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4 2. OBJECTIVE Compute gross earnings of employees. Two pieces of data are needed to compute gross pay for hourly rate basis employees: the number of hours worked during the payroll period, and the rate of pay. HOURS WORKEDAt Kent Furniture and Novelty Company, the shipping supervisor keeps a weekly time sheet. Each day she enters the hours worked by each shipping clerk. At the end of the week, the office clerk uses the time sheet to compute the total hours worked and to prepare the payroll. Many businesses use time clocks for hourly employees. Each employee has a time card and inserts it in the time clock to record the times of arrival and departure. The payroll clerk collects the cards at the end of the week, determines the hours worked by each employee, and multiplies the number of hours by the pay rate to compute the gross pay. Some time cards are machine readable. A computer determines the hours worked and makes the earnings calculations.
GROSS PAYAlicia Martinez, Jorge Rodriguez, and George Dunlap are shipping clerks at Kent Furniture and Novelty Company. They are hourly employees. Their gross pay for the week ended January 6 is determined as follows:
Cecilia Wu is the shipping supervisor at Kent Furniture and Novelty Company. She is an hourly employee. She earns $14 an hour, and she worked 40 hours. Her gross pay is $560 (40 × $14).
WITHHOLDINGS FOR HOURLY EMPLOYEES REQUIRED BY LAWRecall that three deductions from employees’ gross pay are required by federal law. They are FICA (social security) tax, Medicare tax, and federal income tax withholding. Social Security Tax The social security tax is levied on both the employer and the employee. This text calculates social security tax using a 6.2 percent tax rate on the first $90,000 of wages paid during the calendar year. Tax-exempt wagesEarnings in excess of the base amount set by the Social Security Act are earnings in excess of the base amount set by the Social Security Act ($90,000). Tax-exempt wages are not subject to FICA withholding. 4 3. OBJECTIVE Determine employee deductions for social security tax. If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer. When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or applied to payment of the employee’s federal income taxes. To determine the amount of social security tax to withhold from an employee’s pay, multiply the taxable wages by the social security tax rate. Round the result to the nearest cent. The following shows the social security tax deductions for Kent Furniture and Novelty Company’s hourly employees.
Medicare Tax The Medicare tax is levied on both the employee and the employer. To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent. The following shows the Medicare tax deduction for hourly employees. 4 4. OBJECTIVE Determine employee deductions for Medicare tax.
Federal Income Tax A substantial portion of the federal government’s revenue comes from the income tax on individuals. Employers are required to withhold federal income tax from employees’ pay. Periodically the employer pays the federal income tax withheld to the federal government. After the end of the year, the employee files an income tax return. If the amount of federal income tax withheld does not cover the amount of income tax due, the employee pays the balance. If too much federal income tax has been withheld, the employee receives a refund. 4 5. OBJECTIVE Determine employee deductions for income tax
Withholding Allowances The amount of federal income tax to withhold from an employee’s earnings depends on the
important! Determining the number of withholding allowances for some taxpayers is complex. In the simplest circumstances, a taxpayer claims a withholding allowance for
As the number of withholding allowances increases, the amount of federal income tax withheld decreases. The goal is to claim the number of withholding allowances so that the federal income tax withheld is about the same as the employee’s tax liability. To claim withholding allowances, employees complete Employee’s Withholding Allowance Certificate, Form W-4A form used to claim exemption (withholding) allowances. The employee gives the completed Form W-4 to the employer. If the number of exemption allowances decreases, the employee must file a new Form W-4 within 10 days. If the number of exemption allowances increases, the employee may, but is not required to, file another Form W-4. If an employee does not file a Form W-4, the employer withholds federal income tax based on zero withholding allowances. FIGURE 10.1 shows Form W-4 for Alicia Martinez. Notice that on Line 5, Martinez claims one withholding allowance.
Computing Federal Income Tax Withholding Although there are several ways to compute the federal income tax to withhold from an employee’s earnings, the wage-bracket table methodA simple method to determine the amount of federal income tax to be withheld using a table provided by the government is almost universally used. The wage-bracket tables are in Publication 15, Circular E. This publication contains withholding tables for weekly, biweekly, semimonthly, monthly, and daily or miscellaneous payroll periods for single and married persons. Figure 10.2 shows partial tables for single and married persons who are paid weekly. Use the following steps to determine the amount to withhold: important!
As an example, let’s determine the amount to withhold from Cecilia Wu’s gross pay. Wu is married, claims two withholding allowances, and earned $560 for the week.
Using the wage-bracket tables, can you find the federal income tax amounts to withhold for Martinez, Rodriguez, and Dunlap? Other Deductions Required by Law Most states and some local governments require employers to withhold state and local income taxes from earnings. In some states employers are also required to withhold unemployment tax or disability tax. The procedures are similar to those for federal income tax withholding. Apply the tax rate to the earnings, or use withholding tables. WITHHOLDINGS NOT REQUIRED BY LAWThere are many payroll deductions not required by law but made by agreement between the employee and the employer. Some examples are
These and other payroll deductions increase the payroll recordkeeping work but do not involve any new principles or procedures. They are handled in the same way as the deductions for social security, Medicare, and federal income taxes. Kent Furniture and Novelty Company pays all medical insurance premiums for each employee. If the employee chooses to have medical coverage for a spouse or dependent, Kent Furniture and Novelty Company deducts $40 per week for coverage for the spouse and each dependent. Dunlap and Wu each have $40 per week deducted to obtain the medical coverage. Exercise 10.1, 10.2, 10.3, 10.4, 10.5 Problem 10.1A, 10.2A, 10.3A, 10.4A, 10.1B, 10.2B, 10.3B, 10.4B |
