Fundamental Payroll
Certification 2011
Paycheck Fundamentals
Chapter 3
ANNE SCHAFROTH, CPP
Paycheck Fundamentals
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Federal Withholding
Social Security & Medicare Withholding
Additional Deductions from Pay
State Taxes
Deceased Employees
Gross to Net Calculations
Employer-Paid Taxes
2
Elements of a Pay Check
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Gross Amount vs
Actual Paycheck
Amount
Additions
Deductions
Net Pay
ABC Manufacturing
1213 West Higgins Rd
Palatine, IL 60638
John I. Doe
234 Main St
Highland Park, IL 60035
Check #
814177
Period End
08/31/2011
EE # 5609
DEPT 33456
Hours
80.00
80.00
Rate/Amt
Current
4246.88
4229.17
17.71
Year to Date
81250.38
60022.17
283.36
736.90
4664.91
2242.74
13300.30
Fed W/H
Social Security W/H
Medicare W/H
IL State W/H
Health PreT
Dental Pre T
Vision Plan Pre T
401(k)
401(k) Co Match
561.87
173.40
59.86
197.96
98.00
14.00
6.52
169.17
84.59
12182.00
3332.87
1150.63
3805.77
1568.00
224.00
104.32
3238.73
1619.45
Net Pay
2948.39
55360.70
Description
JP Morgan Chase
JP Morgan Chase
Amount
1948.39
1000.00
Total Gross
Regular
Group Term Life
Floating Holiday
Flex Time Off
Company Holiday
Bonus
Direct Deposit #1
Direct Deposit #2
17.71
Routing
71000012
71000012
Account
11112222000
22200044040
3
Withholding Federal Taxes
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Taxable wages = all remuneration for
services (includes non-cash benefits)
Federal taxation is FIT, SS, MED
Some benefits are fully taxable, some
partially taxable and some are nontaxable
4
Taxable Compensation
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Back pay
Bonus
Commission
Company car (personal use)
Dismissal pay (severance)
ER pd commuter fees in
excess of $230/month
ER pd parking greater than
$230/month
Fringe benefits (unless
excluded)
Gifts, gift cards, prizes
Group legal services
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Group term life greater than
$50,000
Non-accountable reimbursed
business expenses
Noncash fringe benefits unless
excluded by IRC
Sick pay and disability benefits
(portion attributable by
employer contribution)
Nonqualified moving expenses
Overtime pay
Regular wages
Tips
5
Nontaxable Compensation
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Dependent child care up to
$5000 under section 129 plan
Company vehicle (business use
only)
De minimus fringe benefits
Disability benefits (employee
contributions)
Educational assistance (job
related /no limit)
Group term life up to $50,000
Med/dent health plans
(employer contribution)
No-additional-cost fringe
benefits
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Qualified ee discounts on ER
goods/services
Qualified moving expenses
Qualified transportation fringe
benefits
Reimbursed business expenses
Working condition fringe (if
deductible if it was paid by ee)
Non-job-related education up
to $5250
Long term care insurance
Workers’ compensation benefits
Health Savings Accounts
6
Wages / Taxability
 Period Ending – is the period when wages were earned
 Pay Date - is the date wages are paid and dictates the
taxability, as well as structure for depositing and reporting of
taxes to government 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 overpayment; OP and RP can be netted
together for W2; Employer can 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 can claim refund of federal tax on 1040.
7
Factors Affecting Withholding
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Form W-4 Withholding Certificate
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Employee’s marital status
Number of withholding allowances
Pay Frequency
Whether regular or supplemental wages
Pretax Deductions
8
Withholding Methods
Three main acceptable methods:
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*Wage-Bracket Method (Pub 15 - Circular E)
*Percentage Method (Pub 15 – Circular E)
Optional/Mandatory Flat Rate of 25% (or in
some instances, 35%)
* Methods Used Most Commonly
9
Withholding Methods
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Wage Bracket Method — quickest and
easiest
10
Withholding Methods
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-
Percentage
Method
most common
method used in
computerized
payroll systems
11
Withholding Methods
Optional Flat Rate Method
Supplemental wages paid in addition to employee’s regular wages.
