Fundamental Payroll Certification 2010 Paycheck Fundamentals Chapter 3 Paula Black CPP, PHR paula.black@us.lawson.com.

Fundamental PayrollCertification 2010

Paycheck Fundamentals

Chapter 3Paula Black CPP, PHR paula.black@us.lawson.com

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

2

Elements of a Pay Check

Gross Amount vs Actual Pay Check Amount

Additions Deductions Net Pay

3

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

Check #814177

Period End08/31/2010

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 118.24 2274.89High Opt Health PreT 98.00 1568.00Delta Dental Hg 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 2945.55 55304.50

Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1945.55Direct 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, partially taxable and some are non- taxable

4

Taxable Compensation Back Pay Bonus Commission Company Car (personal

use) Dismissal (severance) ER pd commuter fees in

excess of $230/month ER pd parking greater than

$230/month Fringe Benefits (unless

excluded) Gifts, gift cards, prizes Group legal services

Group term life greater than $50,000

Non-acountable reimbursed business expense

Noncash Fringe benefits unless excluded by IRC

Sick pay and Disability Benefits (portion attributable by employer contribution)

Non qualified moving expense

Overtime pay Regular wages Tips 5

Nontaxable Compensation Dependent child care up to

$5000 under section 129 plan Company vehicle (business

only) De minimus Fringes Disability benefits (employee

contribution) 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

benefit Reimbursed business expense Working condition fringe if

can be deductible if 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 time wages are earned Pay Date - is the date wages are paid and dictates the

taxability, as well as structure for depositing and reporting of taxes to 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 overpayments; OP and RP can be netted together for W2; Employer 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 claims refund of Federal tax on 1040. 7

Factors Affecting Withholding

Form W-4 Withholding Certificate Employees marital status Number of withholding allowances

Pay Frequency Whether regular or supplemental

wages Pretax Deductions

8

Withholding Methods

Three main acceptable calculating means:

Wage Bracket Method (Pub 15 - Circular E) *Percentage Method (Pub 15 – Circular E) *Optional Flat Tax/Supplemental Rate of

25% or in some instances 35%

* Methods Used Most Often

9

Withholding Methods

Wage Bracket Method — simplest

10

Withholding Methods

Percentage Method

- most common especially with computerized payroll

- Step 1:

11

Withholding Methods

Percentage Method – Step 2

12

Withholding Methods

Optional Flat Tax/Supplemental RateSupplemental Wages compensation paid in addition to

employee’s regular wages.

Examples: bonuses, commissions, overtime pay, payments paid during the payroll period with the regular bonuses, commissions, overtime pay, backpay, payments for nondeductible moving expenses.

Does not take into account Form W-4 elections Can result in under or over withholding Supplemental Rate 25% Mandatory Flat Rate 35% Supplemental Wages also subject to Social Security, Medicare

& FUTA13

Supplemental Wages When YTD Supplemental Wages exceed

$1,000,000 use Supplemental Rate 35% The remainder of the year all supplemental

wages are subject to 35% withholding When reaching limit can apply to all wages or

tax using flat rate that applies:YTD Supplemental Wages $900,000.00; Bonus of

$200,000

($200,000 x 35% = $71,000)OR (($100,000 x 25% = $25,000) + ($100,000 x 35% = $35,000)

= $60,000)

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Supplemental WagesMethods for Taxing Supplemental Wages

If paid separately must be 25%/35%

If paid with regular wages 2 Options:Combine wages; calculate entire check at

25%/35% ORAggregate Method 1) calculate regular taxes on the combined

wages 2) calculate taxes on regular wages only 3) subtract the regular taxes and remaining is

considered supplemental wage tax portion15

Supplemental Wages

$1,000 Bonus Paid Separately:$1,000 x 25% = Federal Tax $250

$1,000 Bonus Combined with Regular Wages:Regular Wages $850.00Bonus 1,000.00 $1,850.00 x 25% = $462.50

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Supplemental WagesAggregate Method:(Optional; Must use this method if no FIT withheld in preceding year) Bonus $500.00 Regular Weekly Wages $645 W-4 Single with 5 allowances. Wage-Bracket Method: Weekly Wage Federal Tax $22 ($500.00 + $645 = $1,145.00) Wage-Bracket Method: Federal Tax $108.00 ($108.00 - $22 = $86) $86 would be attributed to

Supplemental Wages

Also acceptable to use Wage-Bracket on Regular Wage $22 and flat rate on Supplemental Wages ($500.00 x 25% = $125.00)

17

Federal Withholding

Final Notes: Rounding up to next 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 Annuities18

Social Security & Medicare Taxes

Federal Insurance Contributions Act (FICA)

Statutory deductions 2 Taxes: Social Security & Medicare Combined: 7.65 % of taxable wages

19

Social Security & Medicare Taxes

Social Security Also known as OASDI- Old Age

Survivors Disability Insurance 6.2 % Maximum Salary $106,800 Maximum Contribution $6,621.60 Employer Matches EE contributions

20

Social Security & Medicare Taxes

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

21

Social Security & Medicare Taxes

When paying Federal Tax on $1000.00

22

Example EE Tax ER Tax Totals

FICA 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

Voluntary deductions Charitable contributionsRetirement programs i.e. 401kCredit union Direct payments Savings Bonds PurchaseHealth Insurance Outside Section 125Stock Purchase in employers companyAdvances / loan repaymentsUnion dues and fees

23

Additional deductions from payVoluntary deductions

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

Pledge CardMust be shown on pay statements and W2 for individual 1040 filing

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Additional deductions from pay Involuntary Deductions-Wage

Attachments (in order; exceptions) Child Support Orders Chapter 13 Bankruptcy Federal agency garnishments Federal Tax Levies State Tax Levies Local Tax Levies Creditor Garnishments Student Loan Garnishments

