Income taxes
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People. Dollars. Federal Income Taxes. Income Taxes. CALCULATING FEDERAL INCOME TAX on FORM 1040 ( 2013). (Married, 2 Exemptions). Income (Adjusted Gross Income): $25,000. Exemptions: ($ 7,800 ) [2 x $ 3,900 ]. Standard Deduction: ($ 12,200 ) (Married). ------------

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Income Taxes

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Income taxes

People

Dollars

Federal Income Taxes

Income Taxes

CALCULATING FEDERAL INCOME TAX on FORM 1040 (2013)

(Married, 2 Exemptions)

Income (Adjusted Gross Income): $25,000

Exemptions: ($7,800) [2 x $3,900]

Standard Deduction: ($12,200) (Married)

------------

Taxable Income: $ 5,000

Therefore, using total wages (income) to calculate federal withholding taxes would overstate the amount of taxes.

see Form 1040 pdf document


Federal income tax withholding

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

(FIT or FWT)

  • Taxable Wages

Definition: Wages total compensation paid to employees.

Compensation includes:

  • wages/salary

  • vacation pay

  • bonuses

  • tips


Federal income tax withholding1

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Tips

  • tips


Federal income tax withholding2

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Tips

  • employee reports tips for the month, if over $20.

  • the report is due from employee by the 10th of the following month.

  • the report includes tips from charge cards, as well as cash tips.

see Form 4070 pdf document

  • employer collects FIT, FICA-SS and FICA-HI from employee.

  • employer also pays FICA-SS and FICA-HI.

  • large food or beverage establishment (10+ EE’s)  must allocated tips if the total tips reported during any payroll period are less than 8% of the establishment’s gross receipts for that period.


Federal income tax withholding3

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

(FIT or FWT)

  • Taxable Wages

Definition: Wages total compensation paid to employees.

Compensation includes:

  • wages/salary

  • vacation pay

  • bonuses

  • tips

  • fringe benefits


Federal income tax withholding4

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Fringe Benefits

  • fringe benefits


Federal income tax withholding5

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Fringe Benefits

Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically.

  • Taxable Fringe Benefits examples

  • personal use of company car

  • vacations (company-paid)

  • tickets for entertainment / sporting events

  • athletic club membership

  • frequent flier miles (not yet, but maybe in the future?)

  • Non-Taxable Fringe Benefits

  • employee discounts

  • meals at employer-run eating establishments


Federal income tax withholding6

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Wages Exempt from FIT(examples)

  • Employer contribution to a 401(k) program.

  • Employer contribution to a Health Reimbursement Account (HRA)

  • Dependent Care Assistance – up to $5,000 per year.

  • Exclusion from wages. You can generally exclude the value of transportation benefits that you provide to an em-ployee during 2014 from the employee's wages up to the following limits.

  • $130 per month for combined commuter highway ve-hicle transportation and transit passes.

  • $250 per month for qualified parking.

  • For a calendar year, $20 multiplied by the number of qualified bicycle commuting months during that year for qualified bicycle commuting reimbursement of ex-penses incurred during the year.

  • employer must have a written plan that does not discriminate in favor of the most highly paid workers.

  • Educational Assistance, if it maintains/improves job status. Up to $5,250 per year for non-job-related educational expenses.

  • Employer-Provided Parking – up to $245 per month.

  • De Minimus Fringe Benefits – benefits of little value (e.g., Holiday Turkey/Ham).


Federal income tax withholding7

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Wage Deductions

  • Deductions that reduce Wages prior to calculating FIT

  • deferred arrangements (e.g., 401(k), SEP, IRA)

  • allows EE’s to contribute income to a “plan” and avoid FIT at the time of contribution… but FIT is due when the funds are withdrawn at a later time (retirement).

  • NOTE: this is NOT exempt from FICA

  • cafeteria plans (section 125)

  • allows EE’s to pay for medical, dental and dependent care with “pre-tax” dollars.

  • NOTE: this is also exempt from FICA


Income taxes

Federal Income Taxes

  • Example of Section 125 Deduction:

  • Assume a 30% Total Tax Rate (FIT, SIT, FICA) and $1,000 of Medical Expenses.

  • As you can see, you are $300 better off to have the medical expenses deducted prior to calculating payroll taxes.


Federal income tax withholding8

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Wage Deductions

  • Deductions that reduce Wages prior to calculating FIT

  • deferred arrangements (e.g., 401(k), SEP, IRA)

(this is NOT exempt from FICA)

  • cafeteria plans (section 125)

(this is also exempt from FICA)

  • Deductions that do NOT reduce Wages prior to calculating FIT

  • union dues

  • wage garnishments

  • loan payments

  • credit union, United Way donation, etc.