Examples: bonuses, commissions, overtime pay, back pay
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Does not take into account Form W-4 elections
Can result in under or over withholding
Supplemental Rate 25%
Mandatory Flat Rate 35%
Supplemental Wages also subject to Social Security, Medicare & FUTA
12
Supplemental Wages
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When YTD supplemental wages exceed $1,000,000,
use mandatory flat rate of 35%
For the remainder of the year, all supplemental wages
are subject to 35% withholding
When reaching limit, can apply to all wages or only that
portion going over $1,000,000:
YTD Supplemental Wages $900,000; Bonus of $200,000
($200,000 x 35% = $70,000)
OR
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(($100,000 x 25% = $25,000) + ($100,000 x 35% = $35,000) =
$60,000)
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13
Supplemental Wages
Methods for Taxing Supplemental Wages
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If paid with regular wages, must withhold as if a
single payment for the pay period
If paid separately, there are two options:
Calculate supplemental amount at 25% or 35%
OR
Use aggregate method
 1) calculate taxes on the combined wages
 2) calculate taxes on regular wages only
 3) subtract #2 from #1 – the remaining is
considered supplemental wage tax amount
14
Supplemental Wages
Calculate supplemental amount at 25% or 35%:
$1,000 Bonus Paid Separately (or defined separately):
$1,000 x 25% = $250
15
Supplemental Wages
Aggregate Method:
(Optional; Must use this method if no FIT withheld in preceding year)
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Bonus $500.00 Regular Weekly Wages $645
W-4 Single with 5 allowances.
Wage-Bracket Method: Weekly Wage Federal Tax $29
($500.00 + $645 = $1,145.00)
Wage-Bracket Method: Federal Tax $113.00
($113.00 - $29 = $84) $84 would be attributed to Supplemental
Wages
Also acceptable to use Wage-Bracket on Regular Wage $29 and
flat rate on Supplemental Wages ($500.00 x 25% = $125.00)
16
Federal Withholding
Final Notes:
 Rounding to whole dollar
 $.01 to $.49 Round Down $53.40 = $53
 $.50 to $.99 Round Up $353.60 = $354
 Be consistent!!
 Withholding income tax from pensions and
annuities
 Use Form W-4P Withholding Certificate for
Pensions and Annuities
17
Social Security &
Medicare Taxes
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Federal Insurance Contributions Act (FICA)
2 parts: Social Security & Medicare
7.65 % of taxable wages for employers
5.65 % of taxable wages for employees
18
Social Security &
Medicare Taxes
Social Security
 Also known as OASDI- Old Age
Survivors Disability Insurance
 6.2 % & 4.2 %
 Maximum Salary $106,800
 Maximum for ER $6,621.60
 Maximum for EE $4,485.60
19
Social Security &
Medicare Taxes
Medicare Taxes
 Also know as HI—Health Insurance
 1.45 %
 No Maximum Salary
 No Maximum Contribution
 Employer Matches EE Contribution
20
Social Security &
Medicare Taxes
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When paying Fica Tax on $1000.00
Example
EE Tax
ER Tax
Totals
OASDI 4.2% &
6.2%
$42.00
$62.00
$104.00
Medicare 1.45%
$14.50
$14.50
$ 29.00
Total Due
$133.00
21
Additional deductions from
pay
Types of voluntary deductions:
Charitable contributions
Retirement programs i.e. 401k
Credit union
Direct payments
Savings bonds purchase
Health insurance outside Section 125
Stock purchase in employer’s company
Advances / loan repayments
Union dues and fees
22
Additional deductions from
pay
Additional notes on voluntary
deductions:
Require authorization (written or electronic)
Last Priority – Wage Assignments first
ER can set Priority
Substantiation of charitable contributions
requires 2 types of documentation
Pledge Card
Pay statements or W2
23
Additional deductions from
pay
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Involuntary Deductions-Wage
Attachments (general priorities):
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Child support orders
Chapter 13 bankruptcy
Federal agency garnishments
Federal tax levies
State tax levies
Local tax levies
Creditor garnishments
Student loan garnishments
24
Federal Tax Levies
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Take home pay minus exempt amount
documented in Pub. 1494
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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
25
Federal Tax Levies
Amount of exempt wages based on
 Marital status
 Number of exemptions
Part 3 of Form 668-W
