Chapter 3: Calculating Federal Tax

Transcription

1 Chapter 3: Calculating Federal Tax CHAPTER 3: CALCULATING FEDERAL TAX... 1 CALCULATING FEDERAL TAX OVERVIEW... 1 FEDERAL INCOME TAX, CODE 99 - CE ACCUMULATOR Calculating Federal Income Tax... 2 Supplemental Payments... 5 Income Not Subject to Withholding - CE Accumulator Withholding for Non-resident Aliens... 6 SOCIAL SECURITY TAX... 7 Employee Social Security Tax Code Employer Social Security Tax Code Calculating Tax... 9 MEDICARE TAX... 9 Employee Medicare Code Employer Medicare Code Employee Medicare Hospital Insurance Tax Code Calculating Tax FEDERAL UNEMPLOYMENT WAGES Calculating Federal Tax Overview This section describes the Federal tax calculations for the following taxes: Federal Income Tax - Federal Income tax is based on annualized taxable wages and uses an exemption amount based on the number of dependents claimed by an individual. In addition to the Federal Income tax calculation, the following tax information is also included: Federal Income tax. Federal Income tax on supplemental payments. Federal Income tax on income not subject to withholding (federally exempt). Social Security Tax - In addition to the Social Security tax calculation, the following information is also included: Social Security Excludable Sick Pay. Optional use of accumulators 6 and 8. Tax Manual U.S. Tax Manual Chapter 3: Calculating Federal Tax 1

2 Social Security Wages and Tips. Federal Income Tax, Code 99 - CE Accumulator 2 Federal Income tax uses a system-generated type/limit code of S6. The S-deduction type code is used for both Federal and state tax deductions. Unlike most type codes, which actually define the calculation to be performed, the S-type code causes the system to look at the first two positions of each individual's corresponding DN field for another code which, in turn, determines the calculation to be performed. Code 99 represents the calculation for Federal income tax. This code is system-generated into the first two positions of DN02 for every individual in a U.S. group. The last six positions of DN02 are zerofilled. Example: Note: The normal method of calculating Federal tax can be overridden if the number of dependents is set up to equal 99. In this case, the additional amount field DA02 must be passed and will contain a flat amount if DS02 = 0 or percentage if DS02 = 2 to be withheld instead of the regular amount. Also, supplemental payments will override the normal taxation process, and allows the program to take the Federal Supplemental Tax Rate (See the Supplemental Payments section) on the taxable amount. Calculating Federal Income Tax Effective Date: 01/01/2018 Federal Tax Code 99 Federal income tax is based on annualized taxable wage less an exemption amount based on the number of dependents claimed by an individual. The adjusted taxable wages are then applied to one of two graduated tax tables, depending on the individual's marital status, to determine the amount of tax to be withheld. Taxable accumulator 1 is used to accumulate wages subject to federal tax by an individual. Individuallevel fields relative to Federal Income tax that print on the Employee Status Report are: Employee Field TQ01 Quarter-to-date federal wages TY01 YTD federal wages TC01 Current period federal taxable wages YD02 YTD federal tax FDTW YTD federal wages while in current state FDTX YTD federal tax while in current state MARR Marital status FEDP (DB02) Federal dependents DS02 Federal tax participation switch PFW1-PFW5 YTD federal wages while in state for tax packet PFT1-PFT5 YTD federal tax while in state for tax packet DN DA02 (FEDA) Chapter 3: Calculating Federal Tax Tax Manual U.S. Tax Manual

