ac122.01: unit 5 seminar may 16, 2012 school of business and management

AC122.01: Unit 5 Seminar May 16, 2012

School of Business and Management

Agenda

• Welcome

• Seminar Rules

• Chapter 5 Income Tax Withholding

Questions

Seminar Rules by Greg Rose1. If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one!

2. When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue.

3. Please do NOT start side conversations.

4. Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good!

5. Don`t worry about typos. Be clear as you can and refrain

from smileys and slang – use proper English.

• Assignments Grading

• Late Policy

• Seminar procedures and Polling

• Questions

EE-ER relationship must exist for FIT withholding to apply See Chapter 3 for how to determine status Statutory nonemployees (direct sellers and qualified real estate agents)

have no federal taxes withheld

Taxable wages for FIT withholding purposes Wages/Salaries Vacation Supplemental payments Bonuses/Commissions Taxable fringe benefits (see next slide) Tips Cash awards

Coverage Under Federal Income Tax (FIT) Withholding Laws

Fringe Benefits

Noncash fringe benefits treated as compensation ER must withhold FIT unless specifically excluded Examples include

Tickets to athletic events Athletic club membership Personal use of corporate car Frequent flier miles Stock options (when option exercised) Complete list found in Figure 4-2 (page 4-6)

Specifically excluded fringe benefits include Qualified employee discounts Reduced tuition, meals & lodging if for employer benefit Complete list found on page 4-4

How to Withhold FIT on Fringe Benefits

Value and withhold like supplemental wages (flat 25%) ER must figure value of fringe benefits no later than

1/31

Value and add to regular pay - treat as one paycheck and withhold accordingly Flexible reporting – option of treating benefits as being

paid on any basis Can add $500 on 4 paychecks or entire $2,000 with one

paycheck for withholding purposes, for example

FIT Withholding on Tips

Employee must report tips to ER by 10th of each month

Employer must withhold FIT and FICA based on this information (called “reported tips”)

Employer is not required to withhold on allocated tips - only reported tips Tip allocation can be done one of three methods –

hours worked, gross receipts or good faith agreement

FIT Withholding on Tips

What if taxes withheld > hourly wages to be paid? For example blackjack dealer reported tips = $2,000

for one week; her FIT/FICA withholding will exceed her paycheck

In that situation, EE gets no paycheck and pays quarterly estimated tax payments

or Can pay balance of tax when file1040 tax return

Traveling Expenses

Travel reimbursements made to an employee, paid under an “accountable plan”, are not subject to FIT withholding

An accountable plan is an IRS-approved plan If there is not a plan in place, travel

reimbursements are made under a non-accountable plan and considered wagesTherefore ER must withhold FIT

What is Exempt from FIT

Law excludes certain payments including: Ministers’ wages/salaries Advances Educational assistance

If maintains/improves job status $5,250 per year of employer provided assistance for

undergraduate or graduate is tax-free (also applies to down-sized employees)

Qualified moving expense reimbursements Transportation in a commuter highway vehicle/transit

pass up to $230/month value


Contribution to cafeteria plans Employee can choose between cash (pay) or qualified

(nontaxable) benefits (list on page 4-7)

Contribution to Flexible-Spending Accounts These are salary reductions whereby EE puts pretax dollars

into a trust account to be used for health care, certain insurance premiums and dependent care

These dollars do not have FIT or FICA withheld on them Forfeited if not used!!


Health Savings Accounts (HSA) If EE has high-deductible health insurance, can contribute

annually to an HSA pretax to meet out of pocket medical bills

Archer Medical Savings Accounts Apply to small employers (50 or fewer employees)

and are set up with high-deductible insurance plans

What is Exempt from FIT (Pretax salary reductions) Contributions to tax-deferred retirement accounts

Types of retirement plans 401(k), 403(b), 457 or SIMPLE plans Contributions are made pretax for FIT purposes However, ER must still withhold and match FICA Additional ‘make up amounts’ allowed to be contributed if age

50 or older (see page 4-9 for annual contribution amounts)

Individual Retirement Accounts [IRAs] For certain taxpayers, the lesser of $5,000 or 100% of earned

income may be contributed pretax to a retirement account Conditions must be met for deductibility $6,000 annual contribution allowed if age 50 or older

Roth IRAs accommodate nondeductible contributions

How Does an Employer Know Amount to Withhold for FIT?

Best for employee if FIT withholding = tax liability Goal is no refund and no tax due

Employee completes W-4 See W-4 (Employee’s Withholding Allowance Certificate) in

Figure 4-3 on page 4-11

Identify number of withholding allowances One allowance for self (if not claimed by other person) One for each dependent Special allowances such as itemized deductions, other

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

Completing Form W-4 Choose “Single” or “Married” or “Married, but withhold at

higher single rate” box Q: Why would an EE choose the last option listed above? (line 3) A: 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 (line 7) Valid for one year and must be reclaimed each year Can’t claim exempt if:

Dependent on someone else’s tax return and Income exceeds $950 (including more than $300 unearned income)

Some individuals are automatically exempt

Note: Never advise employee as to how many allowances to claim

Other Situations on W-4

If EE doesn’t provide a completed W-4, ER withholds as if single and zero allowances (highest rate)

EE can change W-4 When ER receives amended W-4, has 30 days to changeEE must change within 10 days for decrease in # of

allowancesLose child as an allowance (custody)Become single

If there’s an increase in # of allowances, can change or leave in effect

Unauthorized changes/additions invalidate W-4 ER can establish electronic W-4 system but must provide paper

option if employee requests

Validity of W-4Employers are not required to verify authenticity

If form is altered, employer cannot accept invalid form

Can then ask for new W-4 to be submitted Or, if a new hire, withhold at single and zero withholding rates

FIT Withholding on Other Income Sources

Pensions (W-4P) in excess of $24,960 per year Withhold as if married with 3 allowances unless complete

W-4P to change amount of tax withholding

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

Government payments such as Social Security by completing a W-4V This request is voluntary

Employer Calculates FIT Withholding

Use either wage-bracket method (easiest)or

Percentage method (only use if one of the following situations apply)Highly compensated individual Compensated annually, semiannually or daily

Need to knowSingle/married, how often paid, gross pay and # of

allowances

Example #1 Calculating FIT Withholding

FACTS: Noni’s annual salary is $40,144 – she is paid biweekly and her W-4 shows “Married with 4”. What is her FIT withholding?

