ADP Added Value Services

Payroll Fundamentals
2017 Edition

Workbook

Copyright © 2016–2017 ADP, LLC

 Table of Contents

Payroll Fundamentals ........................................................................................ 1

Contact Us ........................................................................................................................... 1
Proprietary Information and Legal Disclaimer ....................................................................... 1
Objectives ........................................................................................................... 2
Introduction ........................................................................................................ 3
Payroll Resources .............................................................................................. 4
Determining Who is an Employee .................................................................... 5
Employee Status Under Common Law ................................................................................. 5
Statutory Employees ............................................................................................................ 5
Statutory Nonemployees ...................................................................................................... 6
Paying the Employee ......................................................................................... 7
Exempt vs. Non-Exempt ....................................................................................................... 7
Minimum Wage .................................................................................................................... 8
Calculating Wages ............................................................................................................... 9
Calculating Wages Practice ................................................................................................ 12
Payroll Deductions ........................................................................................... 13
Types of Deductions ........................................................................................................... 13
Calculating Federal Tax Withholding .................................................................................. 14
Social Security and Medicare Taxes................................................................................... 16
Calculating Gross to Net Practice #1 .................................................................................. 17
Determining Taxable Compensation................................................................................... 18
Calculating Gross to Net Practice #2 .................................................................................. 21
Depositing and Reporting Taxes .................................................................... 23
The Principle of Constructive Receipt ................................................................................. 23
Federal Tax Deposit Rules ................................................................................................. 23
The Employment Tax Return – Form 941 ........................................................................... 25
Federal Unemployment Insurance (FUTA) ......................................................................... 26
Tax Deposit Practice .......................................................................................................... 27
Additional Practice Calculations .................................................................... 28

Revised 02/14/2017
Payroll Fundamentals

Payroll Fundamentals
Contact Us
For additional support regarding this topic, please contact: Debbie Mathewson at
(714)266-2441 or debbie.mathewson@adp.com.

Proprietary Information and Legal Disclaimer

This document may contain information that is privileged, confidential or otherwise
exempt from disclosure. It must not be copied, transmitted, or distributed in any form
or by any means without the express written permission of ADP. ADP provides no
guarantee regarding the accuracy of the referenced site, its contents, or this tutorial.

The information provided in this document is for informational purposes only and not
for the purpose of providing legal, accounting, or tax advice. The information and
services ADP provides should not be deemed a substitute for the advice of any such
professional. Such information is by nature subject to revision and may not be the most
current information available.

ADP and the ADP logo are registered trademarks of ADP, LLC. ADP A more human
resource. is a service mark of ADP, LLC. All other marks are the property of their
respective owners. Copyright © 2016-2017 ADP, LLC. All rights reserved.

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Payroll Fundamentals

Objectives

 Locate reference material to research payroll issues

 Determine who is considered an employee

 Review the difference between exempt and non-exempt employees

 Calculate gross pay earnings

 Review several types of deductions

 Calculate Federal Income Tax Withholding

 Calculate Social Security and Medicare Taxes

 Determine what compensation is taxable

 Calculate employee wages from gross to net

 Explain federal tax depositing and filing requirements

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Payroll Fundamentals

Introduction
Most of us take our paychecks for granted. Whether we receive a physical check or
have our pay deposited directly into our checking accounts, many of us don’t realize
how much effort goes into creating that paycheck.

A payroll department is made up of people who have to know many different laws.
These laws cover topics such as who is considered an employee, what deductions are
coming out of an employee’s check, which deductions have to be included for tax
purposes, what taxes must be withheld, and when they have to be deposited.

The American Payroll Association (APA) offers a certification for payroll professionals
who pass a rigorous 4-hour exam. This is called the Certified Payroll Professional
(CPP) exam. While that exam covers a broad range of payroll topics, this course will
focus on some of the basics. For those who are considering or are currently studying
for the CPP exam, this course can also serve as a good foundation for what’s to come.

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Payroll Fundamentals

Payroll Resources
There are several resources available to payroll associates. Throughout this class, we
will be accessing some of these online resources to assist us in answering questions
and calculating taxes.

IRS Publication 15 (Circular E Employers Tax Guide) https://www.irs.gov/pub/irs-

pdf/p15.pdf

IRS Publication 15-A (Employers Supplemental Tax Guide) https://www.irs.gov/pub/irs-

pdf/p15a.pdf – provides additional information on how to determine worker status

IRS Publication 15-B (Employers Tax Guide to Fringe Benefits) -

https://www.irs.gov/pub/irs-pdf/p15b.pdf

Fair Labor Standards Act (FLSA) Website - http://www.dol.gov/compliance/laws/comp-

flsa.htm

Fair Labor Standards Act Advisor - http://www.dol.gov/elaws/flsa.htm

American Payroll Association www.americanpayroll.org – has information on the Certified

Payroll Professional exam

The Bridge Sponsored by ADP® – https://thebridge.adp.com – An online community for

ADP clients which includes spaces for payroll and tax where clients can post and
answer questions. Requires an ADP login and password.

ADP Tools & Resources http://www.adp.com/tools-and-resources.aspx - provides payroll

and tax information, including calculation tools, payroll taxability, and reference guides. From
Insights & Resources, scroll down to Tools & Resources and click the link for Compliance
Resources to locate the tools below.

