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
401(k) plan Section 2 Payroll Deductions 308-337_CH12_868829.indd 3...
View Full Document