MASTERING PAYROLL
SOLUTIONS TO HOMEWORK EXERCISES
Section 1EMPLOYEES V. NONEMPLOYEES
1. ABC Corporation uses different categories of workers. In the table below, list the
six categories and indicate with a Yes or No whether the worker’s pay is subject
to FITW, FICA and/or FUTA.
Type of Worker
FITW
FICA tax
FUTA tax
Common-law employee
Yes
Yes
Yes
Statutory employee
No
Yes
Yes
Statutory nonemployee
No
No
No
Independent contractor
No
No
No
Temp agency referral*
No
No
No
Leased employee*
No
No
No
* These workers are employees of the agency, and therefore FITW, FICA
withholding and FUTA tax are the responsibility of the agency, not
ABC. In some states, the client employer and not the temp/leasing
agency is responsible for paying state unemployment insurance.
2. In the table below, list the six categories of workers. If the company pays the tax on
the right, circle “Employer” and the percentage of wages paid; if the worker pays
the tax, circle “Worker” and the percentage of wages paid in taxes. If neither the
employer nor the worker pays a particular tax, overwrite “N/A” (not applicable).
Type of worker
Common-law employee
Statutory employee
FICA tax
7.65% employer
7.65% employee
7.65% employer
7.65% employee
FUTA tax
Employer
Employer
Statutory nonemployee
15.3% worker
N/A
Independent contractor
15.3% worker
N/A
7.65% employer
(agency)
7.65% employee
7.65% employer
(agency)
7.65% employee
Employer
(agency)
Temp agency referral*
Leased employee*
Employer
(agency)
* These workers are employees of the agency that hires them (and assigns
them to firms where they perform their services). Accordingly, FICA tax
is shared by the employee and the employer (the agency). Similarly,
FUTA tax on these workers is borne by the agency. In some states, the
client employer and not the temp/leasing agency is responsible for
paying state unemployment insurance.
© American Institute of Professional Bookkeepers, 2010
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3. Every August, Breckim, Inc.’s secretary Amy, goes on vacation for two weeks and
her brother Jim fills in for her.
a. For payroll purposes, which category of worker is Jim?
Jim is classified as a common-law employee. The short length of
employment has no bearing on this determination.
b. Should Breckim withhold any taxes from Jim? If yes, which taxes?
Yes. Because Jim is a common-law employee, Breckim must withhold
FIT SIT as well as any applicable local income taxes and FICA (6.2%
Social Security; 1.45% Medicare).
c. Does Breckim owe any taxes on the amounts it pays Jim?
Breckim owes 7.65% employer FICA (6.2% Social Security, 1.45%
Medicare) plus FUTA and SUI. It may also owe SDI and other
state/local taxes.
4. Sotto Industry’s receptionist, Hector, goes on vacation for one week in the
summer and a second week in the fall. During Hector’s absence, Sotto calls a
temp agency, which sends Barbara to fill in for him.
a. For payroll purposes, which category of worker is Barbara?
Barb’s replacement is classified as a temporary help agency referral.
b. Should Sotto withhold any taxes from the temp’s pay? If yes, which taxes?
No. Sotto should not withhold any taxes from the temp. The agency is
the temp’s employer and therefore responsible for withholding FIT
and FICA from its employees’ wages. However, if the agency fails
either to pay its employees or to pay or withhold employment taxes,
Sotto may be liable for unpaid amounts. (Some states may require
that the temp agency, rather than Sotto, pay SUI.)
c. Does Sotto owe any taxes on the amounts it pays the temp?
No. Sotto is not responsible for either employment or unemployment
taxes on the temp’s wages. The temp agency is responsible for
employer FICA and FUTA. However, if the agency fails to pay its
employee’s wages or any of the related taxes, Sotto may be liable for
these amounts. In some states, the client rather than the temp or
leasing agency is responsible for SUI.
5. Kwan, a licensed real estate agent, works for the HomeCo real estate agency.
Kwan is compensated solely by a commission, which is 60% of the commission on
the properties she sells.
a. For payroll purposes, which category of worker is Kwan?
As a licensed real estate agent, Laura is classified as a statutory
nonemployee.
b. Should HomeCo withhold any taxes from Kwan? If yes, which taxes?
No. Payments to statutory nonemployees are exempt from FITW.
c. Does HomeCo owe any taxes on the amounts it pays Kwan?
No. Payments to statutory nonemployees are exempt from FICA and
FUTA. State law varies concerning state unemployment insurance tax.
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6. Lashawn’s father, James, broke his hip and requires 24-hour in-home assistance.
Lashawn hires Allison, a certified personal nurse, to take care of James.
a. For payroll purposes, which category of worker is Allison?
A companion sitter is classified as a statutory nonemployee.
b. Should Lashawn withhold any taxes from Allison? If yes, which taxes?
No. A companion sitter not employed by an agency is generally
considered self-employed for federal employment and withholding tax
purposes. The amounts that Lashawn pays Allison are not subject to
FITW, FICA or other federal withholding.
c. Does Lashawn owe any taxes on the amounts she pays Allison?
No. Lashawn is not responsible for any employment or unemployment
taxes on amounts paid Allison. Instead, Allison is responsible for the
entire 15.3% of FICA (referred to as “self-employment taxes”), as well
as FIT and SIT (on self-employment income).
