CHAPTER 4
Learning Objectives
After studying this chapter, students should be able to:
1. Explain coverage under the Federal Income Tax Withholding Law by determining:
(a) the employer-employee relationship, (b) the kinds of payments defined as
wages, and (c) the kinds of pretax salary reductions.
2. Explain: (a) the types of withholding allowances that may be claimed by employees
for income tax withholding and (b) the purpose and use of Form W-4.
3. Compute the amount of federal income tax to be withheld using: (a) the percentage
method; (b) the wage-bracket method; (c) alternative methods such as quarterly
averaging, annualizing of wages, and part-year employment; and (d) withholding of
federal income taxes on supplementary wage payments.
4. Explain: (a) Form W-2, (b) the completion of Form 941, Employer’s Quarterly
Federal Tax Return, (c) major types of information returns, and (d) the impact of
state and local income taxes on the payroll accounting process.
Contents
Chapter 4 outline:
LEARNING OBJECTIVES
COVERAGE UNDER FEDERAL INCOME TAX WITHHOLDING LAWS
Employer-Employee Relationship
Statutory Employees/Nonemployees
Taxable Wages
Fringe Benefits
Withholding on Fringe Benefits
Flexible Reporting
4–2 Payroll Accounting
Pretax Salary Reductions
Cafeteria Plans
Flexible-Spending Accounts
Health Savings Accounts
Archer Medical Savings Accounts
Deferred Arrangements
TAX-DEFERRED RETIREMENT ACCOUNTS
Individual Retirement Accounts
Roth IRA
WITHHOLDING ALLOWANCES
Personal Allowances
Allowances for Dependents
Additional Withholding Allowance
Other Withholding Allowances
Form W-4 (Employee’s Withholding Allowance Certificate)
Completing Form W-4
Withholding Allowances
Changing Form W-4
Exemption from Income Tax Withholding
FEDERAL INCOME TAX WITHHOLDING
Percentage Method
Wage-Bracket Method
OTHER METHODS OF WITHHOLDING
SUPPLEMENTAL WAGE PAYMENTS
Vacation Pay
Supplemental Wages Paid with Regular Wages
Supplemental Wages Paid Separately from Regular Wages
Method A
Method B
Gross-Up Supplemental
Chapter 4 4–3
WAGE AND TAX STATEMENTS
Form W-2
Form W-2c
Form W-3
Penalties
Form W-3c
Privately Printed Forms
RETURNS EMPLOYERS MUST COMPLETE
INFORMATION RETURNS
INDEPENDENT CONTRACTOR PAYMENTS
BACKUP WITHHOLDING
Matching Quiz (p. 4–38)
4–4 Payroll Accounting
Questions for Review (p. 4–38)
Note: All answers and solutions are based on Tax Tables A and B in the textbook and
the tax regulations presented in Chapter 4. Tax Tables A and B are used by employers,
effective January 1, 2017.
3. a. Nonexempt
9. Employees who had no income tax liability in 2017 and do not expect to have any
for 2018 qualify for exemption from withholding of federal income tax from their
10. The special period rule allows employers to use October 31 as the cutoff date for
Chapter 4 4–5
13. The formula is:
14. When the federal income tax has already been withheld from the employee’s regular
wages, the employer may select one of two alternative methods for withholding the
16. Employers who are required to prepare information returns (Form 1099 series)
18. Employees who willfully file false Forms W-4 are subject to fines of up to $1,000 or
4–6 Payroll Accounting
Questions for Discussion (p. 4–39)
1. No, Lagomarsino should not include the cash value of Oberstar’s meals as part of
his taxable wages. The general rule is that the value of meals and lodging furnished
2. Generally, a payroll period is the period of service for which a payment of wages is
3. This question gives students an opportunity to become acquainted with their state’s
income tax withholding law. If your state has no withholding law, you may assign
4. There is no law against withholding more federal income taxes from a worker’s pay
than would be required under the wage-bracket or percentage method. Reynolds
would be proceeding legally by amending her Form W-4 and would be joining many
5. a. The IRS claims that several hundred casino waitresses and waiters fail to report
about $10,000 in tips each year and owe an average of $2,400 in back taxes. Wait-
Chapter 4 4–7
reported.
6. Since the fringe benefit is subject to federal income and social security taxes, it
Problem Sets (p. 4–41)
The principles and practices of payroll accounting discussed in Chapter 4 are applied in
the Problem Sets as shown below.
