Week 4 Project

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Learning Objective #1: Payroll and Form 1040

Withholding taxes are imposed on taxpayers to help fund government operations using a “pay as you go” system.

At the end of the year, the employer is required to summarize an employee’s earnings and taxes withheld on a Form W-2.

Form 1040 compares tax liability with tax payments to determine whether a taxpayer will receive a refund or own more money.

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Federal taxes are withheld from a taxpayer’s income to help fund government operations using a “pay as you go” system. At the end of the year, the employer will give an employee a Form W-2 which is the starting point to preparing the Form 1040. The amount of federal income tax withheld from the taxpayer will be compared with the liability determined on the Form 1040 to figure a refund or amount due.

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Learning Objective #1: Payroll and Form 1040 Concept Check 10-1

The payroll tax withholding system was established to produce a stream of revenue for governmental operations. True or false?

True

Forms W-2 and 1040 are forms used to match tax liability with tax payments. True or false?

True

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Learning Objective #2: Federal Tax Calculations 1

Withholding taxes are an approximation of the proportionate share of total tax liability the employee will owe to the federal government.

Form W-4 is completed by the employee to claim withholding allowances.

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When a taxpayer starts a job, a Form W-4 is completed by the employee to claim withholding allowances. These allowances are then used in the calculation of federal withholding from the employee’s gross pay. An employee can complete a W-4 during the year if there are life events that can impact the amount of tax liability at the end of the year. Examples are getting married, divorced, or the birth of a child. The goal is to have only as much federal tax withheld as will approximate the annual tax liability.

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Learning Objective #2: Federal Tax Calculations 2

Two withholding methods:

Percentage Method.

Uses a range of percentages to calculate taxes.

Used in computerized systems.

Wage Bracket Method.

Uses a table of wage brackets and allowances.

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There are two withholding methods available to employers to calculate the amount of federal tax to withhold. The first is the wage bracket method where withholding tables are provided by the IRS for employers to use. The second method is the percentage method where ranges of percentages are used to calculate the taxes. This is the method used by computerized systems.

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Learning Objective #2: Federal Tax Calculations 3

Federal Insurance Contributions Act (F I C A).

Old age, survivors, and disability insurance (O A S D I or social security) = 6.2% up to a maximum of $132,900 for 2019.

Hospital insurance (Medicare) = 1.45% on all wages (no maximum).

There is a matching tax for F I C A (both O A S D I and Medicare) on employers.

An additional 0.9% for Medicare is withheld from the employee for wages in excess of $200,000. There is no employer match for this additional tax.

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FICA – Federal Insurance Contributions Act is a two-part tax. The first part is for OASDI (old age, survivors, and disability insurance) where the employee is charged 6.2% on wages and earnings up to a maximum of $132,900 for 2019. The second part is hospital insurance or Medicare where the employee is charged 1.45% on all wages and earnings for 2019.

The employer must also match the amounts withheld for FICA from the employee.

An additional 0.9% for Medicare is withheld from the employee for wages in excess of $200,000. There is no employer match for this additional tax.

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Learning Objective #2: Federal Tax Calculations 4

Employees are required to report cash tips (in excess of $20) to their employer by the 10th of the month after the month in which the employee receives the tips using Form 4070.

Employers must withhold income tax and F I C A taxes on employee tips.

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Cash tips are subject to withholding and FICA taxes as well. Tipped employees are required to report cash tips using Form 4070 to the employer by the 10th of the month after the month in which the employee received the tips.

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Learning Objective #2: Federal Tax Calculations 5

Large food and beverage establishment may be required to “allocate” tips to employees.

If tipped employees do not report tips in an amount of at least 8% of gross receipts, the employer must allocate the difference to the employees using Form 8027.

Employers are not required to withhold federal taxes on allocated tips. They are reported on Form W-2.

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Form 8027 is used for large food and beverage establishments that are required to “allocate” tips to employees. In this situation, the employees must report at least 8% of gross receipts as tips. If employees do not, the employer must complete Form 8027 to allocate the difference between what the employees reported and what the employer calculated. Employers are not required to withhold taxes on allocated tips as they are reported on the employee’s W-2.

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Learning Objective #2: Federal Tax Calculations Concept Check 10-2 1

Withholding and other employment taxes are levied only on cash wages and/or salaries paid to the employee. True or false?

False

The employer fills out Form W-4 to determine how many withholding allowances the employee is entitled to take. True or false?