7. Eric worked for Xyleen Industries for years before being laid off early this year.
Currently self-employed, Eric occasionally fills in at Xyleen, doing the same work
he did before he was terminated.
a. For payroll purposes, which category of worker is Eric?
The IRS considers him to be an employee of Xyleen, because he
continues to provide the same services to Xyleen as he did before being
laid off earlier in the year.
b. Should Xyleen withhold any taxes from Eric’s pay? If yes, which taxes?
Yes. Because Eric is an employee, Xyleen should withhold FIT, SIT
and employee FICA (6.2% for Social Security and 1.45% Medicare)
from amounts it pays to Eric.
c. Does Xyleen owe any taxes on the amounts it pays Eric?
Yes. Xyleen owes employer FICA of 7.65% (6.2% Social Security and
1.45% Medicare), FUTA and SUI, if applicable.
Section 2FEDERAL AND STATE WAGE-HOUR LAW
1. Define mom and pop shop for under federal law. How are mom and pop shops
covered by federal wage-hour law?
Mom and pop shops are family-owned-and-operated businesses that
employ only family members. They are exempt from the federal wagehour law, regardless of size.
2. Calculate the required pay for each employee under FLSA.
a. One week in February 2010, Andy works 40 hours. His state’s minimum
wage is $6.00 an hour.
Andy’s must be paid the greater minimum wage of federal ($7.25) v. or
state ($6.00). His required pay is $290 ($7.25 × 40 hours).
b. One week in April 2010, Ronnell works 38 hours. Her state’s minimum wage
is $6.75 an hour.
Beth’s employer must pay the greater of the federal minimum wage
($7.25) or state minimum wage ($6.75). Her required pay is $275.50
($7.25 × 38 hours).
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c. One week in May 2010, Christie works 30 hours. Her state’s minimum wage
is $8.00 an hour.
Christie’s employer must pay the greater of the federal minimum wage
($7.25) or state minimum wage ($8.00). Her required pay is $240 ($8.00
× 30 hours).
d. One week in June 2010, Jamie works 40 hours. His state has no minimum wage.
Jamie employer must pay the federal minimum wage ($7.25). His
required pay is $290 ($7.25 × 40 hours).
e. One week in August 2010, Cho works 30 hours. Her state’s minimum wage is
$7.00 an hour.
Cho’s employer must pay the greater of the federal minimum wage
($7.25) or state minimum wage ($7.00). Her required pay is $217.50
($7.25 × 30 hours).
f.
One week in February 2010, Frank works 40 hours. His state’s minimum
wage is $7.95 an hour.
Frank’s employer must pay the greater of the federal minimum wage
($7.25) or state minimum wage ($7.95). His required pay is $318 ($7.95
× 40 hours).
g. One week in March 2010, Gina works 40 hours. Her state has no minimum wage.
Gina’s employer must pay the federal minimum wage ($7.25). Her
required pay is $290 ($7.25 ×40 hours).
3. Calculate the pay for each of the following under federal wage-hour law:
a. Andrea, a waitress, earns $2.13 an hour, plus tips. One week in
January 2010, Andrea works 40 hours and earns $210, including
$85.20 in wages and $124.80 in tips. How much must Andrea’s
employer pay her for the week?
Because Andrea’s pay for the week of $210 does not equal the
federal minimum wage ($7.25 × 40 = $290), her employer must
pay her the $80 difference ($290  $210), or a total $165.20
($2.13 × 40 hours = $85.20 + $80) in wages.
b. Jose, a waiter, is paid $2.13 an hour, plus tips. One week in March 2010, he
works 30 hours and earns $240, including $63.90 in wages and $176.10 in
tips. How much must Jose’s employer pay him for the week?
Because Jose earned at least the minimum wage for the week ($7.25 ×
30 hours = 217.50 and Jose earned $240), his employer needs to pay
him only the tipped employee minimum wage of $2.13 an hour, which
comes to $63.90 ($2.13 × 30 hours) in wages.
c. Cameron, a waitress, is paid $2.13 an hour, plus tips. One week in March
2010, she works 30 hours and earns $200, including $63.90 in wages and
$136.10 in tips. How much must Cameron’s employer pay her for the week?
Because Cameron did not earn a $217.50 minimum wage for a 30-hour
workweek ($7.25 × 30 = $217.50), Cameron’s employer must pay her the
$17.50 difference ($217.50  $200). The total amount the employer must
pay Cameron is $81.40 ($2.13 × 30 hours = $63.90 + $17.50) in wages.
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d. Darrell, a valet parker, is paid $2.13 an hour, plus tips. One week in April
2010, he works 32 hours and earns $250, including $68.16 in wages and
$181.84 in tips. How much must Darrell’s employer pay him for the week?
Darrell need not be paid additional wages because his average hourly
wage rate for the workweek exceeded the federal minimum wage ($250
÷ 32 = $7.81).
4. Is escheat law a federal or state law? What does escheat law cover? What does it
require of employers?
State law. Escheat law governs what employers must do with unclaimed
paychecks. It requires that the employer turn over unclaimed wages to
the appropriate state agency after a specified period of time.
