Chapter 2.1 Federal Income Tax

Transcription

1 Chapter 2.1 Federal Income Tax Determine the amount of tax withheld for federal income tax. Those who have received paychecks before have noticed that the check did not total what the gross income should have been. In this chapter we will discuss and calculate the deductions and withholdings that can occur from a paycheck. In order for the federal government to pay for services, a federal income tax (FIT) is withheld from your paycheck. The Internal Revenue Service (IRS) provides employers the tables necessary to determine the amount to withhold from employees paychecks. The amount withheld depends on your amount of income as well as your marital status, and withholding allowances. You may claim one allowance for yourself, one for your spouse, and one for each dependent you support.

2 Chapter 2.1 Federal Income Tax Determine the amount of tax withheld for federal income tax. One method for calculating federal income tax withheld is using the table Married Persons Weekly Payroll. Dan Caine is a welder, is married and claims 1 allowance. His weekly income is $ What is the federal income tax withheld? Step 1: Find the income range from the table. Step 2: Find the column for 2 allowances. Step 3: Cross intersect to find the amount of federal income tax withheld. The amount withheld is $ Percentage Method. Some companies use a percentage method to compute income tax withheld. Percentage method uses taxable wages to determine the withholding amount. Taxable wage depends on the number of allowances you claim and the weekly allowance rate.

3 Chapter 2.1 Federal Income Tax Determine the amount of tax withheld for federal income tax. Allowance Amount = Number of Allowances Weekly Rate Taxable Wage = Gross Pay Allowance Amount Amount withheld for FIT = Taxable wage and a table Percentage Method of Withholding Single Person Weekly Taxable Wage Each Weekly Allowance = Amount of income tax to withhold: Over But not over $51.00 $ $0.00 plus 10% of excess over $ plus 15% of the excess over , plus 25% of excess over

4 Chapter 2.1 Federal Income Tax Determine the amount of tax withheld for federal income tax. Lance Hart s gross pay fro this week is $ He is a carpenter s apprentice, is single, and claims 2 allowances. Using the percentage method, what amount will Lance s employer withhold for federal income tax? Step 1: Allowance Amount = Number of Allowances $63.46 $ = 2 $63.46 Step 2: Taxable Wage = Gross Pay Allowance Amount $ = Step 3: Tax Withheld for FIT = $14.40+[ 15% $ ] $25.10 What happens if your employer does not withhold enough? What happens if your employer withholds too much?

5 Chapter 2.2 State Income Tax Determine the amount of tax withheld for state income tax (SIT). Like federal income tax, most states have a state tax. Florida and Texas do not have a state tax; however, the other taxes can be large to pay for the state provided services. Some states express the state tax as a percentage using exemptions. Exemptions are very much like federal withholding allowances. Taxable Wages = Annual Gross Pay Exemptions State Income Tax = Taxable Wages Tax Rate Tony Raymond s gross pay is $44,750 a year. The state income tax rate is 3% of taxable wage. He takes one exemption for himself and one exemption for his child. How much does Tony s employer withhold from his gross earnings for state income tax. Exemptions Single $2,000 Married 4,000 Each Dependent 2,000 $44, = $40,750 $40,750 3% = $1,222.50

6 Chapter 2.2 State Income Tax Determine the amount of tax withheld for state income tax (SIT). Andrea McReedy earns $52,600 per year. She is married and pays $2,430 in state income tax per year. She claims no other dependents. What is the state income tax rate for her state? Taxable Wages = Annual Gross Pay Exemptions Taxable Wages = $52,600 $4,000 = $48,600 State Income Tax = Taxable Wages Tax Rate $2,430 = $48,600 tax rate Tax Rate = $2,430 = 0.05 or 5% $48,600

7 Chapter 2.3 Graduated State Income Tax Determine the amount of state tax withheld from a graduated scale. Some states use a graduated income tax. This means that the more you earn the more tax you will pay. This is exactly like graduated commission. We need to introduce a new equation to aid us in determining the amount of taxes being withheld per paycheck. Annual Tax Withheld Tax Withheld per Pay Period = Number of Pay Periods per year

8 Chapter 2.3 Graduated State Income Tax Determine the amount of state tax withheld from a graduated scale. Louise Main s annual salary is $34,500. She receives her pay semimonthly. Her exemptions total $2,000. Determine how much her employer deducts for state income tax per paycheck. Taxable Wages = $34,500 $2,000 = $32,500 First $1,000: $1, % = $15.00 Next $2,000: $2, % = $60.00 Next $2,000: $2, % = $90.00 Over $5,000: 32, % = $1, Total Taxes = $1, State Tax Taxable Wages Tax Rate First $1, % Next $2,000 Next $2,000 Over $5,000 Exemptions % Single $2,000 Married 4,000 Each Dependent 2,000 Tax Withheld per Pay Period = Annual Tax Withheld Number of Pay Periods per Year = $1,540 = $

9 Chapter 2.4 Social Security and Medicare Taxes Calculate the amount withheld for Social Security and Medicare taxes. The Federal Insurance Contributions Act (FICA) requires employers to deduct a percent of your income as taxes for Social Security and Medicare. Social Security pays for retirement and disability benefits; while Medicare provides medical insurance. These benefits are for those who are 65 years and older. Social Security tax rate is 6.2% and is paid on the first $97,500 of income. The Medicare tax rate is 1.45% with no limit on your earnings. Tax Withheld = Gross Pay Tax Rate Riley Henderson s gross biweekly pay is $728. His earnings to date for the year total $26,208. What amount does his employer deduct from his pay this period for Social Security taxes and Medicare taxes? Gross Pay Social Security tax rate = $ % = $45.14 Gross Pay Medicare tax rate = $ % = $10.56 Total Deduction = $ $10.56 = $55.70

10 Calculate the deduction for group health insurance. Chapter 2.5 Group Health Insurance Many businesses offer to pay for health insurance because group insurance rates are cheaper than individual rates. Most companies will often pay part of the insurance costs, or premium, while the employee pays for the remaining percentage. Employee s Share = Annual Amount Employee s Percent The employee s amount is then deducted each pay period. Total Annual Amount Paid by Employee Deduction per Pay Period = Number of Pay Periods per Year Nadine McClure has family medical coverage through her company. The annual cost is $9,800. The company pays 75% of the cost. How much does she have deducted from her biweekly paycheck? 100% - 75% = 25% employee pays $9,800 25% = $2,450 total employee pays $2, pay periods = $94.23 deducted per pay period

11 Chapter 2.5 Group Health Insurance Calculate the deduction for group health insurance. Kim Choi pays $ per month for group medical insurance. Her employer pays 55% of the cost. How much is the annual premium. 100% 55% = 45% Kim pays Employee s Percent Annual Premium Number ofpay Periods per year = Deduction per pay Period 0.45 x 12 = $ Kim s anual Premium = $3,088.00

12 Calculate the net pay per pay period. Chapter 2.6 Statement of Earnings As we have discussed, there are deductions from our paychecks for federal and state taxes, insurance, Social Security, and Medicare. Other deductions may occur for union dues, community contributions, savings and/or retirement plans. Attached with your pay stub is an itemized list of all your deductions called a statement of earnings. The statement of earnings shows your gross pay, all your deductions and a bottom-line figure which is your net pay. Net Pay is the amount of money you have left after all withholdings and deductions are subtracted from your gross pay. Tis is sometimes called your net income or your takehome pay. Net Pay = Gross Pay Total Deductions