Fast Wage / Tax Facts http://adp.com/tools-and-resources/compliance-

connection/state-taxes.aspx – provides facts for all the states, including minimum wage
amounts, wage withholding methods, and unemployment insurance wage limits. From
the Compliance Connection area, scroll down to the States area and click the Learn
More link.

Federal Tax Deposit Calendar

http://www.adp.com/~/media/Compliance/Calendars/2017FTDCalendar_final.as
hx - This is an ADP calendar used to mark all federal deposit due dates and holidays.
From the Insights & Resources area of www.adp.com, scroll down to Tools &
Resources, click the link for Compliance Resources, scroll down to Calendars and click
the Learn More link.

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Payroll Fundamentals

Determining Who is an Employee

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf
Publication 15 – page 10

Employee Status Under Common Law

One of the most basic decisions an employer must make when hiring a worker to
perform a service is whether the worker is an employee. The significance of this
determination is that the employer is required to withhold and deposit income, social
security, and Medicare taxes from the employees’ wages and it must contribute an
amount that matches the social security and Medicare tax withholdings of the
employee. Under the Federal Unemployment Tax Act (FUTA), covered employers
must also pay a certain percentage based on each employee’s wages to support
federal and state unemployment insurance programs.

Generally, employees are defined either under common law or under statutes for
certain situations. While there is no uniform definition of an employee under all payroll
laws, most workers can be classified as either employees or _____________
___________ once the common law test has been applied. Under common law rules,
anyone who performs services for you is your employee if you have the right to
_________ what will be done and how it will be done.

Statutory Employees

Statutory employees are workers who, while they are not employees under the
common law, are treated as employees for certain employment tax purposes.
Payments made by an employer to statutory employees are not subject to _________
_________ tax withholding, but are subject to withholding for social security and
Medicare and, in some instances, the employer must pay federal Unemployment
(FUTA) tax. The following would be considered statutory employees:

D________ – _______________________________________________________

I___________ ______________ - _______________________________________

S___________ - _____________________________________________________

H________________ - ________________________________________________

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Payroll Fundamentals

Statutory Nonemployees

Statutory nonemployees are those who by law are treated as self-employed for all
federal tax purposes, including income and employment taxes. The workers who fall in
this category are:

R_____
E__________________________________________________

D_________
S______________ - __________________________________________________
___________________________________________________________________

Companion Sitters – This is another type of Statutory Nonemployee. Companion

sitters are individuals who furnish personal attendance, companionship, or household
care services to children or to individuals who are elderly or disabled. A person
engaged in the trade or business of putting the sitters in touch with individuals who
wish to employ them (that is, a companion sitting placement service) will not be treated
as the employer of the sitters if that person does not receive or pay the salary or wages
of the sitters and is compensated by the sitters or the persons who employ them on a
fee basis. Companion sitters who are not employees of a companion sitting placement
service are generally treated as self-employed for all federal tax purposes.

Example 1: Fred is an experienced plumber who agreed to perform full-time services

for Acme Building Company. He performs the work in the order designated by ABC
and according to their specifications. ABC supplies all Fred’s materials, frequently
inspects his work, pays him on a piecework basis, and carries workers’ compensation
insurance on him. Fred does not advertise his services or hold himself out as available
to perform similar services for other companies.
What is Fred’s worker classification? ______________________________

Example 2: Anne is a licensed cosmetologist. She does her work in a salon space at
Salon Suites Inc. She determines the prices for her work, keeps all the fees charged to
her clients, schedules appointments for her clients, is responsible for providing her own
supplies, and pays Salon Suites a monthly rental amount. What is Anne’s worker
classification? ______________________________

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Payroll Fundamentals

Paying the Employee

Resource Alert - http://www.dol.gov/compliance/laws/comp-flsa.htm

Once a worker has been classified as an employee, , there are rules about how an
employee must be paid. One of the most basic payroll and employment laws is the
___________________________________________________________________

The FLSA does the following:

 Sets _____________________________________________________________

 Requires __________________________________________________________

 Places ____________________________________________________________

 Mandates _________________________________________________________

Exempt vs. Non-Exempt

Some employees are exempt from the overtime pay provisions of the FLSA. Exempt
employees are often referred to as “salaried” employees.
For pending FLSA changes, visit https://www.dol.gov/whd/overtime/final2016/ and
https://www.dol.gov/whd/overtime/final2016/litigation.htm

Below are examples of exempt employees, which are illustrative, but not all-inclusive.

C___________________________________

A__________________________________

P__________________________________

E__________________________________

S__________________________________

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Payroll Fundamentals

Minimum Wage

The federal minimum wage rate is currently $7.25 per hour. Many states also have
minimum wage laws. In states where the employee is subject to both the federal and
state laws, the employee is entitled to the higher of the two minimum wages. For the
purpose of this class we will be focusing on only the federal law.

Employees may be paid on a piecework, salary, or commission basis, so long as the

wages at least equal the minimum hourly rate.