Section 3PAYING EMPLOYEES UNDER FEDERAL LAW
1. MadCo’s policy is to deduct 1 hour of pay when an employee punches in 5 or more
minutes late. One week in April 2010, Employee Bob, who is paid $7.25 an hour,
punches in 5 minutes late one day and 10 minutes late another, but is on time
the other 3 days. Bob works 40 hours that week and MadCo docks him 3 hours
pay. How much must MadCo pay Bob for the week?
Bob actually worked 40 hours during the week, but MadCo intends to pay
him $268.25 ($7.25 × 37 hours), after docking him 3 hours of pay. Because
$268.25 is less than $290 ($7.25 minimum hourly wage in effect for April
2010 × 40 actual hours worked), Bob’s employer must pay him gross
wages for the workweek of $290.
2. For each of the following, give the number of hours the employee must receive
straight pay and overtime pay for the week and total pay for the week.
a. On Monday and Thursday, Plumbing Inc. employee Ramon drives home in the
company van so that he can respond to emergency calls. He works 46 hours for
the workweek, including 4 hours travel from his home to emergency calls.
Andy should be compensated for 46 hours during the workweek,
including 6 hours of overtime (premium) pay. When an employee is on
24-hour call and takes home a company vehicle to be able to respond
to emergencies, the employee must be compensated for time spent
traveling between home and the job site when responding to such
emergencies.
b. Grace’s 40-hour workweek is M–F. On Sunday she eats a bad clam, so she
stays home on Monday and works a half-day on Tuesday, for which she is
paid 12 hours sick leave. On Friday, she works an extra 3 hours.
Tammy should be paid for 43 hours (12 hours sick time plus 31 hours
worked TuesdayFriday). However, no overtime pay is required
because her actual hours worked are 31, which does not exceed 40.
c. One Friday, Harold, who works a 40-hour, M–F week, leaves early to pick up
his daughter, having worked 37 hours for the week. The following week he
works 43 hours.
For the first week, Harold should be paid for 37 hours of work. For the
second week, he should be paid for 43 hours, of which 3 hours should
be paid at the overtime rate.
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3. Compute gross wages due to each of the following employees under federal wagehour law:
a. Ryan’s pay is $1,000 for a 40-hour workweek. One week, he works 46 hours.
$1,000  40 = $25 hourly pay rate x 1.5 = $37.50 premium pay rate.
(40 hours × $25) + (6 hours × $37.50) = $1,225 gross wages.
b. Derrick’s pay is $414 for a 36-hour workweek. One week, he works 42 hours.
$414  36 = $11.50 hourly pay rate x 1.5 = $17.25 premium pay rate.
(40 hours × $11.50) + (2 hours × $17.25) = $494.50 gross wages.
c. Lisa’s pay is $900 for a 30-hour workweek. One week, she works 40 hours.
$900  30 = $30 hourly pay rate.
(40 hours × $30) = $1,200 gross wages.
No overtime pay is included because actual hours worked do not
exceed 40.
4. Compute gross wages due to each of the following employees under federal wagehour law:
a. Latisha’s is normally paid $1,200 for a 40-hour workweek. One Monday she is out
sick but receives 8 hours sick pay. She then works 40 hours Tuesday–Friday.
$1,200  40 = $30 hourly pay rate.
(48 hours × $30) = $1,440 gross wages.
No overtime pay is included because actual hours worked do not
exceed 40.
b. Al’s is normally paid $500 for a 40-hour workweek. One week, he works 45
hours.
$500  40 = $12.50 hourly pay rate x 1.5 = $18.75 premium pay rate.
(40 hours × $12.50) + (5 hours × $18.75) = $593.75 gross wages.
c. Lee’s is normally paid $1,500 for a 40-hour workweek. To make up for leaving
early one Friday, he works 44 hours this week.
$1,500  40 = $37.50 hourly pay rate × 1.5 = $56.25 premium pay rate.
(40 hours × $37.50)+ (4 hours × $56.25) = $1,725 gross wages.
Section 4EMPLOYMENT RECORDS AND PAYROLL RECORDKEEPING
1. What are the five types of documents employers must inspect at time of hiring or
obtain from the employee after hiring?
1.
2.
3.
4.
5.
Social Security number
Form W-4, Employee’s Withholding Allowance Certificate
State withholding allowance certificate
Age certificates (for minors)
Form I-9
2. What is the purpose of Form I-9, and who completes it?
Form I-9 is required under the Immigration Reform and Control Act of 1986,
which was designed to reduce the number of undocumented workers in the
U.S. All employees must complete and sign the first part of the I-9. Then, all
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employers complete their portion, which substantiates the employee’s sworn
statement. Employers must also request documents that prove both the
employee’s identity and authorization to work in the U. S.
3. Which documents provide both an employee’s proof of identity and authorization
to work in the United States?
U.S. passports (expired or unexpired), certain foreign passports, permanent
residence cards, and alien registration receipt cards are all types of
documents that employers can use to substantiate both the employee’s
identity and the authorization to work in the U.S. (See the Form I-9 for a
complete list of documents.)
4. Which documents provide proof of identity, but not the authorization to work in
the United States?
A driver’s license, school ID card with photo, voter registration card, and
U.S. military card or draft record are all types of documents employers can
use to substantiate the employee’s identity (but not the authorization to
work in the U.S.) (See the Form I-9 for a complete list of documents.)
