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Fundamental Payroll Certification 2011. Paycheck Fundamentals Chapter 3. Anne Schafroth, cpp . Paycheck Fundamentals. Federal Withholding Social Security & Medicare Withholding Additional Deductions from Pay State Taxes Deceased Employees Gross to Net Calculations

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fundamental payroll certification 2011

Fundamental PayrollCertification 2011

Paycheck Fundamentals

Chapter 3

Anne Schafroth, cpp

paycheck fundamentals
Paycheck Fundamentals
  • Federal Withholding
  • Social Security & Medicare Withholding
  • Additional Deductions from Pay
  • State Taxes
  • Deceased Employees
  • Gross to Net Calculations
  • Employer-Paid Taxes
elements of a pay check
Elements of a Pay Check
  • Gross Amount vs Actual Paycheck Amount
  • Additions
  • Deductions
  • Net Pay
withholding federal taxes
Withholding Federal Taxes
  • Taxable wages = all remuneration for services (includes non-cash benefits)
  • Federal taxation is FIT, SS, MED
  • Some benefits are fully taxable, some partially taxable and some are non- taxable
taxable compensation
Back pay

Bonus

Commission

Company car (personal use)

Dismissal pay (severance)

ER pd commuter fees in excess of $230/month

ER pd parking greater than $230/month

Fringe benefits (unless excluded)

Gifts, gift cards, prizes

Group legal services

Group term life greater than $50,000

Non-accountable reimbursed business expenses

Noncash fringe benefits unless excluded by IRC

Sick pay and disability benefits (portion attributable by employer contribution)

Nonqualified moving expenses

Overtime pay

Regular wages

Tips

Taxable Compensation
nontaxable compensation
Dependent child care up to $5000 under section 129 plan

Company vehicle (business use only)

De minimus fringe benefits

Disability benefits (employee contributions)

Educational assistance (job related /no limit)

Group term life up to $50,000

Med/dent health plans (employer contribution)

No-additional-cost fringe benefits

Qualified ee discounts on ER goods/services

Qualified moving expenses

Qualified transportation fringe benefits

Reimbursed business expenses

Working condition fringe (if deductible if it was paid by ee)

Non-job-related education up to $5250

Long term care insurance

Workers’ compensation benefits

Health Savings Accounts

Nontaxable Compensation
wages taxability
Wages / Taxability
  • Period Ending – is the period when wages were earned
  • Pay Date - is the date wages are paid and dictates the taxability, as well as structure for depositing and reporting of taxes to government agencies
  • Constructive Receipt - is the date the funds are available to the employee
  • Overpayments / Repayments
    • in same calendar year, repayment requested is the employee’s net overpayment; OP and RP can be netted together for W2; Employer can claim refund of taxes from IRS
    • in subsequent year, repayment requested is Gross OP minus EE and ER SS and Med taxes; ER can claim refund from IRS; OP and RP cannot be netted together for W2; EE can claim refund of federal tax on 1040.
factors affecting withholding
Factors Affecting Withholding
  • Form W-4 Withholding Certificate
    • Employee’s marital status
    • Number of withholding allowances
  • Pay Frequency
  • Whether regular or supplemental wages
  • Pretax Deductions
withholding methods
Withholding Methods

Three main acceptable methods:

  • *Wage-Bracket Method (Pub 15 - Circular E)
  • *Percentage Method (Pub 15 – Circular E)
  • Optional/Mandatory Flat Rate of 25% (or in some instances, 35%)

* Methods Used Most Commonly

withholding methods1
Withholding Methods
  • Wage Bracket Method — quickest and easiest
withholding methods2
Withholding Methods
  • Percentage Method
  • most common method used in computerized payroll systems
withholding methods3
Withholding Methods

Optional Flat Rate Method

Supplemental wages paid in addition to employee’s regular wages.