Workweek
In determining whether the employee has been paid the minimum wage, the employer
must establish a workweek. The employee’s pay cannot be averaged over any longer
period to determine whether they have been paid the minimum wage. The workweek
must be a regularly recurring period of 168 hours (7 consecutive 24-hour periods). It
does not have to be the same as a calendar week or begin at the start of a day.

Payroll Period

While the workweek must be established to determine that the minimum wage is being
paid, the payroll period is a period of service for which the employer pays wages.
Some common payroll periods are:

M_____________ (___ pay periods per year)

S_____________ (___ pay periods per year)

B_____________ (___ pay periods per year)

W____________ (___ pay periods per year)

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Payroll Fundamentals

Calculating Wages
Overtime Requirements

The required overtime pay under the FLSA is 1 ½ times the employee’s “regular rate of
pay.” In general, the regular rate of pay is an hourly pay rate determined by dividing
the total regular pay actually earned for the workweek by the total number of hours
worked. The FLSA requires overtime pay for hours physically worked over 40 in a
workweek. Hours for which employees are paid, but during which no actual work was
done, do not have to be counted when calculating the number of hours worked.
Example 1: If Jane is paid $685 biweekly and typically works a 40-hour workweek, her
hourly rate would be determined as follows:
$_____ ÷ 80 hours = $_____ per hour

If Jane were to work more than 40 hours in one workweek, she would be entitled to
overtime or premium pay for those hours. That premium pay could be calculated as
$8.56 x .5 = $4.28 per hour

If Jane works the following hours during a particular pay period, let’s calculate her pay:

S M T W Th F S Total
Week 1 0 8 10 11 8 8 0
Week 2 0 9 8 10 8 8 0

What were the total hours that Jane worked for week 1? ___
What were the total hours that Jane worked for week 2? ___
What were the total hours that Jane worked for the entire pay period? ___

How many hours of overtime did Jane work in this pay period? ___

Now we’ll take Jane’s regular rate of pay and calculate the total amount of regular and
premium pay that she is entitled to.

Regular rate of pay = $______ per hour x ___ (total hours) = $________
Premium pay = regular rate of pay $____ x .5 x __ overtime hours = $_____
Regular pay $______ + Premium pay $_____ = $_____ total wages for this pay
period

Another way to calculate overtime is to calculate the regular hours first, then calculate
the overtime hours separately and add the regular and overtime pay together:

Regular rate of pay = $_____ per hour x ___ (regular hours) = $______
Overtime pay = regular rate of pay $_____ x 8 hours x 1.5 = $______
Regular pay $______ + Overtime pay $______ = $______ total wages for this pay
period

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Payroll Fundamentals

Example 2: Joe earns $7.65 per hour. His normal workweek is 40 hours from Sunday
through Saturday and he typically works 8 hours a day. Joe’s employer allows for paid
sick time. Last week Joe worked the following schedule:

Monday 8 hours
Tuesday Sick day
Wednesday 10 hours
Thursday 9 hours
Friday 8 hours

How many total hours did Joe work? ____

For how many hours will Joe be paid? ____
How many overtime hours is Joe entitled to? _____
Let’s calculate Joe’s pay for this week: ____ hours x $7.65 = $________

Employees Working at More Than One Rate

When an employee is paid at two or more different rates by an employer for doing two
or more different jobs during the workweek, the regular rate of pay must take into
account the different rates.

Example: Mike works as a researcher for 8 hours a day from Monday through Friday
for $12 an hour. In the same week, he works an extra 12 hours (4 on Thursday and 8
on Saturday) as a filer for $9 an hour. His regular rate of pay would be calculated as
follows:
40 hours x $12 = $_____
12 hours x $9 = $_____
Total pay = $_____ ÷ 52 hours = $______ average per hour

Mike’s overtime pay will have to be calculated based on the average we came up with
above. Now, let’s calculate his overtime pay and his total pay for this payroll period.

Overtime = 12 hours x $______ x .5 = $______

$______(regular wages) + $______ (overtime premium) = $________

Total wages

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Payroll Fundamentals

Pieceworkers

Some employees get paid based on how many items they produce. Under a piece-rate
system, the method for determining the regular rate of pay is to add the weekly piece-
rate earnings to any other earnings for the workweek and then divide the total by the
number of hours worked in the workweek. The rate of pay must always equal at least
the hourly minimum wage.

Example: John receives $.85 for each paper airplane he assembles, plus a $.25
bonus per airplane for each airplane over 352 he assembles in a regular 46-hour
workweek. In one workweek, John assembled 420 paper airplanes.

Regular piecework earnings: 420 airplanes x $.85 = $_____

Production bonus: 68 airplanes x $.25 = $______
Total piecework earnings: $_____ + $_____ = $_______
Regular rate of pay: $_____ ÷ 46 hours = $_____
Total overtime premium: $_____ x .5 x 6 hours = $_____
Total earnings for workweek: $______ + $______ = $_______

Salaried Employees

Not all salaried employees are exempt from the FLSA’s overtime requirements. Only
those employees whose salaries exceed a certain level and who meet the duties and
responsibilities tests for exemption are classified as exempt. All other salaried
employees must be paid overtime. The regular rate of pay for such employees is
determined by dividing the employee’s salary by the number of hours the salary is
intended to compensate.