3 The number of dependents claimed by an individual for Federal tax purposes is entered in the first two positions of DB02. The last six positions of DB02 are not used, and always contain zeros. Therefore, another data element has been created - FEDP - which enables you to enter just the two-digit value when initially adding or later changing the number of dependents. The system automatically appends six zeros to the two-digit FEDP value, resulting in an eight-digit value for DB02. However, except on individual status reports, the entire eight-digit value of DB02 is printed. DB02 can be used to indicate that the Federal tax calculation routine (which is triggered by the code 99 in DN02) is to be bypassed. This is accomplished by entering '99' instead of the number of dependents claimed, in FEDP (the first two positions of DB02). This is used to indicate that only additional tax (if any) is to be calculated for this individual. To bypass federal tax calculations for an individual, including both normal and supplemental payments, enter a 1 in DS02. Federal tax calculations are bypassed when an individual qualifies for no tax status. Note: Internally current federal taxable wages are maintained in field WS01, during CE and CD calculation. It is not retained in WS01, but gets updated to TC01. The one-character field MARR is used to determine an individual's marital status for Federal tax. MARR can contain the following values: Single Value 0 or M Married 1 or S Single (default) 2 or B Married, but use the higher single tables for the calculation of Federal income tax. The calculation of federal tax, before additional tax is: 1. Annualize current taxable wages (from taxable accumulator 1) by multiplying by the number of payments per year (CPNO). 2. Multiply the number of dependents by $4,150 and subtract the result from the annualized wages to arrive at the adjusted wage. 3. Apply the adjusted wage to the appropriate graduated tax table that follows: Including head of household (MARR = 1 or S) or married requesting single tables (MARR = 2 or B). Single (Including Head of Household) Annualized Taxable Wage Annualized Tax Amount Over But Not Over Amount Plus Percentage Of Excess Over $0 $3,700 $0 + 0% $0.00 $3,700 $13,225 $0 + 10% $3,700 $13,225 $42,400 $ % $13,225 $42,400 $86,200 $4, % $42,400 $86,200 $161,200 $14, % $86,200 $161,200 $203,700 $32, % $161,200 $203,700 $503,700 $45, % $503,700 $503,700 And over $150, % $420,700 Tax Manual U.S. Tax Manual Chapter 3: Calculating Federal Tax 3

4 Married Married (MARR = 0 OR M) Annualized Taxable Wage Annualized Tax Amount Value Over But Not Over Amount Plus Percentage Of Excess Over $0 $11,550 $0 + 0% $0 $11,550 $30,600 $0 + 10% $11,550 $30,600 $88,950 $1, % $30,600 $88,950 $176,550 $8, % $88,950 $176,550 $326,550 $28, % $176,550 $326,550 $411,550 $64, % $326,550 $411,550 $611,550 $91, % $411,550 $611,550 And over $161, % $611,550 An individual can request to have more Federal tax withheld than that which would be withheld by the normal tax calculation. This can be accomplished by one of several methods, depending on the individual's preference. Each of the following methods utilizes DA02, DS02, and possibly DB02. If the individual would like a specific dollar amount withheld in addition to the normal tax calculation each pay period, that pay-period additional amount is entered in DA02 in the format $$$$$$.. If federal tax calculated before additional tax is less than zero, and an additional fixed amount of tax is requested, the additional fixed amount will be reduced accordingly. Perhaps the individual would prefer that the additional amount to be withheld be in proportion to the amount of wages earned each pay period. This would be accomplished by entering a '2' in the deduction participation field, this causes the system to treat any value in DA02 as a percentage, in the format %%%%.%%%%, rather than a dollars-and-cents value. This percentage times current federal taxable wages results in the additional amount to be withheld. The above methods will only be used if the current wages paid are federal taxable wages; if the current wages paid are not federal taxable wages, no additional amounts or percentages will be withheld. The DS02 (Deduction Participation) values for federal tax calculation are: 0 Calculate tax normally and treat DA02 (if not zero) as fixed additional tax amount. 1 Do not calculate any federal tax. 2 Calculate tax normally, and treat DA02 (if not zero) as an additional tax percentage. The deduction limit code of 6 causes the DA02 amount (whether calculated or specified) to be added to any amount calculated by the normal tax routine. This total becomes the current Federal tax, OD02. If DA02 contains all zeros, no additional amount will be withheld. The data element FEDA represents the exact same master file field as the data element DA02. There is no advantage to using one data element as opposed to the other to reference this field, except perhaps the data element FEDA can be more easily associated with the function of this field. The only difference in the processing of this field depending on the data element chosen, is that a change transaction to DA02 would be sorted and processed before the same change transaction to FEDA. 4 Chapter 3: Calculating Federal Tax Tax Manual U.S. Tax Manual

