fundamental payroll certification 2010 paycheck fundamentals chapter 3 paula black cpp, phr...
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Fundamental PayrollCertification 2010
Paycheck Fundamentals
Chapter 3Paula Black CPP, PHR [email protected]
Paycheck Fundamentals Federal Withholding Social Security & Medicare Withholding Additional Deductions from Pay Advanced Earned Income Credit State Taxes Deceased Employees Gross to Net Calculations Employer-Paid Taxes
2
Elements of a Pay Check
Gross Amount vs Actual Pay Check Amount
Additions Deductions Net Pay
3
ABC Manufacturing1213 West Higgins RdPalatine, IL 60638John I. Doe234 Main StHighland Park, IL 60035
Check #814177
Period End08/31/2010
EE # 5609DEPT 33456
Hours Rate/Amt Current Year to DateTotal Gross 80.00 4246.88 81250.38Regular 80.00 4229.17 60022.17Group Term Life 17.71 17.71 283.36Floating Holiday 736.90Flex Time Off 4664.91Company Holiday 2242.74Bonus 13300.30
Fed W/H 561.87 12182.00Social Security W/H 255.96 4919.95Medicare W/H 59.86 1150.63IL State W/H 118.24 2274.89High Opt Health PreT 98.00 1568.00Delta Dental Hg Pre T 14.00 224.00Vision Plan Pre T 6.52 104.32401(k) 169.17 3238.73401(k) Co Match 84.59 1619.45
Net Pay 2945.55 55304.50
Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1945.55Direct Deposit #2 71000012 22200044040 JP Morgan Chase 1000.00
Withholding Federal Taxes
Taxable wages = all remuneration for services (includes Non-Cash Benefits)
Federal taxation is FIT, SS, MED
Some benefits are fully taxable, partially taxable and some are non- taxable
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Taxable Compensation Back Pay Bonus Commission Company Car (personal
use) Dismissal (severance) ER pd commuter fees in
excess of $230/month ER pd parking greater than
$230/month Fringe Benefits (unless
excluded) Gifts, gift cards, prizes Group legal services
Group term life greater than $50,000
Non-acountable reimbursed business expense
Noncash Fringe benefits unless excluded by IRC
Sick pay and Disability Benefits (portion attributable by employer contribution)
Non qualified moving expense
Overtime pay Regular wages Tips 5
Nontaxable Compensation Dependent child care up to
$5000 under section 129 plan Company vehicle (business
only) De minimus 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 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 6
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. 7
Factors Affecting Withholding
Form W-4 Withholding Certificate Employees marital status Number of withholding allowances
Pay Frequency Whether regular or supplemental
wages Pretax Deductions
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Withholding Methods
Three main acceptable calculating means:
Wage Bracket Method (Pub 15 - Circular E) *Percentage Method (Pub 15 – Circular E) *Optional Flat Tax/Supplemental Rate of
25% or in some instances 35%
* Methods Used Most Often
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Withholding Methods
Wage Bracket Method — simplest
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Withholding Methods
Percentage Method
- most common especially with computerized payroll
- Step 1:
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Withholding Methods
Percentage Method – Step 2
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Withholding Methods
Optional Flat Tax/Supplemental RateSupplemental Wages compensation paid in addition to
employee’s regular wages.
Examples: bonuses, commissions, overtime pay, payments paid during the payroll period with the regular bonuses, commissions, overtime pay, backpay, payments for nondeductible moving expenses.