5. Which documents substantiate an employee’s authorization to work in the
United States but not proof of identity?
A Social Security card, birth certificate, and U.S. citizen identification
card are all types of documents employers can use to substantiate the
employee’s authorization to work in the U.S. (but not the employee’s
identity). (See the Form I-9 for a complete list of documents.)
6. On August 6, 2009, Becky completes a W-4. On February 15, 2010, she submits a
new W-4 claiming 3 additional exemptions. Until what date must Becky’s
employer retain the new W-4?
Her employer must retain Becky’s August 6, 2009 W-4 until April 15, 2014
(4 years after April 15, 2010). Her 2010 W-4 must be retained the later of
4 years from her termination, or 4 years after she submits another revised
W-4.
7. Until what date must an employer retain the following documents?
a. W-2s issued to employees for 2009
W-2s should be retained for 4 years from April 15 following the tax
year to which the document pertains. These W-2s should be retained
until April 15, 2014.
b. A 2009 Form 940 filed on January 31, 2010
Form 940 should be retained for 4 years from the filing due date
(January 31, 2014).
c. A 2008 Form W-2 for a former employee that was returned to the employer as
undeliverable
The IRS requires that a returned W-2 be retained for 4 years from
April 15 following the tax year to which the document pertains. Thus,
the employer should retain this returned W-2 until April 15, 2013.
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d. A W-4 submitted on March 12, 2009
Although Federal wage and hour law only requires employers to hold
on to W-4s for 3 years, the IRS requires that W-4s be retained for 4 years
from April 15 following the tax year to which the document pertains.
Thus, the employer should retain this W-4 the later of 4 years from her
termination, or 4 years after a revised W-4 is submitted
e. Employment applications
Although under Federal wage and hour law and the EEOC require
employers to hold on to employment applications for 3 years, the IRS
requires that the applications be retained for 4 years from April 15
following the tax year to which the document pertains.
f.
A cancelled check remitting payroll taxes for September 2005
Although federal wage and hour law requires employers to retain
cancelled checks for 3 years, the IRS requires that voided and
cancelled checks be retained for 4 years from April 15 following the
tax year to which the document pertains. Thus, a cancelled check for
the 2005 tax year would need to be retained until April 15, 2010.
g. An I-9 for an employee hired September 9, 2007 who quit December 6, 2009
Immigration laws require that I-9 forms be retained for 3 years from
date of hire, or 1 year from date of termination, whichever is later. Thus,
the employer should retain the employee’s I-9 until December 6, 2010.
h. An I-9 for an employee hired March 15, 2009 and fired November 16, 2010
Immigration laws require that I-9 forms be retained for 3 years from
the date of hire, or one year from the date of termination, whichever is
later. Thus, the employer should retain the employee’s I-9 until
November 16, 2011.
Section 5EMPLOYEE DATA: FORM W-4 AND STATE WITHHOLDING
ALLOWANCE CERTIFICATES
1. How long does a new employee have to submit a completed W-4? How must the
employer withhold FIT until the W-4 is received from a new employee?
New employees should complete Form W-4 on their first day of work.
Until Form W-4 is submitted, the employer is required to withhold federal
income tax as through the employee is single with zero allowances.
2. On March 5, 2010, Mischa submits a new W-4. If payday is Friday, on what date
will Mischa see her first paycheck reflecting the new W-4?
Mischa’s employer must make sure that Mischa’s FITW is adjusted no
later than his paycheck dated April 9, 2010, the first paycheck for the
payday 30 days from the date that the revised W-4 was submitted (the
Friday that falls after April 2).
3. On March 26, 2010, Paul submits a new W-4. If Paul is paid the first day of each
month, on what date will he see his first paycheck reflect the new W-4?
Paul’s employer must make sure that Paul’s FITW is adjusted by his
paycheck dated April 30, 2010 (May 1 is a Saturday; therefore, payday is
April 30; the first paycheck after April 23, which is 30 days after March 22).
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4. On October 5, 2010, Janet starts a part-time job, but does not expect to earn
enough to pay federal income tax for the year so she claims exempt. Does Janet
need to submit a new W-4 in 2010? If so, by when—and how does her employer
withhold if she does not do this?
Until Janet submits Form W-4, her employer is required to withhold
federal income tax as though she were single with zero allowances.
For Janet to get back the overwithheld FIT, she must either revise her W-4
to account for the overwithholding or claim a refund on her 1040 for 2010.
But she cannot do this until she receives her W-2 from her employer. Janet
could have avoided the problem by giving her employer a W-4 on her first
day of work.
Section 6HOW EMPLOYERS WITHHOLD AND DEPOSIT FEDERAL TAXES
1. Don is paid $10,000 a month—$5,000 on the 15th, and $5,000 on the last day of
the month. As of October 31, 2010, Don’s year-to-date FICA wages are $100,000.
How much FICA must Don’s employer withhold from each of Don’s November
and December 2010 paychecks?
The OASDI wage limit for 2010 is $106,800. Thus, for the period ending
November 15, 2010, $5,000 of Don’s pay is subject to 6.2% OASDI. In
subsequent pay periods only $1,800 will be subject to Social Security tax.
Because there is no wage limit on Medicare withholding, all of Don’s
FICA taxable wages for the year are subject to 1.45% HI.