5 Current and year-to-date Federal tax withheld are displayed on various system reports, including the individual's pay statement. Supplemental Payments Federal Supplemental Tax Rate Table Effective January 1, % up to $1,000, % for anything over $1,000,000 Federal Supplemental Tax Rate Table Effective January 1, % up to $1,000,000 37% for anything over $1,000,000 On supplemental payments (transactions 90 and 91) federal tax is calculated differently. Only tax calculations are applicable; non-tax deductions are not calculated. Each of the four pay-producing adjustments calculates taxes differently. The 52 transaction calculates taxes the same as for normal earnings. The taxes on a 90 transaction are based on regular earnings and taxes, and are normally taxed at a higher rate than normal earnings. Although the rate might not actually change, the tax is usually higher because the individual cannot be given exemptions for his dependents on a supplemental wage because these dependents have already been taken into account on the paycheck for that same cycle. To calculate the tax on TC90 supplemental wages: 1. Add the supplemental earnings to the current period earnings. 2. Figure the tax on these combined earnings. 3. Subtract the tax taken from the current paycheck. With this method, when code 90s are entered on a 'SPECIAL' processing status, the taxes calculated are the same as for normal pay, since all 80, 81, 82, and 85 transactions are inhibited. Code 91 adjustments are exactly like code 90s except in the method of calculating taxes. Assuming the tax fields are not entered on 30-series sub-codes, FICA will be calculated normally, federal tax will be taken at the Federal Supplemental Tax Rate, and state taxes will also be calculated normally unless the state has provided a special calculation for supplemental payments. The current FICA, federal and primary state taxes - OD01, OD02, and OD03 - are often used by subsequent tax calculation routines; for instance, a state tax can be based on current federal tax, a local tax can be based on the current primary state tax, or a state tax can be based on taxable wages minus the current FICA and/or federal taxes, etc. You should either avoid overriding any of the first three deductions or you should also override any subsequent tax deduction that uses the overridden tax in its calculation routine. 92 transactions is no longer a valid tax process for supplemental pays and should not be used. Income Not Subject to Withholding - CE Accumulator 5 "Federally Exempt" wages, taxable accumulator 5, are wages subjected to federal taxation, but not subject to withholding. This is considered other compensation for W-2 reporting if group data element CT05, taxable accumulator 5 limit code, is blank. If CT05 is blank, the system default, taxable accumulator 5 is not being used for user-defined purposes. Normally taxable accumulator 5 will not have been included in taxable accumulator 1 - federal wages. Tax Manual U.S. Tax Manual Chapter 3: Calculating Federal Tax 5

6 Withholding for Non-resident Aliens Employers are required to calculate income tax withholding on the wages of non-resident alien employees by adding a specific amount to the wages. This amount is added solely for the purpose of calculating Federal income tax withholding for each pay period. The added amount is not income or wages to the employee, it does not affect Federal income, FICA, or FUTA tax liability, it is not reported as income or wages, and it is not reported on the W-2 form. To set up this withholding, follow these steps. 1. Do either of the following: (a) Enter a 6 or a 7 in the DS02 field. A "6" treats the DA02 field (additional Federal withholding) as an additional dollar amount to be added to the amount in the standard Federal tax in the calculation of Federal tax. A "7" treats the amount as a percentage. Or (b) Connect the TPF table to the DS02 field. The TPF table stores Federal tax withholding codes. 2. Add the appropriate amount from the NRA table (shown below) to the "temporary" Federal taxable wage. The amounts that are added are standard for all non-resident alien employees, regardless of actual wages paid. These amounts are shown in the following table. Effective Date: January 1, 2017 Payroll Period Add Additional Weekly $44.20 Biweekly $88.50 Semimonthly $95.80 Monthly $ Quarterly $ Semiannually $1, Annually $2, Annualize this amount. 4. Non Resident Aliens are only allowed to permit one withholding allowances. If the value in DBnn is greater than 01, the system will ignore and calculate using 01, thereafter multiply by $4,050 and subtract from Step 3. If the value is 00 then withholding allowance is not applied. 5. Apply the result of Step 4 to the table: Non Resident Aliens calculation will default to single and bypass the Federal Marital status if it is set to Married. 6 Chapter 3: Calculating Federal Tax Tax Manual U.S. Tax Manual