Example: Sara typically works 35 hours per week and is paid a semimonthly salary of
$1,200. In a recent workweek, she worked 43 hours.

Annual Salary: $1,200 x 24 = $__________

Weekly Salary: $28,800 ÷ 52 = $______
Regular rate of pay: $______ ÷ 35 hours = $_______
Regular pay: $______ x 43 hours = $_______
Premium pay: $______ x 3 hours x .5 = $_____
Total pay: $______

What if Sara works 38 hours in one week? Would that change the amount that she’s
entitled to for this pay period?
_____________________________________________________

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Calculating Wages Practice

1. Susie receives an hourly wage of $12 per hour for a 35-hour workweek. In one
week, in addition to her regular hours, she works an additional 7 hours on
Saturday. Calculate her total earnings for this week.

Regular rate of pay – 42 hours x $12 = $_____

Overtime pay – __ hours x $12 x .5 = $____
Total pay – $_____ + $____ = $______

2. John works under the piece-rate system and he receives $2 for each toy car he
produces. He also receives a bonus of $.50 for each car he produces over 300 in a
workweek. In one workweek, John produces 326 toy cars in 43 hours. Calculate his
earnings for this week.

326 cars x $2 = $_____

26 cars x $.50(bonus) = $_____
Total piece-rate earnings = $_____
Regular rate of pay –$_____ ÷ 43 hours = $______
Overtime pay –$_____ x 3 overtime hours x .5 = $_____
Total earnings –$_____ + $_____ = $_______

3. An employee is paid $9 per hour plus a 10% increase for evening shifts. During the
past week, the employee worked 24 hours on day shift and 24 hours on evening
shift. Under FLSA, what should be the gross wages for the week?

Day shift – 24 hours x $_____ = $______

Night shift – 24 hours x $_____ = $______

Regular rate of pay –_____ + _____ ÷ ____ total hours = $_____ per hour
Overtime pay –$_____ x __ overtime hours x .5 = $_____
Total pay –$_____ + $______ + $_____ = $______

4. Mark is a nonexempt employee who works 35 hours per week and is paid a
monthly salary of $2,500. During a certain workweek, Mark worked 43 hours.
Calculate his total earnings for this week.

Annual salary: $2,500 x 12 months = $__________

Weekly salary: $30,000 ÷ 52 weeks = $_________
Regular rate of pay: $______ ÷ 35 hours = $______
Regular pay: 43 hours x $______ = $________
Premium pay: 3 hours x $_______ x .5 = $________
Total earnings: $_______ + $______ = $________

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Payroll Deductions
Types of Deductions

There are several deductions that can come out of a paycheck. Take a few moments
to write down as many deductions as you can think of:

Statutory vs. Voluntary Deductions

Statutory deductions are mandatory and are required by law. What are some examples
from above of statutory deductions?


What are some examples of voluntary deductions?

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Payroll Fundamentals

Calculating Federal Tax Withholding

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf

Publication 15 – page 20

Every employer that pays wages is required to deduct and withhold federal income tax
from those wages. To know how much federal income tax to withhold from employees’
wages, employers should have a Form W-4 on file for each employee. This form is
designed to tell the employer how many withholding allowances the employee is
claiming, a number that will determine the amount to withhold from the employee’s
wages for federal income tax. The W-4 also indicates the employee’s marital status
and tells the employer if the employee is claiming totally exempt from withholding.

There are several methods that can be used to calculate this withholding, but we will
focus on two of the most common methods: Wage Bracket Method and Percentage
Method

Wage Bracket Method

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf

Publication 15 – page 47

The wage bracket method uses IRS tables. These tables can be found starting on
page 47 of Publication 15 (2017 version). There are two tables for each of the following
pay periods (one for single and one for married person): weekly, biweekly,
semimonthly, monthly, and daily or miscellaneous. Here are the steps used to
calculate federal withholding using the wage bracket method:

1. Find the table that applies to the employee’s pay period and marital status
2. Determine the employee’s wages subject to federal income tax withholding.
3. Locate the wage bracket in the first two columns in which the employee’s
wages for the pay period can be found.
4. Move across the table to the tax amount which corresponds to the row that
reflects the withholding allowances on their W-4.

Example: Sally is paid biweekly and earns $925 in taxable compensation each pay
period. On her W-4, she has indicated she is married with 2 withholding allowances.
Using the wage bracket method, determine the amount of federal income tax to
withhold from Sally’s paycheck: ___________________

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Percentage Method

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf

Publication 15 – page 43

Because of more numerous and complicated calculations, the percentage method of

withholding is generally used by employers with automated payroll systems or by
service bureaus that handle payroll processing for many different employers.

Use the following steps to figure the income tax to withhold using the percentage
method:

1. Multiply one withholding allowance for your payroll period (see Table 5 on page
44 of Publication 15) by the number of allowances that the employee claimed
on their W-4
2. Subtract that amount from the employee’s wages
3. Determine the amount to withhold from the appropriate table on pages 45-46
of Publication 15 (Hint: reading this table from right to left makes this method a
little easier)

Example 1: Joe is single and claims three withholding allowances on his W-4. He is
paid semimonthly and his taxable earnings for this pay period are $1,500. Determine
his federal income tax withholding using the percentage method.

