Chapter 10
Payroll Taxes
“I want to find out who this FICA guy is
and how come he’s taking so much of
my money.”
-- Nick Kypreos
McGraw-Hill Education
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LO # 1 Payroll and Form 1040
• Withholding taxes are imposed on taxpayers
to help fund government operations using a
“pay as you go” system
• At the end of the year, the employer is
required to summarize an employee’s
earnings and taxes withheld on a Form W-2
• Form 1040 compares tax liability with tax
payments to determine whether a taxpayer
will receive a refund or own more money.
10-2
LO # 1 Payroll and Form 1040
Concept Check 10-1
1. The payroll tax withholding system was
established to produce a stream of
revenue for governmental operations.
True
2. Forms W-2 and 1040 are forms used
to match tax liability with tax payments.
True
14-3
LO # 2 Federal Tax Calculations
• Withholding taxes are an approximation
of the proportionate share of total tax
liability the employee will owe to the
federal government.
• Form W-4 is completed by the employee
to claim withholding allowances.
10-4
LO # 2 Federal Tax Calculations
• Two withholding methods:
– Percentage Method
• Uses a range of percentages to calculate taxes
• Used in computerized systems
– Wage Bracket Method
• Uses a table of wage brackets and allowances
10-5
LO # 2 Federal Tax Calculations
• Federal Insurance Contributions Act (FICA)
– Old age, survivors, and disability insurance
(OASDI or social security) = 6.2% up to a
maximum of $117,000 for 2014
– Hospital insurance (Medicare) = 1.45% on
all wages (no maximum)
• There is a matching tax for FICA (both OASDI
and Medicare) on employers.
• An additional 0.9% for Medicare is withheld
from the employee for wages in excess of
$200,000. There is no employer match for this
additional tax.
10-6
LO # 2 Federal Tax Calculations
• Employees are required to report cash
tips (in excess of $20) to their employer
by the 10th of the month after the month
in which the employee receives the tips
using Form 4070.
• Employers must withhold income tax
and FICA taxes on employee tips.
10-7
LO # 2 Federal Tax Calculations
• Large food and beverage
establishment may be required to
“allocate” tips to employees.
• If tipped employees do not report tips
in an amount of at least 8% of gross
receipts, the employer must allocate
the difference to the employees using
Form 8027.
• Employers are not required to
withhold federal taxes on allocated
tips. They are reported on Form W-2.
10-8
1. Withholding and other employment taxes are
levied only on cash wages and/or salaries
paid to the employee.
False
2. The employer fills out Form W-4 to
determine how many withholding allowances
the employee is entitled to take.
False
14-9
LO # 2 Federal Tax Calculations
Concept Check 10-2
3. Jim is single and earns $600 per week. He claimed two
allowances on his W-4 form provided to the employer. What
amount of federal withholding tax will be deducted from his gross
compensation?
$52 when the wage bracket method or $52.00 when percentage
method is used.
4. Jenny earns $118,475 in 2014. How much social security tax will
be withheld from her compensation? How much Medicare taxes
will be withheld from her compensation?
$7,254.00 in social security taxes and $1,717.89 in Medicare taxes.
14-10
LO # 2 Federal Tax Calculations
Concept Check 10-2
5. Form 4070 is completed by tipped
employees for any and all tips earned
for the period.
False
14-11
LO # 3 Reporting and Paying Payroll Taxes
• Employers must make payroll tax deposits of
amounts withheld from employees’ wages
• A “lookback” period determines whether an
employer is a monthly or semiweekly
schedule depositor.
– 4 quarters starting with July 1, 2012 – June 30,
2013 for wages paid in 2014.
– Monthly - $50,000 or less in tax liability
– Semiweekly – more than $50,000 in tax liability
10-12
LO # 3 Reporting and Paying Payroll Taxes
• Semiweekly deposit schedule:
– Taxes associated with payrolls paid on a
Wednesday, Thursday, or Friday are due
the following Wednesday.
– Taxes associated with payrolls paid on a
Saturday, Sunday, Monday, or Tuesday are
due the following Friday.