FICA withheld from November 15–December 31, 2010, is as follows:
November 15, 2010: $310 OASDI ($5,000 × 6.2%) + $72.50 HI ($5,000 ×
1.45%) = $382.50 total FICA withheld.
November 30, 2010: $111.60 OASDI ($1,800 x 6.2) + $72.50 HI ($5,000 ×
1.45%) = $184.10 total FICA withheld.
December 15, 2010: Because Don has met the 2010 OASDI limit of
$106,800, only $72.50 will be withheld for FICA, all of which is for HI
(1.45% x $5,000)
December 31, 2010: $72.50 total FICA withheld ($5,000 × 1.45% HI)
2. Ray earns $3,200 a week, which he receives every Friday. As of Friday, July 30,
2010, Ray’s year-to-date wages are $96,000. How much FICA tax must Ray’s
employer withhold from his paychecks on August 6, 13, 20 and 27, 2010?
The 2010 OASDI wage limit is $106,800, so his entire August 6 paycheck
of $3,200 is subject to 6.2% OASDI and, of course, 1.45% HI. ($106,800 $96,000 = $10,800 Social Security taxable)
August 6, 2010: ($3,200 × 6.2%) OASDI + ($3,200 × 1.45%) HI = $244.80
Similarly, on August 13, his total wages have not reached the 2010
OASDI ceiling so his entire paycheck of $3,200 is still subject to 6.2%
OASDI and 1.45% HI. The same is true for his paycheck of August 20.
August 13, 2010: ($3,200 × 6.2%) OASDI + ($3,200 × 1.45%) HI = $244.80
August 20, 2010: ($3,200 x 6.2%) OASDI + ($3,200 × 1.45%) HI = $244.80
But after August 20, his total wages of $105,600 are only $1,200 away
from the 2010 OASDI ceiling, so only $1,200 is subject to OASDI.
(continued)
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August 27, 2010: ($1,200 x 6.2%=$74.40) OASDI + ($3,200 x 1.45%) HI=$120.80
Starting with his September 3, 2010, paycheck, Ray will have met the
2010 OASDI wage ceiling of $106,800, so all his paychecks for the rest of
the year will be subject only to HI (1.45%).
3. Using the 2010 Payroll Tax Withholding Table from IRS Pub. 15, Circular E
(found in Mastering Payroll, Section 6), compute FITW for the following:
a. Sandy is married, claims 3 allowances on her W-4 and is paid $645 a week.
$17. This amount corresponds to the amount in the row for $640$650
and column for 3 withholding allowances on page 43 of Publication 15.
b. Zhang is single, claims 1 allowance on his W-4 and is paid $1,890 every 2 weeks.
$255. This amount corresponds to the amount in the row for $1,880$1,900
and column for 1 withholding allowance on page 46 of Publication 15.
c. Sofia is single, claims 4 allowances on her W-4 and is paid $1,700 every 2 weeks.
$129. This amount corresponds to the amount in the row for $1,700$1,720
and column for 4 withholding allowances on page 46 of Publication 15.
d. Carlo is married, claims 6 allowances on his W-4 and is paid $1,350 a week.
$90. This amount corresponds to the amount in the row for
$1,350$1,360 and column for 6 withholding allowances on page 44 of
Publication 15.
e. Gene is single, claims zero allowances on his W-4 and is paid $659 every 2 weeks.
$54. This is the amount in the row for $640$660 and column for zero
withholding allowances on page 45 of Publication 15.
4. Which of the following employees is subject to FITW? to FICA? Answer “yes” or
“no” in the spaces provided.
FITW
FICA
a.
Dennis, a senior in high school, is 17 years old and
works part-time after school and on weekends for his
father, a CPA whose practice is a sole proprietorship.
Yes
No
b.
Evita, 15 years old, works part-time at her father’s
bodega, which he runs as partnership with his cousin.
Yes
Yes
c.
Patty, age 19, a full-time college student, lives at home
with her parents and disabled 10-year-old brother.
Patty’s parents pay her to take care of her brother.
Yes
No
Debbie and Dave work full-time and pay Dave’s
mother, Tina, to come to their home and watch the
kids after school.
Yes
No
d.
Dennis is exempt from FICA because children under age of 18 employed by
sole proprietorships owned by their parents are exempt from FICA. But,
Evita is subject to FICA because the exemption applies only to children
who work for a partnership where the child is related to both partners.
Patty is exempt from FICA because she is under age 21 and performs
domestic services in her parents’ home. Tina is exempt from FICA because,
although a parent, she performs domestic services in her child’s home.
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5. How do employers know whether they must deposit their federal employment
tax liabilities electronically in 2009? in 2010?
Employers with more than $200,000 of federal tax deposits during 2007
must make electronic deposits in 2009. Those with more than $200,000 of
federal tax deposits during 2008 must make electronic deposits in 2010.
Under proposed regulations—IRS “proposed regulations” are in effect
when proposed, all employers must remit their taxes electronically unless
they are permitted to pay the tax with their income tax return.
6. What is the lookback period? To which employer tax liabilities does it apply?
How is it used to determine an employer’s deposit frequency in 2010?
