©2003 South-Western College Publishing, Cincinnati, Ohio

Be able to complete Form W-4: Employee’s
Withholding Allowance Certificate
© 2003 South-Western College Publishing Transparency 9-2

 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

 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

 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

 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

 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

 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

 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

 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

 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

 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

 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 (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

 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

 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

© 2003 South-Western College Publishing Transparency 9-21