Chapter 7: Payroll and Income Tax

Percentage Method

A method to calculate withholdings. Opposite of wage bracket method - uses computers for their payroll

Hourly overtime pay rate = ______x______

Regular hourly pay rate; 1.5

What does the FICA tax require?

Separate reporting for Social Security and Medicare

Fair Labor Standards Act

Sets minimum wage standards, overtime regulations for employees of companies covered by this federal law and ensures that employees working for an hourly rate receive time and a half pay for hours worked in excess of their regular 40 hr week (overtime regulations)

Some states offer a merit rating system that results in a ______________ SUTA rate for companies with a stable employment period.

lower

Salary Plus Comission

person receives base salary plus commission based on dollar amount of their sales

Gross pay = ______x______

Hours employee worked; rate per hour

Current federal hourly minimum wage:

$7.25

Florida wages increased in 2021 from _____ to ______.

$8.56, $8.65

5. Apply Social Security Tax Rates

- Calculating the amount of Social Security tax to pay is easy as it is a fixed percentage of an employee's gross pay. Employers must bear in mind that they too are responsible for paying social security taxes. The current tax rate for Social Security is 6.2% for the employee - The Social Security tax is also a flat rate tax but this one has a maximum cap of $142,800 in 2021. The amount that appears in box 3 of your Form W-2 should not be more than this in the 2021 tax year. The cap is called the Social Security wage base, and it can be adjusted annually by the Social Security Administration. - It's possible that you could be taxed on more than the wage base if you work for more than one employer and they're each withholding up to the base. You can claim a refund from the IRS when you file your tax return if you pay too much, or just keep track of your earnings and alert your employers to stop withholding for Social Security when your total income reaches this figure.

7. Subtract other deductions

- Employees may have voluntary contributions or mandatory deductions that need to be reduced from their gross pay. - Examples of voluntary contributions include 401(k) contributions, deferred compensation programs, long-term disability, and flexible spending accounts. - Examples of mandatory deductions include child support and alimony - Some of your income might not be subject to withholding. Traditional 401(k) contributions are subtracted first before withholding is calculated.*** - Some health insurance and group life insurance premiums paid by your employer might not be included in your income. Dependent care reimbursement accounts and adoption assistance are also not typically considered taxable income.

6. Deduct Medicare faxes

- Like the Social Security tax, Medicare taxes are also a fixed percentage of a person's earnings. In addition, employers are also responsible for paying Medicare taxes. Employees are currently taxed at 1.45% for Medicare - The Medicare tax is a flat tax on all compensation income located in box 5 of your W -2. The rate is 2.9 percent. Half the Medicare tax, or 1.45 percent, is paid by the employer. The other 1.45 percent is paid by the employee. Medicare tax is deducted from an employee's total compensation as payroll withholding each pay period.

2. Determine the employees gross pay

- This is determined by multiplying the number of hours worked in a pay period by the hourly rate. For example, if an employee works 40 hours in a pay period and earns $15 an hour, you would multiply 40 times $15 to get a gross pay of $600. - Don't forget to factor in any overtime, commissions, or bonuses awarded during the pay period. - Pay periods may be weekly, bi-weekly, or monthly. If the period is bi-weekly, for instance, then a full-time employee should work about 80 hours. - An employee with a fixed salary will earn the same amount no matter how many hours they work.

Payroll Cycles (4)

- Weekly: 52 times (once a week) - Biweekly: 26 times (once every two weeks) - Semimonthly: 24 times (twice a month) - Monthly: 12 times (once a month)

% used for FUTA

.6% or .006

Steps to Payroll

1. Complete W-4 Form 2. Determine the employees gross pay 3. Obtain and Federal Income Tax Tables 4. Apply federal and state income taxes to oay 5. Apply Social Security Tax Rates 6. Deduct Medicare Taxes 7. Subtract other deductions 8. Finalize net pay

Determining Income Tax Liability

1. Determine the filing status: Single, head of household, married, filing jointly, or married filing separately 2. Locate the appropriate schedule based on the filing status determined in Step 1. Read down the column "If lone 5 is: Over -" to find the bracket containing the taxable income. 3. Calculate the tax liability by following the instructions under the column headings "The tax rate is" and "of the amount over" for the taxable income row identified in Step 2.

Steps for Percentage Method

1. Locate the specified payroll period's withholding for the # of allowances 2. Subtract the amount of allowances withheld from the total pay 3. Locate the persons marital status and find it on the specific part in the pay table. Then, subtract from the first base amount of the selected period and then follow the formula on the pay table given 4. Calculate state income tax 5. Calculate net pay by subtracting the number of all deductions to the gross pay

Calculating Taxable Income

1. Total all income 2. Subtract from step 1 any adjustments to income in order to calculate adjusted gross income 3. Subtract from step 2 the standard deduction or the total of itemized deductions (whichever is greater) 4. Subtract from Step 3 the exemption allowance, found by multiplying the total number of exemptions claimed by the exemption amount -Taxable Income = Adjusted gross income - Standard or Itemized deductions - Exemption allowance

A taxpayer in the ______ bracket saves 25 cents in FIT for each dollar spent on a deductible expense.