The lookback period runs for the 12 months ending on June 30 of the prior
year. Thus, for 2010, the lookback period is July 1, 2008 June 30, 2009.
The lookback period is used for Form 941 tax liabilities: FICA and FITW.
Employers with more than $50,000 in federal tax liabilities during the
lookback period are semiweekly tax depositors for 2010—if $50,000 or
less, monthly depositors (unless they trigger the one-banking-day rule).
Instructors: We recommend not grading students if they fail to mention
the one-banking-day rule on every problem 941 problem.
7. For each of the following scenarios, determine whether the employer is a monthly,
semiweekly or annual depositor for 2010 and check the appropriate box.
Monthly
a.
AAA begins operations March 1, 2010,
and anticipates a quarterly 941 tax
liability of about $5,000.
X
b.
BBB was started in 1992. For the
lookback period ending June 30, 2009,
BBB’s cumulative tax liabilities were
$45,000.
X
c.
d.
e.
f.
CCC started up in 2004. For the lookback
period ending June 30, 2010, CCC’s
cumulative tax liabilities were $75,000.
Semiweekly
X
DDD was begun in 2004. For the
lookback period ending June 30, 2009,
DDD’s cumulative tax liabilities were
$45,000. DDD’s 941 tax liability for its
March 2010 wages was $103,550.
X
EEE began in 2000. For the lookback
period ending June 30, 2009, EEE’s
cumulative tax liabilities were $29,000.
EEE’s tax liability for its January 2010
wages is $100,050.
X
FFF started up in September 2010 and
expects a 2010 941 tax liability of $2,000.
Homework Solutions
With
Form 941
X
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Mastering Payroll
AAA (a new employer) has $0 of accumulated 941 taxes in its lookback
period, and therefore, is automatically a monthly depositor. With 941 tax
liabilities under $100,000, AAA has not triggered the one-banking-day
rule. Because BBB’s cumulative 941 tax liability during the lookback
period did not exceed $50,000 and its 941 tax liability has been under
$100,000, BBB is also a monthly depositor.
CCC’s 941 tax liability during the lookback period exceeded $50,000, so
CCC is a semiweekly depositor. Although the 941 tax liabilities for DDD
and EEE did not exceed $50,000 for the lookback period, both triggered
the one-banking-day deposit rule, which switched them to semiweekly
depositors for the rest of that calendar year and the next calendar year
(which includes 2010 for both DDD and EEE).
FFF can deposit its 941 tax liability when it files its Form 941 because its
941 tax liability does not exceed $2,500 for the quarter.
8. Determine when each of the following must deposit its 941 tax liabilities.
a. Quikstep, a monthly depositor, pays employees on Friday. Its 941 tax liability
for the April 16, 2010, payday is $2,400.
As a monthly depositor that has not triggered the one-banking-day
rule, Quikstep must deposit its 941 tax liability no later than May 17,
2010 (the next banking day after May 15, 2010 which falls on a
weekend or legal holiday).
b. Slowque, a monthly depositor, pays employees on Friday. Slowque’s 941 tax
liability for the September 10, 2010, payday is $2,000.
As a monthly depositor that has not triggered the one-banking-day
rule, Slowque deposits its 941 tax liabilities incurred in September no
later than October 15, 2010 (or the next banking day if October 15,
2010 falls on a weekend or legal holiday).
c. BigTime, a semiweekly depositor, pays employees on Friday. BigTime’s 941
tax liability for the Friday, July 16, 2010, payday is $12,400.
As a semiweekly depositor that has not triggered the one-banking-day
rule, BigTime must deposit its 941 tax liability no later than the next
Wednesday (July 21, 2010). If the due date falls on a legal holiday,
BigTime has until the next business day to make the deposit.
d. Fernandez & Sons, a monthly depositor, pays employees on the 15th and last
days of the month. Its 941 tax liability for the June 30, 2010, payday is $112,400.
Fernandez & Sons has triggered the one-banking-day rule, and
therefore it must deposit its 941 tax liability by the end of the next
banking day (July 1, 2020, or next business day). Fernandez & Sons
will become a semiweekly depositor for the rest of 2010 and all of 2011.
9. Determine when each of the following must deposit its 941 shortfall if it is to
avoid penalties.
a. Dallas DCS, a monthly depositor, discovers a $55 shortfall on 941 tax
liabilities incurred for April 2010.
Homework Solutions
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Mastering Payroll
To avoid penalties, Dallas DCS must deposit its taxes no later than
August 2, 2010 (the due date of Form 941 for the second quarter). If
the due date falls on a weekend or legal holiday, Dallas DCS would
have until the next business day to deposit the shortfall amount.
b. Chic Shop, a monthly depositor, discovers a shortfall of 1.95% on its 941 tax
deposit for October 2010.
To avoid penalties, Terri’s Clearance Shops must deposit its taxes no
later than January 31, 2010 (the due date of Form 941 for the fourth
quarter). If the due date falls on a weekend or legal holiday, Terri’s
would have until the next business day to deposit the shortfall
amount.
c. Baby Bits, Inc., a semiweekly depositor, discovers a shortfall amount for the
941 tax liability that it deposited for August 2010.
Baby Bits must deposit taxes no later than Wednesday, September 17,
2010 (the first Wednesday or Friday falling on or after the 15th day of
the month following the shortfall). If the due date falls on a weekend
or legal holiday, Baby Bits has until the next business day to make the
deposit.