False

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Learning Objective #2: Federal Tax Calculations Concept Check 10-2 2

Jim is single and earns $600 per week. He claimed two allowances on his W-4 form provided to the employer. What amount of federal withholding tax will be deducted from his gross compensation?

$40 when the wage bracket method or $40.11 when percentage method is used.

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Learning Objective #2: Federal Tax Calculations Concept Check 10-2 3

Jenny earns $140,500 in 2019. How much social security tax will be withheld from her compensation? How much Medicare taxes will be withheld from her compensation?

$8,239.80 in social security taxes and $2,037.25 in Medicare taxes.

Form 4070 is completed by tipped employees for any and all tips earned for the period. True or false?

False

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Learning Objective #3: Reporting and Paying Payroll Taxes 1

Employers must make payroll tax deposits of amounts withheld from employees’ wages

A “lookback” period determines whether an employer is a monthly or semiweekly schedule depositor.

4 quarters starting with July 1, 2017 – June 30, 2018 for wages paid in 2019.

Monthly – $50,000 or less in tax liability.

Semiweekly – more than $50,000 in tax liability.

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Employers are required to make payroll tax deposits at predetermined times during the month. A “lookback” period determines whether the employer is a monthly or semiweekly schedule depositor. If during the lookback period, the employer has $50,000 or less in tax liability, it is a monthly schedule depositor; otherwise it must make deposits on a semiweekly basis.

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Learning Objective #3: Reporting and Paying Payroll Taxes 2

Semiweekly deposit schedule:

Taxes associated with payrolls paid on a Wednesday, Thursday, or Friday are due the following Wednesday.

Taxes associated with payrolls paid on a Saturday, Sunday, Monday, or Tuesday are due the following Friday.

All employers are now required to use the Electronic Funds Transfer Payments System (E F T P S) to make deposits

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Semiweekly deposit schedules are based on when the taxes associated with payrolls are paid, not accrued. Taxes paid on a Wednesday, Thursday, or Friday are due by the next Wednesday. Taxes paid on a Saturday, Sunday, Monday, or Tuesday are due by the following Friday

All employers must use the Electronic Funds Transfer Payments system - EFTPS where payments are made through a secure website.

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Learning Objective #3: Reporting and Paying Payroll Taxes 3

An employer who accumulates $100,000 or more in taxes on any day during a deposit period, must deposit the tax by the next banking day, regardless of the type of depositor.

The employer becomes a semiweekly schedule depositor for the remainder of the calendar year and for the following year.

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When an employer accumulates $100,000 or more in taxes on any one day during the deposit period, a deposit must be made by the next banking day regardless of the employer’s depositor status. The employer then automatically becomes a semiweekly schedule depositor for the remainder of the current year and for the following year.

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Learning Objective #3: Reporting and Paying Payroll Taxes 4

Form 941 – is a reconciliation of the amount of payroll tax liability and the payments made by the employer to cover the liability. It is due by the end of the month following the close of the quarter.

If there is a tax liability of less than $2,500 at the end of the quarter, this amount can be paid when the Form 941 is filed.

Form 944 is for very small employers.

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Form 941 is a reconciliation of the amounts withheld by the employer and the payments (deposits) made by the employer to the government. It is a report due on the last business day of the month following the end of the quarter. If there is a tax liability of less than $2,500 at the end of the quarter, the employer can pay the tax when filing the Form 941 without penalty. Form 944 is an annual return for very small employers and is allowed only if the IRS informs the employer that it qualifies for annual reporting.

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Learning Objective #3: Reporting and Paying Payroll Taxes Concept Check 10-3 1

All new employers must use the semiweekly schedule deposit system. True or false?

False

The deposit schedule for an employer is based on the total tax liability that the employer reported on Form 941 during the prior four quarters starting on July 1 and ending on June 30 of the next year. True or false?

True

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Learning Objective #3: Reporting and Paying Payroll Taxes Concept Check 10-3 2

Semi-weekly schedule depositors remit taxes on the following Wednesday if the payroll is paid on a Wednesday, Thursday, or Friday. True or false?

True

The penalty for not paying the appropriate federal taxes on time is based on the total amount of the tax liability whether or not a partial payment was made on time. True or false?

False

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Learning Objective #3: Reporting and Paying Payroll Taxes Concept Check 10-3 3

Form 941 is prepared by the employer to record all federal taxes withheld including federal withholding, social security, and Medicare taxes and amounts paid for these taxes. True or false?

True

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Learning Objective #4: Self-Employment Taxes

Self-employment taxes are based on net earnings in excess of $400 generated by a sole proprietor taxpayer (remember Chapter 6).

