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Fundamental Payroll Certification 2009

Fundamental Payroll Certification 2009. Paycheck Fundamentals Chapter 3. Withholding Federal Taxes. IRS defines taxable wages as all remuneration for services Federal taxation is FIT, SS, MED Some benefits are fully taxable, partially taxable and some are non- taxable. Back Pay Bonus

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Fundamental Payroll Certification 2009

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  1. Fundamental PayrollCertification 2009 Paycheck Fundamentals Chapter 3

  2. Withholding Federal Taxes • IRS defines taxable wages as all remuneration for services • Federal taxation is FIT, SS, MED • Some benefits are fully taxable, partially taxable and some are non- taxable

  3. Back Pay Bonus Commission Comp Car (pers use) Dismissal (severance) ER pd commuter fees in excess of $110 monthly ER pd parking >$250 monthly Fringe Benefits (most) Gifts, gift cards, prizes Group legal services Group term life >$50,000 Nonacountable reimbursed business expense Noncash Fringe benefits unless excl by IRC Taxable Compensation

  4. Taxable Compensation (Cont) • Sick pay and Disability Benefits (portion attributable by employer contribution) • Non qualified moving expense • Overtime pay • Regular wages • Tips

  5. Dependent child care up to $5000 under section 129 plan Company vehicle (business only) Deminimus Fringes Disability benefits (employee contribution) 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 Nontaxable Compensation

  6. Nontaxable Compensation (Cont) • Qualified transportation fringe benefit • Reimbursed business expense • Working condition fringe if can be deductible if paid by ee • Non-job related education up to $5250 • Long term care insurance • Workers compensation benefits • Health Savings Accounts

  7. Wages / Taxability • Period Ending – is the time wages are earned • Pay Date - is the date wages are paid and dictates the taxability, as well as structure for depositing and reporting of taxes to 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 overpayments; OP and RP can be netted together for W2; Employer 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 claims refund of Federal tax on 1040.

  8. Factors affecting Withholding • Employees marital status (W4) • Number of withholding allowances (W4 exemptions) • Pay Frequency • Whether regular or supplemental wages • Pretax Deductions

  9. Withholding Methods • Three main acceptable calculating means • Wage Bracket-(Pub 15 - Circular E) • Wage Percentage-(Pub 15 – Circular E) • Supplemental rate of 25% or in some instances 35%

  10. Withholding Methods • Wage bracket—simplest • Wage Percentage-most common especially with computerized payroll • Supplemental are all varied wages from pay period to pay period

  11. Supplemental wages • If paid separately must be 25% or 35%(if over 1 million in supple wages) • If paid with regular wages: • Calculate entire check at 25% or • Calculate regular taxes on the combined sum—calculate taxes on reg wages only subtract the reg taxes and remaining is considered supplemental (must be segmented on the records)

  12. Supplemental wages • 35% supplemental amount must be taken when a employees supplemental wages reach $1,000,000. • The remainder of the year all supplemental wages are subject to 35% withholding • Aggregate method-when no FIT on wages in preceeding year • Calculate the reg then calulate with supplemental wages—the difference must be withheld on the supplemental payment

  13. Social Security & Medicare Taxes • Federal Insurance Contributions Act (FICA) • Statutory deductions • 7.65 % of taxable wages

  14. Social Security & Medicare Taxes Social Security • Also known as OASDI- Old Age Survivors Disability Insurance • 6.2 % • Maximum Salary $106,800 • Maximum Contribution $6,621.60 • Employer must match EE contributions

  15. Social Security & Medicare Taxes Medicare Taxes • Also know as HI—Health Insurance • 1.45 % • No maximum salary • No maximum limit • Must be matched by employer

  16. Additional deductions from pay • Voluntary deductions • Charitable contributions • Retirement programs i.e. 401k • Credit union • Direct payments • Savings Bonds • Stock in employers company • Advances / loan repayments • Union dues and fees

  17. Additional deductions from pay • Voluntary deductions • Must be authorized • Last Priority • Charitable contributions must be shown on pay statements and W2 for individual 1040 filing

  18. Additional deductions from pay • Involuntary deductions-Wage attachments • Child support orders • Chapter 13 Bankruptcy • Federal agency garnishments • Federal Tax Levies • State Tax Levies • Local Tax Levies • Creditor Garnishments • Student Loan Garnishments

  19. Federal Tax Levies • Take home pay less exempt amount proved by chart • 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

  20. Federal Tax Levies • Based on Marital Status • Number of exemptions • Payroll frequency • Chart to show exempt amount from Levy Publication 1494 • Do not stop withholding until 668-D- Release of Levy is received

  21. Child Support • All orders since 1-1-94 are considered immediate unless stated • Welfare Reform Reconciliation Act of 1996 all orders in arrears are immediate • Consumer Credit Protection Act (CCPA) governs amount that can be taken • Based on a percentage of DisposableEarnings • Gross wages less taxes (generally not including tips)

  22. Child SupportMaximum % • If the employee supports a second family –cannot exceed 50% of disposable earnings (55% if arrearage) • If employee does not support a second family –cannot exceed 60% of disposable earnings (65% if arrearage) • State max withholding may be lower but cannot be higher than these limits

  23. Uniform Interstate Family Support Act-- UIFSA • Clarifies the rules for processing out of state wage orders • Duration and specific amts of payments • Person or agency to receive the payment • Medical support –specific amt / mandatory coverage • Amt of payment if arrears and interest states as a sum

  24. UIFSA—Continued • Employers must: • Withhold employers fee for processing order • Determine the maximum amt permitted to be withheld • Determine the time frame for withholding and disbursement to agency • Handle multiple orders

  25. Multiple Order Handling • State law governs the handling of multiple orders • Multiple state orders default to ee ”worked in state”

