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Fundamental PayrollCertification 2014
Paycheck Fundamentals
Chapter 3ANNE SCHAFROTH, CPP
Paycheck Fundamentals Federal Withholding Social Security & Medicare Withholding Additional Deductions from Pay State Taxes Deceased Employees Gross to Net Calculations Employer-Paid Taxes
2
Elements of a Pay Check
Gross Amount vs Actual Paycheck Amount
Additions Deductions Net Pay
3
ABC Manufacturing1213 West Higgins RdPalatine, IL 60638John I. Doe234 Main StHighland Park, IL 60035
Check #814177
Period End08/31/2011
EE # 5609DEPT 33456
Hours Rate/Amt Current Year to DateTotal Gross 80.00 4246.88 81250.38Regular 80.00 4229.17 60022.17Group Term Life 17.71 17.71 283.36Floating Holiday 736.90Flex Time Off 4664.91Company Holiday 2242.74Bonus 13300.30
Fed W/H 561.87 12182.00Social Security W/H 255.96 4919.95Medicare W/H 59.86 1150.63IL State W/H 197.96 3805.77Health PreT 98.00 1568.00Dental Pre T 14.00 224.00Vision Plan Pre T 6.52 104.32401(k) 169.17 3238.73401(k) Co Match 84.59 1619.45
Net Pay 2883.54 54056.98
Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1883.54Direct Deposit #2 71000012 22200044040 JP Morgan Chase 1000.00
Withholding Federal Taxes
Taxable wages = all remuneration for services (includes non-cash benefits)
Federal taxation is FIT, SS, MED
Some benefits are fully taxable, some partially taxable and some are non- taxable
4
Taxable Compensation Back pay Bonus Commission Company car (personal
use) Dismissal pay (severance) ER pd commuter fees in
excess of $130/month ER pd parking greater than
$250/month Fringe benefits (unless
excluded) Gifts, gift cards, prizes Group legal services
Group term life greater than $50,000
Non-accountable reimbursed business expenses
Noncash fringe benefits unless excluded by IRC
Sick pay and disability benefits (portion attributable by employer contribution)
Nonqualified moving expenses
Overtime pay Regular wages Tips
5
Nontaxable Compensation Dependent child care up to
$5000 under section 129 plan Company vehicle (business
use only) De minimus fringe benefits Disability benefits (employee
contributions) Educational assistance (job
related /no limit) Group term life up to $50,000 Med/dent health plans
(employer contribution) No-additional-cost fringe
benefits
Qualified ee discounts on ER goods/services
Qualified moving expenses Qualified transportation fringe
benefits Reimbursed business expenses Working condition fringe (if
deductible if it was paid by ee) Non-job-related education up
to $5250 Long term care insurance Workers’ compensation
benefits Health Savings Accounts
6
Wages / Taxability Period Ending – is the period when wages were earned Pay Date - is the date wages are paid and dictates the
taxability, as well as structure for depositing and reporting of taxes to government agencies
Constructive Receipt - is the date the funds are available to the employee
Overpayments / Repayments in same calendar year, repayment requested is the
employee’s net overpayment; OP and RP can be netted together for W2; Employer can claim refund of taxes from IRS
in subsequent year, repayment requested is Gross OP minus EE and ER SS and Med taxes; ER can claim refund from IRS; OP and RP cannot be netted together for W2; EE can claim refund of federal tax on 1040.
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Factors Affecting Withholding
Form W-4 Withholding Certificate Employee’s marital status Number of withholding allowances
Pay Frequency Whether regular or supplemental
wages Pretax Deductions
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Withholding Methods
Three main acceptable methods: *Wage-Bracket Method (Pub 15 - Circular
E) *Percentage Method (Pub 15 – Circular E) Optional/Mandatory Flat Rate of 25% (or
in some instances, 39.6%)
* Methods Used Most Commonly
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Withholding Methods
Wage Bracket Method — quickest and easiest
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Withholding Methods
11
Percentage Method
- most common method used in computerized payroll systems
Withholding Methods
Optional/Mandatory Flat Rate Method
Supplemental wages paid in addition to employee’s regular wages.
