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Income Tax Withholding-Math with Business Applications, Payroll Unit - YouTube
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The personal income
tax is the largest,
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single source of money for
the federal government.
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The law requires that
the bulk of the tax
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owed by an individual be paid
as the income is earned.
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For this reason,
employers must deduct
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money from the gross earnings
of almost every employee.
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These deductions, called
income tax withholdings,
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are sent periodically to the
Internal Revenue Service.
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The amount of money withheld from
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each employee depends
on several factors,
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including marital
status, gross earnings,
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and the number of withholding
allowances and income.
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Generally, the
withholding tax for
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a married person is less
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than the withholding tax for
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a single person making
the same income.
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Each employee must file
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a W-4 form as shown with
his or her employer.
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On this form, the employee states
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the number of withholding
allowances being claimed
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along with additional
information so that the employer
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can withhold the proper
amount for income tax.
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For example, if we have
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a person that's married
with three children,
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they could claim a total
of five allowances,
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one for themselves,
and their spouse,
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along with their three children.
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This then would be used to
determine the amount of
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tax obligation,
and being married,
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they'd be at a lower tax rate,
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plus because of having to
provide for three children,
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they would be taxed
at a lower amount.
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Gross earnings are the basis
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for the tax amount being held.
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Generally, a person with
a higher gross earnings
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is going to have more
withheld for taxes.
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There are two methods
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used to determine
the amount of tax.
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One is the wage bracket method
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and the other is the
percentage method.
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We'll take a look at
both of these methods,
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starting with the
wage bracket method.
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The Internal Revenue
Service supplies
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withholding tax tables to
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be used with the
wage bracket method.
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These tables are extensive,
covering weekly,
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biweekly, semi monthly, monthly,
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and daily pay periods.
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There are different tables based
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on marital status as well.
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In the textbook, we
have pages as well as
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the pages available
electronically and
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Math Excel showing what
these would look like.
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Here's an example.
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This is a page from the tax table
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for persons that are
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single and they are
receiving monthly pay.
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This line that's
highlighted is showing
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the number of withholding
allowances being claimed,
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and you might think someone
single would only have
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either one or no allowances,
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but if they are in a, say,
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head of household
where they're actually
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responsible for minors or
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individuals that they can
claim as dependants they
[221]
could have these numbers
for their allowances.
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The left-hand side is
indicating the wages,
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and it's a bracket method where
we're looking at at least
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for the first column and a
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less than for the second column.
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So we would find the range
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or interval that fits the
earnings for the individual
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and then match it up with
the number withholdings
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to determine how
much money will be
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deducted from their
pay and sent to
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the IRS for their federal
income tax withholding.
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This is another example
from the tax table,
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but it's showing the
withholding amount
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for someone that's married
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and receiving pay
on a weekly basis.
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We still have the number of
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withholding allowances and here's
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the intervals for the wage.
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So you would find
the range that fit
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the amount of their wages,
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and then read the
appropriate amount of
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withholding for
federal income tax
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based on their number
of allowances.
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Let's take a look at
this example here.
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Bob Martinez has monthly
earnings of almost $2,900.
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He's married and claims four
withholding allowances.
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Find his withholding tax using
the wage bracket method.
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We would need to find
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the appropriate page
using the tax table.
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We would want to identify
the number of withholdings,
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and in this case
it would be four.
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Actually, you can see this
in the textbook on page 243.
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We'd want to make
sure we were using
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the married table as well,
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looking for the interval
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that contains his
monthly earnings.
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Here we have at least $2,800,
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but less than $2,840.
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We would line it up with
the number of allowances,
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and according to the table,
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and of course we
would be looking at
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the married one, is $29.
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So $29 would be deducted
from his gross pay and
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his employer would
send that off for
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his income tax or federal
withholding tax obligation.
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There are states that
require income tax as well,
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but some states do
not have income tax,
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and here we have a list of
the seven states that do not.
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In addition, there are
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states that have a
limited income tax.
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They are Tennessee
and New Hampshire,
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that only tax income from
dividend and interest.
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There are some states having
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a flat tax rate or
percent of income,
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but the majority of the
states issue tax tables
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with taxes going as high as
nine percent and 10 percent.
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We have an example of
an optometrist here,
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assistant working in Michigan has
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a gross earnings of
$3,225 for the month.
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Determine the state
withholding tax.
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We would be supplied
this information,
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or here in the textbook
looking for Michigan,
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we could determine
what that tax rate is.
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It's a 4.35 percent income tax.
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Multiplying that
by her wages would
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give us the amount
of tax that would be
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withheld from her
gross wages and sent
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off to the Michigan
Department of Revenue.
