Chapter 10, Problem 10.3APR

Wage and tax statement data on employer FICA tax

Ehrlich Co. began business on January 2. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in the following year, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.

None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5% on salary. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:

Employee	Date First Employed	Monthly Salary	Monthly Income Tax Withheld
Arnett	Nov. 16	$ 5,500	$ 944
Cruz	Jan. 2	4,800	833
Edwards	Oct. 1	8,000	1,592
Harvin	Dec. 1	6,000	1,070
Nicks	Feb. 1	10,000	2,350
Shiancoe	Mar. 1	11,600	2,600
Ward	Nov. 16	5,220	876

Instructions

1.    Compute the amounts to he reported for the year on each employee’s Wage and Tax Statement (Form W-2), arranging the data as follows (round to the nearest cent):

Employee

Gross Earnings

Federal Income Tax Withheld

Social Security Tax Withheld

Medicare Tax Withheld

2.    Compute the following employer payroll taxes for the year: (A) social security, (B) Medicare, (C) state unemployment compensation at 5.4% on the first $10,000 of each employee’s earnings, (D) federal unemployment compensation at 0.8% on the first $10,000 of each employee’s earnings, (E) total.

To determine

Payroll: The total payment that a company is required to pay to its employee for the services received is called as payroll.

Payroll withholding deduction: The amounts which the employer withheld from employees’ gross pay to deduct taxes such as federal income tax, state income tax, local income tax, and social security tax are called payroll withholding deduction.

Employer payroll taxes: The taxes which the employer must pay to the employees with their salaries is called employer payroll taxes. Such taxes are not withheld from employees’ gross earnings but instead they are paid by employer.

To calculate: The amount that would be reported for the year on each employee’s wage and tax statement.

Answer to Problem 10.3APR

Calculate the amount that would be reported for the year on each employee’s wage and tax statement.

Employee	Gross Earnings	Federal Income Tax Withheld	Social Security Tax Withheld	Medicare Tax Withheld
Mr. A	$8,250(1)	$1,416(2)	$495.00(3)	$123.75(4)
Mr. C	$57,600(5)	$9,996(6)	$3,456.00(7)	$864.00(8)
Mr. E	$24,000(9)	$4,776(10)	$1,440.00(11)	$360.00(12)
Mr. H	$6,000(13)	$1,070(14)	$360.00(15)	$90.00(16)
Mr. N	$110,000(17)	$25,850(18)	$6,600.00(19)	$1,650.00(20)
Mr. S	$116,000(21)	$26,000(22)	$6,960.00(23)	$1,740.00(24)
Mr. W	$7,830(25)	$1,314(26)	$469.80(27)	$117.45(28)

Explanation of Solution

Working notes:

Calculate gross earnings for Mr. A.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$5,500\times 1.5\\ =\$8,250\end{array}$ (1)

Calculate federal income tax withheld for Mr. A.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$944\times 1.5\\ =\$1,416\end{array}$ (2)

Calculate social security taxes withheld for Mr. A

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$8,250\times 6\%\\ =\$495\end{array}$ (3)

Calculate Medicare taxes withheld for Mr. A.

$\begin{array}{c}\text{Medicare tax Withheld}=\text{Gross}\text{earnings}\times 1.5\text{\%}\\ =\$8,250\times 1.5\%\\ =\$123.75\end{array}$ (4)

Calculate gross earnings for Mr. C.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$4,800\times 12\\ =\$57,600\end{array}$ (5)

Calculate federal income tax withheld for Mr. C.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$833\times 12\\ =\$9,996\end{array}$ (6)

Calculate social security taxes withheld for Mr. C.

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$57,600\times 6\%\\ =\$3,456\end{array}$ (7)

Calculate Medicare taxes withheld for Mr. C.

$\begin{array}{c}\text{Medicare tax Withheld = Grossearnings×1}\text{.5\%}\\ \text{= \$57,600 ×1}\text{.5\%}\\ \text{= \$864}\end{array}$ (8)

Calculate gross earnings for Mr. E.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$8,000\times 3\\ =\$24,000\end{array}$ (9)

Calculate federal income tax withheld for Mr. E.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$1,592\times 3\\ =\$4,776\end{array}$ (10)

Calculate social security taxes withheld for Mr. E.

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$24,000\times 6\%\\ =\$1,440\end{array}$ (11)

Calculate Medicare taxes withheld for Mr. E.

$\begin{array}{c}\text{Medicare tax Withheld}=\text{Gross}\text{earnings}\times 1.5\text{\%}\\ =\$24,000\times 1.5\%\\ =\$360\end{array}$ (12)

Calculate gross earnings for Mr. H.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$6,000\times 1\\ =\$6,000\end{array}$ (13)

Calculate federal income tax withheld for Mr. H.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$1,070\times 1\\ =\$1,070\end{array}$ (14)

Calculate social security taxes withheld for Mr. H.

