Fundamentals of Taxation 2011 Chapter 10 Solutions

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CHAPTER 10
PAYROLL TAXES

Discussion Questions

1. What type of compensation is subject to employer withholding?

Answer:
Wages subject to withholding include all pay given to employees for services performed. The wages include salaries, vacation allowances, bonuses, commissions, and possibly fringe benefits.

2. Who completes Form W-4 and what is its purpose? What information does it provide to employers?

Answer:
The Form W-4 is completed by the employee at the beginning of employment. The W-4 shows the number of withholding allowance requested by the taxpayer. The greater the number of withholding allowances, the smaller the amount of income tax that will be withheld from the employee’s check.

3. If a taxpayer makes $30,000 per year, will the annual withholding differ depending on whether the taxpayer is paid weekly, semimonthly, or monthly? Explain.

Answer:
The annual withholding will not materially differ regardless of the pay period of the taxpayer. As the payroll period gets shorter, tax withholding per check will decrease, yet the total for the year will remain roughly the same.

4. If a taxpayer works more than one job, will the withholding from the various jobs necessarily cover his or her tax liability? Explain.

Answer:
Generally, no. The withholding tables are designed to estimate the tax liability from the amount of the paycheck for a given pay period. If an individual receives $1,000 per week from each of two different employers, each employer will withhold based on a $1,000 per week salary. Since the individual’s wages are really $2,000/week, the employee will likely be in a higher tax bracket and the tax withheld will be too low.

5. What must the employer do if an employee claims more than 10 allowances or claims an exemption from withholding?

Answer:
As of January 1, 2006, employers no longer have to submit Form W-4 to the IRS for individuals claiming more than 10 allowances. If the IRS requests to review the W-4, the employer must make the form available for review.

6. In addition to federal tax withholding, what other taxes are employers required to withhold from an employee’s paycheck? How are the calculations made?

Answer:
FICA taxes – social security of 6.2% up to $97,500 in 2007 and Medicare taxes of 1.45% for all wages. Employers will also withhold state and/or local income taxes if applicable.

7. Who pays FICA? What are the percentages and limits on the payments?

Answer:
A total of 15.3% of wages are paid for FICA (up to $97,500 in wages for Social Security). The employer plays half and the employee plays half through withholding. The total Social Security percentage is 12.4% on the first $900 of wages and the total Medicare percentage is 2.9% (unlimited wage amount).

8. When are employees required to report tips to their employer? Are tips subject to the same withholding requirement as regular salary?

Answer:
Employees are required to report cash tips to their employer by the 10th of the month after the month in which the employee receives the tips. Employees can use Form 4070 to report tips. Tips are subject to withholding of income taxes, Social Security, and Medicare taxes.

9. What are the tip reporting requirements for a large food and beverage establishment?

Answer:
For a large food establishment (10 employees or more), employers must allocate tips to employees if employees do not report tips in an amount of at least 8% of gross receipts.

10. When must employers make payroll tax deposits?

Answer:
The frequency of the deposits depends on the amounts withheld and owed to the government. Generally, employers deposit taxes either monthly or semiweekly. The determination is made with reference to a lookback period.

11. What is a “lookback” period?

Answer:
The lookback period is four quarters beginning July 1 of the...
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