Fundamental PayrollCertification 2013

Paycheck Fundamentals

Chapter 3ANNE SCHAFROTH, CPP

Paycheck Fundamentals Federal Withholding Social Security & Medicare Withholding Additional Deductions from Pay State Taxes Deceased Employees Gross to Net Calculations Employer-Paid Taxes

2

Elements of a Pay Check

Gross Amount vs Actual Paycheck Amount

Additions Deductions Net Pay

3

ABC Manufacturing1213 West Higgins RdPalatine, IL 60638John I. Doe234 Main StHighland Park, IL 60035

Check #814177

Period End08/31/2011

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 197.96 3805.77Health PreT 98.00 1568.00Dental 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 2883.54 54056.98

Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1883.54Direct 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, some partially taxable and some are non- taxable

4

Taxable Compensation Back pay Bonus Commission Company car (personal

use) Dismissal pay (severance) ER pd commuter fees in

excess of $245/month ER pd parking greater than

$245/month Fringe benefits (unless

excluded) Gifts, gift cards, prizes Group legal services

Group term life greater than $50,000

Non-accountable reimbursed business expenses

Noncash fringe benefits unless excluded by IRC

Sick pay and disability benefits (portion attributable by employer contribution)

Nonqualified moving expenses

Overtime pay Regular wages Tips

5

Nontaxable Compensation Dependent child care up to

$5000 under section 129 plan Company vehicle (business

use only) De minimus fringe benefits Disability benefits (employee

contributions) 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

benefits Reimbursed business expenses Working condition fringe (if

deductible if it was 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 period when wages were earned Pay Date - is the date wages are paid and dictates the

taxability, as well as structure for depositing and reporting of taxes to government 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 overpayment; OP and RP can be netted together for W2; Employer can 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 can claim refund of federal tax on 1040.

7

Factors Affecting Withholding

Form W-4 Withholding Certificate Employee’s marital status Number of withholding allowances

Pay Frequency Whether regular or supplemental

wages Pretax Deductions

8

Withholding Methods

Three main acceptable methods: *Wage-Bracket Method (Pub 15 - Circular

E) *Percentage Method (Pub 15 – Circular E) Optional/Mandatory Flat Rate of 25% (or

in some instances, 39.6%)

* Methods Used Most Commonly

9

Withholding Methods

Wage Bracket Method — quickest and easiest

10

Withholding Methods

11

Percentage Method

- most common method used in computerized payroll systems

Withholding Methods

Optional/Mandatory Flat Rate Method

Supplemental wages paid in addition to employee’s regular wages.

Examples: bonuses, commissions, overtime pay, back pay

Does not take into account Form W-4 elections Can result in under or over withholding Supplemental Rate 25% Mandatory Flat Rate 39.6% Supplemental Wages also subject to Social Security, Medicare

& FUTA12

Supplemental Wages When YTD supplemental wages exceed

$1,000,000, use mandatory flat rate of 39.6% For the remainder of the year, all supplemental

wages are subject to 39.6% withholding When reaching limit, can apply to all wages or

only that portion going over $1,000,000:YTD Supplemental Wages $900,000; Bonus of $200,000

($200,000 x 39.6% = $79,200)OR (($100,000 x 25% = $25,000) + ($100,000 x 39.6% =

$39,600) = $64,600)

13

Supplemental WagesMethods for Taxing Supplemental Wages

If paid with regular wages, must withhold as if a single payment for the pay period

If paid separately, there are two options:Calculate supplemental amount at 25% or

39.6% ORUse aggregate method 1) calculate taxes on the combined wages 2) calculate taxes on regular wages only 3) subtract #2 from #1 – the remaining is

considered supplemental wage tax amount 14

Supplemental Wages

Calculate supplemental amount at 25% or 39.6%:

$1,000 Bonus Paid Separately (or defined separately):

$1,000 x 25% = $250

15

Supplemental WagesAggregate Method:(Optional; Must use this method if no FIT withheld in current or

preceding year) Bonus $500.00 Regular Weekly Wages $645.00 W-4 Single with 5 allowances. Wage-Bracket Method: Weekly Wage Federal Tax $27.00 ($500.00 + $645.00 = $1,145.00) Wage-Bracket Method: Federal Tax $108.00 ($108.00 - $27.00 = $81.00) $81.00 would be attributed to

Supplemental Wages

Also acceptable to use Wage-Bracket on Regular Wage $27 and flat rate on Supplemental Wages ($500.00 x 25% = $125.00)

16

Federal Withholding

Final Notes: Rounding to 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 Annuities17

Social Security & Medicare Taxes

Federal Insurance Contributions Act (FICA)

2 parts: Social Security & Medicare 7.65 % of taxable wages for

employers 7.65 % of taxable wages for

employees

18

Social Security & Medicare Taxes

Social Security Also known as OASDI- Old Age

Survivors Disability Insurance 6.2 % Maximum Salary $113,700.00 Maximum for ER $7,049.40 Maximum for EE $7,049.40

19

Social Security & Medicare Taxes

Medicare Taxes Also know as HI—Health Insurance 1.45 % No Maximum Salary No Maximum Contribution Employer Matches EE Contribution

20

Social Security & Medicare Taxes

When paying Fica Tax on $1000.00

21

Example EE Tax ER Tax Totals

OASDI 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

Types of voluntary deductions:Charitable contributionsRetirement programs i.e. 401kCredit union Direct mortgage payments Health insurance outside Section 125Stock purchase in employer’s companyAdvances / loan repaymentsUnion dues and fees

22

Additional deductions from payAdditional notes on voluntary deductions:

Require authorization (written or electronic)Last Priority – Wage Assignments firstER can set PrioritySubstantiation of charitable contributions requires 2 types of documentation