Examples: bonuses, commissions, overtime pay, back pay
Does not take into account Form W-4 elections Can result in under or over withholding Supplemental Rate 25% Mandatory Flat Rate 39.6% Supplemental Wages also subject to Social Security, Medicare
& FUTA12
Supplemental Wages When YTD supplemental wages exceed
$1,000,000, use mandatory flat rate of 39.6% For the remainder of the year, all supplemental
wages are subject to 39.6% withholding When reaching limit, can apply to all wages or
only that portion going over $1,000,000:YTD Supplemental Wages $900,000; Bonus of $200,000
($200,000 x 39.6% = $79,200)OR (($100,000 x 25% = $25,000) + ($100,000 x 39.6% =
$39,600) = $64,600)
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Supplemental WagesMethods for Taxing Supplemental Wages
If paid with regular wages, must withhold as if a single payment for the pay period
If paid separately, there are two options:Calculate supplemental amount at 25% or
39.6% ORUse aggregate method 1) calculate taxes on the combined wages 2) calculate taxes on regular wages only 3) subtract #2 from #1 – the remaining is
considered supplemental wage tax amount 14
Supplemental Wages
Calculate supplemental amount at 25% or 39.6%:
$1,000 Bonus Paid Separately (or defined separately):
$1,000 x 25% = $250
15
Supplemental WagesAggregate Method:(Optional; Must use this method if no FIT withheld in current or
preceding year) Bonus $500.00 Regular Weekly Wages $645.00 W-4 Single with 5 allowances. Wage-Bracket Method: Weekly Wage Federal Tax $25.00 ($500.00 + $645.00 = $1,145.00) Wage-Bracket Method: Federal Tax $101.00 ($101.00 - $25.00 = $76.00) $76.00 would be attributed to
Supplemental Wages
Also acceptable to use Wage-Bracket on Regular Wage $25 and flat rate on Supplemental Wages ($500.00 x 25% = $125.00)
16
Federal Withholding
Final Notes: Rounding to whole dollar
$.01 to $.49 Round Down $53.40 = $53 $.50 to $.99 Round Up $353.60 = $354 Be consistent!!
Withholding income tax from pensions and annuities Use Form W-4P Withholding Certificate
for Pensions and Annuities17
Social Security & Medicare Taxes
Federal Insurance Contributions Act (FICA)
2 parts: Social Security & Medicare 7.65 % of taxable wages for
employers 7.65 % of taxable wages for
employees
18
Social Security & Medicare Taxes
Social Security Also known as OASDI- Old Age
Survivors Disability Insurance 6.2 % Maximum Salary $117,000.00 Maximum for ER $7,254.00 Maximum for EE $7,254.00
19
Social Security & Medicare Taxes
Medicare Taxes Also know as HI—Health Insurance 1.45 % No Maximum Salary No Maximum Contribution Employer Matches EE Contribution
20
Social Security & Medicare Taxes
When paying Fica Tax on $1000.00
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Example EE Tax ER Tax Totals
OASDI 6.2% $62.00 $62.00 $124.00
Medicare 1.45%
$14.50 $14.50 $ 29.00
Total Due $153.00
Additional deductions from pay
Types of voluntary deductions:Charitable contributionsRetirement programs i.e. 401kCredit union Direct mortgage payments Health insurance outside Section 125Stock purchase in employer’s companyAdvances / loan repaymentsUnion dues and fees
22
Additional deductions from payAdditional notes on voluntary deductions:
Require authorization (written or electronic)Last Priority – Wage Assignments firstER can set PrioritySubstantiation of charitable contributions requires 2 types of documentation
Pledge CardPay statements or W2
23
Additional deductions from pay Involuntary Deductions-Wage
Attachments (general priorities): Child support orders Chapter 13 bankruptcy Federal agency garnishments Federal tax levies State tax levies Local tax levies Creditor garnishments Student loan garnishments
24
Federal Tax Levies
Take home pay minus exempt amount documented in Pub. 1494 IRS instructions on form 668-W Notice of
Levy on Wages, Salary & Other Income Deductions in effect prior to levy are ok No new voluntary deductions allowed Involuntary deductions mandated by