7 Social Security Tax Social Secutiry is self-adjusting for individuals active on the database. As part of the Social Security calculation, the current plus YTD taxable is multiplied by the Social Security rate to assure YTD tax is in sync. If not, the current tax is added or subtracted. Employee Social Security Tax Code 98 Fields relative to Employee Social Security Individual Level Field DS01 FCTW FCTY FPYD TC06 TQ06 TY06 Social Security Participation Switch Social Security wages YTD in current stage Prior jurisdiction Social Security wages YTD Prior jurisdiction Social Security tax YTD Current Social Security wages QTD Social Security wages YTD Social Security wages DN01 Social Security Tax code 98 OD01 YD01 Current Social Security tax YTD Social Security tax Employer Social Security Tax Code 95 Employer Social Security Tax is established via a deduction set up on the group record established with a T type and 6 limit calculation. The Deduction ID is determined per a client configuration. The deduction established for Social Security tax requires on the system level a QTD tax field be defined. T type deductions bypass the usage of the period to date accumulators, and default to system level definitions for tax amounts. Fields relative to Employer Social Security Tax Manual U.S. Tax Manual Chapter 3: Calculating Federal Tax 7

8 Individual Level Field DSnn Social Security Participation Switch ERSW Prior jurisdiction Social Security wages YTD ERST Prior jurisdiction Social Security tax YTD TC20 Current Social Security wages TQ20 QTD Social Security wages TY20 YTD Social Security wages DNnn Social Security Tax code 95 ODnn Current Social Security tax YDnn YTD Social Security tax 8 Chapter 3: Calculating Federal Tax Tax Manual U.S. Tax Manual

9 Calculating Tax Employee Tax Code 98 Effective Date: 01/01/2018 Calculate the amount of Social Security tax as follows: 1. Compute YTD Social Security wages by adding current Social Security wages plus previous YTD Social Security wages. 2. Compute YTD Social Security tax using 6.2% times YTD Social Security wages, not to exceed the Social Security wage limit of $128,400. If the YTD Social Security tax exceeds the maximum tax of $7, the maximum will be substituted. Employer Tax Code 95 Effective Date: 01/01/2018 Calculate the amount of Social Security tax as follows: 1. Compute YTD Social Security wages by adding current Social Security wages plus previous YTD Social Security wages. 2. Compute YTD Social Security tax using 6.20% times YTD Social Security wages, not to exceed the Social Security wage limit of $128,400. If the YTD Social Security tax exceeds the maximum tax of $7, the maximum will be substituted. Medicare Tax Medicare and Medicare Hospital Insurance are self-adjusting. As part of the calculation, the current plus YTD taxable is multiplied by the rate to assure YTD tax is in sync. If not, the current tax is added or subtracted. Medicare Tax for both employee and employer is established via two deductions; set up on the group record. The Deduction ID for both is determined per a client configuration. Medicare Hospital Insurance Tax for employee is established via a deduction; set up on the group record. The Deduction ID is determined per a client configuration. The deduction for Medicare and Medicare Hospital Insurance is established for employee is setup as an S type and limit 6 calculations. The deduction established for the employer is setup as a T type and 6 limit calculations. What distinguishes the two deductions is the tax id retrained in the individual s DNnn field. Employee Medicare tax is code 97, while Employer Medicare is code 94. Medicare Hospital Tax is code 93 Medicare Employee Fields Individual Level Field DSnn FPTY T021 TC02 TQ02 TY02 Medicare Participation Switch Prior jurisdiction Medicare wages YTD Prior jurisdictioin Medicare tax YTD Medicare Wages QTD Medicare wages YTD Medicare wages DNnn Medicare Tax code 97 Tax Manual U.S. Tax Manual Chapter 3: Calculating Federal Tax 9