$1,500 - $_______ (3 withholding allowances for semimonthly) = $_________ (subject

wages) - $______ = $_____ x ___% = $______ + $_______ = $_________

Example 2: Jane is married and claims four allowances on her W-4. She receives an
annual salary of $99,000 and is paid monthly. Calculate her federal income tax
withholding using the percentage method.

$99,000 ÷ 12 (monthly payroll) = $_________

$________ - $_______ (IRS allowance amount x 4) = $_________ (subject wages)
- $________ = $______ x ____% = $______ + $_______ = $_________

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Social Security and Medicare Taxes

Resource Alert – www.irs.gov – Type “Social Security” in search box

http://www.irs.gov/businesses/small/international/article/0,,id=104936,00.html

Employees working in the United States must pay social security and Medicare taxes.
Social security coverage provides retirement benefits and medical insurance
(Medicare) benefits to individuals who meet certain eligibility requirements. Employers
must deduct these taxes from each wage payment as well as pay an employer portion.
These taxes are collected together as Federal Insurance Contribution Act (FICA) tax.

For social security, the tax is applied only on wages up to the taxable wage base (or
wage limit). For 2017, the social security wage limit is $_______________. The social
security rate is _____%. This amount is withheld from employees and also paid by
employers.

For Medicare, there is no wage limit and the rate is ______ for wages up to $200,000.
This amount is withheld from employees and also paid by employers. In addition to this
withholding rate, employers must also withhold an additional 0.9% from wages in
excess of $200,000. This additional withholding is not paid by employers.

Now that we’ve learned about the three federal taxes withheld from employees’
checks, let’s look at examples where we put them all together.

Example 1: Mike is paid $900 in federal taxable wages every two weeks, is married
and claims 2 withholding allowances. Using the wage bracket method for federal
income tax withholding, calculate Mike’s net pay.

Taxable biweekly wages: $ 900.00

Federal income tax withheld: $ -_____
Social security tax withheld: $ -_____
Medicare tax withheld: $ -_____
Net pay: $ ______

Example 2: Sue earns an annual salary of $62,000, is paid weekly and on her W-4,
she claims single with two withholding allowances. Using the percentage method for
federal income tax withholding, calculate the net pay of her weekly paycheck.

Taxable weekly wages: $___________

Federal income tax withheld: $ - __________
Social security tax withheld: $ -__________
Medicare tax withheld: $ - _________
Net pay: $ _________

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Calculating Gross to Net Practice #1

Jane is an office assistant. She earns $15.48 an hour and is paid weekly. She is a
nonexempt employee. The W-4 form filed with her employer indicates her tax status as
married with two withholding allowances. Using the IRS Publication 15, calculate her
FIT using the wage bracket method.

Last week, Jane worked a total of 48 hours. In addition to FIT, social security, and
Medicare, Jane also has deductions as follows:

 State income tax: 2.25%

 City income tax: 1.0%

Given this information, answer the following questions:

1. What is Jane’s gross pay? $______

2. How much FIT is deducted from Jane’s earnings? $_____

3. How much social security is deducted from Jane’s earnings? $_____

4. How much Medicare is deducted from Jane’s earnings? $______

5. How much SIT is deducted from Jane’s earnings? $______

6. How much is deducted for the city income tax? $______

7. What is Jane’s net pay? $______

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Determining Taxable Compensation

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15b.pdf

Publication 15b

The Internal Revenue Code (IRC) uses the term “gross income” as the starting point
for determining a taxpayer’s federal tax bill. This generally includes all compensation
for services, including fees, commissions, fringe benefits, and similar items. Wages
and benefits are generally included in income and subject to income and employment
tax withholding, payment, and reporting requirements, unless the IRC says otherwise.

Taxable Fringe Benefits

Some examples of taxable fringe benefits are:

When noncash fringe benefits or perks are provided by an employer to its employees,
the amount of the benefit is defined as its _____ ___________ _________, or what it
would cost an individual to purchase the benefit on the open market in an “______
__________ ______________.”

The fair market value added to an employee’s earnings is known as _________

income.

Imputing Income

In most situations involving fringe benefits, taxes are not or cannot be withheld when
the benefit is provided to the employee. Therefore, the taxable value of the benefit
must be added to a regular wage payment.

The taxes are then calculated on the total of the imputed income added to the taxable
gross earnings.

After the taxes have been calculated and deducted, the imputed income is then
subtracted from the total to come up with the employee’s net pay.

Group Term Life

Under IRS regulations, employer-provided group term life insurance premiums for
coverage in excess of $___________ are considered taxable income and are subject
to social security and Medicare taxes, but not FIT or FUTA.

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Nontaxable Fringe Benefits

Nontaxable benefits are not subject to federal income tax withholding or social
security, Medicare, or FUTA taxes. Some examples of nontaxable fringe benefits are:

Example: John earns $2,500 each pay period in taxable wages and was recently
awarded an all-expenses paid vacation for reaching his sales goal. The fair market
value of this vacation was $1,800. How should this be calculated?

