CHAPTER 4 INCOME TAX TAXWITHHOLDING Developed by Lisa Swallow, CPA CMA MS

CHAPTER 4CHAPTER 4

INCOME INCOME

TAXTAX

WITHHOLDINGWITHHOLDING

Developed by Lisa Swallow, CPA CMA MS

Taxable Wages for FIT Taxable Wages for FIT Withholding PurposesWithholding Purposes

Wages/Salaries Cash Bonuses Profit sharing

Supplemental Wages Severance pay Retroactive increases Vacation Pay How to withhold:

with regular pay (treat as one paycheck and withhold accordingly)

alone - 28% flat supplemental withholding

Fringe BenefitsFringe Benefits

Non cash fringe benefitsER must withhold FIT unless specifically

excludedExamples include:

tickets to athletic events athletic club membership personal use of corporate car frequent flier miles stock options(when option exercised)

Specifically excluded fringe benefits include: de minimis and working condition fringe reduced tuition, qualified transportation fringes, meals &

lodging if for ER benefit

How to Withhold FIT on How to Withhold FIT on Noncash Fringe BenefitsNoncash Fringe Benefits

Withhold like supplemental (28%) With regular pay - treat as one paycheck and withhold

accordingly (for example - country club membership valued at $2000/year - can put $500 on 4 paychecks)

For FICA/FIT, ER must withhold on fair market value of benefit > amount employee paid towards benefit

Don’t have to withhold FIT on personal use of corporate car if ER chooses - but must always withhold FICA on personal use of corporate car

Still, the fair market value is on W-2 and EE has to pay FIT at year end

ER must figure value of fringe benefits no later than 1/31

FIT Withholding on TipsFIT Withholding on Tips

ER receives form 4070 from EE by 10th of each month

ER must withhold based on form 4070 (reported tips)

Employer is not required to withhold on allocated tips (see chapter 3) - only reported tips

FIT Withholding on Tips FIT Withholding on Tips (continued)(continued)

What if taxes withheld > hourly wages to be paid? For example blackjack dealer reported tips =

$2000 for one week; her FIT/FICA withholding will exceed her paycheck EE gets no paycheck and pays balance with

form 1040 or can make quarterly estimated tax payments

What is Exempt from FITWhat is Exempt from FIT Ministers < 18 newspaper carriers Moving expenses if EE will deduct Educational assistance if it maintains/improves job

status Travel Reimbursements but only if made under an

“accountable plan” ER has drafted IRC-approved plan; if there is not a

plan in place, travel reimbursements are made under a non-accountable plan, considered wages, and therefore ER must withhold FIT

What is Exempt from FIT What is Exempt from FIT (continued)(continued)

Contributions to deferred compensation plan 401(k) or SEP or SIMPLE contributions

These are retirement plan contributions that are made pretax for FIT purposes; however, ER must still calculate/withhold/match FICA

Contribution to flex plans or cafeteria plans Section 125

These are salary reductions whereby EE puts pretax dollars into a trust account to be used for health care and dependent care; these dollars do not have FIT or FICA withheld on them

How does ER know how How does ER know how much to withholdmuch to withhold

Best for EE if FIT withholding = tax liability (goal is no refund and no tax due)

W-4 How many withholding allowances One allowance for self (if not claimed by other

person) One for each dependent Special allowances (itemized deduction, other

compensation, tax credits, etc. – use worksheet on back of W-4 to calculate)

W-4W-4

Single or married or “married but tax withheld at higher single rate” box - why would an EE choose this? Because possibly other sources of taxable income

Exempt status Can claim if taxpayer had no income tax liability last

year and none expected this year Can’t claim exempt if dependent on someone else’s tax

return and earn $700 and have unearned income

* never advise employee as to how many allowances to claim*

Other Situations on W-4Other Situations on W-4

If EE doesn’t provide a completed W-4, ER withholds at single rate, 0 allowances

EE can change, when ER receives new W-4, has 30 daysEE must change within 10 days for decrease in # of

allowances Lose child as an allowance (custody) Become single Don’t have to do if lose allowance due to death

Unauthorized changes/additions invalidate W-4 File in personnel file – only send to IRS if:

EE claims 11+ withholding allowancesClaims exempt and is earning more than $200/week

How does ER find what How does ER find what amount to withhold?amount to withhold?