Examples: bonuses, commissions, overtime pay, back pay

  • Does not take into account Form W-4 elections
  • Can result in under or over withholding
  • Supplemental Rate 25%
  • Mandatory Flat Rate 35%
  • Supplemental Wages also subject to Social Security, Medicare & FUTA
supplemental wages
Supplemental Wages
  • When YTD supplemental wages exceed $1,000,000, use mandatory flat rate of 35%
  • For the remainder of the year, all supplemental wages are subject to 35% withholding
  • When reaching limit, can apply to all wages or only that portion going over $1,000,000:

YTD Supplemental Wages $900,000; Bonus of $200,000

    • ($200,000 x 35% = $70,000)

OR

    • (($100,000 x 25% = $25,000) + ($100,000 x 35% = $35,000) = $60,000)
supplemental wages1
Supplemental Wages

Methods for Taxing Supplemental Wages

  • If paid with regular wages, must withhold as if a single payment for the pay period
  • If paid separately, there are two options:

Calculate supplemental amount at 25% or 35%

OR

Use aggregate method

    • 1) calculate taxes on the combined wages
    • 2) calculate taxes on regular wages only
    • 3) subtract #2 from #1 – the remaining is considered supplemental wage tax amount
supplemental wages2
Supplemental Wages

Calculate supplemental amount at 25% or 35%:

$1,000 Bonus Paid Separately (or defined separately):

$1,000 x 25% = $250

supplemental wages3
Supplemental Wages

Aggregate Method:

(Optional; Must use this method if no FIT withheld in preceding year)

  • Bonus $500.00 Regular Weekly Wages $645
  • W-4 Single with 5 allowances.
  • Wage-Bracket Method: Weekly Wage Federal Tax $29
  • ($500.00 + $645 = $1,145.00)
  • Wage-Bracket Method: Federal Tax $113.00
  • ($113.00 - $29 = $84) $84 would be attributed to Supplemental Wages

Also acceptable to use Wage-Bracket on Regular Wage $29 and flat rate on Supplemental Wages ($500.00 x 25% = $125.00)

federal withholding
Federal Withholding

Final Notes:

  • Rounding to whole dollar
    • $.01 to $.49 Round Down $53.40 = $53
    • $.50 to $.99 Round Up $353.60 = $354
    • Be consistent!!
  • Withholding income tax from pensions and annuities
    • Use Form W-4P Withholding Certificate for Pensions and Annuities
social security medicare taxes
Social Security & Medicare Taxes
  • Federal Insurance Contributions Act (FICA)
  • 2 parts: Social Security & Medicare
  • 7.65 % of taxable wages for employers
  • 5.65 % of taxable wages for employees
social security medicare taxes1
Social Security & Medicare Taxes

Social Security

  • Also known as OASDI- Old Age Survivors Disability Insurance
  • 6.2 % & 4.2 %
  • Maximum Salary $106,800
  • Maximum for ER $6,621.60
  • Maximum for EE $4,485.60
social security medicare taxes2
Social Security & Medicare Taxes

Medicare Taxes

  • Also know as HI—Health Insurance
  • 1.45 %
  • No Maximum Salary
  • No Maximum Contribution
  • Employer Matches EE Contribution
social security medicare taxes3
Social Security & Medicare Taxes
  • When paying Fica Tax on $1000.00
additional deductions from pay
Additional deductions from pay
  • Types of voluntary deductions:
    • Charitable contributions
    • Retirement programs i.e. 401k
    • Credit union
    • Direct payments
    • Savings bonds purchase
    • Health insurance outside Section 125
    • Stock purchase in employer’s company
    • Advances / loan repayments
    • Union dues and fees
additional deductions from pay1
Additional deductions from pay
  • Additional notes on voluntary deductions:
    • Require authorization (written or electronic)
    • Last Priority – Wage Assignments first
    • ER can set Priority
    • Substantiation of charitable contributions requires 2 types of documentation
      • Pledge Card
      • Pay statements or W2
additional deductions from pay2
Additional deductions from pay
  • Involuntary Deductions-Wage Attachments (general priorities):
    • Child support orders
    • Chapter 13 bankruptcy
    • Federal agency garnishments
    • Federal tax levies
    • State tax levies
    • Local tax levies
    • Creditor garnishments
    • Student loan garnishments
federal tax levies
Federal Tax Levies
  • Take home pay minus exempt amount documented in Pub. 1494
    • IRS instructions on form 668-W Notice of Levy on Wages, Salary & Other Income
  • Deductions in effect prior to levy are ok
  • No new voluntary deductions allowed
  • Involuntary deductions mandated by company as condition of employment are ok
federal tax levies1
Federal Tax Levies