10-13
LO # 3 Reporting and Paying Payroll Taxes
• All employers are now required to use the
Electronic Funds Transfer Payments System
(EFTPS) to make deposits
10-14
LO # 3 Reporting and Paying Payroll Taxes
• An employer who accumulates
$100,000 or more in taxes on any day
during a deposit period, must deposit
the tax by the next banking day,
regardless of the type of depositor.
• The employer becomes a semiweekly
schedule depositor for the remainder of
the calendar year and for the following
year.
10-15
LO # 3 Reporting and Paying Payroll Taxes
• Form 941 – is a reconciliation of the
amount of payroll tax liability and the
payments made by the employer to cover
the liability. It is due by the end of the
month following the close of the quarter.
• If there is a tax liability of less than $2,500
at the end of the quarter, this amount can
be paid when the Form 941 is filed.
• Form 944 is for very small employers.
10-16
LO # 3 Reporting and Paying Payroll Taxes Concept Check 10-3
1. All new employers must use the semiweekly
schedule deposit system.
False
2. The deposit schedule for an employer is
based on the total tax liability that the
employer reported on Form 941 during the
prior four quarters starting on July 1 and
ending on June 30 of the next year.
True
14-17
LO # 3 Reporting and Paying Payroll Taxes Concept Check 10-3
14-18
LO # 4 Self-Employment Taxes
• Self-employment taxes are based on net
earnings in excess of $400 generated by
a sole proprietor taxpayer (remember
Chapter 6)
• For 2014, refer to Schedule SE (Section
A or B) to determine the for AGI
deduction on Form 1040.
• The self-employed taxpayer is
responsible for all parts of FICA (15.3%)
10-19
LO # 4 Unemployment Taxes and Form 940
• Federal Unemployment Tax Act (FUTA)
is 6.0% of wages up to $7,000. There is
a maximum credit for state employment
taxes (SUTA) of 5.4%, reducing the
amount due to the IRS to 0.6%.
• Form 940 is filed annually by the
employer to report and reconcile FUTA
liabilities and payments.
10-20
LO # 4 Household Workers and
Schedule H
• Household workers are considered
employees subject to federal income, FICA,
and FUTA taxes if:
– Paid wages of $1,900 or more in 2014
– Federal withholding taxes were withheld
from these workers
– Wages of at least $1,000 were paid to all
household workers combined in any
calendar quarter in 2013 or 2014.
10-21
LO # 4 Household Workers and
Schedule H
• Schedule H is completed by the
employer/taxpayer and submitted with
Form 1040.
– Taxes are due for household employees
and paid when the employer taxpayer files
Form 1040.
10-22
LO # 4 Concept Check 10-4
1.
A self-employed taxpayer is treated both as an
employee and employer, thus, pays a combined
total of 15.3% for FICA taxes.
True
2. What is the effective tax rate for FUTA provided
employers pay into their state SUTA programs on a
timely basis?
a. 0.6%
b. 6.2%
c. 5.4%
d. 10%
Answer: a
14-23
LO # 4 Concept Check 10-4
3. Who can use Schedule H?
Individuals who employ household workers and pay
wages of $1,900 or more in 2014, or who pay $1,000
to all workers combined in any of the prior two years.
4. Taxpayers who employ household workers are
subject to payroll taxes under what conditions?
They paid any one household employee wages of
$1,900 or more in 2014, federal income taxes were
withheld from employee wages, and household
wages of at least $1,000 were paid to all household
workers combined in any calendar quarter in 2013 or
2014.
14-24
LO # 5 Forms W2 andW3
• Employers report wages earned and taxes withheld to
employees on Form W-2.
– W-2s are due to employees by January 31 of the
next year
– Copy A is remitted to the Social Security
Administration by February 28th or 29th in a leap
year or the next business day if it falls on a
weekend.
• Form W-3 is a transmittal form that summarizes all
employee W2’s prepared by the company.
– It is sent with Copy A of all W-2’s
10-25
LO # 5 Forms W2 andW3
• Form W-2C (Statement of Corrected
Income and Tax Amounts) is used to
correct a W-2 that was incorrectly
prepared.
