ch09

Report
Chapter 9
Withholding,
Estimated Payments,
and Payroll Taxes
©2003 South-Western College Publishing, Cincinnati, Ohio
Objective
Be able to complete Form W-4: Employee’s
Withholding Allowance Certificate
© 2003 South-Western College Publishing
Transparency 9-2
Withholding Methods
 Employer must withhold taxes from
employees’ pay based on their Form W-4
 Pay includes salaries, bonuses, commissions,
vacation, some non-cash fringe benefits
 W-4 tells employer number of exemptions claimed
by employee
single, married, or married but tax withheld at higher
single rate
can claim exempt status if had no liability last year and
expect none this year
 Best tax planning scenario is if withholding
equals tax liability (no refund/tax due)
© 2003 South-Western College Publishing
Transparency 9-3
Objective
Know how to calculate income tax
(FIT) and FICA tax withholding from
wages
© 2003 South-Western College Publishing
Transparency 9-4
Computing Withholding
 To compute amount to withhold from pay
 Employers must know
# of allowances claimed
gross wages for the pay period
marital status
 Use IRS tables to calculate federal income tax
based on gross wages
© 2003 South-Western College Publishing
Transparency 9-5
Withholding on Tips
 Employer must receive a tip report from each
employee and withholds taxes based on this
report
 If employee reports less than 8% of gross
food/beverage sales in tips
 Employer must “allocate” tips up to 8% and collect
taxes on these tips
 Employer must report to IRS “Annual Information
Return of Tip Income & Allocated Tips” (Form
8027)
© 2003 South-Western College Publishing
Transparency 9-6
Other Withholdings
 Required withholding on IRA and pension
distributions, bonuses, etc.
 Backup withholding required on interest and
dividends when:
 Taxpayer does not provide an identification
number (SSN) or provides incorrect number
 Taxpayer fails to certify that he/she is not subject
to withholding
 Backup withholding is 30% of amount paid to
taxpayer
© 2003 South-Western College Publishing
Transparency 9-7
Estimated Payments
 Self-employed taxpayers and other taxpayers
with non-wage income 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 the following year
 Annual required payment is the lesser of
 90% of current year tax, or
 100% of prior year tax, but
exception if AGI > $150,000 for prior year, then annual
required payment = 112% of prior year
© 2003 South-Western College Publishing
Transparency 9-8
FICA Tax
 Federal Insurance Contributions Act (FICA)
was intended to provide retirement benefits
for workers and their families
 FICA is two taxes
 Social Security - 6.2% of first $84,900 of gross
earnings
 Medicare - 1.45% on total gross earnings
 If taxpayer has more than one source of
income, possible to overpay Social Security
 Taxpayer can then claim the excess with other
pre-payments of income tax
© 2003 South-Western College Publishing
Transparency 9-9
Federal Tax Deposit System
 Employers withhold both FIT and FICA from
paychecks and must make deposits either
monthly or semi-weekly based upon the total
amounts withheld
 Monthly - made by 15th of following month
 Semi-weekly - made within 3-4 days of running
payroll
 exceptions:
owe > $100,000 then must deposit within 24 hours
owe less than $1,000 in a quarter, may pay with quarterly
Form 941 Payroll Tax Return
© 2003 South-Western College Publishing
Transparency 9-10
Federal Tax Deposit System
(continued)
 To make deposit, fill out Form 8109 as a
deposit slip and take deposit to a Federal
Depository
 If mailed, must be postmarked second day before
due date,or
 May be electronically deposited via EFTPS
(Electronic Federal Tax Payment System)
© 2003 South-Western College Publishing
Transparency 9-11
Objective
Be able to complete Form W-2 and
Form 941 and understand certain
other employer payroll reporting
requirements
© 2003 South-Western College Publishing
Transparency 9-12
Employer Reporting Requirements
 Annually, employers must send W-2s
 By 1/31 to each employee
 By 2/28 with a Form W-3 (transmittal) to the Social
Security Administration
 May have obligation to send W-2 and state
specific transmittal form to state Department of
Revenue
 W-2 shows gross wages, income and FICA
tax withholdings and “special Items”
 Unreported tips, 401(k) contributions, employer
provided day care, and other taxable fringe
benefits
© 2003 South-Western College Publishing
Transparency 9-13
Reporting Requirements
 Annually, employers must complete Form
1099-MISC for each independent contractor
 By 1/31 to each unincorporated independent
contractor who earned > $600 and provided a
service (for example - attorney, lawn service, etc.)
 By 2/28 with a Form 1096 (transmittal) to the IRS
 May have obligation to send 1099s and state
specific transmittal form to state Department of
Revenue
© 2003 South-Western College Publishing
Transparency 9-14
FUTA Tax
 Federal Unemployment Tax Act requires
employers to pay tax to support
unemployment payments
 Employer pays 6.2% (net) up to first $7,000
per employee per year, but credit of up to
5.4% for state employment taxes
 Deposit quarterly (if over $100)
 File annual report (940-EZ) to show gross wages,
FUTA wages and FUTA tax
© 2003 South-Western College Publishing
Transparency 9-15
Objective
Know how to calculate taxes for
self-employed taxpayers
© 2003 South-Western College Publishing
Transparency 9-16
Self-Employment Tax (Schedule SE)
 Self-Employment (SE) tax is the same as FICA,
except taxpayer is both employer and employee.
Therefore, rates are:
 Social Security - 12.4% of first $84,900 of net selfemployment income
 Medicare - 2.9% on total net self-employment income
 If taxpayer has both W-2 wages and self-employment
income, the $84,900 limit applies to the combined
earnings
 Don’t have to pay SE tax if SE income is less than
$400
 May take a “for” deduction for one-half of SE tax paid
© 2003 South-Western College Publishing
Transparency 9-17
Objective
Understand the special tax and
reporting requirements for household
employees
© 2003 South-Western College Publishing
Transparency 9-18
The Nanny Tax
 Household employee is anyone working in
taxpayer’s home (full- or part-time) such as
cook, housekeeper, etc.
 Employer must
 Pay FICA on any household employee who earns
> $1,300 in a calendar year
 Withhold taxes for household employee and pay
FUTA
 Report FICA and FIT annually
© 2003 South-Western College Publishing
Transparency 9-19
The Nanny Tax (continued)
 Employer must also
 Complete a Schedule H and attach to 1040, or
 If have 941 and 940 filing requirements for other
business, can add household employees on to
these reports
 Must file W-2 for each household employee
who earns $1,300 or more a year
 Not required for anyone under 18 unless
providing household services is his or her
principal occupation
© 2003 South-Western College Publishing
Transparency 9-20
The End
© 2003 South-Western College Publishing
Transparency 9-21

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