Federal income tax withholding9

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Form W-4

(Employee’s Withholding Allowance Certificate)

  • to be completed by the employee

see Form W-4 pdf document

  • employee can change anytime – existing W-4 becomes invalid

  • employee can additionally have more tax withheld by claiming fewer

    exemptions and/or additional dollars

  • employee may claim “exemption” from income tax withholding if no

    income tax liability last year and none expected this year

  • employer must maintain the W-4 and use it to calculate income tax to be

    withheld

  • employer is to implement within 30 days from receipt of W-4

  • (no reimbursement of taxes if implemented within 30 days)

  • employer must withhold at single, no allowance rate (i.e., highest taxes) if

    no W-4 is received from employee


Federal income tax withholding10

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • FYI… Fictitious World Example of How to Use Tax Tables

  • MARRIED TAX TABLE (make-believe)

Taxable WagesTaxof the Amount Over

$0 - $100$0 plus 10%$0

$101 - $200$10 plus 20%$100

$201 - $300$30 plus 30%$200

$301 - $60 plus 40%$300

  • EXEMPTION = $15 (make-believe)


Federal income tax withholding11

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Withholding Methods

  • Percentage Method

Start with Taxable Wages.

Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.

Subtract the result from #2 from #1.

Compute tax from “Percentage Method” tables, using the correct pay period and marital status.


Percentage method examples

Federal Income Taxes

Percentage Method Examples

  • Joe, Single, 2 Allowances, earning $280.30 Weekly

  • (Joe, S/2, $280.30, Weekly)

  • Taxable Wages: $280.30

  • Allowances: $76.00 x 2 = $152.00

  • Excess Wages: $280.30 - $152.00 = $128.30

  • W/H Taxes: ($128.30 - $43.00) x 10% = $8.53


Percentage method examples cont

Federal Income Taxes

Percentage Method Examples (cont.)

  • Mary, Married, 3 Allowances, earning $1,552.73 Bi-Weekly

  • (Mary, M/3, $1,552.73, Bi-Weekly)

  • Taxable Wages: $1,552.73

  • Allowances: $151.90 x 3 = $455.70

  • Excess Wages: $1,552.73 - $455.70 = $1,097.03

  • W/H Taxes: [ ($1,097.03 - $1,023.00) x 15% ] + $69.80 = $80.90


Percentage method examples cont1

Federal Income Taxes

Percentage Method Examples (cont.)

  • Steve, Single, 3 Allowances, earning $2,000.00 Bi-Weekly

  • (Steve, S/3, $2,000.00, Bi-Weekly)

  • Taxable Wages: $2,000.00

  • Allowances: $151.90 x 3 = $ 455.70

  • Excess Wages: $2,000.00 - $ 455.70 = $1,544.30

  • W/H Taxes: [ ($1,544.30 - $1,506.00) x 25% ] + $195.40 = $204.98


Federal income tax withholding12

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Withholding Methods (cont.)

  • Percentage Method

Start with Taxable Wages.

Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.

Subtract the result from #2 from #1.

Compute tax from “Percentage Method” tables, using the correct pay period and marital status.

  • Wage-Bracket Method

Start with Taxable Wages.

Locate the correct withholding table, using the correct pay period and marital status.

Locate the proper wage bracket.

Move across to tax amount, which is located in the appropriate allowance column.


Wage bracket method examples

Federal Income Taxes

Wage-Bracket Method Examples

  • Jenny, Married, 3 Allowances, earning $750.00 Weekly

  • (Jenny, M/3, $750.00, Weekly)

  • Select Table: Married - Weekly

  • Find Wage Bracket: $750 - $760

  • Move across to proper allowance column: (3) $37.00

  • Let’s Calculate using Percentage Method:

  • Taxable Wages: $750.00

  • Allowances: $76.00 x 3 = $228.00

  • Excess Wages: $750.00 - $228.00 = $522.00

  • W/H Taxes: [ ($522.00 - $512.00) x 15% ] + $34.90 = $36.40


Wage bracket method examples cont

Federal Income Taxes

Wage-Bracket Method Examples (cont.)

  • Chris, Single, 0 Allowances, earning $2,130.00 Semi-Monthly

  • (Chris, S/0, $2,130.00, Semi-Monthly)

  • Select Table: Single – Semi-Monthly

  • Find Wage Bracket: $2,120 - $2,140

  • Move across to proper allowance column: (0)  $336.00


Federal income tax withholding13

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Withholding Methods (cont.) (FYI…)

  • Quarterly and Yearly Averaging

  • used with fluctuating, but “estimate-able” income

  • based on income estimate for Quarter or Year

  • divide estimate by number of pay periods - then determine tax withholding

  • withhold average tax amount every pay period


Quarterly averaging example

Federal Income Taxes

Quarterly Averaging Example

  • Bill is expected to earn $8,000 during the 2nd quarter, but his pay may vary dramatically between pay periods. Pay periods are semi-monthly and Bill claims 2 allowances and married.

