Income Taxes Federal Income Taxes Therefore, using total wages (income) to calculate federal withholding taxes would overstate the amount of taxes. CALCULATING

Income Taxes

Federal Income Taxes

Therefore, using total wages (income) to calculate federal withholding taxes would overstate the amount of taxes.

CALCULATING FEDERAL INCOME TAX on FORM 1040 (2014)

(Married, 2 Exemptions)

Income (Adjusted Gross Income): $25,000

Standard Deduction: ($12,400) (Married)

------------Taxable Income: $ 4,700

Exemptions: ($7,900) [2 x $3,950]People

Dollars

see Form 1040 pdf document

FEDERAL INCOME TAX WITHHOLDING


(FIT or FWT)

Taxable Wages

Definition: Wages total compensation paid to employees.

wages/salaryvacation paybonuses tips

Compensation includes:



tips

Tips



Tips

employee reports tips for the month, if over $20.

the report includes tips from charge cards, as well as cash tips.

employer collects FIT, FICA-SS and FICA-HI from employee.

the report is due from employee by the 10th of the following month.

see Form 4070 pdf document

employer also pays FICA-SS and FICA-HI.

large food or beverage establishment (10+ EE’s) must allocated tips if the total tips reported during any payroll period are less than 8% of the establishment’s gross receipts for that period.



(FIT or FWT)

Taxable Wages

Definition: Wages total compensation paid to employees.

wages/salaryvacation paybonuses tips fringe benefits

Compensation includes:



fringe benefits

Fringe Benefits



Fringe Benefits

Taxable Fringe Benefits examples personal use of company car

vacations (company-paid)

tickets for entertainment / sporting events

athletic club membership

frequent flier miles (not yet, but maybe in the future?)

Non-Taxable Fringe Benefits employee discounts

meals at employer-run eating establishments

Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically.

WSJ Article



Wages Exempt from FIT (examples)

Educational Assistance, if it maintains/improves job status. Up to $5,250 per year for non-job-related educational expenses.

Dependent Care Assistance – up to $5,000 per year.• employer must have a written plan that does not

discriminate in favor of the most highly paid workers.

Employer contribution to a Health Reimbursement Account (HRA)

Employer contribution to a 401(k) program.

De Minimus Fringe Benefits – benefits of little value (e.g., Holiday Turkey/Ham).

Employer-Provided Parking – up to $245 per month.

Exclusion from wages. You can generally exclude the value of transportation benefits that you provide to an employee during 2014 from the employee's wages up to the following limits.• $130 per month for combined commuter highway vehicle

transportation and transit passes.• $250 per month for qualified parking.• For a calendar year, $20 multiplied by the number of

qualified bicycle commuting months during that year for qualified bicycle commuting reimbursement of expenses incurred during the year.



Wage Deductions Deductions that reduce Wages prior to calculating FIT

deferred arrangements (e.g., 401(k), SEP, IRA)

cafeteria plans (section 125)

• allows EE’s to contribute income to a “plan” and avoid FIT at the time of contribution… but FIT is due when the funds are withdrawn at a later time (retirement).

• allows EE’s to pay for medical, dental and dependent care with “pre-tax” dollars.

• NOTE: this is also exempt from FICA

• NOTE: this is NOT exempt from FICA


Example of Section 125 Deduction: Assume a 30% Total Tax Rate (FIT, SIT, FICA) and

$1,000 of Medical Expenses.

As you can see, you are $300 better off to have the medical expenses deducted prior to calculating payroll taxes.



Wage Deductions Deductions that reduce Wages prior to calculating FIT

deferred arrangements (e.g., 401(k), SEP, IRA)

cafeteria plans (section 125)

(this is NOT exempt from FICA)

(this is also exempt from FICA)

Deductions that do NOT reduce Wages prior to calculating FIT union dues wage garnishments loan payments credit union, United Way donation, etc.