Biweekly gross $40,144/26 = $1,544.00

Can use wage bracket tables to look up married, biweekly and 4 allowances

FIT withholding = $69


FACTS: John earns an annual salary of $84,400 and is paid biweekly. His W-4 shows “Married with 1”. What is his FIT withholding?

Biweekly gross is $84,400/26 = $3,246.15

Must use percentage method

To Do: Subtract amount of allowances* (biweekly allowance for 1) from

gross$3,246.15 - $142.31 = $3,103.84

FIT equals $365.40 + (.25)($3,103.84 – $2,958.00) = $401.86

*From 2011 Table of Allowances found in Appendix

TABLE OF ALLOWANCE VALUES

Payroll Period One Withholding Allowance

• Weekly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 71.15

• Biweekly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142.31

• Semimonthly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154.17

• Monthly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.33

• Quarterly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925.00

• Semiannually . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,850.00

• Annually. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,700.00

• Daily or miscellaneous (each day of the payroll period). . . . 14.23*From 2011 Table of Allowances found in Appendix


FACTS: Maggie earns an annual salary of $336,000 and is paid monthly. Her W-4 shows “Married with 2” . What is FIT withholding?

Monthly gross is $336,000/12 = $28,000


To Do: Subtract amount of allowances (monthly allowance for 2)

from gross$28,000 - ($308.33 x 2) = $27,383.34

FIT equals $3,959.52 + (.33)($27,383. 34 - $18,350.00) = $6,940.52


FACTS: Belinda earns a monthly salary of $3,000 and is paid biweekly. Her W-4 says “Single with 2”. What is her FIT withholding?

Annualize salary $3,000 x 12 = $36,000

Biweekly gross $36,000/26 = $1,384.62

Can use wage bracket tables to look up single, biweekly and 2 allowances

FIT withholding = $137


FACTS: Ferhart’s annual salary is $485,000 – he is paid semimonthly. His W-4 says “Married with 4”. What is his FIT withholding?

Semimonthly gross is $485,000/24 = $20,208.33


To Do: Subtract amount of allowance (semimonthly allowance for 4)

from gross$20,208.33 – ($154.17 x 4) = $19,591.65

FIT equals $4,273.91 + (.35)($19,591.65 – $16,127.00) = $5,486.54

Supplemental Wages Withholding Examples include

Vacation pay (treated differently than other supplemental wages) Severance pay, bonuses and commissions Exercised nonqualified stock options

How to withhold With regular pay (treat as one paycheck and withhold accordingly)

or Paid Separately

Method A – Add supplemental and regular wages from recent payroll; calculate FIT as if it were single regular payroll payment

Method B - 25% flat supplemental withholding (35% for amounts in excess of $1,000,000)

Gross-Up Supplemental Wages If want to distribute intended amount of supplemental check, must

‘gross up’ this amount

For example, an employer wants her employee to receive a $700 bonus check (net)

To do: divide desired net check by total of [1.00 – tax rates]FIT tax rate = .25OASDI tax rate = .062HI tax rate = .0145$700/[1.00 – (.25 + .062 + .0145)] = $1,039.35 grossed up bonus Then subtract taxes to get $700 desired net bonus

Note: in many states there is a required withholding rate for state income tax!

Wages and Tax Statement (W-2)

Form W-2 informs employees of wages and withholding taxesHard copy to EE on or before 1/31, to SSA before 2/28

or Can post on secure web site so EE can access individual W-2If issuing 250+ W-2s must use magnetic media - have until 3/31

to electronically fileCan request extension of time via FIRE at http://fire.irs.gov

W-3 is transmittal form and 941s must tie to W-3 Various penalties for filing incorrect or late W-2s Must file W-2c and W-3c (if correcting) Must report exempt wages/tips and benefit of EE health insurance to comply with HIRE and HCERA Acts

Returns – Quarterly & Informational

Quarterly reports of taxable wages required (see Figure 4-13 on page 4-30 for major returns that must be completed)

Employers must file information returns for compensation paid to independent contractors (IC) 1099-MISC with 1096 as transmittal

See Figure 4-14 (page 4-31)Must issue to IC if paid at least $600 and aren’t

incorporated

IC must submit taxpayer identification number (TIN) on W-9 to hiring agent

If TIN not supplied orally, in writing or on W-9, then must withhold federal income tax = 28% of payments made

Withholding State & Local Income Taxes

In states with state income tax (SIT) and localities with local income tax, generally the payroll department must File periodic withholding returns to report wages and

withholding Prepare reconciliation returns to compare deposits to

withholdings File annual statements to report annual wages paid and

applicable taxes/fees withheld Issue information returns to report payments to individuals

not subject to withholding

Three different methods of withholding SIT – full taxation, left over taxation and reciprocity

Questions

Thank you for attending this seminar.

ac122.01: unit 5 seminar may 16, 2012 school of business and management

Documents