company as condition of employment are ok
25
Federal Tax LeviesAmount of exempt wages based on Marital status Number of exemptions
Part 3 of Form 668-W Payroll frequency needed for number of annual pay
periods Chart to show exempt amount from levy --
Publication 1494 Do not stop withholding until Form 668-D, Release
of Levy is received 26
Child Support All orders are considered immediate
unless stated All orders in arrears are immediate Consumer Credit Protection Act (CCPA)
governs amount that can be taken Based on a percentage of
Disposable Earnings Gross wages minus taxes (generally not
including tips)
27
Child SupportMaximum %
If the employee supports a second family – cannot exceed 50% of disposable earnings (55% if in arrears)
If employee does not support a second family –cannot exceed 60% of disposable earnings (65% if in arrears)
State maximum withholding may be lower, but cannot be higher than these limits
28
Uniform Interstate Family Support Act -- UIFSA Clarifies the rules for processing out-of-
state wage orders Duration and specific amount of payments Person or agency to receive the payments Medical support – specific amount /
mandatory coverage Amount of payment of arrears and interest,
stated as a sum
29
UIFSA—Continued
Employers must comply with rules of their work state when: Withholding employer’s fee for
processing order Determining the maximum amount
permitted to be withheld Determining the time frame for
withholding and disbursement Handling multiple orders
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Multiple Order Handling
State law governs the handling of multiple orders
Multiple state orders default to the state where the employee works
31
States resolve multiple order challenges- - - 1 of 3 ways
1. Allocate the available funds to each order on a percentage basis
2. Allocate available funds equally to all orders
3. Prioritize based on receipt of orders Current support calculated before
arrearages
32
APA & Office of Child Support Enforcement
Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states
Must have current child support obligation amount based on pay cycle, arrears amount, medical support amount, payee, and payee’s address
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Centralized Support Collectionsand Disbursement Units
Federal law mandated all states develop one unit to disburse payments
All states but South Carolina currently participate in a centralized collections location within their state
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State law takes priority –Federal law limitations
State can allow an administrative fee for processing
Payment must be made within 7 days of withholding from wages
First payment must be made within 14 days of mailing date of order
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Garnishments Consumer Credit Protection Act
Federal Limit =25% orAmount of disposable pay that exceeds
30 x federal minimum wage Multiple orders are prioritized and will
effect lower priority attachments Garnishment Limits (Page 3-26) Watch for changes in Federal minimum
wage36
State Tax Calculated by
Wage bracket Percentage method or flat percentage Percentage of federal
No state tax:
37
Alaska Tennessee
Florida Texas
Nevada Washington
New Hampshire Wyoming
South Dakota
Local Income Taxes
Cities, counties, school districts, etc.
Each local taxing authority has its own requirements. Verify with the locality for its requirements and your compliance.
38
Local: City, School District, County, and Head Taxes
Most common states for local taxation are Ohio, Indiana and Pennsylvania
Many variances and local government regulations on these taxes – verify with the agency to determine their requirements
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State Disability Tax Six states have employee/employer funded
programs for illness and disability
Employers must deduct, report, pay, and record payments—failure to withhold is employer’s liability.