Does not take into account Form W-4 elections Can result in under or over withholding Supplemental Rate 25% Mandatory Flat Rate 35% Supplemental Wages also subject to Social Security, Medicare
& FUTA13
Supplemental Wages When YTD Supplemental Wages exceed
$1,000,000 use Supplemental Rate 35% The remainder of the year all supplemental
wages are subject to 35% withholding When reaching limit can apply to all wages or
tax using flat rate that applies:YTD Supplemental Wages $900,000.00; Bonus of
$200,000
($200,000 x 35% = $71,000)OR (($100,000 x 25% = $25,000) + ($100,000 x 35% = $35,000)
= $60,000)
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Supplemental WagesMethods for Taxing Supplemental Wages
If paid separately must be 25%/35%
If paid with regular wages 2 Options:Combine wages; calculate entire check at
25%/35% ORAggregate Method 1) calculate regular taxes on the combined
wages 2) calculate taxes on regular wages only 3) subtract the regular taxes and remaining is
considered supplemental wage tax portion15
Supplemental Wages
$1,000 Bonus Paid Separately:$1,000 x 25% = Federal Tax $250
$1,000 Bonus Combined with Regular Wages:Regular Wages $850.00Bonus 1,000.00 $1,850.00 x 25% = $462.50
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Supplemental WagesAggregate Method:(Optional; Must use this method if no FIT withheld in preceding year) Bonus $500.00 Regular Weekly Wages $645 W-4 Single with 5 allowances. Wage-Bracket Method: Weekly Wage Federal Tax $22 ($500.00 + $645 = $1,145.00) Wage-Bracket Method: Federal Tax $108.00 ($108.00 - $22 = $86) $86 would be attributed to
Supplemental Wages
Also acceptable to use Wage-Bracket on Regular Wage $22 and flat rate on Supplemental Wages ($500.00 x 25% = $125.00)
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Federal Withholding
Final Notes: Rounding up to next whole dollar
$.01 to $.49 Round Down $53.40 = $53 $.50 to $.99 Round Up $353.60 = $354 Be consistent!!
Withholding Income Tax from Pensions and Annuities Use Form W-4P Withholding Certificate
for Pensions and Annuities18
Social Security & Medicare Taxes
Federal Insurance Contributions Act (FICA)
Statutory deductions 2 Taxes: Social Security & Medicare Combined: 7.65 % of taxable wages
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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 Matches EE contributions
20
Social Security & Medicare Taxes
Medicare Taxes Also know as HI—Health Insurance 1.45 % No Maximum Salary No Maximum Contribution Employer Matches EE Contribution
21
Social Security & Medicare Taxes
When paying Federal Tax on $1000.00
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Example EE Tax ER Tax Totals
FICA 6.2% $62.00 $62.00 $124.00
Medicare 1.45%
$14.50 $14.50 $ 29.00
Total Due $153.00
Additional deductions from pay
Voluntary deductions Charitable contributionsRetirement programs i.e. 401kCredit union Direct payments Savings Bonds PurchaseHealth Insurance Outside Section 125Stock Purchase in employers companyAdvances / loan repaymentsUnion dues and fees
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Additional deductions from payVoluntary deductions
Require authorization (written or electronic)Last Priority – Wage Assignments firstER can set PrioritySubstantiation of Charitable contributions requires 2 types of documentation
Pledge CardMust be shown on pay statements and W2 for individual 1040 filing
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Additional deductions from pay Involuntary Deductions-Wage
Attachments (in order; exceptions) Child Support Orders Chapter 13 Bankruptcy Federal agency garnishments Federal Tax Levies State Tax Levies Local Tax Levies Creditor Garnishments Student Loan Garnishments
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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
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Federal Tax LeviesAmount of Exempt Wages based on Marital Status Number of exemptions
Part 3 of Form 668-W Payroll frequency needed for number of annual Pay
Periods Chart to show exempt amount from Levy Publication
1494 Do not stop withholding until 668-D - Release of Levy is
received Look at chart . . . 27
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
Disposable Earnings Gross wages less taxes (generally not
including tips)
28
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
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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 30
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 orders31
Multiple Order Handling
State law governs the handling of multiple orders
Multiple state orders default to ee ”worked in state”
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States resolve multiple order challenges- - - 1 of 3 ways
1. Allocate the available funds to each order on a percentage basis
2. Allocate available funds equally to all orders
3. Prioritize based on receipt of order Current support calculated before
arrearages
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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
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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
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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
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Garnishments Consumer Credit Protection Act
Federal Limit 25% orAmt 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) Watch for Changes in Federal Minimum
Wage
37
Advanced Earned Income Credit --AEIC Qualifications
Expected Gross income if single/ HOH be less than $35,535
Expected Gross income if Married/ jointly be less than $40,545
Must have dependent child living with them at least 6 months of the year
Principal home is US Must file a W5 form annually
38
AEIC cont.