For 2019, refer to Schedule SE (Section A or B) to determine the for A G I deduction on Form 1040.

The self-employed taxpayer is responsible for all parts of F I C A (15.3%).

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Self-employment taxes are based on net earnings in excess of $400. A percentage of the self-employment taxes are permitted as a for AGI deduction on the front of Form 1040. Refer to Schedule SE for the new rates.

The self-employed taxpayer is responsible for 12.4% of OASDI on the first $132,900 of earnings and 2.9% of Medicare on all earnings.

A W-2 employee who also is self-employed in another business, will calculate the self-employment income subject to tax after the W-2 earnings are taken into consideration.

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Learning Objective #4: Unemployment Taxes and Form 940

Federal Unemployment Tax Act (F U T A) is 6.0% of wages up to $7,000. There is a maximum credit for state employment taxes (S U T A) of 5.4%, reducing the amount due to the I R S to 0.6%.

Form 940 is filed annually by the employer to report and reconcile F U T A liabilities and payments.

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The Federal Unemployment tax (also known as FUTA) is calculated at 6.0% of wages up to $7,000 per employee. There is a 5.4% maximum credit for contributions to a state employment tax fund (SUTA) reducing the amount of FUTA tax to 0.6%. As of July 1, 2011 the FUTA rate is 6.0%, there is a 5.4% maximum credit reducing the amount of FUTA tax to 0.6%.

Form 940 is an annual report used to reconcile FUTA liabilities and payments for the year. FUTA payments made during the year are paid using EFTPS system.

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Learning Objective #4: Household Workers and Schedule H 1

Household workers are considered employees subject to federal income, F I C A, and F U T A taxes if:

Paid wages of $2,100 or more in 2019.

Federal withholding taxes were withheld from these workers.

Wages of at least $1,000 were paid to all household workers combined in any calendar quarter in 2018 or 2019.

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Household workers are considered employees subject to withholding if they are paid wages of $2,100 or more in 2019, and /or if wages of at least $1,000 were paid to all household workers combined in any calendar quarter in 2018 or 2019. The taxpayer/employer can opt to pay the taxes for his/her household workers using Schedule H filed along with Form 1040. He/she can also withhold as a regular employer during the year.

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Learning Objective #4: Household Workers and Schedule H 2

Schedule H is completed by the employer/taxpayer and submitted with Form 1040.

Taxes are due for household employees and paid when the employer taxpayer files Form 1040.

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Learning Objective #4: Household Workers and Schedule H Concept Check 10-4 1

A self-employed taxpayer is treated both as an employee and employer, thus, pays a combined total of 15.3% for F I C A taxes. True or false?

True

What is the effective tax rate for F U T A provided employers pay into their state S U T A programs on a timely basis?

a. 0.6%

b. 6.2%

c. 5.4%

d. 10%

Answer: a

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Learning Objective #4: Household Workers and Schedule H Concept Check 10-4 2

Who can use Schedule H?

Individuals who employ household workers and pay wages of $2,100 or more in 2019, or who pay $1,000 to all workers combined in any of the prior two years.

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Learning Objective #4: Household Workers and Schedule H Concept Check 10-4 3

Taxpayers who employ household workers are subject to payroll taxes under what conditions?

They paid any one household employee wages of $2,100 or more in 2019, federal income taxes were withheld from employee wages, and household wages of at least $1,000 were paid to all household workers combined in any calendar quarter in 2018 or 2019.

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Learning Objective #5: Forms W2 and W3 1

Employers report wages earned and taxes withheld to employees on Form W-2.

W-2s are due to employees by January 31 of the next year.

Copy A is remitted to the Social Security Administration by January 31 of the next year.

Form W-3 is a transmittal form that summarizes all employee W2’s prepared by the company.

It is sent with Copy A of all W-2’s.

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Learning Objective #5: Forms W2 and W3 2

Form W-2C (Statement of Corrected Income and Tax Amounts) is used to correct a W-2 that was incorrectly prepared.

Form W-3C (Transmittal of Corrected Income and Tax Statements) accompanies Copy A of the W-2C to the Social Security Administration.

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When corrections must be made to a W-2 that has been sent to the Social Security Administration, Form W-2C and W-3C are used to record these changes. Remember that copy A of the W-2 (or W-2C) and the transmittal W-3 (or W-3C) are never sent directly to the IRS; they are sent to the Social Security Administration. The IRS computers will tap into the Social Security database to retrieve data for a taxpayer.

