Tax Accounting Chapter 9
Two types of qualified retirement plans
1. Defined Contribution (newer) 2. Defined Benefit (old.. uncommon.. expensive)
What are the steps for the percentage method to calculate withholding for a pay period?
1. Multiply the # of allowances claimed by the employee by the allowance amount 2. Subtract that amount from the employees gross wages for the pay period 3. Apply the result in step 2 to the percentage method table for the appropriate Marital Status AND Pay Period
Employer reporting requirements
Annually, employers must send Wage and Tax Statement (Form W-2) to each employee by 1/31; also, send to Social Security Administration by 2/28 with a Form W-3 transmittal Form W-2G required for gambling winnings
Paul earns $55,000 during the current year. His employer contributes $3,000 during the year to a qualified retirement plan on behalf of Paul. The amount of the contribution for the year is based on Paul's desire to have a monthly retirement benefit of $3,500. What type of retirement plan is this?
Defined benefit plan
FUTA tax
Federal Unemployment Tax Act (FUTA) requires employers to pay tax to administer state unemployment programs Net FUTA rate = .6% must deposit quarterly if over $500
FICA Taxes
Fica Taxes have 2 parts Social Security (old age, survivors, and disability insurance = OASDI) @ 6.2% ONLY ON THE FIRST $128,400 ^^^^^^^^^ UNLESS WORKED MORE THAN 1 JOB REPORT EXCESS FOR REFUND Medicare @ 1.45% -- always no matter wage amount
How do you use the wage-bracket method to calculate withholding?
Follow the appropriate chart based up wages, marital status, pay period, and allowances
Indicate the form that should be used to report the payment. Payment of $400 in dividends by a corporation to a shareholder
Form 1099-DIV
Indicate the form that should be used to report the payment. Interest of $400 paid by a bank
Form 1099-INT
Which of the following forms should be used by a company to report a payment of $1,500 to a computer consultant who is not an employee of the company?
Form 1099-MISC
Indicate the form that should be used to report the payment. Periodic payments from a retirement plan
Form 1099-R
Indicate the form that should be used to report the payment. Salary as president of the company
Form W-2
Indicate the form that should be used to report the payment. Las Vegas keno winnings of $25,000
Form W-2G
Allen (age 32) takes a distribution of $20,000 from his traditional IRA account which he plans to deposit into an IRA with a different bank. During the 60-day rollover period, he gambles and loses the entire IRA balance. What income and/or penalties must he show on his tax return related to the failed rollover?
Income = 20,000 Penalty = 10% of distribution not transferred = 2,000
FICA Tax "dollar amount subject to"
ONLY applies to social security, not medicare
Thomas is an employer with two employees, Patty and Selma. Patty's wages are $12,450 and Selma's wages are $1,275. The state unemployment tax rate is 5.4 percent. What is the FUTA tax after the state tax credit
Pattys wages = 12450 (7000 is the maximum) Selmas wages = 1275 7000 + 1275 = 8275 x .6% = 49.65
Thomas is an employer with two employees, Patty and Selma. Patty's wages are $12,450 and Selma's wages are $1,275. The state unemployment tax rate is 5.4 percent. What is the State unemployment tax
Pattys wages = 12450 (7000 is the maximum) Selmas wages = 1275 7000 + 1275 = 8275 x 5.4% = 446.85
Thomas is an employer with two employees, Patty and Selma. Patty's wages are $12,450 and Selma's wages are $1,275. The state unemployment tax rate is 5.4 percent. What is the FUTA tax before the state tax credit
Pattys wages = 12450 (7000 is the maximum) Selmas wages = 1275 7000 + 1275 = 8275 x 6% = 496.50
Rollover Transfer
Taxpayer receives funds and then transfers part or all to a new retirement plan 20% withholding - employee gets 80% of funds but still has to transfer 100% if taxpayer older than 59.5 = 10% penalty tax exception for IRAs - not susceptible to 20% withholding
ESTIMATED PAYMENTS
Taxpayers must make quarterly estimated tax payments if after witholding, payment due for next year is => 1000
FUTA Tax
The Federal Unemployment Tax Act This is a tax that is not withheld from employees' wages, but instead is paid in full by employers. The FUTA rate is 6% of an employees wages up to $7000 A credit is allowed for state unemployment taxes of 5.4% bringing it to .6% instead
Mark the incorrect answer. Estimated income tax payments: a. If inadequate, may result in nondeductible penalties. b. Are made in four installments on April 15, June 15, and September 15 of the tax year and on January 15 of the following year. c. Need not be filed if the estimated tax, after subtracting withholding, can reasonably be expected to be more than $1,000. d. May be based on the amount of the tax liability for the prior year.
c. Need not be filed if the estimated tax, after subtracting withholding, can reasonably be expected to be more than $1,000.