10 ODnn YDnn Current Medicare tax YTD Medicare tax Medicare Employer Fields Individual Level Field DSnn ERMW ERMT TC21 TQ21 TY21 Medicare Participation Switch Prior Medicare wages YTD Prior Medicare Social Security taxes YTD Current Medicare Wages QTD Medicare wages YTD Medicare wages DNnn Medicare Tax code 94 ODnn NNNN YDnn Current Medicare tax Client configured QTD Medicare Tax YTD Medicare Tax Medicare Hospital Insurance Employee Fields Individual Level Field DSnn PHIW PHIT DDnn NNNN DCnn Medicare HI Participation Switch Prior Medicare HI wages YTD Prior Medicare HI taxes YTD Current Medicare HS Wages Client configured - QTD Medicare HI wages YTD Medicare HI wages DNnn Medicare Tax code 93 ODnn NNNN YDnn Current Medicare HI tax Client configured QTD Medicare HI Tax YTD Medicare Tax Employee Medicare Code Multiply the Medicare tax rate (1.45%) by the current year-to-date Medicare taxable wage base (current taxable wages (TC02)) plus the previous taxable wage TY02). 2. Subtract the previous year-to-date Medicare tax (YDnn) from the result of Step Any adjustment resulting in a change to the DC field that does not correctly adjust YDnn will cause the system to adjust the Medicare tax (positive or negative) automatically. 10 Chapter 3: Calculating Federal Tax Tax Manual U.S. Tax Manual

11 Employer Medicare Code Multiply the Medicare tax rate (1.45%) by the current year-to-date Medicare taxable wage base (current taxable wages (TC21)) plus the previous taxable wage TY21). 2. Subtract the previous year-to-date Medicare tax (YDnn) from the result of Step Any adjustment resulting in a change to the DC field that does not correctly adjust YDnn will cause the system to adjust the Medicare tax (positive or negative) automatically. Employee Medicare Hospital Insurance Tax Code If previous YTD Medicare Hospital Wages (DCnn) exceed $200, Multiply the Medicare Hospital Insurance tax rate (.9%) by the current year-to-date Medicare Hospital tax taxable wage base (DDnn) plus the previous taxable wage (DCnn.) 3. Subtract the previous year-to-date Medicare Hospital tax (YDnn) from the result of Step Any adjustment resulting in a change to the DC field that does not correctly adjust YDnn will cause the system to adjust the Medicare Hospital tax (positive or negative) automatically. Calculating Tax Effective Date: 01/01/1994 The Medicare tax is self-adjusting, as is the Social Security tax. That is, any adjustment transactions resulting in a change to the taxable accumulator base that does not correctly adjust the tax withheld, will cause the system to adjust the tax amount automatically. Federal Unemployment Wages FUTA, the Federal Unemployment Tax Act, imposes a tax only on employers. The tax is based on each employee s taxable wages until such wages reach the taxable wage base of $7,000, at which time there is no further FUTA liability. Federal unemployment wages are accumulated in Taxable Accumulator 4. Most wages are applicable. The Federal Unemployment (FUTA) Taxable wage base is $7,000. Federal unemployment wages are reported when processing the Quarterly Subsystem. Although the system holds the FUTA rate, PeopleStrategy does not calculate the tax. The current FUTA rate is.006. State Exceptions California The federal unemployment tax credit reduction is effective for California employers. The reduction in the FUTA tax credit is 0.3% for the first year, and an additional 0.3% for each succeeding year until the loan is repaid. The FUTA credit reduction results in a net increase in FUTA taxes and applies to all California contributing employers. It is unclear of this state is projected to have a FUTA credit reduction in The IRS releases the final credit reduction list for the upcoming year in November FUTA tax rate 6.0% Credit allowed 5.4% Net FUTA Tax 0.6% FUTA Credit Reduction 2.1% Tax Manual U.S. Tax Manual Chapter 3: Calculating Federal Tax 11

12 Total FUTA Tax 2.7% 12 Chapter 3: Calculating Federal Tax Tax Manual U.S. Tax Manual