Amount of exempt wages based on

  • Marital status
  • Number of exemptions

Part 3 of Form 668-W

  • Payroll frequency needed for number of annual pay periods
  • Chart to show exempt amount from levy -- Publication 1494
  • Do not stop withholding until Form 668-D, Release of Levy is received
child support
Child Support
  • All orders are considered immediate unless stated
  • All orders in arrears are immediate
  • Consumer Credit Protection Act (CCPA) governs amount that can be taken
  • Based on a percentage of DisposableEarnings
    • Gross wages minus taxes (generally not including tips)
child support maximum
Child SupportMaximum %
  • If the employee supports a second family – cannot exceed 50% of disposable earnings (55% if in arrears)
  • If employee does not support a second family –cannot exceed 60% of disposable earnings (65% if in arrears)
  • State maximum withholding may be lower, but cannot be higher than these limits
uniform interstate family support act uifsa
Uniform Interstate Family Support Act -- UIFSA
  • Clarifies the rules for processing out-of-state wage orders
  • Duration and specific amount of payments
  • Person or agency to receive the payments
  • Medical support – specific amount / mandatory coverage
  • Amount of payment of arrears and interest, stated as a sum
uifsa continued
UIFSA—Continued
  • Employers must comply with rules of their work state when:
    • Withholding employer’s fee for processing order
    • Determining the maximum amount permitted to be withheld
    • Determining the time frame for withholding and disbursement
    • Handling multiple orders
multiple order handling
Multiple Order Handling
  • State law governs the handling of multiple orders
  • Multiple state orders default to the state where the employee works
states resolve multiple order challenges 1 of 3 ways
States resolve multiple order challenges- - - 1 of 3 ways
  • Allocate the available funds to each order on a percentage basis
  • Allocate available funds equally to all orders
  • Prioritize based on receipt of orders
    • Current support calculated before arrearages
apa office of child support enforcement
APA & Office of Child Support Enforcement
  • Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states
  • Must have current child support obligation amount based on pay cycle, arrears amount, medical support amount, payee, and payee’s address
centralized support collections and disbursement units
Centralized Support Collectionsand Disbursement Units
  • Federal law mandated all states develop one unit to disburse payments
  • All states but South Carolina currently participate in a centralized collections location within their state
state law takes priority federal law limitations
State law takes priority –Federal law limitations
  • State can allow an administrative fee for processing
  • Payment must be made within 7 days of withholding from wages
  • First payment must be made within 14 days of mailing date of order
garnishments consumer credit protection act
Garnishments Consumer Credit Protection Act
  • Federal Limit =