25

Federal Tax Levies

Take home pay less exempt amount proved by chart 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

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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 668-D - Release of Levy is

received Look at chart . . . 27

Child Support All orders since 1-1-94 are considered

immediate unless stated Welfare Reform Reconciliation Act of

1996 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 less taxes (generally not

including tips)

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Child SupportMaximum %

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

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

State max withholding may be lower but cannot be higher than these limits

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

state wage orders Duration and specific amts of payments Person or agency to receive the

payment Medical support –specific amt /

mandatory coverage Amt of payment if arrears and interest

states as a sum 30

UIFSA—Continued

Employers must: Withhold employers fee for processing

order Determine the maximum amt

permitted to be withheld Determine the time frame for

withholding and disbursement to agency

Handle multiple orders31

Multiple Order Handling

State law governs the handling of multiple orders

Multiple state orders default to ee ”worked in state”

32

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 order Current support calculated before

arrearages

33

APA & Office of Child Support Enforcement

Both agencies lobbied and Congress implemented a standardized Child Support form which is mandated in all states and must have payment amount based on pay cycle, arrears, medical support, obligations, payee, obligee and appropriate address

34

Centralized Support CollectionsDisbursement Units

Welfare Law of 1996 mandated all states develop one unit to disburse payments

All states but South Carolina currently participate in central collections location in their state

35

State law takes priority –Federal law limitations

State can allow fee for processing Payment must be made within 7

days of withholding from wages 1st payment must be made within

14 days of mailing date of order

36

Garnishments Consumer Credit Protection Act

Federal Limit 25% orAmt of disposable pay that exceeds 30 x

minimum wage Multiple types of orders are prioritized and

will affect lower priority attachments Garnishment Limits Table (Page 3-27) Watch for Changes in Federal Minimum

Wage

37

Advanced Earned Income Credit --AEIC Qualifications

Expected Gross income if single/ HOH be less than $35,535

Expected Gross income if Married/ jointly be less than $40,545

Must have dependent child living with them at least 6 months of the year

Principal home is US Must file a W5 form annually

38

AEIC cont.

Gross remains same-net increases Special tax tables are utilized Maximum entitlement is $1,830.00 If employee exceeds the salary

limit-AEIC is automatically stopped W5 must be done annually

39

State Tax Calculated by

wage bracket % or flat percentage Percentage of federal

No state tax:

40

Alaska Tennessee

Florida Texas

Nevada Washington

New Hampshire Wyoming

South Dakota

Local Income Taxes

Each local taxing authority has its own requirements. Must verify with the locality for compliance

41

State Disability Tax Six jurisdictions have employee/employer

funded programs for illness and disability

Employers must report, pay and record payments—failure to pay is employers liability

42

California New York

Hawaii Puerto Rico

New Jersey Rhode Island

State Unemployment Tax

Three states have provisions to withhold SUI from employees:

Up to the unemployment wage base All other states unemployment tax

is the employers expense

43

Alaska New Jersey Pennsylvania

Local tax, City tax, School Districts and head taxes

Most common states for local taxation are Ohio and Pennsylvania

Many variances and local government regulations on these taxes –verify if necessary with the agency which is applicable to the circumstance, i.e. residency vs. place of work

44

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

Tax payment for Social Security and Medicare Taxes On W2, post in Amount paid in box 3 & 5 and Social Security and

Medicare in box 4 & 6 Amount not reported as Federal Taxable Wages in box 1 of W2 Also provide 1099 MISC with Federal Taxable Wages reported in box

3 and give 1099 to the Estate or Beneficiary (use TIN not SSN) If payment is paid in year after death

Do Not withhold Social Security and Medicare Do Not issue a W2 Do issue a 1099 and report amount of payment in box 3 of 1099

MISC

45

Paying the EmployeeGross to Net Calcuation

Calculate Total Wages Determine Pretax Deduction

Amounts (excluded from Disposable Earnings)

Tax Withholding Determined Disposable Earnings

(Total Earnings – Taxes) for Child Support and Garnishments Deductions

Deductions Levy deducted from Take Home

Pay Result = Net Pay

46

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

Check #814177

Period End08/31/2010

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 118.24 2274.89High 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 2945.55 55304.50

Routing Account Description AmountDirect Deposit #1 71000012 11112222000 JP Morgan Chase 1945.55Direct Deposit #2 71000012 22200044040 JP Morgan Chase 1000.00

Grossed Up Payments(ADP –Net to Gross Calc) Employer Pays the Taxes! Typical situations for a Grossed Up Payments

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

47

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 page 3-39 to 3/40

48

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 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 not state income tax.

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

49

Answer:1. ($2,000 / (100% - (25% + 6.2% + 1.45%)) =2. $2,000 / 67.35% = $ 2,969.56 the answer is D3. $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%) / Net % = Gross Earnings

Need to know for Exam !!!50

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 income tax. Calculate the gross amount of the bonus.

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

51

Answer:1. ($500 / (100% - (25% + 1.45%)) =2. $500/ 73.55% = $ 679.81 the answer is B3. $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 $106,640 and the employee is paid biweekly. The employee lives and works in a state where there is no income tax. Calculate the gross amount of the bonus.

A) $598.02B) $679.81C) $742.39D) $693.30

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Answer:1. ($500 / (100% - (25% + 1.45%)) =2. $500 + ((106,800 – 106,640) x 6.2%)/ 73.55% = $500 + $9.92/ 73.55% = $693.30 the answer is D3. $693.30 – 173.33 – 10.05 – 9.92 = $500

THANK YOU!!!!

Questions?

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Paycheck FundamentalsChapter 3

Paula Black CPP, PHR paula.black@us.lawson.com