Chapter 2Net Income

Federal Income Tax federal income tax is the money

withheld by an employer from an employer paycheck to pay federal government taxes

withholding allowances – the number of people an employee supports, which helps employers know how much money to withhold for federal income tax.

Example 1Carla Good is an actuary. Her gross pay for this week is $425.88. She is married and claims 2 allowances for herself and her husband. What amount will Carla’s employer withhold from her pay for FIT?

-step 1: find the income range from the table

-step 2: find the column for 2 allowances-step 3: the amount of federal income tax

to be withheld is $14.00

Find the federal income tax withheld each week using the weekly payroll tables. Dan Caine, a welder, is married, claims

1 allowance, and earns $390.50 $18.00

Angie Kim, executive assistant, is single, claims 2 allowances, and earns $435.95

$31.00

Percentage Method Some companies use percentage

method instead of tax tables to compute the income tax withheld. With this method, you use taxable wages to find the withholding amount.

Taxable wages depend on the number of allowances you claim.

Percentage method of withholding – single person

Each weekly allowance is 63.46

Weekly taxable wage The amount of income tax to withhold is:

Over But not over

$51.00 $195.00 $0.00 plus (10% of the excess over $51.00)

$195 $645.00 $14.40 plus (15% of the excess over $195)

$645 $1482 $81.90 plus (25% of the excess over $645)

Example 2 Lance Hart’s gross pay for this week is $393.23.

He is a carpenter’s apprentice, is single, and claims 2 allowances. Using the percentage method, what amount will Lance’s employer withhold from his pay for federal income tax? Step 1- find the allowance amount

Allowance amount = the # of allowances x 63.46 $126.92 = 2 x 63.46Step 2 – find the taxable wage

taxable wage = gross pay – allowance amount $266.31 = $393.23 - $126.92

Step 3 – find the amount withheld for FIT using the table A. find the taxable wage in the row over $195 but

not over $645 B. find the amount of income tax withheld by:

Tax withheld for FIT = $14.40 plus 15% of the excess over $195

= $14.40 + [0.15 x ($266.31 - $195)]

= $14.40 + (0.15 x $71.31) = $14.40 + $10.70

= $25.10

Lesson 2.2 State Income Tax

State Income Tax

Most states require employers to withhold a certain amount of pay for income tax. In some states, the tax withheld is a percentage of taxable wages

Exemptions – withholding allowances which allow for supporting yourself, your spouse, and others in your family who are your dependents.

taxable wages = annual gross pay – exemptionsstate income tax = taxable wages x tax rate

Example 1Tony Raymond’s gross pay as a landscape designer is $44,750 a year. The state income tax rate is 3% of taxable wages. He takes an exemption for himself and 1 exemption for his child. How much does Tony’s employer withhold yearly from his gross earnings for state income tax?

Exemptions

Single $2,000

Married $4,000

Each dependent

$2,000

Step 1- find the taxable wagesannual gross pay – exemptions

$44,750 – (2000 + 2000)

$44,750 – 4000 = $40, 750 taxable wages

Step 2 – find the annual tax withheldtaxable wages x tax rate 40,750 x 3% = $1,222.50

Example 2Andrea McReedy is a dispatcher for a local trucking company. She 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?

Step 1 – let r = state income tax rate for her state

Step 2 – use the formula for state income tax, substituting for taxable wages and solve for r

state income tax = (taxable wages – exemptions) x tax rate

2430 = (52,600 - 4000) x r2430 = 48600r = 0.05 = r

The state income tax rate for Andrea’s state is 5%

Lesson 2.3Graduated State Income Tax

Graduated income tax A system that increases the tax rate at different

levels of income The tax rate increases as income increases May be as low as 1% or as high as 10%

Tax withheld per pay period =

Example Louise Main’s annual salary as a police officer is

$34,500. She receives her pay semimonthly, or twice a month. Her exemptions total $2000. Use the table to determine how much her employer deducts for state income tax from each of her semimonthly paychecks.

State Tax

Taxable wages

Tax rate

First $1000 1.5%

Next $2000 3.0%

Next $2000 4.5%

Over $5000 5.0%

exemptions

Single $2000

Married $4000

Each dependent

$2000

Step 1 – find the taxable wagesannual gross pay – exemptions $34,500 - $2000 = $32,500

Step 2 – find the annual state tax withhelda. first $1000: 1.5% of $1000 = $15.00b. next $2000: 3.0% of $2000 = $60.00c. next $2000: 4.5% of $2000 = $90.00d. over $5000: 5.0% of (32,500 – 5000) = 5% of 27,500

= $1375.00Total: $1540.00

Step 3 – find the tax withheld per pay periodtax withheld per pay period =

= $59.23

Try on your own

Eddie Black is single and receives his pay biweekly. His annual salary as a tailor for Whyte and Broom is $21, 350. What is the amount of tax withheld each pay period?

answer: $33.94

Lydia Robins’ annual salary from Dresler & Everhard is $67,500. She is married, has one dependent, and is paid monthly. What is the amount of tax withheld each pay period?

answer: $249.17