Gross remains same-net increases Special tax tables are utilized Maximum entitlement is $1,830.00 If employee exceeds the salary
limit-AEIC is automatically stopped W5 must be done annually
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State Tax Calculated by
wage bracket % or flat percentage Percentage of federal
No state tax:
40
Alaska Tennessee
Florida Texas
Nevada Washington
New Hampshire Wyoming
South Dakota
Local Income Taxes
Each local taxing authority has its own requirements. Must verify with the locality for compliance
41
State Disability Tax Six jurisdictions have employee/employer
funded programs for illness and disability
Employers must report, pay and record payments—failure to pay is employers liability
42
California New York
Hawaii Puerto Rico
New Jersey Rhode Island
State Unemployment Tax
Three states have provisions to withhold SUI from employees:
Up to the unemployment wage base All other states unemployment tax
is the employers expense
43
Alaska New Jersey Pennsylvania
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
44
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
45
Paying the EmployeeGross to Net Calcuation
Calculate Total Wages Determine Pretax Deduction
Amounts (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
46
ABC Manufacturing1213 West Higgins RdPalatine, IL 60638John I. Doe234 Main StHighland Park, IL 60035
Check #814177
Period End08/31/2010
EE # 5609DEPT 33456
Hours Rate/Amt Current Year to DateTotal Gross 80.00 4246.88 81250.38Regular 80.00 4229.17 60022.17Group Term Life 17.71 17.71 283.36Floating Holiday 736.90Flex Time Off 4664.91Company Holiday 2242.74Bonus 13300.30
Fed W/H 561.87 12182.00Social Security W/H 255.96 4919.95Medicare W/H 59.86 1150.63IL State W/H 118.24 2274.89High Opt Health PreT 98.00 1568.00Delta Dental Hg Pre T
14.00 224.00
Vision Plan Pre T 6.52 104.32401(k) 169.17 3238.73401(k) Co Match 84.59 1619.45
Net Pay 2945.55 55304.50
Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1945.55Direct Deposit #2 71000012 22200044040 JP Morgan Chase 1000.00
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
47
Gross Up Calculation steps
1. 100% - tax% = Net %2. Payment / Net %= Gross Earnings3. Check by calculating Gross to net
Need to Know for Exam !!!Examples page 3-39 to 3/40
48
Test Your KnowledgeAn 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) $3,060.44B) $2,666.67C) $3,108.00D) $2,969.56
49
Answer:1. ($2,000 / (100% - (25% + 6.2% + 1.45%)) =2. $2,000 / 67.35% = $ 2,969.56 the answer is D3. $2,969.56 - 742.39 – 184.11 – 43.06 = $2,000
Gross UpSpecial Circumstances
Employee meets or met SS tax limit
1. 100% - Tax %(no SS %) = Net %2. Payment + ((SS wage base-YTD
payments) x 6.2%) / Net % = Gross Earnings
Need to know for Exam !!!50
Test Your KnowledgeAn 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) $500.00B) $679.81C) $742.39D) $777.00
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Answer:1. ($500 / (100% - (25% + 1.45%)) =2. $500/ 73.55% = $ 679.81 the answer is B3. $679.81 – 169.95 – 9.86 = $500
Test Your KnowledgeAn 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) $598.02B) $679.81C) $742.39D) $693.30
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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 D3. $693.30 – 173.33 – 10.05 – 9.92 = $500