  • Divide the estimated wages by the number of pay periods:

  • $8,000 / 6 semi-monthly pay periods = $1,333.33

  • Using Wage-Bracket Table, find withholding amount for each pay period:

  • $65 per pay period should be withheld


Federal income tax withholding14

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Supplemental Wages

  • vacation pay

  • bonuses

  • commissions

  • severance

  • If Paid with Regular Wages (on same check)

  • If both wages are combined together, then compute tax on entire payment as we have done previously

  • If shown separately, can have two different rates for each payment  one for the regular wages and, say, 25% for the supplemental wages


Federal income tax withholding15

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Supplemental Wages (cont.)

  • If Paid Separately from Regular Wages (two separate checks)

  • Method B

  • (1) add supplemental wages to the previous-paid regular wages

  • (2) then calculate tax on entire amount

  • (3) then subtract previously-held tax to arrive at tax amount to withhold for supplemental wages

    • (use this method if no income tax withheld from regular wages)


Federal income tax withholding16

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Method B(example)

  • June 15th: Louis, married, 1 allowances earns $985 semi-monthly.

  • FIT Withholding is $47.00 (from wage bracket table)

  • June 18th: Bonus of $500 is paid to Louis.

  • Method B: Add $500 bonus to previous-paid wages of $985, which equals $1,485. FIT withholding based on $1,485 is $108 (from wage bracket table). Since $47 previously withheld on 6/15, need to withhold ($108 - $47 = ) $61 when paying the $500 bonus.

  • Analysis: Tax is based on the 15% “marginal” tax rate for this example.


Federal income tax withholding17

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Supplemental Wages (cont.)

  • If Paid Separately from Regular Wages (two separate checks)

  • Method B

  • (1) add supplemental wages to the previous-paid regular wages

  • (2) then calculate tax on entire amount

  • (3) then subtract previously-held tax to arrive at tax amount to withhold for supplemental wages

    • (use this method if no income tax withheld from regular wages)

  • Method A

  • withhold a flat 25% on the supplemental pay


Federal income tax withholding18

Federal Income Taxes

FEDERAL INCOME TAX WITHHOLDING

  • Supplemental Wages (cont.)

  • Vacation

  • Treat as if it’s a regular payment for the vacation pay period(s)

Example Lump sum payment of 2 weeks vacation to an employee who earns $1,000 per week and who’s taking their two week vacation:

  • Income tax withholding is calculated as follows:

WEEK 1

$1,000

Calculate W/H

WEEK 2

$1,000

Calculate W/H

Add the total W/H and deduct from the $2,000 payment.

=

+

  • If paid in lieu of time, combine with regular pay


Income taxes

Wage & Tax Statements

  • Form W-2 (Wage & Tax Statement)

  • Prepared by Employer if employee had any of the following:

  • income tax or FICA taxes were withheld

  • income tax would have been withheld if employee had claimed one withholding allowance or had not claimed exemption from withholding

  • any amount paid to the employee for services, if the employer was a trade or business

  • Must be given to employees on or before January 31st


Income taxes

Wage & Tax Statements

  • Form W-3 (Transmittal of Wage & Tax Statements)

  • The form is automatically sent to employers during the 4th quarter

  • Used as a “cover form” for filing all W-2’s Copy A

  • Form W-3 and all the W-2’s are sent to the Social Security Administration by the end of February

  • Must file electronically instead of Form W-3 if W-2’s number 250 or more – due date extended to March 31st

  • Form W-2c and Form W-3c (Corrected Statements)

  • Use Form W-3c if more than one Form W-2c; otherwise just file W-2c


Income taxes

Wage & Tax Statements


Income taxes

Wage & Tax Statements


Income taxes

Wage & Tax Statements

  • Form 1099 (Miscellaneous Income)

  • Form 1099-MISC used to report payments such as rents, legal fees, payments to independent contractors, royalties, and award

  • Form 1096 is used to transmit the 1099’s to the IRS


Income taxes

Wage & Tax Statements


Income taxes

Wage & Tax Statements


Income taxes

Illinois State Income Tax

  • Form IL-W-4

(Employee’s Illinois Withholding Allowance Certificate)

  • There are two different types of allowances – Basic allowances ($2,125 each) and Additional allowances ($1,000 each).

  • Employee may include an additional dollar amount of withholding, similar to FIT

  • Employees that are residents of Iowa, Kentucky, Michigan and Wisconsin (reciprocal agreements) must complete Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, to be exempt from Illinois Income Tax withholding

show IL-W-5-NR.pdf document


Income taxes

Illinois State Income Tax

  • Taxes

  • Straight, 3%5% rate after allowances

  • Can use Percentage Method or Wage-Bracket Method (see handouts)

  • Deposit Requirements (based on a “lookback” period)

  • If more than $12,000  Semi-Weekly depositor.

  • Between $1,000 and $12,000  Monthly depositor (new taxpayers, as well)

  • Less than $1,000  Annual depositor.

  • Use Form IL-501 to deposit (analogous to Form 8109) or electronic deposit.


Income taxes

Illinois State Income Tax

  • Form IL-941

  • If Annual depositor  use Form IL-941 and it’s due by January 31st

  • If Monthly or Semi-Weekly depositor  then file quarterly, even if $0 for quarter - form is due by end of the following month.


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