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Learning Objective #5: Forms W2 and W3 Concept Check 10-5 1

The employee uses the information from a W-2 to prepare his/her federal, state, and local (if applicable) tax returns. True or false?

True

Where and when must the employer send Copy A of the W-2 form?

Copy A is sent to the Social Security Administration along with Form W-3 which is the transmittal form. They are due January 31, 2020.

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Learning Objective #5: Forms W2 and W3 Concept Check 10-5 2

Explain the process if an employer must correct an employee’s W-2.

An employer who must correct an employee’s W-2 must file Form W-2C and W-3C as soon as possible.

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Learning Objective #5: Forms W2 and W3 Concept Check 10-5 3

What are the maximum penalty amounts per return imposed on a company that prepares incorrect W-2s?

Penalties range from $50 per return to $270 per return, with a maximum depending on the size of the business. Also a penalty of $550 per return for intentional disregard of filing requirements with no maximum penalty.

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Learning Objective #6: Supplemental Wage Payments

Supplemental wages are compensation paid in addition to an employee’s regular wages.

Withholding on supplemental wages can be calculated using one of two methods:

Flat tax of 22%.

Combine the supplemental payments with regular wages and calculate the withholding tax.

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Supplemental wages such as commissions and bonuses are compensation paid in addition to the regular wages of an employee. The employer must withhold federal income tax on these wages using one of two methods. The employer can withhold a flat 22% on the supplemental amount or combine the supplemental payment with the employee’s regular wages and then calculate the withholding tax.

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Learning Objective #6: Backup Withholding

Generally, an employer or vendor must withhold 24% of certain taxable payments if the payee fails to furnish a correct taxpayer identification number (T I N).

Payments include interest, dividends, rents, royalties, commissions, non-employee compensation and certain other payments made in the course of a trade or business.

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Taxpayers must furnish employers and other vendors with a taxpayer identification number (TIN). If they do not, the employer or vendor is required to withhold 24% in federal taxes from these payments as backup withholding.

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Learning Objective #6: Form W-9

Form W-9 is prepared by the recipient and given to the requester. Failure to furnish a correct T I N can result in a $50 penalty. The penalty for willful neglect in completing the form is $500.

Form is used to:

Certify the T I N the taxpayer is giving is correct,

Certify the taxpayer is not subject to backup withholding, or,

Claim exemption from backup withholding if the taxpayer is a U.S. exempt payee.

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Learning Objective #6:Estimated Tax Payments and Form 1040-ES

Form 1040-ES is used when a taxpayer must make tax payments for estimated taxes due.

Estimated payments are required if unpaid tax liability > $1,000 and withholding and credits do not meet certain “safe harbor” thresholds.

Estimated taxes are due April 15, June 15, September 15, and January 15 (of the next year) or the next business day if they fall on a holiday or weekend.

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Estimated payments are required if a taxpayer’s unpaid tax liability will be greater than $1,000 above and beyond any W-2 withholding and other credits. There is a safe-harbor threshold to avoid any penalties. Payments are due periodically throughout the year.

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Learning Objective #6: Estimated Tax Payments and Form 1040-ES Concept Check 10-6 1

Describe the two methods that are available to calculate the withholding from supplemental payments.

Method 1a: Withhold at a flat rate of 22%.

Method 1b: If taxes have already been withheld from regular wages, add the two payments together, calculate the tax as if they are one payment and subtract the tax already paid. Withhold the remaining tax from the supplemental wages.

Method 2: If taxes are not already withheld from regular wages, add the two amounts together and calculate the tax as if they are one payment.

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Learning Objective #6: Estimated Tax Payments and Form 1040-ES Concept Check 10-6 2

Payments subject to backup withholding are withheld at a flat tax rate of 24% if the payee fails to furnish the payer with a correct T I N. True or false?

True

What is a Form W-9?

It is used for U.S. persons (including resident aliens) to document their taxpayer identification number (T I N). This form must be on file with the payer.

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Learning Objective #6: Estimated Tax Payments and Form 1040-ES Concept Check 10-6 3

What is the penalty for failing to furnish a correct T I N to a requester?

$50 for each failure unless the failure is due to reasonable cause and not to willful neglect. If the taxpayer makes false statements with no reasonable basis that results in backup withholding, a penalty of $500 is assessed. There can also be criminal penalties including fines and imprisonment.

Taxpayers use Form 1040-ES to remit additional amounts to the I R S so that they receive a refund when they file Form 1040. True or false?

False

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