Question

Payroll tax expense has been recognized and paid for the first three quarters of the year but not the last quarter (although salaries and wages have already been properly accrued, i.e. the employee entry). Your company has 10 employees who earn $38,000 per year, 2 employees who earn $65,000 per year, and the CEO who earns $286,000 per year. For this year, FICA tax is 7.65% on the first $128,400 of an employee's wages and 1.45% on any amount more than $128,400. Federal unemployment tax is 6% of the first $7,000 of each employee's wages but can receive a credit of up to 5.4% for amounts paid for state unemployment taxes. The state unemployment tax rate is 4.8% (and only on the first $7,000 of each employee's wages).

Answer 1

To calculate payroll tax expense for the final quarter, the FICA tax of 7.65% is applied to earnings up to $128,400, and 1.45% beyond that, while the federal unemployment tax is 6% of the first $7,000 of each employee's wages. Offsets are available for state unemployment tax payments. Specific calculations differ for employees based on their earnings about the Social Security wage base limit.

Step-by-step explanation:

When calculating payroll tax expenses for the last quarter for a company's employees, various considerations must be taken into account. This includes applying different tax rates to different portions of an employee's income based on FICA tax requirements and unemployment tax considerations. In this scenario, if we're considering the last quarter, we'll need to prorate the annual salaries to reflect the last three months of the year.

It is important to note that the FICA tax rate is 7.65% on the first $128,400 of an employee's wages and 1.45% on any amount more than $128,400 for Social Security and Medicare taxes. Also, for Federal unemployment tax, 6% is applied to the first $7,000 of each employee's wages with potential credits reducing this rate due to contributions to state unemployment.

FICA Tax Calculation:

For the 10 employees earning $38,000 per year, since their earnings are below the Social Security wage base limit, you would calculate the payroll taxes at 7.65% for the entire earnings. The 2 employees earning $65,000 are also below the ceiling, so the calculation would be the same rate for their total earnings. However, for the CEO who earns $286,000, you would apply the full rate of 7.65% only up to $128,400 of earnings, and then 1.45% for the remaining portion of their income.

Unemployment Tax Calculation:

Each employee's first $7,000 earnings are subject to the Federal unemployment tax rate of 6%, potentially offset by credits for state unemployment tax paid at 4.8%.