Form W-4

employee may claim “exemption” from income tax withholding if no income tax liability last year and none expected this year

to be completed by the employee

employee can change anytime – existing W-4 becomes invalid

employee can additionally have more tax withheld by claiming fewer exemptions and/or additional dollars

(Employee’s Withholding Allowance Certificate)

employer must maintain the W-4 and use it to calculate income tax to be withheld

employer is to implement within 30 days from receipt of W-4 (no reimbursement of taxes if implemented within 30 days)

employer must withhold at single, no allowance rate (i.e., highest taxes) if

no W-4 is received from employee

see Form W-4 pdf document



FYI… Fictitious World Example of How to Use Tax Tables

EXEMPTION = $15 (make-believe)

Taxable Wages Tax of the Amount Over

$0 - $100 $0 plus 10% $0

$101 - $200 $10 plus 20% $100

$201 - $300 $30 plus 30% $200

$301 - $60 plus 40% $300

MARRIED TAX TABLE (make-believe)



Withholding Methods Percentage Method

1. Start with Taxable Wages.

2. Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.

3. Subtract the result from #2 from #1.

4. Compute tax from “Percentage Method” tables, using the correct pay period and marital status.

Percentage Method Examples


Joe, Single, 2 Allowances, earning $280.30 Weekly(Joe, S/2, $280.30, Weekly)

1. Taxable Wages: $280.30

2. Allowances: $76.90 x 2 = $153.80

3. Excess Wages: $280.30 - $153.80 = $126.50

4. W/H Taxes: ($126.50 - $44.00) x 10% = $8.25

Percentage Method Examples (cont.)


Mary, Married, 3 Allowances, earning $1,552.73 Bi-Weekly(Mary, M/3, $1,552.73, Bi-Weekly)

1. Taxable Wages: $1,552.73

2. Allowances: $153.80 x 3 = $461.4

3. Excess Wages: $1,552.73 - $461.40 = $1,091.33

4. W/H Taxes: [ ($1,091.33 - $1,040.00) x 15% ] + $70.90 = $78.60

Percentage Method Examples (cont.)


Steve, Single, 3 Allowances, earning $2,000.00 Bi-Weekly(Steve, S/3, $2,000.00, Bi-Weekly)

1. Taxable Wages: $2,000.00

2. Allowances: $153.80 x 3 = $ 461.40

3. Excess Wages: $2,000.00 - $ 461.40 = $1,538.60

4. W/H Taxes: [ ($1,538.60 - $1,529.00) x 25% ] + $198.40 = $200.08



Withholding Methods (cont.) Percentage Method

Wage-Bracket Method


2. Locate the correct withholding table, using the correct pay period and marital status.

3. Locate the proper wage bracket.

4. Move across to tax amount, which is located in the appropriate allowance column.


2. Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.

3. Subtract the result from #2 from #1.

4. Compute tax from “Percentage Method” tables, using the correct pay period and marital status.

Wage-Bracket Method Examples


Jenny, Married, 3 Allowances, earning $750.00 Weekly(Jenny, M/3, $750.00, Weekly)

1. Select Table: Married - Weekly

2. Find Wage Bracket: $750 - $760

3. Move across to proper allowance column: (3) $36.00

Let’s Calculate using Percentage Method:

1. Taxable Wages: $750.00

2. Allowances: $76.90 x 3 = $230.70

3. Excess Wages: $750.00 - $230.70 = $519.30

4. W/H Taxes: [ ($519.30 - $165.00) x 10% ] + $0.00 = $35.43

Wage-Bracket Method Examples (cont.)


Chris, Single, 0 Allowances, earning $2,130.00 Semi-Monthly(Chris, S/0, $2,130.00, Semi-Monthly)

1. Select Table: Single – Semi-Monthly

2. Find Wage Bracket: $2,120 - $2,140

3. Move across to proper allowance column: (0) $333.00



Withholding Methods (cont.) (FYI…) Quarterly and Yearly Averaging

used with fluctuating, but “estimate-able” income based on income estimate for Quarter or Year divide estimate by number of pay periods - then determine tax

withholding withhold average tax amount every pay period

Quarterly Averaging Example


Bill is expected to earn $8,000 during the 2nd quarter, but his pay may vary dramatically between pay periods. Pay periods are semi-monthly and Bill claims 2 allowances and married.

