Income Tax Fundamentals 2009
Gerald E. Whittenburg
Martha Altus-Buller
Student’s Copy
2009 Cengage Learning
Employer calculates income tax
withholding from employees’ paychecks
based on their Form W-4
• Pay includes salaries, bonuses, commissions
• 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
• If no W-4 filed, employer must withhold at
highest rate
2009 Cengage Learning
 To
compute amount to withhold from
• Multiply number of allowances found on W-4 by
allowance amounts [found on pp. 9-2, 9-5]
• Subtract that amount from employee’s gross
• 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 each year “Employer’s Tax Guide”
2009 Cengage Learning
 Withholding
is mandatory on
pension and other deferred income
• Rates used depend on nature of payment
 Rates on periodic payments based on
taxpayer’s W-4
 Withhold at either flat 10% [or 20% for certain
2009 Cengage Learning
Self-employed taxpayers must make quarterly
estimated tax payments if
• Annual payment due for the year is ≥ $1000 (after
 Quarterly payments due April 15, June 15, September 15,
and January 15 of next year
Total annual estimated payments is lesser of
• 90% of current year tax or
• 100% of prior year tax or
• 90% of current year TI, AMT & annualized SE income
 Exception: if AGI > $150,000 for prior year, then annual
required payment = 110% of prior year tax
2009 Cengage Learning
 Federal
Insurance Contributions Act
(FICA) introduced to provide
retirement and disability benefits for
American workers and their families
 FICA comprised of two taxes
• Social Security - 6.2% of first $102,000 of
gross wages
• Medicare - 1.45% of total gross earnings
[no cap]
2009 Cengage Learning
Employers withhold both income tax and FICA
from paychecks
 Must deposit these taxes either monthly or
semiweekly [as determined by lookback period]
• Monthly depositors make deposit by 15th of following
 All new employers are automatically monthly
• Semiweekly depositors make deposit either
Wednesday and/or Friday depending upon when
payroll is run
Very small employers with payroll tax liabilities of
$1000 or less can file/pay annually by using a
Form 944
2009 Cengage Learning
To make deposit at commercial bank, fill out Form
8109 (coupon) and take to an authorized
• Or, if mailed, must be postmarked second day before due
May be electronically deposited via Electronic
Federal Tax Payment System [EFTPS]
• Some employers must deposit using EFTPS
Form 941 [Employer’s Quarterly Federal Tax
Return] must include payroll taxes not yet
deposited for quarter
• Can use Form 941 e-file program
2009 Cengage Learning
Self-employment [SE] tax is the same as FICA,
except self-employed taxpayer pays both shares
 Therefore, rates are:
• Social Security [OASDI] is 12.4% of first $102,000 of
net self-employment income
• Medicare is 2.9% on total net self-employment income
If taxpayer has both W-2 wages and selfemployment income, the $102,000 limit applies
to the combined earnings
• FICA is not required if SE income is < $400
• May take a Deduction for AGI for 1/2 of SE tax paid
2009 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
• 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%]
• Must deposit quarterly
if over $500
• Must file annual report
2009 Cengage Learning
Form 940