Understanding Payroll Taxes, Withholding, and Estimated Payments for Employees and Employers

1. Chapter 9 Withholding, Estimated Payments, and Payroll Taxes

2. Objective Be able to complete Form W-4: Employee’s Withholding Allowance Certificate

3. Withholding Methods • Employer must withhold taxes from employees’ pay based on their Form W-4 • Pay includes salaries, bonuses, commissions, vacation, some non-cash fringe benefits • W-4 tells employer number of exemptions claimed by employee • single, married, or married but tax withheld at higher single rate • can claim exempt status if had no liability last year and expect none this year • Best tax planning scenario is if withholding equals tax liability (no refund/tax due)

4. Objective Know how to calculate income tax (FIT) and FICA tax withholding from wages

5. Computing Withholding • To compute amount to withhold from pay • Employers must know • # of allowances claimed • gross wages for the pay period • marital status • Use IRS tables to calculate federal income tax based on gross wages

6. Withholding on Tips • Employer must receive a tip report from each employee and withholds taxes based on this report • If employee reports less than 8% of gross food/beverage sales in tips • Employer must “allocate” tips up to 8% and collect taxes on these tips • Employer must report to IRS “Annual Information Return of Tip Income & Allocated Tips” (Form 8027)

7. Other Withholdings • Required withholding on IRA and pension distributions, bonuses, etc. • Backup withholding required on interest and dividends when: • Taxpayer does not provide an identification number (SSN) or provides incorrect number • Taxpayer fails to certify that he/she is not subject to withholding • Backup withholding is 30% of amount paid to taxpayer

8. Estimated Payments • Self-employed taxpayers and other taxpayers with non-wage income must make quarterly estimated tax payments if annual payment due for the year is ≥ $1000 (after withholding) • Quarterly payments due April 15, June 15, September 15, and January 15 of the following year • Annual required payment is the lesser of • 90% of current year tax, or • 100% of prior year tax, but • exception if AGI > $150,000 for prior year, then annual required payment = 112% of prior year

9. FICA Tax • Federal Insurance Contributions Act (FICA) was intended to provide retirement benefits for workers and their families • FICA is two taxes • Social Security - 6.2% of first $84,900 of gross earnings • Medicare - 1.45% on total gross earnings • If taxpayer has more than one source of income, possible to overpay Social Security • Taxpayer can then claim the excess with other pre-payments of income tax

10. Federal Tax Deposit System • Employers withhold both FIT and FICA from paychecks and must make deposits either monthly or semi-weekly based upon the total amounts withheld • Monthly - made by 15th of following month • Semi-weekly - made within 3-4 days of running payroll • exceptions: • owe > $100,000 then must deposit within 24 hours • owe less than $1,000 in a quarter, may pay with quarterly Form 941 Payroll Tax Return

11. Federal Tax Deposit System (continued) • To make deposit, fill out Form 8109 as a deposit slip and take deposit to a Federal Depository • If mailed, must be postmarked second day before due date,or • May be electronically deposited via EFTPS (Electronic Federal Tax Payment System)

12. Objective Be able to complete Form W-2 and Form 941 and understand certain other employer payroll reporting requirements

13. Employer Reporting Requirements • Annually, employers must send W-2s • By 1/31 to each employee • By 2/28 with a Form W-3 (transmittal) to the Social Security Administration • May have obligation to send W-2 and state specific transmittal form to state Department of Revenue • W-2 shows gross wages, income and FICA tax withholdings and “special Items” • Unreported tips, 401(k) contributions, employer provided day care, and other taxable fringe benefits

14. Reporting Requirements • Annually, employers must complete Form 1099-MISC for each independent contractor • By 1/31 to each unincorporated independent contractor who earned > $600 and provided a service (for example - attorney, lawn service, etc.) • By 2/28 with a Form 1096 (transmittal) to the IRS • May have obligation to send 1099s and state specific transmittal form to state Department of Revenue

15. FUTA Tax • Federal Unemployment Tax Act requires employers to pay tax to support unemployment payments • Employer pays 6.2% (net) up to first $7,000 per employee per year, but credit of up to 5.4% for state employment taxes • Deposit quarterly (if over $100) • File annual report (940-EZ) to show gross wages, FUTA wages and FUTA tax

16. Objective Know how to calculate taxes for self-employed taxpayers

17. Self-Employment Tax (Schedule SE) • Self-Employment (SE) tax is the same as FICA, except taxpayer is both employer and employee. Therefore, rates are: • Social Security - 12.4% of first $84,900 of net self-employment income • Medicare - 2.9% on total net self-employment income • If taxpayer has both W-2 wages and self-employment income, the $84,900 limit applies to the combined earnings • Don’t have to pay SE tax if SE income is less than $400 • May take a “for” deduction for one-half of SE tax paid

18. Objective Understand the special tax and reporting requirements for household employees

19. The Nanny Tax • Household employee is anyone working in taxpayer’s home (full- or part-time) such as cook, housekeeper, etc. • Employer must • Pay FICA on any household employee who earns > $1,300 in a calendar year • Withhold taxes for household employee and pay FUTA • Report FICA and FIT annually

20. The Nanny Tax (continued) • Employer must also • Complete a Schedule H and attach to 1040, or • If have 941 and 940 filing requirements for other business, can add household employees on to these reports • Must file W-2 for each household employee who earns $1,300 or more a year • Not required for anyone under 18 unless providing household services is his or her principal occupation

21. The End