Regular Wages = $_________

Imputed Income = $_________
Total Taxable Wages = $_________

After the taxes are calculated on the total taxable wages, what will happen to the
imputed income amount?
_______________________________________________________________

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Voluntary Deductions

Pretax Deductions

Some deductions reduce an employee’s taxable wages when pre-tax dollars are used
to contribute to benefits such as _________, _________ and ______________
insurance.

Deferred Compensation Plans

The IRS allows employees to invest in qualified tax-deferred savings plans. The most
common of these plans is the 401(k)

Under any qualifying 401(k) plan, employee pretax contributions are limited; and for
2017, the tax-deferred contribution limit is $___________. For individuals age 50 or
older, there is a catch-up provision, which allows them to contribute an additional
$_________.

Contributions to 401(k) are not subject to federal income tax but are still taxable for
social security and Medicare. States and cities vary as to the taxability of 401(k)
contributions.

Cafeteria Plans

Cafeteria plans allow employees to select from two or more __________ involving
cash and qualified benefit programs. These flexible benefits allow employees to
choose the benefit coverage most suitable to their needs.

Under a Cafeteria 125 plan, employees pay for flexible benefits with pretax
contributions.

Under the IRS code, pretax dollars for Cafeteria 125 plans are not subject to federal
income tax, social security, or Medicare taxes.

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Calculating Gross to Net Practice #2

Tom is a senior manager at an accounting firm. His annual salary is $145,000. He has
earned $139,423 so far this year. He is paid biweekly and his W-4 form indicates that
he is married with four withholding allowances. Using the percentage method for FIT,
calculate Tom’s net pay for his last paycheck in December.
In addition to FIT, social security, and Medicare, consider the following items in
calculating this pay:
 Tom has a pretax 401(k) contribution of 9% of his gross earnings
 Tom contributes $200 per paycheck for pre-tax health insurance
 Tom’s state imposes a 3.5% income tax on taxable earnings and follows federal
rules for taxable compensation
 The annual value of Tom’s personal use of a company provided vehicle has been
calculated at $2,475 which is being imputed on this last paycheck of the year
Given this information, answer the following questions:

1. What is Tom’s biweekly salary? $___________

(annual salary ÷ 26 pay periods)

2. How much is Tom’s 401(k) deduction for this pay period? $___________

3. What portion of Tom’s earnings is taxable for FIT and SIT? $ ___________
(biweekly salary – pretax 401(k) – pretax health insurance
+ car lease value)
4. How much FIT is withheld? $ __________

5. How much SIT is withheld? $ ________

6. What portion of Tom’s earnings is taxable for social security? $ _______

7. How much social security tax is withheld? $ ________

8. What portion of Tom’s earnings is taxable for Medicare? $ __________

(biweekly salary (no limit) – health insurance + car lease value)

9. How much Medicare will be deducted from Tom’s earnings? $ _________

10. Using the line items on the next page, calculate Tom’s net pay.

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Biweekly salary $________

Imputed car value + $ _______
Gross earnings = $________
FIT - $ _______
SIT - $ ______
Social Security - $ _
Medicare - $ ______
Health Insurance - $ ______
401(k) contribution - $ ______
Imputed car value - $ _______
Net Pay = $________

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Depositing and Reporting Taxes

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf
Publication 15 – Page 25

Other than paying employees, the most important function of a company’s payroll
department is collecting various taxes required by federal, state, and local
governments. Much of this is accomplished by withholding the required amounts from
employees’ wages and timely paying them to the appropriate governmental unit.

The Principle of Constructive Receipt

Under federal regulations, employers must withhold federal income tax, social security
tax, and Medicare tax when the employee is actually or constructively paid, not when
the wages are earned and become payable. This means that the wages are
considered to have been paid when they have been made available to the employee
without substantial limitation or restriction.

The date when the wages have been paid is often referred to at ADP as the ________
_______. It is this date which determines when the tax deposit will be due. But before
an employer can know their due date, they must know their federal deposit frequency.

Federal Tax Deposit Rules

Employers that file Form 941 (Employer’s Quarterly Federal Tax Return) are assigned
one of two deposit frequencies by the IRS. The deposit frequency is not the same as
the filing frequency for the return.

The two deposit frequencies are _________ and _________________. The

determination of the correct frequency is based on the employer’s total liability for
federal income, social security, and Medicare taxes during a “___________ period.”
This is the 12-month period running from July 1 of the second previous year through
June 30 of the previous year.

Example: For tax year ______, the lookback period will run from July 1, ______
through June 30, ______.

If an employer’s four quarterly forms 941 reflect a total liability of $_________ or less,
then their assigned deposit frequency will be __________. If their total liability exceeds
$___________, then their assigned deposit frequency will be ____________.

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Example: Big Time Java, Inc. reported their federal tax liability as follows:

2017 Lookback Period

3rd quarter 2015 - $13,000

4th quarter 2015 - $15,000
1st quarter 2016 - $13,000
2nd quarter 2016 - $13,000
Total Liability $______

What is Big Time Java’s assigned deposit frequency for 2017? _____________

Next Day Deposit Rule

If an employer’s federal tax liability reaches $100,000 on any day during a monthly or
semiweekly deposit period, the taxes must be deposited by _____________________
__________________. In determining whether the $100,000 threshold is met, monthly
depositors consider only those taxes accumulated during the current calendar month,
not any previous months. Semiweekly depositors take into account only those taxes
accumulated during the current semiweekly period.