Use Circular E and find correct withholding Either Wage Bracket (easiest) or Percentage Method, only use if:

highly compensated or 10+ allowances or compensated annually, semiannually or quarterly

Need to know:Single/marriedHow often paidGross payNumber of allowances

Examples - Calculating FIT Examples - Calculating FIT Withholding (#1)Withholding (#1)

FACTS: Annual salary is $16,500 - paid weekly - Single 4 - what is the FIT withholding?

Weekly gross $16,500/52 = $317.31Can use wage bracket tables to look up

single with 4 allowances FIT withholding = $7


FACTS: Annual salary is $84,400 - paid semimonthly - Married 1 - what is the FIT withholding?

Semimonthly gross is $84,400/24 = $3516.67 Must use Percentage of Withholding tables To Do:

Subtract (# of allowances x amount from withholding allowances table) from gross:

$3516.67 - (1 x $116.67) = $3400.00 Look up $3400.00 in appropriate table and write

formula:$262.20 + (3400.00 - 2017.00)(.28) = $649.44 FIT


FACTS: Monthly salary is $3,000 - paid semimonthly - Single 2 - what is the FIT withholding?

Annualize salary $3000 x 12 = $36,000Semimonthly gross $36,000/24 = $1500Can use wage bracket tables to look up

single with 2 allowances FIT withholding = $190


FACTS: Quarterly salary is $4,000 - paid quarterly - Married 3 - what is FIT withholding?

Must use Percentage of Withholding tables To Do:


$4,000.00 - (3 x 700.00) = $1900.00 Look up $1900.00 in appropriate table and write

formula:(1900.00 - 1613.00)(.15) = $43.05 FIT


FACTS: Annual salary is $336,000 - paid monthly - Single 2 - what is FIT withholding?

Monthly gross is $336,000/12 = $28,000.00 Must use Percentage of Withholding tables To Do:


$28,000.00 - (2 x 233.33) = $27,533.34 Look up $27,533.34 in appropriate table and write

formula:$7654.89 + (27,533.34 – 24,163.00)(.396) = $8989.54

FIT


FACTS: Annual salary is $485,000 - paid semimonthly - Married 4 - what is the FIT withholding?

Semimonthly gross is $485,000/24 = $20,208.33 Must use Percentage of Withholding tables To Do:


$20,208.33 - (4 x 116.67) = $19,741.65 Look up $19,741.65 in appropriate table and write

formula:$3827.38 + (19,741.65 – 12,081.00)(.396) = $6861.00 FIT

FIT Withholding on Other FIT Withholding on Other Sorts of IncomeSorts of Income

Pensions (W-4R) in excess of $14,700 per year Withhold as if M3 unless complete W-4R to

change amount of tax withholding

Third party payer of sick pay (W-4S) Supplemental Wages

Withholding on Supplemental Withholding on Supplemental WagesWages

Items like vacation pay, retroactive increases and bonuses

Can add to regular wages and utilize wage bracket or % method on total gross

orCan withhold at flat 28% if supplemental

wage check issued separately

Earned Income Credit (EIC)Earned Income Credit (EIC) To get reduction in FIT for low income taxpayers In 2001, qualify for EIC if

2 qualifying kids and earned income < ????? 1 qualifying child and earned income < ????? no kids and earned income < ?????

And investment income does not exceed $2400

Earned income is tips, wages, self employment income (and no deduction for salary deferral)

Advanced EICAdvanced EIC

To get part of this on each paycheck, file W-5 (Earned Income Credit Advance Payment Certificate)

Can only get advanced earned income credit if have kidsThe maximum payment is $1412/yearThis advanced earned income credit does not change the

amount that employers must withhold from employees’ wagesThis amount is treated as having been paid to the IRS (on the

941 shows up as a payment)Can only have 1 certificate on file at a time; if married, both

spouses can have a certificate on file Have to refile each year and have to revoke in 10 days if

ineligible

Information ReturnsInformation ReturnsYear end Statements

W-2 to EE by 1/31 and SSA by 2/28 W-3 W-2c and W-3c (if correcting) 250+ W-2s must use magnetic media 941s must tie to W-3 1099-MISC with 1096 as transmittal 1099-DIV with 1096 as transmittal 1099-INT with 1096 as transmittal

Documents

CHAPTER 4 INCOME TAX TAXWITHHOLDING Developed by Lisa Swallow, CPA CMA MS