Bernard J Bieg and Judith A Toland 2014 Cengage Learning All Rights Reserved May not be copied scanned or duplicated in whole or in part except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroo ID: 587835
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Slide1
Payroll accounting 2014
Bernard J. Bieg and Judith A. Toland
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Slide2
Income Tax Withholding
Chapter 4© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Slide3
Learning Objectives
Explain coverage under the Federal Income Tax (FIT) Withholding Law
Explain types of withholding allowances that may be claimed and purpose/use of Form W-4
Compute amount of FIT withheld using various methods
Explain completion of critical quarterly and year-end information returns and impact of state/local income taxes on payroll accounting process
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Slide4
Coverage Under FIT Withholding Laws
Employee-employer relationship must exist for FIT withholding laws to apply
See Chapter 3 for guidance on determining status
Statutory nonemployees (direct sellers and qualified real estate agents) have no federal taxes withheld
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Coverage Under FIT Withholding Laws (cont.)
Taxable wages for FIT withholding purposes – gross amount of following items are taxable
Wages/Salaries
Vacation pay
Supplemental payments
Bonuses/Commissions
Taxable fringe benefits (see next slide)
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Coverage Under FIT Withholding Laws (cont.)
Tips
Cash awards
See Figure 4-1 (page 4-3) for other types of taxable payments
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Figure 4-1
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Figure 4-1(cont.)
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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FIT Withholding on Tips
Employee must report tips to employer by 10th of each monthEmployer 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
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Pretax Salary Reductions are Exempt from FIT
Contribution to cafeteria plansEmployee can choose between cash (pay) or qualified (nontaxable) benefits (list of potential benefits found on page 4-7)
Contribution to Flexible-Spending Accounts
The employee puts pretax dollars into a trust account to be used for health care, certain insurance premiums and dependent care
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Cafeteria Plans, Potential Benefits
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Pretax Salary Reductions are Exempt from FIT (cont.)
These dollars do not have FIT or FICA withheld on themForfeited if not used!!Health Savings Accounts (HSA)
If employee has high-deductible health insurance, can contribute annually to an HSA to meet out of pocket medical bills
Archer Medical Savings Accounts
For small employers that have high-deductible insurance plans
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Tax-Deferred Retirement Contributions Exempt from FIT
Contributions to tax-deferred retirement accounts are monies set aside from current paychecks that will be paid out to employee upon retirementTypes of retirement plans
401(k), 403(b), 457(b) or SIMPLE plans
Contributions are made pretax for FIT purposes
However, employer 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)
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Tax Deferred Retirement Accounts
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Tax-Deferred Retirement Contributions Exempt from FIT (cont.)
Individual Retirement Accounts (IRA)In 2014, depending upon certain conditions, an employee can contribute lesser of $5,500 or 100% of earned income pretax to a retirement account
If made through payroll deductions, generally employer does not need to comply with ERISA as long as certain guidelines are met
Roth IRAs are used for nondeductible contributions
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Completing Form W-4
Choose “Single” or “Married” or “Married, but withhold at higher single rate” box Why would an EE choose the last option listed above? (line 3 of Form W-4)
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Completing Form W-4 (cont.)
Line 3© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Completing Form W-4 (cont.)
Exempt status Can claim if taxpayer had no income tax liability last year and none expected this year (line 7 of Form W-4)
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Completing Form W-4 (cont.)
Line 7© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Completing Form W-4 (cont.)
Valid for one year and must be reclaimed each yearCan’t claim exempt if:Dependent on someone else’s tax return and
Income exceeds $1,000 (including more than $
350
unearned income)
Some individuals are automatically exempt
Note
: Never advise employee as to how many allowances to claim
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Gross-Up Supplemental Wages
If want to give an employee the intended amount of supplemental check, must “gross up” this amountFor example, an employer wants Dov
, an employee, to receive a $700 net bonus check
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Gross-Up Supplemental Wages (cont.)
To do: Must divide desired net check by [1.00 – tax rates]FIT tax rate = 0.25OASDI tax rate = 0.062
HI tax rate = 0.0145
$700/[1.00 – (0.25 + 0.062 + 0.0145)] = $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!
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Returns – Quarterly & Informational
Quarterly reports of taxable wages required (see Figure 4-11 and 4-12, pages 4-27 and 4-28 for major required returns) Payroll income tax withholdings reported on Form 941
Employers must file information returns for compensation paid to independent contractors (IC) Form 945
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Figure 4-11
Major Returns Filed by Employers© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Figure 4-12
Major Information Returns© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Returns – Quarterly & Informational (cont.)
1099-MISC with 1096 as transmittal - See Figure 4-13 (page 4-29)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 this is not done, then hiring agent must withhold federal income tax = 28% of payments made
Nonpayroll
items (like withholding on independent contractors, pensions, IRAs, etc. ) reported on Form 945
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Figure 4-13
Form 1099-MISC© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO-4Slide28
Withholding State & Local
Income TaxesIn 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 withheld
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
LO-4Slide29
Withholding State & Local
Income Taxes (cont.)Issue information returns to report payments to individuals not subject to withholdingThree different methods of withholding SIT – full taxation, leftover taxation and reciprocity
Most states require employers to withhold tax from both nonresidents and residents, unless a reciprocal agreement is in place
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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