Chapter 4: FICA Taxes and Voluntary Deductions

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Learning Objectives

After studying this chapter, you will be able to:

Review Withholding Tax

Calculate Social Security tax

Calculate Medicare tax

Identify states in which State Disability Insurance is

withheld

Apply various voluntary deductions

Record employee payroll journal entries

Mandatory Deductions

Federal Income Tax Withholding

State Income Tax Withholding

Local Income Withholding

Social Security (OASDI) Tax

Medicare (HI) Tax

State Disability Insurance Tax

5 States require disability to be withheld from employee

pay (California, Hawaii, New Jersey, New York, and

Rhode Island)

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Voluntary Deductions

Union Dues

Retirement Plans

Medical Plans

Cafeteria Plans

Flexible Spending Accounts

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Gross Pay and Taxable Pay

Gross Pay encompasses all earnings in a given

period

Taxable Pay

Must subtract tax-deferred contributions from gross pay

to arrive at taxable pay

Taxable pay is used for calculating mandatory

deductions

State and local regulations may differ from federal

withholding

Taxable Pay

An employee works 37 hours the first week of the

year, earns $8.25/hour, 8% of gross pay is contributed

to his 401k plan.

Gross pay?

Taxable pay for Federal Withholding?

Taxable pay for Social Security?

Tax amount?

Taxable pay for Medicare tax?

Tax amount?

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Taxable Pay An employee works 37 hours the first week of the year,

earns $8.25/hour, 8% of gross pay to his 401k plan.

Gross pay? (37 hrs * $8.25 = $305.25)

Taxable pay for Federal Withholding?

8% * $305.25 = $24.42 (401k contribution)

$305.25 – 24.42 = $280.83 (taxable pay for withholding)

Taxable pay for Social Security? $305.25

Tax amount? 6.2% * $305.25 = $18.93

Taxable pay for Medicare tax? $305.25

Tax amount? 1.45% * $305.25 = $4.43

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Taxable Pay

An employee works 43 hours, 3 of which are overtime,

earns $37.50/hour, plus 1.5 times rate for OT. YTD

gross earnings are 117,900. He has 10% withheld for

his 403(b) plan.

What is his gross pay?

What is the taxable pay for withholding?

What is the taxable pay for social security?

What is the taxable pay for Medicare tax?

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Taxable Pay

An employee works 43 hours, 3 of which are overtime,

earns $37.50/hour, plus 1.5 times rate for OT. YTD

gross earnings are 117,900. He has 10% withheld for

his 403(b) plan.

What is his gross pay? $1668.75

What is the taxable pay for withholding? $1501.87

What is the taxable pay for social security? $600

What is the taxable pay for Medicare tax? $1668.75

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Collecting Federal Withholdings

Pay-as-you-go system

Established as a result of the Current Tax Payment Act

of 1943

Employers withhold income tax from employees and

remit to the federal government

Certain employees may be exempt

The Wage-Bracket Method

Determine pay period type

Determine marital status

Identify number of withholding allowances (from W-4

Form)

Determine taxable pay

Circular E provides tables & method for calculating if

more than 10 allowances

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The Percentage Method

Three-step process

Multiply allowances by figure in allowance table

Subtract from taxable pay

Use percentage method table to calculate tax

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Percentage Method

1 allowance, gross pay of $900, paid weekly

1 x $76.90

$900 – 76.90 = $823.10

$99.10 + (25% x (823.10 – 764)) = $113.88

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Other Federal Tax Withholdings

Dealing with deceased & terminated employees

After death, a portion of the employee’s earnings may

be paid; payments not subject to federal tax withholding

Terminated employee is entitled to all compensation

earned; earnings are subject to federal tax withholding

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Changing the W-4 Form

Reasons for changing

Marriage

Divorce

Child’s birth

Job status change

Changes result in adjusting the federal income tax

withholding

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State Income Tax Withholding

Calculated based on state taxable income (may be

same as federal)

Nine states do not collect state income tax

Some states levy a flat tax

Some states levy a graduated tax

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Local Income Tax Withholding