 Payroll frequency needed for number of annual pay periods
 Chart to show exempt amount from levy -- Publication
1494
 Do not stop withholding until Form 668-D, Release of Levy
is received
26
Child Support
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All orders are considered immediate unless
stated
All orders in arrears are immediate
Consumer Credit Protection Act (CCPA)
governs amount that can be taken
Based on a percentage of
Disposable Earnings
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Gross wages minus taxes (generally not including
tips)
27
Child Support
Maximum %
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If the employee supports a second
family – cannot exceed 50% of
disposable earnings (55% if in arrears)
If employee does not support a second
family –cannot exceed 60% of
disposable earnings (65% if in arrears)
State maximum withholding may be
lower, but cannot be higher than these
limits
28
Uniform Interstate Family
Support Act -- UIFSA
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Clarifies the rules for processing out-of-state
wage orders
Duration and specific amount of payments
Person or agency to receive the payments
Medical support – specific amount /
mandatory coverage
Amount of payment of arrears and interest,
stated as a sum
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UIFSA—Continued
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Employers must comply with rules of
their work state when:
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Withholding employer’s fee for processing
order
Determining the maximum amount
permitted to be withheld
Determining the time frame for withholding
and disbursement
Handling multiple orders
30
Multiple Order Handling
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State law governs the handling of
multiple orders
Multiple state orders default to the state
where the employee works
31
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 orders
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Current support calculated before
arrearages
32
APA & Office of Child Support
Enforcement
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Both agencies lobbied and Congress
implemented a standardized Child
Support form which is mandated in all
states
Must have current child support
obligation amount based on pay cycle,
arrears amount, medical support
amount, payee, and payee’s address
33
Centralized Support Collections
and Disbursement Units
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Federal law mandated all states develop
one unit to disburse payments
All states but South Carolina currently
participate in a centralized collections
location within their state
34
State law takes priority –
Federal law limitations
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State can allow an administrative fee
for processing
Payment must be made within 7 days of
withholding from wages
First payment must be made within 14
days of mailing date of order
35
Garnishments
Consumer Credit Protection Act
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Federal Limit =
25% or
Amount of disposable pay that exceeds 30 x
federal minimum wage
Multiple orders are prioritized and will effect
lower priority attachments
Garnishment Limits (Page 3-28)
Watch for changes in Federal minimum wage
36
State Tax
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Calculated by
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Wage bracket
Percentage method or flat percentage
Percentage of federal
No state tax:
Alaska
Tennessee
Florida
Texas
Nevada
Washington
New Hampshire
Wyoming
South Dakota
37
Local Income Taxes
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Cities, counties, school districts, etc.
Each local taxing authority has its own
requirements. Verify with the locality for
its requirements and your compliance.
38
Local: City, School District,
County, and Head Taxes
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Most common states for local taxation
are Ohio, Indiana and Pennsylvania
Many variances and local government
regulations on these taxes – verify with
the agency to determine their
requirements
39
State Disability Tax
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Six states have employee/employer funded programs
for illness and disability
California
New York
Hawaii
Puerto Rico
New Jersey
Rhode Island
Employers must deduct, report, pay, and record
payments—failure to withhold is employer’s liability.
