Chapter 9, Problem 3PSA

Paloma Co. has four employees. FICA Social Security taxes are 6.2% of the first $127,200 paid to each Problem employee, and FICA Medicare taxes are1.45% of gross pay. Also, for the first $7,000 paid to each employee, the Company’s FUTA taxes are 3.5% and SUTA taxes are 2.5%. The company is preparing its payroll calculations for the week ended August 25. Payroll records show the following information for the company's four employees.

In addition to gross pay, the company must pay two-thirds of the $60 per employee weekly health insurance; each employee pays the remaining one-third. The company also contributes an extra 8% of each employee’s gross pay (at no cost to employees) to a pension fund.
Required
Compute the following for the week ended August 25 (Round amounts to the nearest cent):

1. Each employee’s FICA withholdings for Social Security.
2. Each employee’s FICA withholdings for Medicare.
3. Employer’s FICA taxes for Social Security.
4. Employer’s FICA taxes for Medicare.
5. Employer’s FUTA taxes.
6. Employer’s SUTA taxes.
7. Each employee’s net (take-home) pay.
8. Employer’s total payroll-related expenses for each employee.

Summary Introduction

Introduction: FICA stands for Federal insurance contribution act. FICA withholding for social security taxes means deductions done from salary to cover the retirement, disability and survivorship after retirement from employment.

To compute: Each employee’s FICA withholdings for Social Security.

Explanation of Solution

Computation of each employee’s FICA withholdings for social security.

Particular	Amount
Person D
Maximum limit for FICA Social security tax	$127,200
Gross pay till August 18	$126,100
Remaining limit(A)	$1,100
Gross pay for current week(B)	$2,000
Gross pay on which tax has to be deducted(Lower of A & B)	$1,100
FICA social security tax rate	6.2%
FICA social security tax	$68.20
Person T
Maximum limit for FICA Social security tax	$127,200
Gross pay till August 18	$126,300
Remaining limit(A)	$900
Gross pay for current week(B)	$900
Gross pay on which tax has to be deducted(Lower of A & B)	$900
FICA social security tax rate	6.2%
FICA social security tax	$55.80
Person K
Maximum limit for FICA Social security tax	$127,200
Gross pay till August 18	$6,900
Remaining limit(A)	$120,300
Gross pay for current week(B)	$450
Gross pay on which tax has to be deducted(Lower of A & B)	$450
FICA social security tax rate	6.2%
FICA social security tax	$27.90
Person C
Maximum limit for FICA Social security tax	$127,200
Gross pay till August 18	$1,250
Remaining limit(A)	$125,950
Gross pay for current week(B)	$400
Gross pay on which tax has to be deducted(Lower of A & B)	$400
FICA social security tax rate	6.2%
FICA social security tax	$24.80

Summary Introduction

Introduction: FICA stands for Federal insurance contribution act. FICA withholding for Medicare refer to the amount deducted from the salary of the employee to cover the medical emergencies that will arise after retirement.

To compute: Each employee’s FICA withholdings for Medicare.

Explanation of Solution

Computation of each employee’s FICA withholdings for Medicare.

Particular	Amount
Person D
Gross pay of current week	$2,000
FICA Medicare tax rate	1.45%
FICA Medicare tax	$29
PersonT
Gross pay of current week	$900
FICA Medicare tax rate	1.45%
FICA Medicare tax	$13.05
PersonK
Gross pay of current week	$450
FICA Medicare tax rate	1.45%
FICA Medicare tax	$6.52
PersonC
Gross pay of current week	$400
FICA Medicare tax rate	1.45%
FICA Medicare tax	$5.80

Summary Introduction

Introduction: Employer’s FICA taxes for social security refer to the total amount of contribution made by the employer for the survivorship and retirement of the employee.

To compute: Employer’s FICA taxes for Social Security.

Explanation of Solution

Computation of Employer’s FICA taxes for social security.

Particular	Amount
FICA social security tax of person D	$68.20
FICA social security tax of personT	$55.80
FICA social security tax of personK	$27.90
FICA social security tax of personC	$24.80
Total employer’s FICA taxes for social security	$176.70

Summary Introduction

Introduction: Employer’s FICA taxes for Medicare refer to the total amount of contribution made by the employer for employee regarding medical emergencies that will arise after retirement.

To compute: Employer’s FICA taxes for Medicare.

Explanation of Solution

Computation of Employer’s FICA taxes for Medicare.

Particular	Amount
FICA taxes for Medicare of personD	$29
FICA taxes for Medicare of personT	$13.05
FICA taxes for Medicare of personK	$6.52
FICA taxes for Medicare of personC	$5.80
Total employer’s FICA taxes for Medicare	$54.37

Summary Introduction

Introduction: FUTA stands for Federal unemployment tax act. It is a law applicable on employers. Main aim of this act is to remove unemployment. For removing unemployment specific amount of fund is collected from the employer.

