CHAPTER 9

©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star ©2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.logo, and South-Western are trademarks used herein under license.

CHAPTER 9

Withholding, Estimated Payments & Payroll TaxesIncome Tax Fundamentals 2007 Gerald E. Whittenburg & Martha Altus-Buller


Withholding Methods

Employer calculates income tax withholding from employees’ paychecks based on their Form W-4 Pay includes salaries, bonuses, commissions

Also vacation and retirement pay 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


Compute Withholding

To compute amount to withhold from pay Multiply number of allowances found on W-4

by allowance amounts [found on p. 9-2] Subtract that amount from employee’s gross

wages Use IRS tables to calculate federal income

tax based on gross wages Tables published in Circular E Found in textbook in appendix C


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

Withhold at either flat 10% [or 20% for certain distributions] for nonperiodic payments

Pension & Deferred Income


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, AMT and SE income

annualized Exception: if AGI > $150,000 for prior year, then annual

required payment = 110% of prior year tax


FICA Tax

Federal Insurance Contributions Act (FICA) introduced to provide retirement and disability benefits for American workers and their families

FICA comprised of two taxes Social Security - 6.2% of first $94,200 of

gross wages Medicare - 1.45% of total gross earnings [no

cap]


Federal Tax Deposit System Employers withhold both income tax and

FICA from paychecks Must deposit these taxes either monthly or

semiweekly [as determined by 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


Federal Tax Deposit System

To make deposit at commercial bank, fill out Form 8109 (coupon) and take to an authorized depository Or, if mailed, must be postmarked second day before

due date 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 any payroll taxes not yet deposited for quarter


Self-Employment Tax Self-employment [SE] tax is the same as FICA,

except self-employed taxpayer pays both shares

Therefore, rates are: Social Security [OASDI] is 12.4% of first $94,200 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 $94,200 limit applies to the combined earnings FICA is not required if SE income is < $400 May take a Deduction for AGI for 1/2 of SE tax paid


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% [if all state unemployment taxes paid timely]

Therefore, net FUTA rate = .8% [6.2% - 5.4%] Must deposit quarterly if over $500 Must file annual report on 940-EZ or 940

CHAPTER 9

Documents

Transcript of CHAPTER 9