Welcome to lesson seven.
In this lesson we'll continue to discuss your responsibilities as an employer.
As you learned in lesson six, whether you are handling this yourself, or paying someone else to do it, you need to know your responsibilities.
At the end of this lesson you will be able to identify wages that are subject to employment taxes.
Explain the difference between an accountable plan and a non-accountable plan, and figure your payroll taxes using the appropriate method.
In lesson six you learned how to tell if the person you are paying is your employee or an independent contractor.
You also learned that this is an important decision that defines what your roles and responsibilities will be.
Withholding, filing, and paying payroll and unemployment taxes are all part of your responsibilities as an employer.
Usually when we think of payments made to workers we think of salaries or hourly wages paid to employees in a paycheck.
Some payments are wages for employment tax purposes and some are not.
Payments, however, can take many forms and are not always money going directly to the worker.
In this lesson we'll discuss the employment tax rules for wages and other types of compensation.
What are wages?
Wages that are subject to federal employment taxes include all payments you give an employee for services performed.
The pay may be in cash or in other forms, salaries, vacation pay, bonuses, commissions, and certain fringe benefits are some examples of amounts that you include in wages for employment tax purposes.
However, not all employee compensation is considered wages.
For example if you pay the cost of an accident or health insurance plan for your employees, these payments are not wages and are not subject to tax.
Also, if you reimburse an employee for business expenses under an accountable plan, those amounts are not wages and are not subject to tax.
Sometimes your employees will need to pay expenses for your business.
This happens a lot when they travel or use their car for business, but this can also be for other supplies or materials used in your business.
When you pay them back it's not taxable if you have an accountable plan.
However, payments to your employees for necessary business expenses under a non-accountable plan are supplemental wages subject to employment taxes.
Wait a minute.
What's an accountable plan?
What's a non-accountable plan?
Did I miss something?
Let's discuss accountable plans.
An accountable plan is a reimbursement or allowance arrangement between you and your employee that meets all three of the following rules.
Your employee must pay for deductible expenses while performing services as your employee.
Account to you for those expenses within a reasonable time.
And return to you any advanced amounts that are more than the actual expenses within a reasonable period.
What is a reasonable period?
That depends on the facts and circumstances.
Generally it's considered reasonable if your employee received any advances within 30 days of the time they incur the expense, they adequately account for the expenses within 60 days after the time the expenses were paid, and they then return any excess amounts within 120 days from the date the expenses were paid.
Okay, so what's a non-accountable plan?
You have a non-accountable plan if an employee is not required to, or does not account for expenses in a timely manner.
It is also a non-accountable plan if you advance an amount to your employee for business expenses and that employee is not required to or does not return any amounts not used for business expenses.
What?
I didn't understand any of that.
That's a lot of information to take in at once.
Basically if you give your employee money for travel or business expenses and they never account for it or return any, you have a non-accountable plan.
It doesn't make any difference if they were supposed to account for the money and didn't, or if you didn't require them to account for it.
Publication 15 has more information on accountable and non-accountable plans, supplemental wages, taxable and non-taxable benefits, and other forms of compensation.
Understanding wages for employment tax purposes is not easy.
Remember to start with publication 15 to help answer most of your questions related to compensation.
Now let's take a look at how to figure your payroll.
First you need to know the total amount of compensation and benefits included in each employee's wages for the pay period.
The next step is to figure the amount of income tax to withhold from each employee.
The two most common methods are the wage bracket method and the percentage method.
Under the wage bracket method you simply locate in publication 15 the proper table for your payroll period and the employee's marital status as shown on their W-4.
Then look at their W-4 for the number of withholding allowances claimed.
Use the number of allowances claimed on the W-4 and the amount of wages paid, then follow the column and row to find the amount of tax to withhold.
For withholding computations for employees claiming more than 10 withholding allowances, you will need to refer to the special wage bracket instructions in publication 15.
If the employee's wages are greater than the amounts in the last wage bracket of the wage tables or if you do not want to use the wage bracket tables, you can use the percentage method.
This method works for any number of withholding allowances the employee claims and any amount of wages.
Let's review the steps you would take to figure the income tax withholding under the percentage method.
Using the percentage method table in publication 15 multiply one withholding allowance for your payroll period by the number of allowances the employee claims on their W-4.
Then subtract that amount from the employee's wages.
Next find the amount to withhold from the tables for the percentage method of withholding in publication 15.
Now let's look at withholding the employee's share of social security and Medicare taxes.
The W-4 information given does not change the amount of social security and Medicare taxes.
Simply multiply the total wage by the applicable employee social security and Medicare tax percentages.
As the employer you also pay a matching amount.
The employee tax rate for social security tax is 6.2%.
Each year the amount of wages subject to social security withholding changes.
You do not have to withhold any more social security taxes once the employees wages you have paid reach that limit.