  26. States resolve multiple order challenges- - - 1 of 3 ways • Allocate the available funds to each order on a percentage basis • Allocate available funds equally to all orders • Prioritize based on receipt of order • Current support calculated before arrearages

  27. APA & Office of Child Support Enforcement • Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states and must have payment amount based on pay cycle, arrears, medical support, obligations, payee, obligee and appropriate address

  28. Centralized Support CollectionsDisbursement Units • Welfare Law of 1996 mandated all states develop one unit to disburse payments • All states but South Carolina currently participate in central collections location in their state

  29. State law takes priority –Federal law limitations • State can allow fee for processing • Payment must be made within 7 days of withholding from wages • 1st payment must be made within 14 days of mailing date of order

  30. Garnishments Consumer Credit Protection Act • Federal Limit 25% or Amt of disposable pay that exceeds 30 x minimum wage • Multiple types of orders are prioritized and will affect lower priority attachments • Garnishment Limits Table (Page 3-27 & 3-29)

  31. Advanced Earned Income Credit --AEIC • Qualifications • Expected Gross income if single/ HOH be less than $35,463 • Expected Gross income if Married/ jointly be less than $38,583 • Must have dependent child living with them at least 6 months of the year • Principal home is US • Must file a W5 form annually

  32. AEIC cont. • Gross remains same-net increases • Special tax tables are utilized • Maximum entitlement is $1,826.00 • If employee exceeds the salary limit-AEIC is automatically stopped • W5 must be done annually

  33. State Tax • Calculated by • wage bracket • % or flat percentage • Percentage of federal • No state tax: • Alaska, Nevada ,Florida, Tennessee, New Hampshire, South Dakota, Texas, Washington and Wyoming

  34. Local Income Taxes • Each local taxing authority has its own requirements. Must verify with the locality for compliance

  35. State Disability Tax • Six jurisdictions have employee/employer funded programs for illness and disability • California, New York, Hawaii, Puerto Rico, New Jersey, Rhode Island • Employers must report, pay and record payments—failure to pay is employers liability

  36. State Unemployment Tax • Three states have provisions to withhold SUI from employees: • Alaska, New Jersey and Pennsylvania—up to the unemployment wage base • All other states Unemployment tax is the employers expense

  37. Local tax, City tax, School Districts and head taxes • Most common states for local taxation are Ohio and Pennsylvania • Many variances and local government regulations on these taxes –verify if necessary with the agency which is applicable to the circumstance, i.e. residency vs. place of work

  38. Deceased Employees • Payments after date of death are taxable • Federal income tax is responsibility whom ever receives the payment • If the payment is made in same year as the employee’s death • Tax payment for Social Security and Medicare Taxes • On W2, post in Amount paid in box 3 & 5 and Social Security and Medicare in box 4 & 6 • Amount not reported as Federal Taxable Wages in box 1 of W2 • Also provide 1099 MISC with Federal Taxable Wages reported in box 3 and give 1099 to the Estate or Beneficiary (use TIN not SSN) • If payment is paid in year after death • Do Not withhold Social Security and Medicare • Do Not issue a W2 • Do issue a 1099 and report amount of payment in box 3 of 1099 MISC

  39. Paying the EmployeeGross to Net Calcuation • Total Wages have been calculated • Pretax Deduction Amounts determined (excluded from Disposable Earnings) • Tax Withholding Determined • Disposable Earnings (Total Earnings – Taxes) for Child Support and Garnishments Deductions • Deductions • Levy deducted from Take Home Pay • Result = Net Pay

  40. Grossed Up Payments(ADP –Net to Gross Calc) • Employer Pays the Taxes! • Typical situations for a Grossed Up Payments • 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

  41. Gross Up Calculation steps • 100% - tax % = Net % • Payment / Net %= Gross Earnings • Check by calculating Gross to net Need to Know !!! Examples page 3-40 to 3/41

  42. Test Your Knowledge An 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 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 not state income tax. A) $3,060.44 B) $2,666.67 C) $3,108.00 D) $2,969.56 Answer: 1. ($2,000 / (100% - (25% + 6.2% + 1.45%)) = 2. $2,000 / 67.35% = $ 2,969.56 the answer is D 3. $2,969.56 - 742.39 – 184.11 – 43.06 = $2,000

  43. Gross UpSpecial Circumstances • Employee meets or met SS tax limit • 100% - Tax %(no SS %) = Net % • Payment + ((SS wage base-YTD payments) x 6.2%) / Net % = Gross Earnings Need to know !!!

  44. Test Your Knowledge An 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 income tax. Calculate the gross amount of the bonus. A) $500.00 B) $679.81 C) $742.39 D) $777.00 Answer: 1. ($500 / (100% - (25% + 1.45%)) = 2. $500/ 73.55% = $ 679.81 the answer is B 3. $679.81 – 169.95 – 9.86 = $500

  45. Test Your Knowledge An employee is receiving a $500 net bonus. The employee is married with 3 allowances. The employee’s YTD gross pay is $106,640 and the employee is paid biweekly. The employee lives and works in a state where there is no income tax. Calculate the gross amount of the bonus. A) $598.02 B) $679.81 C) $742.39 D) $693.30 Answer: 1. ($500 / (100% - (25% + 1.45%)) = 2. $500 + ((106,800 – 106,640) x 6.2%)/ 73.55% = $500 + $9.92/ 73.55% = $693.30 the answer is D 3. $693.30 – 173.33 – 10.05 – 9.92 = $500

  46. Points of Interest • Methods to calculate taxes • Constructive receipt • Requirements to calculate a check • Gross, Net, Disposable • Taxable income/ Nontaxable Income • Voluntary/ Involuntary Deductions • Child Support & Levy payments • Gross Ups

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