Income Tax Fundamentals 2010
Gerald E. Whittenburg
Martha Altus-Buller
Student’s Copy
2010 Cengage Learning

 Employer calculates income tax withholding from employees’ paychecks based on their Form W-4
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Pay includes salaries, bonuses, commissions
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W-4 completed by employee, tells employer:
 Number of allowances claimed by employee
 Single, married, or married but withhold tax at higher single rate
 Exempt status – employee can only claim exempt if he/she had no income tax liability last year and expects none this year
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If no W-4 filed, employer must withhold at highest rate
2010 Cengage Learning

 To compute amount to withhold from pay using percentage method
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Multiply number of allowances found on W-4 by allowance amounts
◦ Subtract that amount from employee’s gross wages
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Then, use IRS tables to calculate federal income tax based on wages after allowance amounts
 Found in textbook in Appendix C
 IRS also publishes Circular E – “Employer’s Tax Guide”
2010 Cengage Learning

 Withholding is mandatory on pension and other deferred income payments
 Rates used depend on nature of payment
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Rates on periodic payments based on taxpayer’s W-4
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FIT withholding at either flat 10% (or 20% for certain distributions)
2010 Cengage Learning

 Self-employed taxpayers must make quarterly estimated tax payments if
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Annual payment due for the year is ≥ $1000 (after withholding)
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Quarterly payments due April 15, June 15,
September 15, and January 15 of next year
 Total annual estimated payments is lesser of
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90% of current year tax or
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100% of prior year tax or
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90% of current year TI, AMTI & annualized self employment (SE) income
 Exception: if AGI > $150,000 for prior year, then annual required payment = 110% of prior year tax
For 2009 only, qualified small business owners get a break on amount required to be paid in for estimated tax payments
2010 Cengage Learning

 Federal Insurance Contributions Act (FICA) was legislation intended to provide retirement and disability benefits for
American workers and their families
 FICA comprised of two taxes
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Social Security - 6.2% of first $106,800 of gross wages
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Medicare - 1.45% of total gross earnings, with no cap
2010 Cengage Learning

 Employer withholds both income tax and FICA from paychecks
 Must deposit these taxes either monthly or semiweekly (IRS determines by analyzing deposits in lookback period)
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Monthly depositors make deposit by 15th of following month
 All new employers are automatically monthly
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Semiweekly depositors make deposit either Wednesday and/or Friday (depending upon when payroll is run)
 Very small employers with federal payroll tax liabilities of $1,000 or less can file/pay annually by using a Form 944
2010 Cengage Learning

 Deposits made either at authorized depository
(select banks) with a Form 8109 coupon or may be electronically deposited via Electronic Federal
Tax Payment System (EFTPS)
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Some employers must deposit using EFTPS
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Form 941 (Employer’s Quarterly Federal Tax
Return) must be accompanied by payroll taxes not yet deposited for quarter
Note that if liability is less than $2,500, employer may skip monthly deposits and pay with Form 941
2010 Cengage Learning

 Self-employment tax is the same as FICA, except self-employed taxpayer pays both shares
 Therefore, rates are:
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Social Security (OASDI) is 12.4% of first $106,800 of net self-employment income
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Medicare is 2.9% on total net self-employment income
 If taxpayer has both W-2 wages and selfemployment income, the $106,800 limit applies to the combined earnings
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FICA is not required if net earnings < $400
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May take a Deduction for AGI for 1/2 of SE tax paid
2010 Cengage Learning

 Federal Unemployment Tax Act (FUTA) requires employers to pay tax to administer state unemployment programs
 Employer pays 6.2% up to first $7,000 per employee per year
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However credit of up to 5.4% for state unemployment tax is taken against the 6.2%
 Therefore, net FUTA rate = .8% (6.2% - 5.4%)
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Must deposit quarterly if over $500
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Must file annual report Form 940
2010 Cengage Learning