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5.4 Social Security & Payroll Taxes

5.4 Social Security & Payroll Taxes
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  • 1. Social Security Tax Withheld

    Box 3 on the W-2 shows the taxable income for Social Security. Box 4 should show the amount of Social Security tax withheld. What amount should be in box 4? (See Example 1 and Example 2.)

    • Worked-Out Solution

      In 2010, the Social Security tax for employees was 6.2%. So, this employee's Social Security tax is

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               _    _     ____      ______  __    __  
      ____    | || | ||  |  _ \\   /_   _// \ \\ / // 
     |    \\  | || | ||  | |_| ||   -| ||-   \ \/ //  
     | [] ||  | \\_/ ||  | .  //    _| ||_    \  //   
     |  __//   \____//   |_|\_\\   /_____//    \//    
     |_|`-`     `---`    `-` --`   `-----`      `     
     `-`                                              
    
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  • 2. Medicare Tax Withheld

    Box 5 on the W-2 shows the taxable income for Medicare. Box 6 should show the amount of Medicare tax withheld. What amount should be in box 6? (See Example 1and Example 2.)

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      ______    ______   _    _     _____     _  _   
     /_____//  /_   _// | \  / ||  |  ___||  | \| || 
     `____ `    -| ||-  |  \/  ||  | ||__    |  ' || 
     /___//     _| ||_  | .  . ||  | ||__    | .  || 
     `__ `     /_____// |_|\/|_||  |_____||  |_|\_|| 
     /_//      `-----`  `-`  `-`   `-----`   `-` -`  
     `-`                                             
    
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  • 3. State Income Tax Withheld

    Box 16 on the W-2 shows the taxable income for Colorado. Box 17 should show the amount of state income tax withheld. Colorado has a flat income tax of 4.63%. What amount should be in box 17? (See Example 1 and Example 2.)

    • Worked-Out Solution

      In 2010, Colorado had a flat income tax rate of 4.63%. So, this employee's Colorado income tax was

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      ____      ______   _    _    __   __    ______  
     |  _ \\   /_   _// | |  | ||  \ \\/ //  /_   _// 
     | |_| ||   -| ||-  | |/\| ||   \ ` //     | ||   
     | .  //    _| ||_  |  /\  ||    | ||     _| ||   
     |_|\_\\   /_____// |_// \_||    |_||    /__//    
     `-` --`   `-----`  `-`   `-`    `-`'    `--`     
                                                      
    
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  • 4. Deducting Retirement

    John Doe contributes 3% of his salary to a 401(k) retirement plan. This amount is shown in box 12a. How much is John Doe's salary in 2010? (See Example 1 and Example 2.)

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      ______   _    _    _    _      ___       _____  
     /_____// | || | || | |  | ||   / _ \\    / ___// 
     `____ `  | || | || | |/\| ||  | / \ ||   \___ \\ 
     /___//   | \\_/ || |  /\  ||  | \_/ ||   /    // 
     `__ `     \____//  |_// \_||   \___//   /____//  
     /_//       `---`   `-`   `-`   `---`   `-----`   
     `-`                                              
    
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  • 5. Total Tax Deductions

    What percent of John Doe's salary should be withheld to pay federal, Social Security, Medicare, state, and local taxes? (See Example 1 and Example 2.)

    • Worked-Out Solution

      From the W-2 statement, add boxes 2, 4, 6, 17, and 19 to find this employee's total tax liability.

      This means that the total percent paid for taxes was

      So, this taxpayer paid almost a quarter of his gross wages for taxes.

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      _  _     _____    _    _    __   __    ______  
     | \| ||  |  ___|| | |  | ||  \ \\/ //  /_____// 
     |  ' ||  | ||__   | |/\| ||   \ ` //   `____ `  
     | .  ||  | ||__   |  /\  ||    | ||    /___//   
     |_|\_||  |_____|| |_// \_||    |_||    `__ `    
     `-` -`   `-----`  `-`   `-`    `-`'    /_//     
                                            `-`      
    
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  • 6. Company Contributions

    In addition to John Doe's salary, Company A pays a 3% matching contribution to a 401(k) retirement plan and $560 a month for John Doe's health insurance. (See Example 1 and Example 2.)

    1. What is the total compensation package Company A is paying for John Doe? (Note: Worker's Compensation Insurance and Unemployment Insurance are not included for simplicity.)
    2. How much does John Doe receive each year as "take-home pay"?

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    __    __     ___       _____   _    _    _____    
    \ \\ / //   / _ \\    / ___// | || | || |  __ \\  
     \ \/ //   | / \ ||   \___ \\ | || | || | |  \ || 
      \  //    | \_/ ||   /    // | \\_/ || | |__/ || 
       \//      \___//   /____//   \____//  |_____//  
        `       `---`   `-----`     `---`    -----`   
                                                      
    
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