Federal Deposit Due Dates

Once the correct deposit frequency has been determined, the employer then has to
make timely deposits based on that frequency. The deposit due date will be based on
the check date previously discussed under “Constructive Receipt.” Below is a table to
assist in determining the correct due dates based on each frequency.

Deposit Check Date Cutoff Date Due Date

Frequency

Monthly

Semiweekly

Next Day

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Example 1: Bob’s Car Repair, a monthly depositor, pays wages on August 4, 11, 18,
and 25. Below is a breakdown of his payroll tax liability for each of these check dates:

Aug. 4 $15,000
Aug. 11 $15,000
Aug. 18 $15,000
Aug. 25 $15,000
What is Bob’s total tax liability amount for the month of August? $____________
When will this tax liability be due? _____________

Example 2: Gina’s Hair Salon, a semiweekly depositor, pays wages on Friday, May
19, 2017 with a total payroll tax liability amount of $53,000. When will Gina’s tax
deposit be due?
____________________________________________________________________

Impact of one-day rule on monthly depositors. If a monthly depositor accumulates at

least $100,000 in tax liability on any day during a month, it not only must deposit the
liability by the next day, but it also becomes a semiweekly depositor for the remainder
of the current calendar year and the entire next calendar year.

Example 3: John’s Hardware Store, a rapidly expanding business, is a monthly

depositor for 2017. In September, he added two more stores and accumulated an
employment tax liability of $103,200 with his Friday, September 8 check date. When
will this tax deposit be due? _______________________________
On Friday, September 15, he had another payroll with tax liability of $83,500. When will
that tax deposit be due? _________________________________________________

The Employment Tax Return – Form 941

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf
Publication 15 – Page 30

The basic employment tax return filed by employers is Form 941. The purpose of Form
941 is to provide the IRS with a report of each employer’s total taxable wages paid and
payroll tax liability, which can be matched against the employer’s record of tax deposits
and wage and tax information provided to employees on their W-2 forms. Form 941
must be filed by the last day of the month that follows the end of the quarter.

The due dates for filing the 941 are as follows:

Quarter Quarter Ends 941 Due Date

Jan. – Mar. March 31
Apr. – June June 30
July – Sept. September 30
Oct. – Dec. December 31

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Form 944 – Small employers may qualify to file Form 944 Employer’s Annual Federal
Tax Return, instead of the quarterly form 941. Employers whose annual tax liability is
less than $________ will be notified by the IRS that they qualify to file this annual form.

Federal Unemployment Insurance (FUTA)

Resource Alert – https://www.irs.gov/pub/irs-pdf/p15.pdf

Publication 15 – Page 35

Employer contributions in the form of unemployment taxes are required by the Federal
Unemployment Tax Act (FUTA). The FUTA tax is paid only by ___________ and is
calculated as percentage of covered wages for each employee.

The FUTA Rate

The FUTA tax rate is currently ______% on the first $_________ of an employee’s
wages. However, most employers do not pay the full rate. States also require
unemployment insurance to be paid by employers and if the employer pays their state
unemployment taxes in full and on time, they can receive a credit against their FUTA
tax rate of up to ______%. This is referred to as the __________ _________. When
this credit is applied, the employer would then pay ____%.

Credit Reduction
States with a high rate of unemployment and difficulty meeting their benefit obligations
can borrow money from the Federal Unemployment Account to pay benefits. If loans
taken out during one year are not repaid by the end of the following calendar year, the
FUTA credits for employers in those states are reduced, with the extra FUTA taxes
paid being applied against each state’s loan balance.

The reduction schedule is 0.3% for the first year the state is a credit reduction state,
another 0.3% for the second year, and an additional 0.3% for each year thereafter that
the state has not repaid its loan in full.

Sometime after November 10 of each year, the credit reductions for that year are
announced by the IRS and are included in Schedule A (Form 940).

Depositing and Paying the FUTA Tax

The FUTA tax must be deposited by the last day of the month following the end of the
quarter. If an employer’s quarterly FUTA tax is less than $_____, then they do not
have to make the deposit in that quarter. They can carry that liability over to the
following quarter. Once the liability in a quarter reaches $500, then the deposit must be
made.

Reporting FUTA Tax

Employers must report their FUTA liability annually on Form ______. The purpose of
this form is to determine the employer’s FUTA taxable wages for the calendar year and
the FUTA tax liability on those wages after accounting for applicable state
unemployment tax credits and FUTA tax deposits made during the year.

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Tax Deposit Practice

https://www.adp.com/-
/media/Compliance/Calendars/2017FTDCalendar_final.ashx?la=en
2017 Federal Deposit Calendar

1. ABC Corporation is a semiweekly depositor and they have a payroll tax

liability of $65,000 on Thursday, December 8. When is this tax deposit due?

____________________

2. Joe’s Feed Store is a semiweekly depositor and they pay their employees
every Friday. Based on the check dates and liability amounts below,
determine when each of their tax deposits will be due.