• Form W-3C (Transmittal of Corrected
Income and Tax Statements)
accompanies Copy A of the W-2C to the
Social Security Administration
10-26
LO # 5 Concept Check 10-5
1.
The employee uses the information from a W-2 to
prepare his/her federal, state, and local (if
applicable) tax returns.
True
2.
Where and when must the employer send Copy A
of the W-2 form?
Copy A is sent to the Social Security Administration
along with Form W-3 which is the transmittal form. It
is due by 2/28 or 2/29 in a leap year or the next
business day if it falls on a weekend .
14-27
LO # 5 Concept Check 10-5
3. Explain the process if an employer must
correct an employee’s W-2.
An employer who must correct an employee’s
W-2 must file Form W-2C and W-3C as soon
as possible.
14-28
LO # 5 Concept Check 10-5
4. What are the maximum penalty amounts per return
imposed on a company that prepares incorrect
W-2s?
Penalties range from $15 per return to $50 per return,
with a maximum of $250,000/$100,000 for small
businesses. Also a penalty of $100 per return or if
greater 10% of the amount to be reported correctly for
intentional disregard of filing requirements, providing
payees with incorrect statements, or reporting
incorrect information. $50 per return for W-2s
containing mismatched names and TINs.
14-29
LO # 6 Supplemental Wage Payments
• Supplemental wages are compensation
paid in addition to an employee’s regular
wages
• Withholding on supplemental wages can
be calculated using one of two methods:
– Flat tax of 25%
– Combine the supplemental payments with
regular wages and calculate the withholding
tax.
10-30
LO # 6 Backup Withholding
• Generally, an employer or vendor must
withhold 28% of certain taxable
payments if the payee fails to furnish a
correct taxpayer identification number
(TIN)
• Payments include interest, dividends,
rents, royalties, commissions, nonemployee compensation and certain
other payments made in the course of a
trade or business
10-31
LO # 6 Form W-9
• Form W-9 is prepared by the recipient and
given to the requester. Failure to furnish a
correct TIN can result in a $50 penalty. The
penalty for willful neglect in completing the
form is $500.
• Form is used to:
– Certify the TIN the taxpayer is giving is correct
– Certify the taxpayer is not subject to backup
withholding or
– Claim exemption from backup withholding if the
taxpayer is a U.S. exempt payee.
10-32
LO # 6 Estimated Tax Payments and
Form 1040-ES
• Form 1040-ES is used when a taxpayer must
make tax payments for estimated taxes due.
• Estimated payments are required if unpaid tax
liability > $1,000 and withholding and credits
do not meet certain “safe harbor” thresholds.
• Estimated taxes are due April 15, June 15,
September 15, and January 15 (of the next
year) or the next business day if they fall on a
holiday or weekend.
10-33
LO # 6 Concept Check 10-6
1. Describe the two methods that are available to
calculate the withholding from supplemental
payments.
Method 1a: Withhold at a flat rate of 25%
Method 1b:If taxes have already been withheld from
regular wages, add the two payments together,
calculate the tax as if they are one payment and
subtract the tax already paid. Withhold the remaining
tax from the supplemental wages.
Method 2: If taxes are not already withheld from regular
wages, add the two amounts together and calculate
the tax as if they are one payment.
14-34
LO # 6 Concept Check 10-6
2. Payments subject to backup withholding are
withheld at a flat tax rate of 28% if the payee
fails to furnish the payer with a correct TIN
True
3. What is a Form W-9?
It is used for U.S. persons (including resident
aliens) to document their taxpayer
identification number (TIN). This form must
be on file with the payer.
14-35
LO # 6 Concept Check 10-6
4. What is the penalty for failing to furnish a
correct TIN to a requester?
$50 for each failure unless the failure is due to
reasonable cause and not to willful neglect. If
the taxpayer makes false statements with no
reasonable basis that results in backup
withholding, a penalty of $500 is assessed.
There can also be criminal penalties including
fines and imprisonment.
14-36
LO # 6 Concept Check 10-6
5. Taxpayers use Form 1040-ES to remit
additional amounts to the IRS so that
they receive a refund when they file
Form 1040.
False
14-37