This is known as the wage base limit.
This limit is published annually in publication 15.
The employee tax rate for Medicare tax is an additional 1.45%.
There is no wage limit for Medicare taxes so all wages are subject to withholding and just like social security taxes, you as the employer must pay a matching amount.
Generally you compute all payroll deductions on the gross pay of each employee.
However, as your business grows there may be portions of an employee's pay, such as certain contributions to retirement plans that are not subject to some or all of these taxes.
You learned about these plans in lesson five.
For example, salary reduction contributions an employee makes to a 401K plan are subject to social security and Medicare taxes but exempt from income tax withholding.
The total after all appropriate deductions is the employee's net pay.
When it comes to withholding taxes there is no difference between full or part time employees and it does not matter if the worker has another job.
You are not responsible for knowing when the employee's total wages reach the wage base.
You're only responsible for knowing when the employee meets the wage base for wages you have paid.
There are exceptions for when you take over an existing business.
If you acquire an existing business, you may include the wages paid by the previous employer to your employee's wages when you figure their annual wage base limit for social security.
Publication 15 has more information on this topic under successor employers.
Let's apply what you've learned about withholding and work through a few examples.
Ken operates a ceramic tile business and has three employees, Pam, Greg, and Peter.
Pam works in the store and gets $500 weekly.
Greg and Peter are installers and they each get $400 a week.
Let's compute their net pay using the wage bracket method.
Let's begin with Pam.
Pam's W-4 tells you she is married, and is claiming one allowance.
First let's find the table in publication 15 for married persons, weekly payroll period.
Now look down the left side of the table and locate wages of at least $500 but less than $510.
Move over to the column for employee's claiming one allowance.
It tells you to withhold $30 for federal income tax.
Keep in mind these tables change from year to year.
Make sure you have the publication for the current year when you do your computations.
Now we are ready to compute the social security and Medicare tax withholding for Pam.
Since each of these is a flat rate, simply multiply the gross wages of $500 by the 6.2% social security rate for a total of $31.
And by 1.45% for the Medicare tax for a total of $7.25.
You're now ready to deduct the income, social security and Medicare taxes to figure Pam's net pay, $431.75.
In this example there is no state income tax withholding.
So how did we figure Pam's net pay?
Her gross wages are $500.
We looked up her income tax withholding of $30 from the tables.
Her social security tax is $31 and Medicare tax is $7.25.
So after taxes Pam's net pay is $431.75.
Remember, in this example there is no state income tax withholding requirement.
Check out lesson ten for a listing of state employment tax offices.
You can contact your state's employment tax office or visit their web site for their withholding requirements.
Looking back to our example, Pam has one child,is married and earns less than $31,000.
She may be eligible for the earned income tax credit, or EITC.
If she completed a W-5 requesting a portion of the credit be added to her paychecks, you would use the tables in publication 15 to figure the amount of advanced EITC and add it to Pam's net pay.
Next is Greg who is single, claims one withholding allowance and earns $400 per week.
We first go to the table for single persons, weekly payroll period.
Find the row that shows at least $400 but less than $410 and move over to the column for one withholding allowance.
There we find that $37 is the amount to withhold for income tax.
Again we use the flat rate of 6.2% for social security and 1.45% for Medicare and compute withholding of $24.80 and $5.80 respectively.
So Greg's payroll computation looks like this.
His gross wages are $400.
His income tax is $37.
Greg's social security tax is $24.80 and Medicare tax is $5.80.
When you subtract the taxes from his gross wages, Greg's net pay is $332.40.
Finally we compute Peter's payroll as a married person with no withholding allowances.
We will use the table for married persons weekly payroll period.
Find the appropriate income line and withhold the amount that corresponds with zero withholding allowances.
Peter's income tax withholding is $25.
Apply the rates for social security and Medicare taxes to the gross wages and Peter's net pay is $344.40.
You probably notice that Greg and Peter make the same gross pay.
But the withholding allowances and marital status are different so their net pay is different too.
Greg nets $332.40 while Peter nets $344.40.
Remember Ken must pay an amount equal to the social security and Medicare taxes withheld from each employee.
He is also responsible for depositing all of the taxes withheld on his employees.
And that's all we have for you on managing your payroll.
Let's look at what we've covered in this lesson.
First we identified wages that are subject to employment taxes.
Then we learned about accountable and non-accountable plans.
Those of you who have unique types of employees or issues learned about the special rules that apply to them.
And finally we discussed how to figure your payroll.
Thanks for joining me, lesson eight, how to make tax deposits and file your payroll taxes using a computer is up next.
It's another lesson for those of you with employees.
Hang in there, the employment tax lessons are the toughest ones, but you're almost done.
And remember, you can review any part of any lesson any time you want.
Good luck.
For resources discussed in each lesson, please visit the Lesson 10 Supplement.
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