Unit 5
Determining Payroll Deductions
McGraw-Hill/Irwin
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Deductions
• Mandatory deductions:
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Social Security and Medicare (OASDI and HI)
Federal Income Tax
State Income Tax
Garnishments
Child support payments
Union dues
• Voluntary deductions:
– Health insurance premiums
– Retirement accounts contributions
– Life insurance premiums
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Determining Federal Income Tax
Current Payment Act of 1943
– Directed employers to withhold
federal income tax from the
earnings of their employees.
– Two methods
• Wage Bracket Method
• Percentage method of
withholdings (also in
Chapter 6)
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Determining Federal Income Tax
• Wage Bracket method:
– uses the wage bracket tables provided by the IRS.
– tables are included in Pub 15 Circular E , published by IRS
– Four factors are used in designing these tables
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•
•
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Length of the payroll period
Employee's gross earnings for the period
Employee marital status
Number of withholding allowances claimed by the employee
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Determining Federal Income Tax
• Wage Bracket method:
– Form W-4 provides information about the employee’s marital
status and number of withholding allowances
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Reading the Wage Bracket Tables
Marital status
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Allowances
pay period
Reading the Wage Bracket Tables
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Determining Federal Income Tax
• Wage Bracket method example:
– Lucinda Renne is single and has zero allowances. She is on a
weekly payroll period. She earned $ 95 per week. How much
you should withheld for Federal Income tax? $ 12.46
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Other Systems for Determining Income Tax
• Percentage Method:
– Occasionally an employee earns wages that are not
shown on the wage-bracket tables. In these cases,
the percentage method is used.
– Federal Income Tax withholding calculations include:
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•
•
•
number of allowances for the period
payroll period
marital status
gross earnings
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Other Systems for Determining Income Tax
• Percentage Method tables:
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Income Tax Withholding
Percentage method Example:
•
Henry Biddle is married and lists two withholding allowances
for the weekly pay period. His earnings were $ 1,410.40.
How much should you withhold for Federal Income tax?
Step #1 - The first steps to
computing his withholdings, is
to determine the amount of
earnings on which to compute
withholding tax.
$59.62 x 2 = $119.24
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Income Tax Withholding
Step #2 –Subtract total allowances ($119.24)
from total earnings ($1,410.40) to get the
amount ($1,291.16) on which his
withholding tax is computed for the week.
Step #3 – Determine the
amount of income tax to
withhold:
using the table Mr. Biddle
must pay $149.90 plus 25%
of excess earnings over
$1,245.
($1291.16–$1,245) x .25 +
$149.90 = 161.44
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Determining Social Security (FICA) Tax
• FICA ( Federal Insurance Contribution Act):
– OASDI (Old, Age, Survivors and Disability
Insurance) or Social security - .062 (6.2%)
• Limit on taxable earnings for 2005 - $87,900
• Example # 1 :
– Donald Zanka had gross earrings of $ 415.
Calculate his Social Security Tax withholdings:
$ 415 x 6.2% = $ 25.73
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Determining Medicare Tax
• Medicare Tax rate: .0145 (1.45%)
• NO Limit on taxable earnings for 2005
• Example :
– Herman Dostler earned $ 393 in a week.
Calculate his Medicare Tax withholdings:
$ 393 x 1.45% = $5.70
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
State and Local Income Taxes
• State income tax withholding:
– Tax rates and procedures for payment vary from state to state.
– state income tax laws require employers to deduct withholding tax from
an employee’s earnings at the end of each payroll period.
– cities and counties require individuals to pay local income tax as well as
state income tax.
– states provide wage-bracket tables or a percentage method for
computing taxes.
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Other Taxes
• State Disability Insurance Tax
– Most states withhold state disability insurance based on a specified tax rate.
– Example: In California the state SDI rate is 1.18%
• SDI = earnings x .0118
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Other Taxes
• Example:
– Doris Kosta earned
$560.
The deduction for
Disability Insurance is:
$ 6.61 ($560 x .0118 SDI
rate = $6.61)
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Other Taxes
• State Unemployment Tax:
– provide income for
employees who lose their
jobs through no fault of their
own
– In most states State
Unemployment Taxes are
supported by employer
contributions
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Taxes- CA
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Tips and Federal Withholdings
• Tips:
– subject to Federal Income
tax
– Social security tax and
– Medicare tax
• Monthly Tips of $20 or
more:
• Must be reported to employer
• Reported on the employee’s
Federal Income Tax return
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Tips and Federal Withholdings
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Union Deductions
• Unions Deductions and contracts:
– Required union dues are deducted from earnings
– deductions are made on a monthly basis
– Also known as “checkoff”
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Voluntary Deductions
• Voluntary deductions:
– Health insurance
premiums
– Pension Plan
contributions
• Tax Deferred:
– 401K plans
– Simple IRA
• Taxable:
– ROTH IRA
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Voluntary Deductions
• Voluntary deductions:
– Life insurance
premiums
– Charitable
contributions
– Savings Bonds
purchases
– Stock purchases
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Net Pay
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Unit Summary
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Unit Summary
5-28
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Unit Summary
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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Questions?
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