CHAPTER 9

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

2. 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

3. 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

4. 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]

5. 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

6. 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]

7. 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

8. 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

9. 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

10. 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