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$6,000\times 6\%\\ =\$360\end{array}$ (15)

Calculate Medicare taxes withheld for Mr. H.

$\begin{array}{c}\text{Medicare tax Withheld}=\text{Gross}\text{earnings}\times 1.5\text{\%}\\ =\$6,000\times 1.5\%\\ =\$90\end{array}$ (16)

Calculate gross earnings for Mr. N.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$10,000\times 11\\ =\$110,000\end{array}$ (17)

Calculate federal income tax withheld for Mr. N.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$2,350\times 11\\ =\$25,850\end{array}$ (18)

Calculate social security taxes withheld for Mr. N.

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$110,000\times 6\%\\ =\$6,600\end{array}$ (19)

Calculate Medicare taxes withheld for Mr. N.

$\begin{array}{c}\text{Medicare tax Withheld}=\text{Gross}\text{earnings}\times 1.5\text{\%}\\ =\$110,000\times 1.5\%\\ =\$1,650\end{array}$ (20)

Calculate gross earnings for Mr. S.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$11,600\times 10\\ =\$116,000\end{array}$ (21)

Calculate federal income tax withheld for Mr. S.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$2,600\times 10\\ =\$26,000\end{array}$ (22)

Calculate social security taxes withheld for Mr. S.

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$116,000\times 6\%\\ =\$6,960\end{array}$ (23)

Calculate Medicare taxes withheld for Mr. S.

$\begin{array}{c}\text{Medicare tax Withheld}=\text{Gross}\text{earnings}\times 1.5\text{\%}\\ =\$116,000\times 1.5\%\\ =\$1,740\end{array}$ (24)

Calculate gross earnings for Mr. W.

$\begin{array}{c}\text{Gross earnings}=\text{Monthly}\text{salary}\times \text{Number of months}\\ =\$5,220\times 1.5\\ =\$7,830\end{array}$ (25)

Calculate federal income tax withheld for Mr. W.

$\begin{array}{c}\text{Federal income tax withheld}=\text{Monthly income tax withheld}\times \text{Number of months}\\ =\$876\times 1.5\\ =\$1,314\end{array}$ (26)

Calculate social security taxes withheld for Mr. W.

$\begin{array}{c}\text{Social security tax Withheld}=\text{Gross}\text{earnings}\times \text{6\%}\\ =\$7,830\times 6\%\\ =\$469.80\end{array}$ (27)

Calculate Medicare taxes withheld for Mr. W.

$\begin{array}{c}\text{Medicare tax Withheld}=\text{Gross}\text{earnings}\times 1.5\text{\%}\\ =\$7,830\times 1.5\%\\ =\$117.45\end{array}$ (28)

To determine

To calculate: The following employer payroll taxes for the year.

Explanation of Solution

Calculate the following employer payroll taxes for the year.

(A)

Calculate social security tax.

$\begin{array}{c}\text{Social security tax }=\text{Sum}\text{of}\text{Social}\text{security}\text{tax}\text{withheld}\text{for all employees}\\ =\$495+\$3,456+\$1,440+\$360+\$6,600+\$6,960+\$469.80\\ =\$19,780.80\end{array}$

(B)

Calculate Medicare tax.

$\begin{array}{c}\text{Medicare tax }=\text{Sum}\text{of}\text{Medicare}\text{tax}\text{withheld}\text{for all employees}\\ =\$123.75+\$864+\$360+\$90+\$1,650+\$1,740+\$117.45\\ =\$4,945.20\end{array}$

(C)

Calculate State unemployment tax.

$\begin{array}{c}\text{State Unemployment tax}=5.4\%onfirst\$10,000ofeachemployee\text{'}searnings\\ =5.4\%\times \left(\begin{array}{l}\$8,250+\$10,000+\$10,000\\ +\$6,000+\$10,000+\$10,000+\$7,830\end{array}\right)\\ =5.4\%\times \$62,080\\ =\$3,352.32\end{array}$

(D)

Calculate Federal unemployment tax.

$\begin{array}{c}\text{Federal Unemployment tax}=0.8\%onfirst\$10,000ofeachemployee\text{'}searnings\\ =0.8\%\times \left(\begin{array}{l}\$8,250+\$10,000+\$10,000\\ +\$6,000+\$10,000+\$10,000+\$7,830\end{array}\right)\\ =0.8\%\times \$62,080\\ =\$496.64\end{array}$

(E)

Calculate total payroll tax expense.

$\begin{array}{c}\text{Total payroll tax expense}=\left(\begin{array}{l}\text{Social}\text{security}\text{tax}+\text{Medicare}\text{tax }\\ \text{+ State Unemployment tax }\\ \text{+ Federal unemployment tax}\end{array}\right)\\ \text{= \$19,780}\text{.80 +}\text{\$4,945}\text{.20 +}\text{\$3,352}\text{.32 +}\text{\$496}\text{.64}\\ \text{=}\text{\$28,574}\text{.96}\end{array}$