An employer is required by law to withhold payroll

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Unformatted text preview: ired by law to withhold payroll taxes. These taxes include the federal income tax and the social security tax. In addition, employers often must withhold city and state income tax. Federal Income Tax Most people pay the federal government a tax based on their annual income. To ensure that employees have the funds to pay their income taxes, employers are required to withhold a certain amount of money from each payroll check. The employer acts as a collection agent and sends the money withheld to the federal government. The amount of income tax withheld is based on the estimated income tax the employee will actually owe. The exact income tax amount is determined when the employee prepares an income tax return. If too much money was withheld, the Internal Revenue Service (IRS) refunds the overpayment. If too little money was withheld, the employee pays the amount due when the income tax return is filed. To avoid penalties, an employee should have at least 90% of the actual tax liability deducted. Form W-4. The federal income tax amount withheld depends on three factors: (1) the employee’s marital status, (2) the number of allowances the employee claims, and (3) the employee’s gross earnings. The first two items are found on Form W-4, the Employee’s Withholding Allowance Certificate. Each employee fills out a Form W-4 when starting a job and files a revised Form W-4 if the marital status or number of allowances changes. Employers keep a current Form W-4 on file for each employee. Figure 12–3 on page 316 shows the completed Form W-4 for Emily Kardos. The Form W-4 includes the employee’s name, address, social security number, and marital status. The employee also lists the number of allowances claimed (refer to line 4). A withholding allowance reduces the amount of BEFORE YOU READ Payroll deductions are amounts withheld from an employee’s gross earnings. Read to Learn… by law. (p. 315) ® the deductions an employee can choose. (p. 318) Key Terms deduction withholding allowance 401(k) plan Section 2 Payroll Deductions 308-337_CH12_868829.indd 3...
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