month. If her state has a 6.15% income tax rate, find the state withholding tax.
NET PAY… after all the taxes! • To find net pay, first find all the taxes: • FICA • Medicare • Federal Withholding • State Withholding • Any others (like SDI) • Then subtract ALL the taxes from the gross earnings.
Net pay example • Al has monthly gross earning of $8762, is married, and claims 3 withholding allowance. His state withholding is 3% and his union dues are $58. Find his net pay using the percentage method for federal withholding.
Quarterly amount owed to IRS • Remember: employee’s contributions for Medicare and FICA are matched by the employer. Usually paid quarterly… • Payless Dry Cleaners withheld $461.90 in FICA and $108.03 in Medicare Tax from employees. How much must the employer send to the IRS? • In one quarter, City Electronics has collected $1953.82 in FICA, $456.75 in Medicare Tax, and $3780.47 in Federal Withholding tax from its employees. Find the total amount due to the government by the employer.