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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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