40
California New York
Hawaii Puerto Rico
New Jersey Rhode Island
State Unemployment Tax
Three states have provisions to withhold SUI from employees (in addition to the employer’s obligation):
All other states unemployment tax is exclusively the employer’s expense
41
Alaska New Jersey Pennsylvania
Deceased Employees Payments after date of death are taxable Federal income tax is responsibility of whomever receives the payment If the payment is made in same year as the employee’s death
Tax withheld for Social Security and Medicare On W2, report wages in boxes 3 & 5 and tax withheld in boxes 4 & 6 Amount not reported as federal taxable wages in box 1 of W2 Provide 1099-MISC with federal taxable wages reported in box 3,
and use name of deceased’s estate or beneficiary If payment is paid in year after death
Do not withhold Social Security and Medicare Do not issue a W2 Do issue a 1099-MISC and report amount paid in box 3
42
Paying the EmployeeGross to Net Calculation
Calculate Total Wages Determine Pretax Deduction
Amounts Determine Tax Withholding Determine Disposable Earnings
(Total Wages minus Taxes) for Child Support and Garnishment Deductions
Deductions Result = Net Pay
43
ABC Manufacturing1213 West Higgins RdPalatine, IL 60638John I. Doe234 Main StHighland Park, IL 60035
Check #814177
Period End08/31/2011
EE # 5609DEPT 33456
Hours Rate/Amt Current Year to DateTotal Gross 80.00 4246.88 81250.38Regular 80.00 4229.17 60022.17Group Term Life 17.71 17.71 283.36Floating Holiday 736.90Flex Time Off 4664.91Company Holiday 2242.74Bonus 13300.30
Fed W/H 561.87 12182.00Social Security W/H 255.96 4919.95Medicare W/H 59.86 1150.63IL State W/H 197.96 3805.77High Opt Health PreT 98.00 1568.00Delta Dental Hg Pre T
14.00 224.00
Vision Plan Pre T 6.52 104.32401(k) 169.17 3238.73401(k) Co Match 84.59 1619.45
Net Pay 2883.54 54056.98
Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1883.54Direct Deposit #2 71000012 22200044040 JP Morgan Chase 1000.00
Gross Up Payments
Employer Pays the Taxes! Typical situations for a Gross Up Payment
Want a specific amount as net amount – bonus of $100
Employer decides to pay taxes on taxable relocation expense
GTL for a termed employee –SS/Med paid by employer
Employer failed to withhold taxes on an employee’s previous payment
44
Gross Up Calculation steps
1. 100% - tax% = Net %2. Payment / Net %= Gross Earnings3. Check by calculating Gross to net
Need to Know for Exam !!!Examples: pages 3-36 to 3-38
45
Test Your KnowledgeAn employee is to be awarded a net bonus of $2,000 as
supplemental wages. Year-to-date regular and supplemental earnings are $15,000. Using the current supplemental flat tax rate and Social Security and Medicare tax rates, what should be the gross amount of the payment if the employee lives and works in a state with no state income tax?
A) $3,060.44B) $2,666.67C) $3,108.00D) $2,969.56
46
Answer:1. (100% - (25% + 6.2% + 1.45%)) = 67.35%2. $2,000 / 67.35% = $ 2,969.563. $2,969.56 – 742.39 – 184.11 – 43.06 = $2,000
Gross UpSpecial Circumstances
Employee meets or met SS tax limit
1. 100% - Tax % (no SS %) = Net %2. Payment + ((SS wage base-YTD
payments) x 6.2%) divided by Net % = Gross Earnings
47
Test Your KnowledgeAn employee is receiving a $500 net bonus. The employee
is married with 3 allowances. The employee’s YTD gross pay is $115,640 and the employee is paid biweekly. The employee lives and works in a state where there is no state income tax. Calculate the gross amount of the bonus.
A) $500.00B) $679.81C) $742.39D) $777.00
48
Answer:1. (100% - (25% + 1.45%)) = 73.55%2. $500 / 73.55% = $ 679.81 3. $679.81 – 169.95 – 9.86 = $500
Test Your KnowledgeAn employee is receiving a $500 net bonus. The employee
is married with 3 allowances. The employee’s YTD gross pay is $113,650 and the employee is paid biweekly. The employee lives and works in a state where there is no state income tax. Calculate the gross amount of the bonus.
A) $598.02B) $682.66C) $742.39D) $684.02
49
Answer:1 (100% - (25% + 1.45%)) = 73.55%2. $500 + ((113,700 – 113,650) x 6.2%)/ 73.55% = $500 + $3.10 / 73.55% = $684.023. $684.02 – 171.00 – 9.92 – 3.10 = $500