Section 7FEDERAL EMPLOYMENT REPORTING FORMS AND DUE DATES
1. In 2010, Cajun Corporation has 10 employees, 9 of whom are paid from $35,000
to $50,000 and one, $5,000. Compute Cajun’s FUTA liability for 2010 if:
a. Cajun does not pay any SUI during the year.
The first $7,000 of each employee’s taxable wages is subject to the full
6.2% FUTA.
($7,000 × 6.2% × 9 employees) + ($5,000 × 6.2%) = $4,216.
b. Cajun fails to pay its SUI on time during the year.
The first $7,000 of each employee’s taxable wages is subject to the
reduced .8% FUTA.
($7,000 × .8% × 9 employees) + ($5,000 × .8%) = $544.
2. In 2010, Ron Myers’s sole proprietorship pays each of its six full-time employees
over $20,000. Compute Ron’s FUTA liability for 2010 if:
a. The proprietorship does not pay any SUI during the year
The first $7,000 of each employee’s taxable wages is subject to the full
6.2% FUTA.
($7,000 × 6.2% × 6 employees) = $2,604.
b. The proprietorship pays SUI timely and in full throughout the year
The first $7,000 of each employee’s taxable wages is subject to a
reduced .8% FUTA. ($7,000 × .8% × 6 employees) = $336.
Homework Solutions
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Mastering Payroll
3. What is the due date for a company’s FUTA tax if its FUTA tax liability is:
a. $755 as of March 31
The company must deposit its FUTA tax liability no later than April 30
(or next business day if April 30 falls on a weekend or legal holiday).
b. $476 as of June 30
The company can roll over its FUTA tax liability to the third quarter
and subsequent quarters until its liability exceeds $500 or until
January 31 of the following year, whichever comes first.
c. $960 as of September 30
The company must deposit its FUTA tax no later than October 31 (or
next business day if October 31 falls on a weekend or legal holiday).
d. $260 as of December 31
The company may pay its FUTA tax liability with Form 940, due on
January 31 of the next year (or next business day if January 31 falls
on a weekend or legal holiday). An employer that makes all of its
FUTA deposits in full and on time during the year may extend the 940
due date to February 10 (or next business day)—but the deposit is still
due by January 31. If the deposit is made on January 31, the company
can take a 10-day extension for filing its 940.
e. $620 as of December 31
The company must deposit its FUTA tax liability no later than January 31
(or next business day if January 31 falls on a weekend or legal holiday).
4. What is the due date for filing the second quarter 941?
Normally Form 941 is due on the last day of the month following the end
of the quarter, or July 31. However, if July 31 falls on a weekend or legal
holiday, the due date is the next business day. Also, if the employer made
all federal tax deposits for the second quarter on time and the full
amount of taxes have been paid, the employer may file its Form 941 on
August 10 (or next business day).
5. What types of taxes are reported on Form 945? When is the 945 due for 2010?
Form 945 is used to report (1) backup tax under IRC §3406 and federal
income tax withheld under IRC §3402(q); (2) amounts paid as retirement
pay for service in the Armed Forces of the United States under IRC §3402;
(3) certain annuities under IRC §3402(o)(1)(B); and (4) pensions,
annuities, IRAs, and certain other deferred income under IRC §3405.
The due date for the 2010 Form 945 would be January 31, 2011.
6. Provide the date by which the W-2 is due to each of the following:
a. A current employee
January 31 (or next business day if January 31 falls on a weekend or
legal holiday).
Homework Solutions
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Mastering Payroll
b. The Social Security Administration
For employers that do not file W-2s electronically, the due date is the
last day in February (or next business day if the last day in February
falls on a weekend or legal holiday). For employers that electronically
file their W-2s, the due date is March 31 (or next business day).
c. An employee whose last day of work was April 10, 2009
The earlier of January 31, 2010 (or next business day) or 30 days of
the former employee’s request to receive Form W-2.
7. When is the W-3 due for each of the following:
a. Paper W-2s filed with the SSA?
For employers that do not file their W-2s electronically, the due date is
the last day in February (or next business day if the last day in
February falls on a weekend or legal holiday).
b. W-2s filed electronically?
Form W-3 is not filed if W-2s are filed electronically.
c. An employer with 300 employees?
Form W-3 is not filed if W-2s are filed electronically. Employers that
file more than 249 W-2s must file their W-2s electronically.
Section 8WHEN WAGES BECOME TAXABLE
1. In which year are wages taxable for each of the following?
a. An employee paid each Friday whose wages for December 28, 2009
January 1, 2010, is paid Thursday, December 31, 2009
Under the rule of constructive receipt, the wages are taxable in 2009.
b. Bonus checks given out December 31, 2009, but postdated January 4, 2010
Under the rule of constructive receipt, the wages are taxable in 2009.
c. Checks dated December 31, 2009 distributed to employees January 4, 2010
Under the rule of constructive receipt, the wages are taxable in 2010,
when they are first made available to employees.
