Chapter 5, Problem 14PA

a.

To determine

Calculate FICA tax (OASDI and HI) to be withheld for each person.

Explanation of Solution

Federal Insurance Contributions Act (FICA) tax: Federal government imposes taxes on the employees’ pay to provide benefits to retired, old age, orphans, and disabled. This tax is also referred to as Social Security tax because the program is devised to benefit the society. FICA tax includes two components, OASDI (Old age, survivors, and disability insurance), and HI (health insurance).

Calculate FICA tax (OASDI and HI) to be withheld for each person.

Table (1)

Note 1: For all the employees, the wages paid till 40^th Week is less than the taxable wage limit of $128,400. Hence, full weekly wages of each employee will be taxable for OASDI and HI.

Note 2: The amount received by both the partners is considered as the drawings and not a salary. Thus, FICA taxes are not imposed.

b.

To determine

Calculate the amount of the employer’s FICA taxes for the weekly payroll.

Explanation of Solution

Calculate the amount of the employer’s FICA taxes for the weekly payroll.

$\begin{array}{c}\text{Employer’s OASDI tax}=\left(\begin{array}{l}\text{Total OASDI tax contributed}\\ \text{by all the employees}\end{array}\right)\\ =\$76.92\end{array}$

$\begin{array}{c}\text{Employer’s HI tax}=\text{Total HI tax contributed by all the employees}\\ =\text{\$17}\text{.99}\end{array}$

c.

To determine

Calculate the amount of state unemployment contributions for the weekly payroll.

Explanation of Solution

State unemployment compensation tax (SUTA): This is the compensation provided to the unemployed people by the state government from the taxes collected from the employers, as a percentage of 5.4% of employees’ payrolls.

Calculate the amount of state unemployment contributions for the weekly payroll.

Step 1: Compute 41^st week taxable wages of employee’s for SUTA.

Employee	Designation	Wages ($)	Wages up to 40th week ($)	Taxable wages on 41st week ($)
Mr. V.H	General office worker	1,700/month	15,692.40 $\left(\frac{\$1,700\times 12}{52}\right)\times 40$	-
Ms. A.D	Saleswoman	15,000/year	11,538.46 $\left(\frac{\$15,000\times 40}{52}\right)$	-
Mr. G.B	Stock clerk	180/week	7,200 $\left(\$180\times 40\right)$	180
Mr. S.E	Deliveryman	220/week	8,800 $\left(\$220\times 40\right)$	-
Mr. B.L	Cleaning and maintenance, part-time	160/week	6,400 $\left(\$160\times 40\right)$	160
Total				340

Table (2)

Note 1:  For Mr. V.H, Ms. A.D, and Mr. S.E, up to 40th week, the wages is crossing the limit of $8,100. So, none of the wages is taxable in 41^st week.

Note 2: For Mr. G.B, up to 40th week, the wages of $7,200 is not crossing the limit of $8,100. So, the full wages of $180 is taxable in 41^st week.

Note 3: For Mr. B.L, up to 40th week, the wages of $6,400 is not crossing the limit of $8,100. So, the full wages of $160 is taxable in 41^st week.

Step 2: Compute the amount of state unemployment contributions for the weekly payroll.

$\begin{array}{c}\text{State unemployment contributions}=\text{Taxable wages}\times \text{Tax rate}\\ =\text{\$340}\times 3.1\text{\%}\\ =\$10.54\end{array}$

Hence, the amount of state unemployment contributions for the weekly payroll is $10.54.

d.

To determine

Calculate net FUTA tax on the payroll.

Explanation of Solution

Federal unemployment compensation tax (FUTA): This is the compensation provided to the unemployed people by the federal government from the taxes collected from the employers, as a percentage of 6.0% on the first $7,000 of employees’ earnings. Federal government refunds the employers with 5.4% on FUTA, if the employers have paid SUTA. So, FUTA would be reduced to 0.6% for those employers.

Calculate net FUTA tax on the payroll.

Step 1: Compute 41^st week taxable wages of employee’s for FUTA.

Employee	Designation	Wages ($)	Wages up to 40th week ($)	Taxable wages on 41st week ($)
Mr. V.H	General office worker	1,700/month	15,692.40 $\left(\frac{\$1,700\times 12}{52}\right)\times 40$	-
Ms. A.D	Saleswoman	15,000/year	11,538.46 $\left(\frac{\$15,000\times 40}{52}\right)$	-
Mr. G.B	Stock clerk	180/week	7,200 $\left(\$180\times 40\right)$	-
Mr. S.E	Deliveryman	220/week	8,800 $\left(\$220\times 40\right)$	-
Mr. B.L	Cleaning and maintenance, part-time	160/week	6,400 $\left(\$160\times 40\right)$	160
Total				160

Table (3)

Note 1:  For Mr. V.H, Ms. A.D, Mr. GB, and Mr. S.E,  up to 40th week, the wages is crossing the limit of $7,000. So, none of the wages is taxable in 41^st week.

Note 3: For Mr. B.L, up to 40th week, the wages of $6,400 is not crossing the limit of $7,000. So, the full wages of $160 is taxable in 41^st week.

Step 2: Calculate net FUTA tax.

$\begin{array}{c}\text{ Net FUTA tax = Taxable FUTA wages }\times \text{ Tax rate}\\ \text{= \$160}\times \text{ 0}\text{.6\%}\\ \text{=}\text{\$0}\text{.96}\end{array}$

Hence, the net FUTA tax on the payroll is $0.96.

e.

To determine

Calculate the total amount of employer’s payroll taxes for the weekly payroll.

Explanation of Solution

Calculation of employer’s payroll taxes
Type of Tax	Tax Amount
OASDI	$76.92
HI	$17.99
FUTA	$0.96
SUTA	$10.54
Total employer’s payroll taxes	$106.41

Table (4)

Hence, the total amount of employer’s payroll taxes for the weekly payroll is $106.41.