Principle or Practice Problem Set No. (A and B)
1. Using the percentage method to compute 4–2, 4–3
federal income taxes to withhold.
2. Using the wage-bracket method to compute 4–1, 4–3, 4–4, 4–5,
federal income taxes to withhold. 4–8 through 4–9
3. Computing the withholdings for FICA, federal 4–5, 4–8, 4–9
income taxes, state income taxes, and city
income taxes to determine net pay.
4. Computing annual bonus to be paid with 4–6, 4–8
regular salaries.
5. Computing the quarterly totals (weekly and 4–9
monthly paydays) for gross earnings,
deductions, and net pay.
6. Gross-up supplementals. 4–10
7. Compute net pay with tax-free retirement 4–7, 4–11
withholdings.
8. Completing Form 941 and Employer’s Report 4–12
of State Income Tax Withheld.
9. Completing Forms W-2 and Form W-3 for 4–13
calendar year.
4–8 Payroll Accounting
Solutions—Problem Set A
4–1A.
Gross pay …………………………………………. $300.00
4–2A.
Employee
No.
Employee
Name
Marital
Status
No. of
Withholding
Allowances
Gross Wage
or Salary
Amount
to Be
Withheld
1 Amoroso, A. M 4 $1,610 weekly $151.91a
Chapter 4 4–9
4–3A.
Amount to Be
Withheld
Employee
Marital
Status
No. of
Withholding
Allowances
Gross Wage
or Salary
Percentage
Method
Wage-
Bracket
Method
Corn, A. S 2 $ 675 weekly $ 62.28a $ 62.00
Fogge, P. S 1 1,960 weekly 379.63b N/A*
4–4A.
Employee
Marital
Status
No. of
Withholding
Allowances
Payroll Period
W = Weekly
S = Semimonthly
M = Monthly
D = Daily
Wage
Amount to
Be Withheld
Hal Bower M 1 W $1,350 $149.00
Ruth Cramden S 1 W 590 62.00
4–5A.
For Period Ending December 21
No. of Deductions (e)
Marital W/H Total (a) FICA (b) (c) (d) Net
Employee Name Status Allowances Earnings OASDI HI FIT SIT CIT Pay
John, Matthew M 3 $2,524.00 $ 62.00* $36.60 $367.13** $ 50.48 $37.86 $1,969.93
Compute the employer’s FICA taxes for the pay period ending December 21.
Chapter 4 4–11
4–6A.
(a) $250
4–7A.
Gross pay ……………………………………………………………………………… $ 930.00
4–8A.
For Period Ending December 28
No. of Earnings Deductions (g)
Marital W/H (a) (b) (c) FICA (d) (e) (f) Net
Employee Name Status Allowances Regular Supp’l. Total OASDI HI FIT SIT CIT Pay
Hall, Michael M 5 $ 5,000.00* $ 4,800.00 $ 9,800.00 $ 607.60 $142.10 $1,514.00 $196.00 $ 98.00 $ 7,242.30
Compute the employer’s FICA taxes for the pay period ending December 28.
4–12 Payroll Accounting
Employee Name Earnings OASDI* HI* FIT SIT CIT Pay
Hall, Michael $19,800.00 $1,227.60 $ 287.10 $2,142.00 $ 396.00 $198.00 $15,549.30
Chapter 4 4–13
4–10A.
(a)
$100
4–11A.
(c) Clausen’s take-home pay with the
retirement contribution deducted:
Weekly pay ……………………………………………………………….. $ 820.00
(d) Clausen’s take-home pay without the
retirement contribution deducted:
Weekly pay ……………………………………………………………….. $820.00
Chapter 4 4–15
4–12A.
(a)
FEDERAL DEPOSIT INFORMATION WORKSHEET
Employer
Identification Number
00-0004701
Name
Quality Repairs
FEDERAL DEPOSIT INFORMATION WORKSHEET
Employer
Identification Number
00-0004701
Name
Quality Repairs
4–16 Payroll Accounting
4–12A. (Continued)
FEDERAL DEPOSIT INFORMATION WORKSHEET
Employer
Identification Number
00-0004701
Name
Quality Repairs
Chapter 4 4–17
4–12A. (Continued) Form 941
4–18 Payroll Accounting
4–12A. (Continued)
Chapter 4 4–19
4–12A. (Concluded) Employer’s Report of State Income Tax Withheld
(c)
4–13A. Wage and Tax Statement
(a)
4–20 Payroll Accounting
4–13A. (Continued)
(b)
(c)
Source: Internal Revenue Service.