1. Divide the estimated wages by the number of pay periods:

$8,000 / 6 semi-monthly pay periods = $1,333.33

2. Using Wage-Bracket Table, find withholding amount for each pay period:

$64 per pay period should be withheld



Supplemental Wages

If Paid with Regular Wages (on same check)

If both wages are combined together, then compute tax on entire payment as we have done previously

If shown separately, can have two different rates for each payment one for the regular wages and, say, 25% for the supplemental wages

vacation pay bonuses commissions severance



Supplemental Wages (cont.)

If Paid Separately from Regular Wages (two separate checks)

Method B

(1) add supplemental wages to the previous-paid regular wages (2) then calculate tax on entire amount (3) then subtract previously-held tax to arrive at tax amount to

withhold for supplemental wages

(use this method if no income tax withheld from regular wages)



Method B (example) June 15th: Louis, married, 1 allowances earns $985 semi-monthly.

FIT Withholding is $47.00 (from wage bracket table)

June 18th: Bonus of $500 is paid to Louis.

Method B: Add $500 bonus to previous-paid wages of $985, which equals $1,485. FIT withholding based on $1,485 is $106 (from wage bracket table). Since $47 previously withheld on 6/15, need to withhold ($106 - $47 = ) $59 when paying the $500 bonus.

Analysis: Tax is based on the 15% “marginal” tax rate for this example.




If Paid Separately from Regular Wages (two separate checks)

Method B

(1) add supplemental wages to the previous-paid regular wages (2) then calculate tax on entire amount (3) then subtract previously-held tax to arrive at tax amount to

withhold for supplemental wages

(use this method if no income tax withheld from regular wages)

Method A

withhold a flat 25% on the supplemental pay




Vacation

Treat as if it’s a regular payment for the vacation pay period(s)

If paid in lieu of time, combine with regular pay

WEEK 1$1,000

Calculate W/H

Example Lump sum payment of 2 weeks vacation to an employee who earns $1,000 per week and who’s taking their two week vacation:

Income tax withholding is calculated as follows:

Add the total W/H and deduct from the $2,000 payment.

WEEK 2$1,000

Calculate W/H

+ =

Wage & Tax Statements

Form W-2 (Wage & Tax Statement)

income tax or FICA taxes were withheld income tax would have been withheld if employee had claimed one

withholding allowance or had not claimed exemption from withholding any amount paid to the employee for services, if the employer was a

trade or business

Prepared by Employer if employee had any of the following:

Must be given to employees on or before January 31st


Form W-3 (Transmittal of Wage & Tax Statements)

The form is automatically sent to employers during the 4th quarter Used as a “cover form” for filing all W-2’s Copy A Form W-3 and all the W-2’s are sent to the Social Security

Administration by the end of February Must file electronically instead of Form W-3 if W-2’s number 250 or

more – due date extended to March 31st

Form W-2c and Form W-3c (Corrected Statements)

Use Form W-3c if more than one Form W-2c; otherwise just file W-2c




Form 1099 (Miscellaneous Income)

Form 1099-MISC used to report payments such as rents, legal fees, payments to independent contractors, royalties, and award

Form 1096 is used to transmit the 1099’s to the IRS



Illinois State Income Tax

Form IL-W-4

There are two different types of allowances – Basic allowances ($2,150 each) and Additional allowances ($1,000 each).

Employee may include an additional dollar amount of withholding, similar to FIT

Employees that are residents of Iowa, Kentucky, Michigan and Wisconsin (reciprocal agreements) must complete Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, to be exempt from Illinois Income Tax withholding

(Employee’s Illinois Withholding Allowance Certificate)

show IL-W-5-NR.pdf document


Taxes

Straight, 3% 5% 3.75% rate after allowances Can use Percentage Method or Wage-Bracket Method (see handouts)

Deposit Requirements (based on a “lookback” period) If more than $12,000 Semi-Weekly depositor. Between $1,000 and $12,000 Monthly depositor (new taxpayers, as well) Less than $1,000 Annual depositor.

Use Form IL-501 to deposit (analogous to Form 8109) or electronic deposit.


Form IL-941 If Annual depositor use Form IL-941 and it’s due by January 31st

If Monthly or Semi-Weekly depositor then file quarterly, even if $0 for quarter - form is due by end of the following month.

Documents

Income Taxes Federal Income Taxes Therefore, using total wages (income) to calculate federal withholding taxes would overstate the amount of taxes. CALCULATING