Chapter 4: FICA Taxes and
Voluntary Deductions
Learning Objectives

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After studying this chapter, you will be able to:

Review Withholding Tax

Calculate Social Security tax

Calculate Medicare tax

Identify states in which State Disability Insurance is
withheld

Apply various voluntary deductions

Record employee payroll journal entries
Mandatory Deductions

Federal Income Tax Withholding

State Income Tax Withholding

Local Income Withholding

Social Security (OASDI) Tax

Medicare (HI) Tax

State Disability Insurance Tax

5 States require disability to be withheld from employee
pay (California, Hawaii, New Jersey, New York, and
Rhode Island)
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Voluntary Deductions

Union Dues

Retirement Plans

Medical Plans

Cafeteria Plans

4
Flexible Spending Accounts
Gross Pay and Taxable Pay

Gross Pay encompasses all earnings in a given
period

Taxable Pay
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
Must subtract tax-deferred contributions from gross pay
to arrive at taxable pay

Taxable pay is used for calculating mandatory
deductions

State and local regulations may differ from federal
withholding
Taxable Pay

An employee works 37 hours the first week of the
year, earns $8.25/hour, 8% of gross pay is contributed
to his 401k plan.

Gross pay?

Taxable pay for Federal Withholding?

Taxable pay for Social Security?
 Tax

Taxable pay for Medicare tax?
 Tax
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amount?
amount?
Taxable Pay

An employee works 37 hours the first week of the year,
earns $8.25/hour, 8% of gross pay to his 401k plan.

Gross pay? (37 hrs * $8.25 = $305.25)

Taxable pay for Federal Withholding?
 8%
* $305.25 = $24.42 (401k contribution)
 $305.25

Taxable pay for Social Security? $305.25
 Tax

amount? 6.2% * $305.25 = $18.93
Taxable pay for Medicare tax? $305.25
 Tax
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– 24.42 = $280.83 (taxable pay for withholding)
amount? 1.45% * $305.25 = $4.43
Taxable Pay

An employee works 43 hours, 3 of which are overtime,
earns $37.50/hour, plus 1.5 times rate for OT. YTD
gross earnings are 117,900. He has 10% withheld for
his 403(b) plan.

What is his gross pay?

What is the taxable pay for withholding?

What is the taxable pay for social security?

What is the taxable pay for Medicare tax?
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Taxable Pay

An employee works 43 hours, 3 of which are overtime,
earns $37.50/hour, plus 1.5 times rate for OT. YTD
gross earnings are 117,900. He has 10% withheld for
his 403(b) plan.

What is his gross pay? $1668.75

What is the taxable pay for withholding? $1501.87

What is the taxable pay for social security? $600

What is the taxable pay for Medicare tax? $1668.75
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Collecting Federal Withholdings

10
Pay-as-you-go system

Established as a result of the Current Tax Payment Act
of 1943

Employers withhold income tax from employees and
remit to the federal government

Certain employees may be exempt
The Wage-Bracket Method

Determine pay period type

Determine marital status

Identify number of withholding allowances (from W-4
Form)

Determine taxable pay

Circular E provides tables & method for calculating if
more than 10 allowances
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The Percentage Method

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Three-step process

Multiply allowances by figure in allowance table

Subtract from taxable pay

Use percentage method table to calculate tax
Percentage Method

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1 allowance, gross pay of $900, paid weekly

1 x $76.90

$900 – 76.90 = $823.10

$99.10 + (25% x (823.10 – 764)) = $113.88
Other Federal Tax Withholdings

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Dealing with deceased & terminated employees

After death, a portion of the employee’s earnings may
be paid; payments not subject to federal tax withholding

Terminated employee is entitled to all compensation
earned; earnings are subject to federal tax withholding
Changing the W-4 Form


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Reasons for changing

Marriage

Divorce

Child’s birth

Job status change
Changes result in adjusting the federal income tax
withholding
State Income Tax Withholding

Calculated based on state taxable income (may be
same as federal)