25%

The federal government still allows ______ credit on FUTA tax to companies entitled to the lower SUTA rate.

5.4%

Variable Commission Scale

Company pays different commission rates for different levels of net sales

Deductions

Amounts deducted from gross earnings to arrive at net pay

W-4 Employee's Withholding Allowance Certificate

Completed by employee to indicate allowance claimed to determine amount of FIT (federal income tax) that is deducted. - completed by employee once hired - states the marital status and whether they claimed an allowance

What are an employers responsibilities?

Employers must match the employees contributions in taxes for not only Medicare and Social Security. They must pay the federal and state unemployment taxes.

What fund the Social Security program?

FICA

The W-4 form completed helps deduct _____.

FIT

3. Obtain Federal and State Income Tax Tables

Federal Income Tax tables break down the amount of federal income tax an individual owes based on pay, exemptions, and filing status. - amount of tax withheld on wages can be more or less than the amount of federal tax that will be due to the government at the end of the year.

Calculating regular pay and overtime pay to get gross pay

Gross pay = earnings for 40 hours + earnings at time-and-a-half rate (1.5)

Straight Piece Rate Pay Formula

Gross pay = number of units produced x rate per unit

Salary Plus Commission Formula

Gross pay = salary + commission earned

Usually states also charge companies with a poor employment record a ______ SUTA rate. However, these companies cannot take any more than the 5.4% credit against the 6.2% federal unemployment rate.

Higher

How does payroll cycles affect employees?

How often employers pay employees can affect how employees manage their money - all employees would like more money to manage - some prefer a weekly check to spread the inflow of money - those who have monthly bills like either the twice a month or monthly paycheck more convenient

What does knowing a deductible expense do?

It can bring up a good, effective tax planning

More allowances an employee claims, the ______ money that is deducted from an employees paycheck

Less

Those exempted from overtime in The Fair Standards Act:

Managerial people or other workers can be exempted from the overtime pay (excess of a 40 hour week)

Payroll Register

Multicolumn report to record payroll data - often used by companies - increased use of computers in business has made computerized registers a timesaver for many companies

Many managers today receive ______, which is commission they receive due to the sales of people they supervise

Overrides

When commission does not equal the draw, the salesperson ____ the company the difference between the draw and commission.

Owes

Social Security

Part of FICA tax that has a minimum base (changes every year) - a program that includes Old age and Disability, Medicare, Survivor Benefits, etc..

Medicare

Part of FICA tax that has no minimum base and constant rate (1.45)

Many states have ______ their own minimum wages.

Passed

Differential pay schedule

Pay rate is based on a schedule of units completed - company determines the rate these employees make by the amount of units they produce at different levels of production -produce more, incremental amount earned increases

If the FUTA total cumulative tax amount is less than $100, then the employer can _____ the liability yearly. If it's greater than $100, the employer must _________ within a month after the quarter ends.

Pay, pay

Federal Insurance Contributions Act (FICA)

Percent of base amount of each employees salary. FICA taxes used to fund retirement, disabled workers, Medicare, and so on. Now broken down into Social Security and Medicare.

Companies involved in a state unemployment tax fund can __________against their FUTA tax.

Take a 5.4% credit - reality: companies are paying .6% to federal unemployment program

Federal Unemployment Tax Act (FUTA)

Tax paid by employer. - Rate: .8% on first $7,000 of earnings during the calendar year * any wages in excess of $7,000 per worker are exempt wages and are not taxed by FUTA: - federal government participated in a joint federal and state unemployment program to help unemployed workers

State Unemployment Tax Act (SUTA)

Tax paid by employer. Rate varies depending on amount of unemployment the company experiences - many states is 5.4% on the first $7,000 the employer pays an employee during the calendar year.

What is tax liability based on?

Taxable income and the IRS tax rate schedules (tax tables)

Tax liability

The amount of tax owed to the government

Finalize net pay

The amount remaining after these deductions are subtracted will be net pay. Go back over your calculations and make sure that you haven't make any mistakes.

taxable income

The portion of income subject to taxatoon

Draw

The receiving of advance wages to cover business or personal expenses. Once wages are earned, drawing amount reduces actual amount received - companies can allow salespersons to draw against their commission

Gross pay

Wages before deductions

Straight Commission

Wages calculated as a percent of the value of goods sold - companies use this to determine pay of salespersons - usually a certain percentage of the amount the salesperson sells - rental car companies: moving away from this method

1. Complete W-4 Form

When an employee is hired, a W-4 Form is completed. - Allowances mean that less is withheld from each paycheck and your refund will be less at the end of the year (or you may owe the IRS). • Keep in mind, the more exemptions claimed, the less that the employee has withheld from his or her paycheck. - However, that employee might owe money when it comes time to pay taxes. - This information is needed to calculate the federal income tax.

What happens if you determine tax liability of additional income and the tax savings of additional deductions ahead of time?

You have the opportunity to make adjustments throughout the year - may help you to reduce the amount you must pay in taxes

Straight Piece Rate Pay

payment is made according to the number of units produced at a fixed rate per unit - gives employees an incentive to make more money by producing more dolls - companies may also use an hourly wage and a piece rate as a bonus