Tax rates and how they are levied vary widely

May be different for residents and non-residents

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Social Security Tax

Also known as OASDI

Provides retirement benefits and financial support to

employee’s survivors and disabled employees

Rate began at 1% - steadily increasing to current rate

of 6.20%

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Social Security Taxable Wage Base

Maximum threshold of year-to-date earnings on which

Social Security tax is levied

First taxable wage base $3,000 – current $117,000

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Only first $117,000 earnings will be taxed for Social Security

• Wage base is 118,500 for 2015

Taxable Earnings for Social Security

Certain expenses are deducted from gross pay to

arrive at taxable earnings

Three-step process to calculate Social Security tax

Determine current period taxable earnings

Add current earnings to year-to-date taxable earnings

If result not above threshold, multiply by current rate

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Medicare Tax

Taxable earnings for Medicare tax are same as Social

Security tax

Initial Medicare rate was 0.35% - current is 1.45%

No upper earnings limit on Medicare Tax

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The Additional Medicare Tax

2013 – additional 0.9% Medicare tax imposed on

certain earnings

Result of Patient Protection and Affordable Care Act

Threshold based on filing status

Additional Medicare Tax is only imposed on the employee.

There is no employer share of Additional Medicare Tax.

Additional Tax Considerations

Other amounts may be withheld from gross pay

State disability insurance

Wage garnishment

Retirement plans

Cafeteria plans

Union dues

Charitable contributions

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State Disability Insurance

Short-term benefits for those unable to work due to off-

the-job circumstances

Certain states do not require disability insurance

California, Hawaii, New Jersey, New York, Rhode Island

Employees may be required to contribute toward

insurance coverage

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Wage Garnishments

Compliance with court order or other legal proceeding

Amount of wage garnishments are limited

Lesser of 25% of disposable earnings (gross pay –

mandatory deductions) or

30 times federal minimum wage

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Note! Wage garnishment state regulations take precedence over federal regulations

Contributing to Retirement Plans

401(k) Plan

Tax-deferred

Employer contribution optional

403(b) Plan

Available to certain employees at public education

institutions and certain tax-exempt organizations

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Tip! Both plans allow for catch-up withholdings (additional withholdings based on age and/or years of service).

Contributing to Retirement Plans

SIMPLE IRA

For employees of small businesses (fewer than 100)

Contribution limit is lower

Employer contribution required

Deductions exempt from federal income tax withholding

Payroll Deduction IRA

Usually used by self-employed

Not exempt from federal income tax withholding

Receives tax deduction on year-end return

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ERISA of 1974

Employee Retirement Income Security Act of 1974

(ERISA) regulates plans employers offer

Requirements set forth by ERISA for retirement plans

How plan is funded

Fiduciaries may be held accountable for breaches

Plan participation

Accumulation of benefits

Timeframe for when benefits become non-forfeitable

www.dol.gov/compliance/laws/comperisa.htm

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Cafeteria Plans

Choice of at least one taxable and one non-taxable

option

Non-taxable deductions can include:

Medical Care Reimbursements

Adoption Assistance

Group Term Life Insurance

Health Savings Account

Flexible Spending Account (funds set aside for health

care during the year)

Nontaxable for Income Tax & FICA29

Charity, Union Dues, & Insurance

Charitable contributions are deducted from gross

earnings, then remitted directly to charity

Certain employees eligible to join a union; dues

withheld from gross earnings

Insurance premiums may be withheld, then remitted to

insurance company

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Completing the Payroll Register

Completed payroll register includes

Identified and calculated withholding amounts

Net pay (final figure)

Check number for each pay period

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Withholdings

CheckNumber

Net Pay

Accounting for Payroll

Employer must record a journal entry for each

element in payroll register

Each payroll deduction is owed to a corresponding

entity; for example:

Federal income tax withheld is immediately owed to

U.S. Government

Charitable contribution withheld is immediately owed to

the intended charity

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Accounting for Payroll

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