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In these next slides, we're
going to take a look at
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calculating our
federal withholding
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using the percentage method.
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We had the tax table method,
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and here's the percentage method.
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The advantages of using the
percentage method is that you
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don't need this half-inch
thick book of tables,
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and because of the procedure
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for using the percentage method,
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it lends itself to creating
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a program to determine the
amount of withholding.
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It's based on a specific amount
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for each withholding based
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on the pay period or
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the frequency of an individual
receives their pay.
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For example, we have a gross
pay of $2,000 biweekly.
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They're married with
two allowances.
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We have two allowances for
a frequency of biweekly,
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so we'll take the $140
from the table 38 cents,
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multiply it by 2,
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and this is the allowance.
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This is what their
gross pay is reduced by
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for the amount that is
excluded from taxes,
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so here is their taxable income.
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The next step then is
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this formula followed in
the percentage method.
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Because this
individual's married,
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we would go to the portion of
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the percentage
method that gave us
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the tax rate based
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on marital status and in
this case, it's married.
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It says, if the
amount of wages after
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subtracting withholding
allowance is not over $606,
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there's no tax withholding.
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Well, it's over $1,700.
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So we read until we find
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the range that
captures this net pay,
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and it's the second line here.
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It's over $940, but
not over $2,910.
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Above this next part,
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it says the amount
of income tax to
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withhold is $33.40 plus
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15 percent of the excess over
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that flat beginning
minimum of $940.
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We know they're going to
be paying the $33.40,
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but we need to do a
calculation of 15 percent
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of the excess over that minimum
amount in this interval.
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So we take their net
taxable income minus
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940 and multiply
that by 15 percent.
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The minimum tax is $33.40
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plus 15 percent times
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the difference for
the excess amount.
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If you simplify that,
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the federal
withholding income tax
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for this individual
would be $150.29.
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Here we have our
table again showing
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the withholding
allowance based on
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the frequency of the payroll.
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This can be found
in your textbook.
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The second part of this
is based on the tables
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depending on the
frequency of the pay.
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Weekly, biweekly,
there would be one
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for semi monthly, and monthly,
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and on the left-hand
side is for individuals
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single marital status and those
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that are in married
marital status.
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From there, we would then read
to determine the amount of
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withholding based on the amount
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of income that the
individual had.
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Let's look at another example.
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Sadie Simms is married and
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claims three,
withholding allowances.
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Use the percentage method to
find or withholding tax in
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a week where her
earnings were $1,263.
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It starts by determining
the amount of
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withholding allowances
she's paid weekly,
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and she has three withholdings.
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So we'll take the $70.19 for each
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withholding having paid at
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a weekly frequency times a by 3,
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the number she is claiming,
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which means we will subtract
that from her gross wage.
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The amount in blue then is
the amount of her wages that
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she will calculate
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the tax obligation for
federal withholding.
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Next, we go to our
percentage method table.
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We need to find the one that
deals with weekly and we're
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interested in the married
person portion of it,
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we're looking for the range
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that captures her taxable income.
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If you look it's the second
line here, it's over $470,
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but not over $1,455,
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it's within that range.
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If we read further,
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it means that she's
going to be paying
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$16.70 plus 15 percent
of the excess,
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we can have to jump up
and read the heading,
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over her taxable
earnings less the 470,
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which has already been taken
care with this $16.70.
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So here's what the
formula looks like.
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With order of operations,
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you'll want to find
that difference between
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the beginning amount for this
interval and the taxable,
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multiply that by 15 percent,
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next 0.15, and then add it
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to the beginning amount
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of income tax that
will be withheld.
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Totaling that, this
individual will
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have $104.06 withdrawn from
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their gross wages
and sent off for
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their tax obligation for
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that year to the
federal government.
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In this example, Howard
Martin has earnings of
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$5,735 for the month.
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He is married, claims four
withholding allowances.
[844]
Use the percentage method
to find his withholdings.
[847]
We're going to look at
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his frequency of the pay
period, which is monthly.
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The withholding
amount is $304.17.
[856]
We times that by the
four withholdings.
[859]
This is the amount of allowance,
[862]
so we subtract that
from his gross wages.
[865]
That gives us the taxable
earnings that we in turn
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go to our tax table for
the percentage method.
[875]
We're looking for married,
[878]
we find the interval that
captures his taxable earnings.
[882]
It's here where the
arrow is indicating.
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Just like the last one is a flat
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$72.50 plus 15 percent of the
difference of this amount.
[895]
Doing that calculation,
simplifying,
[902]
he has a tasks withholding.
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