Direct Transfer (the right way)
Transferring assets from one retirement plan to another One trustee transfers assets to new trustee No tax ramifications, no limit to # of times able to do this right way -- better option -- safer
T or F A nondeductible penalty may be imposed on underpayments of estimated taxes.
True
T or F In 2018, the maximum amount of wages subject to the Social Security portion of the FICA tax is $128,400.
True
T or F The two most common methods of determining federal income tax withholding are the percentage method and the wage bracket method.
True
T or F When taxpayers overpay Social Security taxes, the excess taxes may be claimed as a credit against their income tax liability.
True
Which one of the following forms must an employer provide to his employee by January 31 of the following year?
W-2
Lamden Company paid its employee, Trudy, wages of $47,000 in 2018. Calculate the FICA tax
Withheld from Trudy (employee) -- social security 6.2% = 2914 -- medicare 1.45% = 681.50 Withheld from Lamden (employer) -- social security 6.2% = 2914 -- medicare 1.45% = 681.50 Total = 7191
Fidicuary Investments paid its employee, Yolanda, wages of $137,000 in 2018. Calculate the FICA tax:
Withheld from Trudy (employee) -- social security 6.2% on the first 128,400 = 7960.8 -- medicare 1.45% = 1986.5 Withheld from Lamden (employer) -- social security 6.2% on the first 128,400 = 7960.8 -- medicare 1.45% = 1986.5 Total = 19894.6
Two ways to transfer assets from one retirement plan to another plan of the same or different type
1. Trustee-to-trustee transfer (direct transfer) --- the taxpayer instructs the trustee of the plan to transfer assets to the trustee of another plan. --- there is no limit to the dollar amount or # of times able to do this 2. Rollover of the distribution ---- taxpayer receives a distribution of funds from a retirement plan and then transfers part or all of the funds to the new retirement plan trustee. --- has a maximum of 60 days in which to transfer funds to the new plan and avoid taxes and penalties --- 60-day rollover period may be waived in cases of events beyond the reasonable control of the taxpayer (death, disability, postal error, disaster) --- the trustee must withhold 20 percent of the amount distributed for federal income taxes, giving the employee only 80 percent of the amount in his or her plan however the employee must contribute 100% of the amount in the old plan to the new trustee within the required 60-day period to avoid tax on the distribution --- if the taxpayer is under 59.5 years old, the portion of the retirement plan distribution not transferred will be subject to a 10 percent penalty tax. --- only allowed one distribution rollover each year
Elwin worked at three jobs during 2018. He earned $30,000, $27,000, and $9,000, respectively, from the jobs. What is the total amount of FICA tax that would have been withheld from Elwin's wages?
30,000 + 27,000 + 9,000 = 66,000 66,000 x 7.65% = 5,049
For 2018, the Social Security portion of the FICA tax is imposed at a rate of (not including any additional tax for high-income earners):
6.2 percent for the employee 6.2 percent for the employer.
Sherina Smith is self-employed for 2018. She estimates her required annual estimated tax payment for 2018 to be $8,336. She had a $417 overpayment of last year's taxes, which she will apply against her first quarter estimated payment. What is the amount of estimated tax she is paying for QUARTER 1?
8336 / 4 = 2084 - 417 = 1667 for quarter 1
Thuy worked as the assistant manager at Burger Crown through August 2018 and received wages of $87,000. Thuy then worked at Up and Down Burger starting in September of 2018 and received wages of $60,000. Calculate the amount of Thuy's OVERPAYMENT of Social Security taxes that she should claim on her 2018 Form 1040
87000 + 60000 = 147000 147000 - 128400 = 18600 18600 * .062 = 1,153.20 overpayment
federal tax deposit system
Employer withholds both federal income tax and FICA from checks Very small employers with federal payroll tax liabilities less than $1,000 file/pay annually by using a Form 944 Large employers (who accumulate $100,000+ of tax liability must comply with special one-day deposit rule)
T or F The FUTA tax is a voluntary unemployment tax which an employer may or may not wish to contribute toward.
False
Tax Payment Vouchers
Self-employed taxpayers are NOT subject to withholding - they must make quarterly estimated tax payments (also applies to taxpayers with LARGE amounts of interest, dividends, and other income not subject to withholding) Payments are made in FOUR installments
Adam Grisly, a single taxpayer, retired from a long career in coal mining in 2017 when he was only 58 years of age. In 2018, his only source of income is wages of $17,500 from a part-time job. Adam knows he needs to save additional funds for retirement and opens an IRA in 2018 and contributes $2,100. Adam is also looking for additional work and completed some training courses for which he received a $200 lifetime learning credit. Adam's tax liability before any credits is $550. What is the amount of Adam's Saver's Credit associated with his IRA contribution?
Tax liability before credit = 550 Lifetime learning credit = 200 Tax liability after credit = 550-200 = 350
self-employment tax
The total Social Security and Medicare tax, including employer-matching contributions, paid by people who work for themselves.