Check Date Liability Amount Due Date

Friday, April 7 $48,000 ____________
Friday, April 14 $50,000 ____________
Friday, April 21 $49,000 ____________

3. Fred’s Fish Emporium is a monthly depositor and they pay their employees
every Friday. Based on the check dates and liability amounts below,
determine when each of their tax deposits will be due.

Check Date Liability Amount Due Date

Friday, August 4 $55,000 ____________________
Friday, August 11 $62,000 ____________________
Friday, August 18 $62,000 ____________________

4. The Burger Bungalow has reported total FUTA wages of $49,850 for 1Q17
and $43,750 for 2Q17 and they also report those wages to their State
Unemployment agency.

What is their total FUTA tax liability for 1st quarter? $_______

When will this tax deposit be due? ____________

What is their total FUTA tax liability for 2nd quarter? $_______

When will this tax deposit be due? ___________

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Additional Practice Calculations

1. Jane is married and is paid $1,319 in taxable earnings by her employer on a
biweekly basis. Jane claims 5 withholding allowances on her Form W-4 and she
does not have any state income tax. Using the wage bracket method for Federal
Income tax, calculate Jane’s net pay for one pay period.

Calculate Taxes
FIT =$_____ (per wage bracket method)
SS = $_____
Medi = $_____

Gross Wages = $1,319.00

FITW - $ ______
SS - $ ______
Medi - $ ______
Net Pay = $_______

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2. John Daly is paid weekly and claims Married – 4 withholding allowances on his
W-4. For this pay period, he works 48 hours and is paid $12.00 per hour. In
addition, he receives a production bonus for having met his quota in the amount
of $125.00. The employer does not pay or tax the production bonus separately.
There is no state tax involved. Using the percentage method for FIT, calculate
John’s net pay.

Calculate wages first

48 hours x $12.00 = $______ + Production Bonus ($____) = $______ (Total
Wages)
Total Wages ÷ 48 hours = $______ Regular rate of pay
Regular rate of pay $_______) x 8 x .5 = $_______ (O.T.)
Gross wages = $_____ + $______ + $______ = $________ Total Gross wages

Calculate FIT
$________ – ($_____ x 4) = $______ - $_____ = $______ x ___% = $______
FITW

Social Security $______ x 6.2% = $_______

Medicare $________ x 1.45% = $_______

Calculate Net Pat

Gross Wages = $________
FITW - $ _______
SS - $ _______
Medicare - $ _______
= $ ________ Net Pay

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3. James earns an annual salary of $55,200 in 2017. He is single, with one

allowance. He is paid semi-monthly and participates in a 401k plan at 10% of
his salary and in a qualified cafeteria plan at $120 per month. There is no state
income tax. Using the percentage method for FIT, calculate his net pay.

Calculate Gross Wages

$55,200 ÷ ___ pay periods = $__________ gross wages per pay period

Calculate Federal Taxable Wages

$_________ - $______ (401k) = $_________ - $____ (cafeteria plan per pay
period) = $__________ Federal taxable wages

Calculate FITW
$________ (Fed taxable wages) - $_______ (1 allowance) = $_________ -
$_______ = $_______ x 25% = $_______ + $_______ = $________FITW

Calculate SS & Medi

$_________ (Gross Wages) - $________ (Cafeteria plan) = $_________
SS $________ x 6.2% = $_________
Medi $_________ x 1.45% = $_______

Calculate Net Pay

Gross Wages = $__________
FITW - $ ________
SS - $ ________
Medi - $ _______
401(k) - $ ________
Café Plan - $ ________
Net Pay = $ _________

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4. Julia is a nonexempt employee paid $16.85 per hour every two weeks. In
addition to her hourly wages, she also earned a production bonus of $125.
During a recent pay period, she worked 43 hours one week and 44 hours the
next week. She also contributes 3% to a 401(k) plan and $95 each pay period to
her company’s health insurance plan. She is married and claims two withholding
allowances withholding allowances. Using the percentage method for FIT,
calculate Julia’s net pay.

Calculate her gross wages

Calculate her federal taxable wages

Calculate her FITW

Calculate her Social Security and Medicare taxable wages

Calculate her Social Security & Medicare tax

Calculate Net Pay

Gross Wages =$ ________

FITW -$ ______
SS - $ _______
Medi - $ _______
Health Insurance - $ _______
401(k) -$ _______
Net Pay = $ ________

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5. Jane earns $4,000 each pay period and is paid semimonthly. She is single and
claims 2 withholding allowances. She contributes 10% to a 401k plan, $150 to a
pre-tax health plan, and $250 to a credit union savings plan. In addition, Jane
uses a company car for personal use, which is valued at $75 per pay period.
Using the percentage method for federal income tax withholding, calculate
Jane’s net pay for her December 31, 2017 check date.

Calculate Federal Taxable Wages

Calculate FITW

Calculate SS & Medi Taxable Wages

Calculate SS & Medi Taxes

Calculate Net Pay

Gross Wages = $_________

Car Value +$_________
FITW - $ _______
SS - $ _______
Medi - $ ______
401(k) - $ _______
Health plan - $ _______
Savings - $ _______
Car Allowance Imputed -$ _____
Net Pay = $ ________

ADP Confidential & Proprietary 32 Copyright © 2016-2017 ADP, LLC