Nine states do not collect state income tax

Some states levy a flat tax

Some states levy a graduated tax
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Local Income Tax Withholding

Tax rates and how they are levied vary widely

May be different for residents and non-residents
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Social Security Tax

Also known as OASDI

Provides retirement benefits and financial support to
employee’s survivors and disabled employees

Rate began at 1% - steadily increasing to current rate
of 6.20%
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Social Security Taxable Wage Base

Maximum threshold of year-to-date earnings on which
Social Security tax is levied

First taxable wage base $3,000 – current $117,000
Only first $117,000
earnings will be
taxed for Social
Security
•Wage base is 118,500 for 2015
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Taxable Earnings for Social Security

Certain expenses are deducted from gross pay to
arrive at taxable earnings

Three-step process to calculate Social Security tax
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
Determine current period taxable earnings

Add current earnings to year-to-date taxable earnings

If result not above threshold, multiply by current rate
Medicare Tax

Taxable earnings for Medicare tax are same as Social
Security tax

Initial Medicare rate was 0.35% - current is 1.45%
No upper earnings limit on Medicare Tax
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The Additional Medicare Tax

2013 – additional 0.9% Medicare tax imposed on
certain earnings

Result of Patient Protection and Affordable Care Act

Threshold based on filing status
Additional Medicare Tax is only imposed on the employee.
There is no employer share of Additional Medicare Tax.
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Additional Tax Considerations

23
Other amounts may be withheld from gross pay

State disability insurance

Wage garnishment

Retirement plans

Cafeteria plans

Union dues

Charitable contributions
State Disability Insurance

Short-term benefits for those unable to work due to offthe-job circumstances

Certain states do not require disability insurance


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California, Hawaii, New Jersey, New York, Rhode Island
Employees may be required to contribute toward
insurance coverage
Wage Garnishments

Compliance with court order or other legal proceeding

Amount of wage garnishments are limited

Lesser of 25% of disposable earnings (gross pay –
mandatory deductions) or

30 times federal minimum wage
Note! Wage garnishment state regulations take
precedence over federal regulations
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Contributing to Retirement Plans


401(k) Plan

Tax-deferred

Employer contribution optional
403(b) Plan

Available to certain employees at public education
institutions and certain tax-exempt organizations
Tip! Both plans allow for catch-up withholdings
(additional withholdings based on age and/or
years of service).
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Contributing to Retirement Plans


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SIMPLE IRA

For employees of small businesses (fewer than 100)

Contribution limit is lower

Employer contribution required

Deductions exempt from federal income tax withholding
Payroll Deduction IRA

Usually used by self-employed

Not exempt from federal income tax withholding

Receives tax deduction on year-end return
ERISA of 1974

Employee Retirement Income Security Act of 1974
(ERISA) regulates plans employers offer

Requirements set forth by ERISA for retirement plans

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
How plan is funded

Fiduciaries may be held accountable for breaches

Plan participation

Accumulation of benefits

Timeframe for when benefits become non-forfeitable
www.dol.gov/compliance/laws/comperisa.htm
Cafeteria Plans

Choice of at least one taxable and one non-taxable
option

Non-taxable deductions can include:

Medical Care Reimbursements

Adoption Assistance

Group Term Life Insurance

Health Savings Account

Flexible Spending Account (funds set aside for health
care during the year)

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Nontaxable for Income Tax & FICA
Charity, Union Dues, & Insurance

Charitable contributions are deducted from gross
earnings, then remitted directly to charity

Certain employees eligible to join a union; dues
withheld from gross earnings

Insurance premiums may be withheld, then remitted to
insurance company
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Completing the Payroll Register

Completed payroll register includes

Identified and calculated withholding amounts

Net pay (final figure)

Check number for each pay period
Net Pay
Withholdings
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Check
Number
Accounting for Payroll

Employer must record a journal entry for each
element in payroll register

Each payroll deduction is owed to a corresponding
entity; for example:
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
Federal income tax withheld is immediately owed to
U.S. Government

Charitable contribution withheld is immediately owed to
the intended charity
Accounting for Payroll
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