Fundamental PayrollCertification 2009

Paycheck FundamentalsChapter 3

Withholding Federal Taxes

IRS defines taxable wages as all remuneration for services

Federal taxation is FIT, SS, MED Some benefits are fully taxable,

partially taxable and some are non- taxable

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Taxable Compensation Back Pay Bonus Commission Comp Car (pers use) Dismissal (severance) ER pd commuter fees

in excess of $110 monthly

ER pd parking >$250 monthly

Fringe Benefits (most) Gifts, gift cards, prizes Group legal services Group term life

>$50,000 Nonacountable

reimbursed business expense

Noncash Fringe benefits unless excl by IRC

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Taxable Compensation (Cont)

Sick pay and Disability Benefits (portion attributable by employer contribution)

Non qualified moving expense Overtime pay Regular wages Tips

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Nontaxable Compensation Dependent child care

up to $5000 under section 129 plan

Company vehicle (business only)

Deminimus Fringes Disability benefits

(employee contribution)

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

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Nontaxable Compensation (Cont) Qualified transportation fringe benefit Reimbursed business expense Working condition fringe if can be deductible if

paid by ee Non-job related education up to $5250 Long term care insurance Workers compensation benefits Health Savings Accounts

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Wages / Taxability Period Ending – is the time wages are earned Pay Date - is the date wages are paid and dictates the

taxability, as well as structure for depositing and reporting of taxes to 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 overpayments; OP and RP can be netted together for W2; Employer 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 claims refund of Federal tax on 1040. 7

Factors affecting Withholding

Employees marital status (W4) Number of withholding allowances

(W4 exemptions) Pay Frequency Whether regular or supplemental

wages Pretax Deductions

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Withholding Methods

Three main acceptable calculating means

Wage Bracket-(Pub 15 - Circular E) Wage Percentage-(Pub 15 –

Circular E) Supplemental rate of 25% or in

some instances 35%

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Withholding Methods

Wage bracket—simplest Wage Percentage-most common

especially with computerized payroll

Supplemental are all varied wages from pay period to pay period

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Supplemental wages If paid separately must be 25% or

35%(if over 1 million in supple wages)

If paid with regular wages: Calculate entire check at 25% or Calculate regular taxes on the

combined sum—calculate taxes on reg wages only subtract the reg taxes and remaining is considered supplemental (must be segmented on the records)

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Supplemental wages 35% supplemental amount must be taken

when a employees supplemental wages reach $1,000,000.

The remainder of the year all supplemental wages are subject to 35% withholding

Aggregate method-when no FIT on wages in preceeding year Calculate the reg then calulate with

supplemental wages—the difference must be withheld on the supplemental payment

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Social Security & Medicare Taxes

Federal Insurance Contributions Act (FICA)

Statutory deductions 7.65 % of taxable wages

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Social Security & Medicare Taxes

Social Security Also known as OASDI- Old Age

Survivors Disability Insurance 6.2 % Maximum Salary $106,800 Maximum Contribution $6,621.60 Employer must match EE

contributions14

Social Security & Medicare Taxes

Medicare Taxes Also know as HI—Health Insurance 1.45 % No maximum salary No maximum limit Must be matched by employer

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Additional deductions from pay Voluntary deductions

Charitable contributions Retirement programs i.e. 401k Credit union Direct payments Savings Bonds Stock in employers company Advances / loan repayments Union dues and fees

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Additional deductions from pay

Voluntary deductions Must be authorized Last Priority Charitable contributions must be

shown on pay statements and W2 for individual 1040 filing

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Additional deductions from pay Involuntary deductions-Wage

attachments Child support orders Chapter 13 Bankruptcy Federal agency garnishments Federal Tax Levies State Tax Levies Local Tax Levies Creditor Garnishments Student Loan Garnishments

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Federal Tax Levies

Take home pay less exempt amount proved by chart 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

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Federal Tax Levies

Based on Marital Status Number of exemptions Payroll frequency Chart to show exempt amount

from Levy Publication 1494 Do not stop withholding until 668-

D- Release of Levy is received

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Child Support All orders since 1-1-94 are considered

immediate unless stated Welfare Reform Reconciliation Act of

1996 all orders in arrears are immediate Consumer Credit Protection Act (CCPA)

governs amount that can be taken Based on a percentage of

Disposable Earnings Gross wages less taxes (generally not

including tips)

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Child SupportMaximum %

If the employee supports a second family –cannot exceed 50% of disposable earnings (55% if arrearage)

If employee does not support a second family –cannot exceed 60% of disposable earnings (65% if arrearage)

State max withholding may be lower but cannot be higher than these limits

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Uniform Interstate Family Support Act-- UIFSA Clarifies the rules for processing out of

state wage orders Duration and specific amts of payments Person or agency to receive the

payment Medical support –specific amt /

mandatory coverage Amt of payment if arrears and interest

states as a sum 23

UIFSA—Continued

Employers must: Withhold employers fee for processing

order Determine the maximum amt

permitted to be withheld Determine the time frame for

withholding and disbursement to agency

Handle multiple orders24

Multiple Order Handling

State law governs the handling of multiple orders

Multiple state orders default to ee ”worked in state”

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States resolve multiple order challenges- - - 1 of 3 ways