40
State Unemployment Tax
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Three states have provisions to
withhold SUI from employees (in
addition to the employer’s obligation):
Alaska
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New Jersey
Pennsylvania
All other states unemployment tax is
exclusively the employer’s expense
41
Deceased Employees
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Payments after date of death are taxable
Federal income tax is responsibility of whomever receives the payment
If the payment is made in same year as the employee’s death
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Tax withheld for Social Security and Medicare
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On W2, report wages in boxes 3 & 5 and tax withheld in boxes 4 & 6
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Amount not reported as federal taxable wages in box 1 of W2
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Provide 1099-MISC with federal taxable wages reported in box 3, and
use name of deceased’s estate or beneficiary
If payment is paid in year after death
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Do not withhold Social Security and Medicare
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Do not issue a W2
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Do issue a 1099-MISC and report amount paid in box 3
42
Paying the Employee
Gross to Net Calculation
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Calculate Total Wages
Determine Pretax Deduction
Amounts
Determine Tax Withholding
Determine Disposable Earnings
(Total Wages minus Taxes) for
Child Support and Garnishments
Deductions
Deductions
Result = Net Pay
ABC Manufacturing
1213 West Higgins Rd
Palatine, IL 60638
John I. Doe
234 Main St
Highland Park, IL 60035
Check #
814177
Period End
08/31/2011
EE # 5609
DEPT 33456
Hours
80.00
80.00
Rate/Amt
Current
4246.88
4229.17
17.71
Year to Date
81250.38
60022.17
283.36
736.90
4664.91
2242.74
13300.30
Fed W/H
Social Security W/H
Medicare W/H
IL State W/H
High Opt Health PreT
Delta Dental Hg Pre T
Vision Plan Pre T
401(k)
401(k) Co Match
561.87
173.40
59.86
197.96
98.00
14.00
6.52
169.17
84.59
12182.00
3332.87
1150.63
3805.77
1568.00
224.00
104.32
3238.73
1619.45
Net Pay
2948.39
55360.70
Description
JP Morgan Chase
JP Morgan Chase
Amount
1948.39
1000.00
Total Gross
Regular
Group Term Life
Floating Holiday
Flex Time Off
Company Holiday
Bonus
Direct Deposit #1
Direct Deposit #2
17.71
Routing
71000012
71000012
Account
11112222000
22200044040
43
Gross Up Payments
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Employer Pays the Taxes!
Typical situations for a Gross Up Payment
 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
44
Gross Up
Calculation steps
1. 100% - tax% = Net %
2. Payment / Net %= Gross Earnings
3. Check by calculating Gross to net
Need to Know for Exam !!!
Examples: pages 3-38 to 3-39
45
Test Your Knowledge
An 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
rate 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 no state income tax?
A) $3,060.44
B) $2,666.67
C) $3,108.00
D) $2,883.93
Answer:
1. (100% - (25% + 4.2% + 1.45%)) = 69.35%
2. $2,000 / 69.35% = $ 2,883.93
3. $2,883.93 - 720.98 – 121.13 – 41.82 = $2,000
46
Gross Up
Special Circumstances
Employee meets or met SS tax limit
1. 100% - Tax % (no SS %) = Net %
2. Payment + ((SS wage base-YTD
payments) x 4.2%) divided by Net %
= Gross Earnings
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47
Test Your Knowledge
An 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 state income tax.
Calculate the gross amount of the bonus.
A) $500.00
B) $679.81
C) $742.39
D) $777.00
Answer:
1. (100% - (25% + 1.45%)) = 73.55%
2. $500 / 73.55% = $ 679.81
3. $679.81 – 169.95 – 9.86 = $500
48
Test Your Knowledge
An 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 state income tax.
Calculate the gross amount of the bonus.
A) $598.02
B) $688.95
C) $742.39
D) $693.30
Answer:
1 (100% - (25% + 1.45%)) = 73.55%
2. $500 + ((106,800 – 106,640) x 4.2%)/ 73.55%
= $500 + $6.72 / 73.55% = $688.95
3. $688.95 – 172.24 – 9.99 – 6.72 = $500
49
Paycheck Fundamentals
Chapter 3
Questions?
THANK YOU!!!!
Anne Schafroth, CPP
aschafroth@artic.edu
50