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CHAPTER 9. Withholding, Estimated Payments & Payroll Taxes Income Tax Fundamentals 2008 Gerald E. Whittenburg Martha Altus-Buller Student’s Copy. 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

Income Tax Fundamentals 2008

Gerald E. Whittenburg

Martha Altus-Buller

Student’s Copy

Withholding methods
Withholding Methods

  • Employer calculates income tax withholding from employees’ paychecks based on their Form W-4

    • Pay includes salaries, bonuses, commissions

    • 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

    • If no W-4 filed, ER must withhold at highest rate

Compute withholding
Compute Withholding

  • To compute amount to withhold from pay

    • Multiply number of allowances found on W-4 by allowance amounts [found on pp. 9-2, 9-5]

    • Subtract that amount from employee’s gross wages

    • 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 each year

Pension deferred income
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

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

Estimated payments
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 & annualized SE income

      • 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 $97,500 of gross wages

    • Medicare - 1.45% of total gross earnings [no cap]

Federal tax deposit system
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

  • Very small employers with payroll tax liabilities of $1000 or less can file/pay annually by using a Form 944

Federal tax deposit system1
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

    • Can use Form 941 e-file program

Self employment tax
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 $97,500 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 $97,500 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 Form 940