2. Randy is paid $8,800, which he receives the last day of each month. After
receiving his November paycheck, his FICA withheld for the year is $7,405.20
($8,800 × 11 paychecks × 6.2% = $6,001.60 Soc. Sec.; $8,800 × 11 paychecks ×
1.45% = $1,403.60 Medicare). On December 31, 2009, Randy receives both his
December paycheck of $8,800 and a $10,000 bonus (bonuses are fully taxable as
wages) dated January 1, 2010. How much FICA should Randy’s employer
withhold for the amounts Randy received in December?
Although the $10,000 bonus check is dated January 1, 2010, Randy
received it in 2009, so it is taxable in 2009.
Before receiving his December paycheck and $10,000 bonus, Randy’s
taxable OASDI wages are $96,800 ($8,800 × 11 months). To reach the 2009
OASDI ceiling of $106,800, he needs only another $10,000 in wages.
$10,000 OASDI taxable wages in December x× 6.2% = $620
Homework Solutions
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Mastering Payroll
$8,800 paycheck + $10,000 bonus = $18,800 HI taxable wages (there is no
limit on HI) × 1.45 % = $272.60.
$620 OASDI + $272. 60 HI = $892.60 total FICA tax Randy’s employer
should withhold from the $18,800 Randy received in December.
Section 9OTHER REPORTING RULES
1. By what date must a Pennsylvania employer submit Copy 1 of Form W-2 to the
Pennsylvania state income tax agency?
January 31 (or next banking day if January 31 falls on a weekend or
legal holiday).
2. By what date must a New Jersey employer submit Copy 1 of Form W-2 to the
New Jersey state income tax agency?
New Jersey is not one of the states listed as an exception to the general
rule that requires that Copy 1 be remitted by the last day in February (or
next banking day if that day falls on a weekend or legal holiday).
3. By what date must an employer submit Copy 2 of Form W-2 to its employees if
the employer’s business and the employee are located in:
a. California
California is not one of the states listed as an exception to the general
rule that requires that Copy 2 be remitted by January 31 (or next
banking day if January 31 falls on a weekend or legal holiday).
b. New Jersey
February 15 (or next banking day if February 15 falls on a weekend or
legal holiday).
4. Who is required to file Form 1099-MISC and what triggers the requirement to file?
Form 1099-MISC is used to report payments of $600 or more for rents,
commissions, fees, prizes and awards, royalties and other nonemployee
compensation. Form 1099-MISC is also used to report wages and/or
accrued vacation pay given to the estate of a deceased employee and
“golden parachute” payments made to nonemployees.
Section 10PAYROLL ENTRIES
1. On February 15, ABC Corporation pays 20 employees total wages of $50,000,
withholding $12,300 FIT, $3,825 FICA and $10 union dues. FUTA is $370.
Prepare the journal entry to record:
a. Employee salaries and deductions:
Salary Expense
FICA Employee
FITW Payable
Union Dues Payable
Cash
Homework Solutions
50,000
3,825
12,300
200
33,675
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Mastering Payroll
b. Company payroll tax expense:
Payroll Tax Expense
FICA Employer
FUTA Payable
4,195
3,825
370
c. Company remittance of payroll taxes:
Remittance to a separate agency requires a separate check and
therefore a separate entry.
FICA Employee
FICA Employer
FITW Payable
Cash
3,825
3,825
12,300
19,950
FUTA Payable
370
Cash
d. Company remittance of the union dues:
Union Dues Payable
Cash
370
200
200
2. On May 31, Drake Corporation pays employees total wages of $15,000, from
which it withholds $1,148 FICA and $1,340 FITW. The FUTA is $120 and SUI,
$440. Prepare the journal entry to record:
a. Employee salaries and deductions:
Salary Expense
FICA Employee
FITW Payable
Cash
15,000
1,148
1,340
12,512
b. Drake’s payroll tax expense:
Payroll Tax Expense
FICA Employer
FUTA Payable
SUI Payable
1,708
1,148
120
440
c. Drake’s remittance of payroll taxes:
Each remittance to a separate agency requires a separate check and
therefore a separate entry.
FICA Employee
FICA Employer
FITW Payable
Cash
1,148
1,148
1,340
3,636
FUTA Payable
Cash
120
SUI Payable
Cash
440
Homework Solutions
120
440
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Mastering Payroll
3. On January 15, Zook Enterprises pays employees total wages of $67,000 from
which it withholds $5,126 FICA, $9,640 FIT and $7,181 for health insurance
premiums. Zook’s share of the health insurance premium is $21,544 for the pay
period. FUTA is $520; SUI is $2,080. Prepare the journal entry to record:
a. Employee salaries and deduction:
Salary Expense
67,000
FICA Employee
FITW Payable
Health Ins./Employee Cont.
Cash
5,126
9,640
7,181
45,053
b. Zook’s payroll tax expense:
Payroll Tax Expense
FICA Employer
FUTA Payable
SUI Payable
7,726
5,126
520
2,080
c. Zook’s remittance of the payroll taxes:
Each remittance to a separate agency requires a separate check and
therefore a separate entry.
FICA Employee
FICA Employer
FITW Payable
Cash
FUTA Payable
Cash
SUI Payable
Cash
5,126
5,126
9,640
19,892
520
520
2,080
2,080
d. Zook’s remittance of the health insurance premiums:
Health Ins./Employee Cont.
Health Insurance Expense
Cash
Homework Solutions
7,181
21,544
28,725
18