Example

CALCULATING FEDERAL INCOME

TAX on 2016FORM 1040

(Married, 2 Exemptions)

Income (adjusted)$25,000

Exemptions$ (8,100)[2 x $4,050]

(Allowances)

Standard Deduction$ (12,600)

(Married)

------

Taxable Income$ 4,300

  • Therefore, using total wages (income) to calculate federal withholding taxes would overstate the amount of taxes.

FEDERAL INCOME TAX WITHHOLDING

FIT or FWT

Taxable Wages

  • Wages – total compensation paid to employees.
  • Compensation includes:

- wages/salary

- vacation pay

- bonuses

- tips

- Fringe Benefits

Taxable Fringe Benefits

-personal use of company car

-vacations (company-paid)

-tickets for entertainment / sporting events

-athletic club membership

-frequent flier miles (not now, but maybe someday?)

Non-Taxable Fringe Benefits

-employee discounts

-meals at employer-run eating establishments

  • Exemptions from FIT

- employer contribution to a 401(k) program

- educational assistance

- employer-provided parking

- de minimus fringe benefits

  • Deductions that reduce Wages prior to calculating FIT

- deferred arrangements (e.g., 401(k), SEP, IRA) (are NOT exempt from FICA)

- cafeteria plans (section 125) (also, exempt from FICA)

  • Deductions that do NOT reduce Wages prior to calculating FIT

- union dues

- wage garnishments

Form W-4 (Employee’s Withholding Allowance Certificate)

  • Completed by the employee.
  • Employee can change anytime – existing W-4 becomes invalid.
  • Employee can additionally have more tax withheld by claiming fewer exemptions and/or additional dollars.
  • Employee may claim “exemption” from income tax withholding if no income tax liability last and expect none this year.
  • Employer must maintain the W-4 and use it to calculate income tax to be withheld.
  • Employer implements within 30 days from receipt of W-4.

- no reimbursement of taxes if within 30 days.

  • Employer must withhold at single, no allowance rate (i.e., highest taxes) if no W-4 from employee.

Withholding Methods

  • Percentage Method
  1. Start with Taxable Wages
  2. Multiply the Number of Allowances by the appropriate Table of Allowance Dollar Value.
  3. Subtract the result from #2 from #1. (Wages minus Allowances)
  4. Compute tax from “Percentage Method” tables, using the correct pay period and marital status.
  • Wage-Bracket Method
  1. Start with Taxable Wages
  2. Locate the correct Withholding Table, using the correct pay period and marital status.
  3. Locate the proper Wage Bracket using Taxable Wages.
  4. Move across to Tax Amount, which is located in the appropriate allowance column.
  • Quarterly and Yearly Averaging

- used with fluctuating, but estimate-able income.

- based on income estimate for Quarter or Year.

- divide estimate by number of pay periods, and then determine tax withholding.

- withhold average tax amount every pay period.

  • Supplemental Wages (e.g., vacation pay, bonuses, commissions, severance, etc.)

- If Paid with Regular Wages (i.e., same check):

If both wages are combined together, then compute tax on entire payment as we have done previously.

If shown separately, can have two different rates for each payment – Ex.: Regular tax for wages and 25% for the supplemental wages.

- If Paid Separately from Regular Wages (i.e., two separate checks):

  1. Method B

- (1) add supplemental wages to the (previous-paid) regular wages, (2) then calculate tax on entire amount, (3) then subtract previously-held tax to arrive at amount to withhold for supplemental wages.

- use this method if no income tax withheld from regular wages.

  1. Method A

- withhold a flat 25% on the supplemental pay.

- Vacation Pay

Treat as if it’s a regular payment for the pay period(s).

If paid in lieu of time, combine with regular pay.

WAGE & TAX STATEMENTS

Form W-2 (Wage and Tax Statement)

  • Prepared by Employer if employee had any of the following:

- income tax or FICA taxes were withheld.

- income tax would have been withheld if employee had claimed one withholding

allowance or had not claimed exemption from withholding.

- any amount paid to the employee for services, if the employer was a trade or

business.

  • Must be given to employees on or before January 31st.

Form W-3 (Transmittal of Wage and Tax Statements)

  • The form is automatically sent to employers during the 4th quarter.
  • Used as a “cover form” for filing all W-2’s Copy A.
  • Form W-3 and all the W-2’s are sent to the Social Security Administration by the end of February January.
  • Must file electronically instead of Form W-3 if W-2’s number 250 or more. – due date extended to March 31st.

Form W-2c and Form W-3c - Corrected Statements

  • Use Form W-3c if more than one Form W-2c; otherwise just file W-2c.

Form 1099

  • Form 1099-MISC used to report payments such as rents, legal fees, payments to independent contractors, royalties, and awards.
  • Form 1096 is used to transmit the 1099’s to the IRS.

ILLINOIS STATE INCOME TAX

SIT or SWT

(we will cover the issue of a “multi-state” employer during the SUTA presentation)

Form IL-W-4 (Employee’s Illinois Withholding Allowance Certificate)

  • There are two different types of allowances – Basic Allowances ($2,175 each) and Additional Allowances ($1,000 each).
  • Employee may include an additional dollar amount of withholding, similar to FIT.
  • Employees that are residents of Iowa, Kentucky, Michigan and Wisconsin (reciprocal agreements) must complete Form IL-W-5-NR, Employee’s Statement of Nonresidence in Illinois, to be exempt from Illinois Income Tax withholding.

Taxes

  • Straight, 3.75% rate after allowances.
  • Can use Percentage Method or Wage-Bracket Method (see handouts)

Deposit Requirements

  • If more than $12,000  Semi-Weekly depositor.
  • Between $1,000 and $12,000  Monthly depositor (new taxpayers, as well)
  • Less than $1,000  Annual depositor.
  • Use Form IL-501 to deposit (similar to Form 8109)

Form IL-941

  • If Annual depositor  use Form IL-941 and it’s due by January 31st
  • If Monthly or Semi-Weekly depositor  then file quarterly, even if $0 for quarter - form is due by end of the following month.