25% or

Amount of disposable pay that exceeds 30 x federal minimum wage

  • Multiple orders are prioritized and will effect lower priority attachments
  • Garnishment Limits (Page 3-28)
  • Watch for changes in Federal minimum wage
state tax
State Tax
  • Calculated by
    • Wage bracket
    • Percentage method or flat percentage
    • Percentage of federal
  • No state tax:
local income taxes
Local Income Taxes
  • Cities, counties, school districts, etc.
  • Each local taxing authority has its own requirements. Verify with the locality for its requirements and your compliance.
local city school district county and head taxes
Local: City, School District, County, and Head Taxes
  • Most common states for local taxation are Ohio, Indiana and Pennsylvania
  • Many variances and local government regulations on these taxes – verify with the agency to determine their requirements
state disability tax
State Disability Tax
  • Six states have employee/employer funded programs for illness and disability
  • Employers must deduct, report, pay, and record payments—failure to withhold is employer’s liability.
state unemployment tax
State Unemployment Tax
  • Three states have provisions to withhold SUI from employees (in addition to the employer’s obligation):
  • All other states unemployment tax is exclusively the employer’s expense
deceased employees
Deceased Employees
  • Payments after date of death are taxable
  • Federal income tax is responsibility of whomever receives the payment
  • If the payment is made in same year as the employee’s death
    • Tax withheld for Social Security and Medicare
    • On W2, report wages in boxes 3 & 5 and tax withheld in boxes 4 & 6
    • Amount not reported as federal taxable wages in box 1 of W2
    • Provide 1099-MISC with federal taxable wages reported in box 3, and use name of deceased’s estate or beneficiary
  • If payment is paid in year after death
    • Do not withhold Social Security and Medicare
    • Do not issue a W2
    • Do issue a 1099-MISC and report amount paid in box 3
paying the employee gross to net calculation
Paying the EmployeeGross to Net Calculation
  • Calculate Total Wages
  • Determine Pretax Deduction Amounts
  • Determine Tax Withholding
  • Determine Disposable Earnings

(Total Wages minus Taxes) for Child Support and Garnishments Deductions

  • Deductions
  • Result = Net Pay
gross up payments
Gross Up Payments
  • Employer Pays the Taxes!
  • Typical situations for a Gross Up Payment
    • Want a specific amount as net amount – bonus of $100
    • Employer decides to pay taxes on taxable relocation expense
    • GTL for a termed employee –SS/Med paid by employer
    • Employer failed to withhold taxes on an employee’s previous payment
gross up calculation steps
Gross Up Calculation steps
  • 100% - tax% = Net %
  • Payment / Net %= Gross Earnings
  • Check by calculating Gross to net

Need to Know for Exam !!!

Examples: pages 3-38 to 3-39

test your knowledge
Test Your Knowledge

An employee is to be awarded a net bonus of $2,000 as supplemental wages. Year-to-date regular and supplemental earnings are $15,000. Using the current supplemental flat tax rate and Social Security and Medicare tax rates, what should be the gross amount of the payment if the employee lives and works in a state with no state income tax?

A) $3,060.44

B) $2,666.67

C) $3,108.00

D) $2,883.93

Answer:

1. (100% - (25% + 4.2% + 1.45%)) = 69.35%

2. $2,000 / 69.35% = $ 2,883.93

3. $2,883.93 - 720.98 – 121.13 – 41.82 = $2,000

gross up special circumstances
Gross UpSpecial Circumstances
  • Employee meets or met SS tax limit
  • 100% - Tax % (no SS %) = Net %
  • Payment + ((SS wage base-YTD payments) x 4.2%) divided by Net % = Gross Earnings
test your knowledge1
Test Your Knowledge

An employee is receiving a $500 net bonus. The employee is married with 3 allowances. The employee’s YTD gross pay is $115,640 and the employee is paid biweekly. The employee lives and works in a state where there is no state income tax. Calculate the gross amount of the bonus.

A) $500.00

B) $679.81

C) $742.39

D) $777.00

Answer:

1. (100% - (25% + 1.45%)) = 73.55%

2. $500 / 73.55% = $ 679.81

3. $679.81 – 169.95 – 9.86 = $500

test your knowledge2
Test Your Knowledge

An employee is receiving a $500 net bonus. The employee is married with 3 allowances. The employee’s YTD gross pay is $106,640 and the employee is paid biweekly. The employee lives and works in a state where there is no state income tax. Calculate the gross amount of the bonus.

A) $598.02

B) $688.95

C) $742.39

D) $693.30

Answer:

1 (100% - (25% + 1.45%)) = 73.55%

2. $500 + ((106,800 – 106,640) x 4.2%)/ 73.55% = $500 + $6.72 / 73.55% = $688.95

3. $688.95 – 172.24 – 9.99 – 6.72 = $500

thank you

Paycheck Fundamentals

Chapter 3

Questions?

Thank You!!!!

Anne Schafroth, CPP aschafroth@artic.edu