Pledge CardPay statements or W2

23

Additional deductions from pay Involuntary Deductions-Wage

Attachments (general priorities): Child support orders Chapter 13 bankruptcy Federal agency garnishments Federal tax levies State tax levies Local tax levies Creditor garnishments Student loan garnishments

24

Federal Tax Levies

Take home pay minus exempt amount documented in Pub. 1494 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

25

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 Form 668-D, Release

of Levy is received 26

Child Support All orders are considered immediate

unless stated 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 minus taxes (generally not

including tips)

27

Child SupportMaximum %

If the employee supports a second family – cannot exceed 50% of disposable earnings (55% if in arrears)

If employee does not support a second family –cannot exceed 60% of disposable earnings (65% if in arrears)

State maximum withholding may be lower, but cannot be higher than these limits

28

Uniform Interstate Family Support Act -- UIFSA Clarifies the rules for processing out-of-

state wage orders Duration and specific amount of payments Person or agency to receive the payments Medical support – specific amount /

mandatory coverage Amount of payment of arrears and interest,

stated as a sum

29

UIFSA—Continued

Employers must comply with rules of their work state when: Withholding employer’s fee for

processing order Determining the maximum amount

permitted to be withheld Determining the time frame for

withholding and disbursement Handling multiple orders

30

Multiple Order Handling

State law governs the handling of multiple orders

Multiple state orders default to the state where the employee works

31

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 orders Current support calculated before

arrearages

32

APA & Office of Child Support Enforcement

Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states

Must have current child support obligation amount based on pay cycle, arrears amount, medical support amount, payee, and payee’s address

33

Centralized Support Collectionsand Disbursement Units

Federal law mandated all states develop one unit to disburse payments

All states but South Carolina currently participate in a centralized collections location within their state

34

State law takes priority –Federal law limitations

State can allow an administrative fee for processing

Payment must be made within 7 days of withholding from wages

First payment must be made within 14 days of mailing date of order

35

Garnishments Consumer Credit Protection Act

Federal Limit =25% orAmount of disposable pay that exceeds

30 x federal minimum wage Multiple orders are prioritized and will

effect lower priority attachments Garnishment Limits (Page 3-28) Watch for changes in Federal minimum

wage36

State Tax Calculated by

Wage bracket Percentage method or flat percentage Percentage of federal

No state tax:

37

Alaska Tennessee

Florida Texas

Nevada Washington

New Hampshire Wyoming

South Dakota

Local Income Taxes

Cities, counties, school districts, etc.

Each local taxing authority has its own requirements. Verify with the locality for its requirements and your compliance.

38

Local: City, School District, County, and Head Taxes

Most common states for local taxation are Ohio, Indiana and Pennsylvania

Many variances and local government regulations on these taxes – verify with the agency to determine their requirements

39

State Disability Tax Six states have employee/employer funded

programs for illness and disability

Employers must deduct, report, pay, and record payments—failure to withhold is employer’s liability.

40

California New York

Hawaii Puerto Rico

New Jersey Rhode Island

State Unemployment Tax

Three states have provisions to withhold SUI from employees (in addition to the employer’s obligation):

All other states unemployment tax is exclusively the employer’s expense

41

Alaska New Jersey Pennsylvania

Deceased Employees Payments after date of death are taxable Federal income tax is responsibility of whomever receives the payment If the payment is made in same year as the employee’s death

Tax withheld for Social Security and Medicare On W2, report wages in boxes 3 & 5 and tax withheld in boxes 4 & 6 Amount not reported as federal taxable wages in box 1 of W2 Provide 1099-MISC with federal taxable wages reported in box 3,

and use name of deceased’s estate or beneficiary If payment is paid in year after death

Do not withhold Social Security and Medicare Do not issue a W2 Do issue a 1099-MISC and report amount paid in box 3

42

Paying the EmployeeGross to Net Calculation

Calculate Total Wages Determine Pretax Deduction

Amounts Determine Tax Withholding Determine Disposable Earnings

(Total Wages minus Taxes) for Child Support and Garnishment Deductions

Deductions Result = Net Pay

43

ABC Manufacturing1213 West Higgins RdPalatine, IL 60638John I. Doe234 Main StHighland Park, IL 60035

Check #814177

Period End08/31/2011

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 197.96 3805.77High 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 2883.54 54056.98

Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1883.54Direct Deposit #2 71000012 22200044040 JP Morgan Chase 1000.00

Gross Up Payments

Employer Pays the Taxes! Typical situations for a Gross Up Payment

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

44

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: pages 3-38 to 3-39

45

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 rate 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 no state income tax?

A) $3,060.44B) $2,666.67C) $3,108.00D) $2,969.56

46

Answer:1. (100% - (25% + 6.2% + 1.45%)) = 67.35%2. $2,000 / 67.35% = $ 2,969.563. $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%) divided by Net % = Gross Earnings

47

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 state income tax. Calculate the gross amount of the bonus.

A) $500.00B) $679.81C) $742.39D) $777.00

48

Answer:1. (100% - (25% + 1.45%)) = 73.55%2. $500 / 73.55% = $ 679.81 3. $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 $113,650 and the employee is paid biweekly. The employee lives and works in a state where there is no state income tax. Calculate the gross amount of the bonus.

A) $598.02B) $682.66C) $742.39D) $684.02

49

Answer:1 (100% - (25% + 1.45%)) = 73.55%2. $500 + ((113,700 – 113,650) x 6.2%)/ 73.55% = $500 + $3.10 / 73.55% = $684.023. $684.02 – 171.00 – 9.92 – 3.10 = $500

THANK YOU!!!!

Questions?

50

Paycheck FundamentalsChapter 3

Anne Schafroth, CPP aschafroth@artic.edu