To compute: Employer’s FUTA taxes.

Explanation of Solution

Computation of Employer’s FUTA taxes.

Particular	Amount
Person D
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till August 18	$126,100
Remaining limit(A)	$0
Gross pay for current week(B)	$2,000
Gross pay on which tax has to be deducted(Lower of A & B)	$0
FUTA tax rate	3.5%
FUTA tax	$0
PersonT
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till August 18	$126,300
Remaining limit(A)	$0
Gross pay for current week(B)	$900
Gross pay on which tax has to be deducted(Lower of A & B)	$0
FUTA tax rate	3.5%
FUTA tax	$0
PersonK
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till August 18	$6,900
Remaining limit(A)	$100
Gross pay for current week(B)	$450
Gross pay on which tax has to be deducted(Lower of A & B)	$100
FUTA tax rate	3.5%
FUTA tax	$3.50
PersonC
Maximum limit of Gross pay for FUTA taxes	$7,000
Gross pay till August18	$1,250
Remaining limit(A)	$5,750
Gross pay for current week(B)	$400
Gross pay on which tax has to be deducted(Lower of A & B)	$400
FUTA tax rate	3.5%
FUTA tax	$14
Total FUTA tax of Employer	$17.50

Summary Introduction

Introduction: SUTA stands for State unemployment tax act. It is a law applicable on employers. The main aim of this act is to remove unemployment from the state. For removing unemployment specific amount of fund is collected from the employer.

To compute: Employer’s SUTA taxes.

Explanation of Solution

Computation of Employer’s FUTA taxes.

Particular	Amount
Person D
Maximum limit of gross pay for SUTA taxes	$7,000
Gross pay till August 18	$126,100
Remaining limit(A)	$0
Gross pay for current week(B)	$2,000
Gross pay on which tax has to be deducted(Lower of A & B)	$0
SUTA tax rate	2.5%
SUTA tax	$0
PersonT
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till August 18	$126,300
Remaining limit(A)	$0
Gross pay for current week(B)	$900
Gross pay on which tax has to be deducted(Lower of A & B)	$0
SUTA tax rate	2.5%
SUTA tax	$0
PersonK
Maximum limit of gross pay for FUTA taxes	$7,000
Gross pay till August 18	$6,900
Remaining limit(A)	$100
Gross pay for current week(B)	$450
Gross pay on which tax has to be deducted(Lower of A & B)	$100
SUTA tax rate	2.5%
SUTA tax	$2.50
PersonC
Maximum limit of Gross pay for FUTA taxes	$7,000
Gross pay till August 18	$1,250
Remaining limit(A)	$5,750
Gross pay for current week(B)	$400
Gross pay on which tax has to be deducted(Lower of A & B)	$400
SUTA tax rate	2.5%
SUTA tax	$10
Total SUTA tax of Employer	$12.50

Summary Introduction

Introduction: Net (take-home) pay refer to the amount that a person has in hand after making deductions regarding the expenses and contribution made by individual towards various withholdings.

To compute: Each employee’s net (take-home) pay.

Explanation of Solution

Computation of each employee’s net (take home) pay.

Particular	Person D	PersonT	PersonK	PersonC
Gross Pay	$2,000	$900	$450	$400
Less: Income Tax Withholding	($284)	($145)	($39)	($30)
Less: FICA social security tax	($68.20)	($55.80)	($27.90)	($24.80)
Less: FICA taxes for Medicare	($29)	($13.05)	($6.52)	($5.80)
Less: Weekly health insurance	($20)	($20)	($20)	($20)
Net (take home) pay	$1598.8	$666.15	$356.58	$319.4

Summary Introduction

Introduction: Payroll-related expenses refer to those expenses which are done by the employer towards employee for their well-being and all other payment made to government in respect of employee.

To compute: Employer’s total payroll-related expense for each employee.

Explanation of Solution

Computation of employer’s total payroll-related expense for each employee.

Particular	PersonD	PersonT	PersonK	PersonC
Gross pay	$2,000	$900	$450	$400
Employer’s FICA taxes for social security	$68.20	$55.80	$27.90	$24.80
Employer’s FICA taxes for Medicare	$29	$13.05	$6.52	$5.80
Employer’s FUTA taxes	$0	$0	$3.5	$14
Employer’s SUTA taxes	$0	$0	$2.50	$10
Employee weekly health insurance	$40	$40	$40	$40
Total payroll-related expense	$2137.20	$1008.85	$530.42	$494.60