a. Net pay for March:
Clay's gross earnings: $3,600
Social Security tax (6% on first $110,000): $3,600 × 6% = $216
Medicare tax (1.5% on all earnings): $3,600 × 1.5% = $54
Federal income tax withholding (15% of gross earnings): $3,600 × 15% = $540
Net pay for Clay in March:
$3,600 - $216 - $54 - $540 = $2,790
Philip's gross earnings: $10,800
Social Security tax (6% on first $110,000): $10,800 × 6% = $648
Medicare tax (1.5% on all earnings): $10,800 × 1.5% = $162
Federal income tax withholding (20% of gross earnings): $10,800 × 20% = $2,160
Net pay for Philip in March:
$10,800 - $648 - $162 - $2,160 = $7,830
b. Net pay for December:
The calculations for December are the same as for March, so the net pay for Clay and Philip would be the same as in March.
c. The net pay is the same in March and December for both employees. This is because the deductions for taxes (Social Security, Medicare, and federal income tax withholding) are based on a percentage of the gross earnings, which remains constant throughout the year.
d. The amounts that Old Town will report on the 2016 W-2s for each employee are as follows:
- Clay: Gross earnings ($3,600 per month ×12 months = $43,200), Social Security tax withheld, Medicare tax withheld, and federal income tax withheld.
- Philip: Gross earnings ($10,800 per month ×12 months = $129,600), Social Security tax withheld, Medicare tax withheld, and federal income tax withheld.
These amounts will be reported in the respective boxes on the employees' W-2 forms for tax reporting purposes.