2.

1 Federal Income Tax (FIT)

 Internal Revenue Service (IRS) provides employers with tables that show how much
money to withhold.

Formula
o Allowance Amount = Number of Allowances x 63.46
o Taxable Wage = Gross Pay – Allowance Amount
o Amount withheld for FIT = Use the Taxable Wage and the table below to
compute
Example: Gross pay $425.88. Married, claims 2 allowances for herself and husband.
What amount will Carla’s employer withhold form her pay for FIT?
o Find income range from table (At least $420, but less that $430)
o Find column for 2 allowances
o Amount of federal income tax to be withheld is $14.00
Percentage Method Example: Gross pay $393.23. Carpenter’s apprentice, single, claims
2 allowances. What amount will Lance’s employer withhold from his pay from federal
income tax?
o Find allowance amount
 Allowance Amount = Number of Allowances x 63.46
 126.92 = 2 x 63.46
o Find Taxable wage
 Taxable wage = gross pay – allowance amount
 266.31 = 393.23 – 126.92
o Find amount withheld for FIT using table
 Find taxable wage in row over $195 but not over $645.
 Find amount of income tax withheld by:
 Tax Withheld for FIT = 14.40 + 15% of the excess over $195.00
2.2 State Income Tax
 Exemptions: Withholding allowances, which allow for supporting yourself, our spouse,
and others in your family who are your dependents.
Formula
o Taxable Wages = Annual Gross Pay – Exemptions
o State Income Tax = Taxable Wages x Tax Rate
Example: Gross pay as a landscape $44,750 a year. State income tax rate 3%.
Exemptions himself and 1 exemption for child. How much does Tony’s employer
withhold yearly from his gross earning for state income tax?
Exemptions: Single: $2,000, Married $4,000, Each Dependent $2,000
o Find taxable wages. Annual Gross Pay – Exemptions
 $44,750 – (2,000 +2,000)
 $44,750 – $4,000 = $40,750 taxable wages
o Find the Annual tax withheld
 Taxable wages x Tax rates
 $40,750 x 3% = $1,222.50 annual state income tax withheld
 Example: 52,600 per year. Married pays $2,430 in state income tax per year. Claims no
dependents. What is the state income tax rate for her state?
o Let r = State income tax rate for Andrea’s state.
o Use the formula for State Income tax, substituting for Taxable Wages and solve
for r.
 State Income Tax = (Taxable Wages – Exemptions) x Tax Rate
 2430 = (52600 – 4000) x r
 2430 = 48600r
 2430/48600=r
 .05=r
2.3 Graduate State Income Tax
 Graduated income Tax: System that increases the tax rate at different levels of income.
Formula
o Tax Withheld per Pay Period= Annual Tax/Withheld/Number of Pay Periods per
year
Example: 34,500 annual salaries. Receives pay semimonthly (2 a month). 2000
exemption.
o Find Taxable wages
 Annual Gross Pay - Exemptions
 34,500-2000=32500
o Find the annual state tax withheld
 1000: 1.5% of 1000 = 15
 2000: 3% of 2000= 60
 Next 2000: 4.5% of 2000 = 90
 Over 5,000: 5% of 32500-5000= 5% of 27500 = 1375
 Total of 1540
o Find tax withheld per pay period
 Tax Withheld per pay period = annual tax withheld/ # of pay periods year
 1540/24=64.17

2.4 Social Security and Medicare Taxes

 Social Security: Pay for retirement and disability benefits and Medicare.
Formula
o Tax Withheld = Gross Pay x Tax Rate
Example: Gross biweekly pay is $728. Earning year $26,208. What amount deduct from
pay for SS taxes? What Medicare taxes? What total deductions? Earning to date less
than $97,500.
o Find Social Security tax amount withheld
 Gross Pay x Tax Rate
 728 x 6.2% = 45.136 = 45.14 Social Security tax
o Find Medicare tax withheld
 Gross Pay x Tax Rate
 728 x 1.45% = 10.56 Medicare tax
 o Find total Deductions
 Social Security Tax + Medicare Tax
 45.14 + 10.56 = 55.70
2.5 Group Health Insurance
 Group Insurance: Health insurance offered by many businesses to employees, paid in
part by the business and in part by the employee.
Formula
 Deduction per Pay Period = Total Annual Amount Paid by Employee/ # of Pay periods
year
Example: Medical coverage through works medical plan. Annual cost is $9,800. 75% of
paid by company. How much does she have deducted from her biweekly pay check?
o Find percent employee pays.
 100% – Percent Company Pays
 100-75=25%
o Find amount employees pays
 Annual amount x Employee’s percent
 9,800 x 25% = 2450 total employee pays.
o Find deduction per pay period
 Deduction per pay period = Total annual amount paid employee/ # of pay
period per year.
 2450/26 = 94.23
Example: 115.8-0 per month for her group medical coverage. Employer pays 55%. How
much annual premium for health insurance?
o Find percent employee pays.
 100-55=45%
o Let a= Annual Premium for Kim’s Health Insurance
o Write and solve an equation for deduction per pay period.
 Employee’s %x Annual Premium/ # of pay periods year = Deduction per
pay period.
 .045 x a /12 = 115.80
 .45a = 1389.60
 .45a/4.45=1389.60/.45
 a = 3,088
2.6 Statement of Earnings
 Net Pay: Amount of money you have left after your employer subtracts all tax
withholdings and personal deductions from your gross pay. Net income or take-home
pay.
Formula: Net Pay = Gross Pay – Total Deductions
Example: Gross weekly salary is $600.00. Married and claims 3 allowances. SS tax 6.2%
of first $97,500. Medicare tax 1.45% gross pay. State tax 1.5% gross pay. Weekly $28.40
deducted for medical insurance and $5 for charity.
o Fine total deductions
 Federal withholding: 26.00
 Social Security: .062 * 600 = 37.20
  Medicare: .0145 * 600 = 8.70
 State Tax: .015 * 600 = 9.00
 Medical insurance = 28.40
 Charity = 5.00
 Total = 114.30
o Find net pay.
 Gross Pay – Total Deductions
 600-114.3=485.7 net pay
Example: Deductions monthly pay are federal income tax of $98, state income tax 3.5%
of gross, city income tax of 1.5% of gross, Social Security, and Medicare. Monthly net
pay is $4,147.21. Find Esther’s monthly gross pay.
 Let m = Esther’s monthly gross pay
 Use net pay formula and solve for “m”
 Net pay = Gross pay – (FIT+SIT+CIT+Social Security+Medicare)
o 4147.21 = m – 98+.035m+.015m+.062m+.0145m
o 4147.21 = m – (98+.1265m)
o 4147.21= m – 98 – 0.1265m
o 4245.21= 0.8735m
o 4860 = m