1. Allocate the available funds to each order on a percentage basis

2. Allocate available funds equally to all orders

3. Prioritize based on receipt of order Current support calculated before

arrearages

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APA & Office of Child Support Enforcement

Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states and must have payment amount based on pay cycle, arrears, medical support, obligations, payee, obligee and appropriate address

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Centralized Support CollectionsDisbursement Units

Welfare Law of 1996 mandated all states develop one unit to disburse payments

All states but South Carolina currently participate in central collections location in their state

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State law takes priority –Federal law limitations

State can allow fee for processing Payment must be made within 7

days of withholding from wages 1st payment must be made within

14 days of mailing date of order

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Garnishments Consumer Credit Protection Act

Federal Limit 25% orAmt of disposable pay that exceeds 30

x minimum wage Multiple types of orders are prioritized

and will affect lower priority attachments

Garnishment Limits Table (Page 3-27 & 3-29)

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Advanced Earned Income Credit --AEIC Qualifications

Expected Gross income if single/ HOH be less than $35,463

Expected Gross income if Married/ jointly be less than $38,583

Must have dependent child living with them at least 6 months of the year

Principal home is US Must file a W5 form annually

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AEIC cont.

Gross remains same-net increases Special tax tables are utilized Maximum entitlement is $1,826.00 If employee exceeds the salary

limit-AEIC is automatically stopped W5 must be done annually

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State Tax

Calculated by wage bracket % or flat percentage Percentage of federal

No state tax: Alaska, Nevada ,Florida, Tennessee,

New Hampshire, South Dakota, Texas, Washington and Wyoming

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Local Income Taxes

Each local taxing authority has its own requirements. Must verify with the locality for compliance

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State Disability Tax

Six jurisdictions have employee/employer funded programs for illness and disability California, New York, Hawaii, Puerto

Rico, New Jersey, Rhode Island Employers must report, pay and

record payments—failure to pay is employers liability

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State Unemployment Tax

Three states have provisions to withhold SUI from employees: Alaska, New Jersey and Pennsylvania

—up to the unemployment wage base All other states Unemployment tax

is the employers expense

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Local tax, City tax, School Districts and head taxes

Most common states for local taxation are Ohio and Pennsylvania

Many variances and local government regulations on these taxes –verify if necessary with the agency which is applicable to the circumstance, i.e. residency vs. place of work

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Deceased Employees Payments after date of death are taxable Federal income tax is responsibility whom ever receives the payment If the payment is made in same year as the employee’s death

Tax payment for Social Security and Medicare Taxes On W2, post in Amount paid in box 3 & 5 and Social Security and

Medicare in box 4 & 6 Amount not reported as Federal Taxable Wages in box 1 of W2 Also provide 1099 MISC with Federal Taxable Wages reported in box

3 and give 1099 to the Estate or Beneficiary (use TIN not SSN) If payment is paid in year after death

Do Not withhold Social Security and Medicare Do Not issue a W2 Do issue a 1099 and report amount of payment in box 3 of 1099

MISC

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Paying the EmployeeGross to Net Calcuation Total Wages have been calculated Pretax Deduction Amounts determined

(excluded from Disposable Earnings) Tax Withholding Determined Disposable Earnings (Total Earnings – Taxes)

for Child Support and Garnishments Deductions

Deductions Levy deducted from Take Home Pay Result = Net Pay

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Grossed Up Payments(ADP –Net to Gross Calc) Employer Pays the Taxes! Typical situations for a Grossed Up Payments

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

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Gross Up Calculation steps

1. 100% - tax % = Net %2. Payment / Net %= Gross Earnings3. Check by calculating Gross to net

Need to Know !!!Examples page 3-40 to 3/41

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Test Your KnowledgeAn 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 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 not state income tax.

A) $3,060.44B) $2,666.67C) $3,108.00D) $2,969.56

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Answer:1. ($2,000 / (100% - (25% + 6.2% + 1.45%)) =2. $2,000 / 67.35% = $ 2,969.56 the answer is D3. $2,969.56 - 742.39 – 184.11 – 43.06 = $2,000

Gross UpSpecial Circumstances

Employee meets or met SS tax limit

1. 100% - Tax %(no SS %) = Net %2. Payment + ((SS wage base-YTD

payments) x 6.2%) / Net % = Gross Earnings

Need to know !!!43

Test Your KnowledgeAn 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 income tax. Calculate the gross amount of the bonus.

A) $500.00B) $679.81C) $742.39D) $777.00

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Answer:1. ($500 / (100% - (25% + 1.45%)) =2. $500/ 73.55% = $ 679.81 the answer is B3. $679.81 – 169.95 – 9.86 = $500

Test Your KnowledgeAn 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 income tax. Calculate the gross amount of the bonus.

A) $598.02B) $679.81C) $742.39D) $693.30

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Answer:1. ($500 / (100% - (25% + 1.45%)) =2. $500 + ((106,800 – 106,640) x 6.2%)/ 73.55% = $500 + $9.92/ 73.55% = $693.30 the answer is D3. $693.30 – 173.33 – 10.05 – 9.92 = $500

Points of Interest Methods to calculate taxes Constructive receipt Requirements to calculate a check Gross, Net, Disposable Taxable income/ Nontaxable Income Voluntary/ Involuntary Deductions Child Support & Levy payments Gross Ups

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