Welcome to “Introduction to Business” – Payroll
This page is designed for High School and College students to supplement an approved text with a little online learning about payroll. Our site contains numerous articles detailing the facets of payroll. This page is a simple overview of how payroll works. The links work as detailed information for those of you who need it. Payroll is how employees are paid. Independent Contractors may do work for you but they are not employees therefore they don’t receive pay checks created by doing payroll. Employees are usually paid in one of three way: Hourly (hours worked times the rate of pay), a salary (fixed amount per pay period) or by the number of completed tasks (piece work).
Alex is a student at your school. Alex works some evenings and weekends plus full time during the summer and holidays at a local fast food restaurant. Alex is over 16 and still lives at home. Alex works by the hour. Enter in how many hours Alex worked last week.
Hours worked : ____
If over 40 hours, Alex may be eligible for overtime depending on who he works for and what type of work he does. Overtime is normally paid at the rate of one and one half times (1 Â½) a workers regular rate.
How much does Alex’s employer pay him for an hour of work? Enter Alex’s rate of pay.
Rate of Pay : ____$
Gross Pay (weekly): ____$
That’s the easy part. Out of Alex’s gross pay certain items are deducted. These deductions can be voluntary or involuntary. The involuntary deductions consist of taxes, garnishments and other items detailed below.
Almost everyone (see Wages Exempt From Social Security and Medicare Taxes) has to pay in OASDI (also known as Social Security) and Medicare. Old Age and Survivors Disability Income is what pays for Social Security retirement and disability payments. OASDI is withheld at the rate of 6.2% on the first $94,200 of wages in 2006. Each year the amount of wages you pay OASDI goes up based on how the National Averages have increased.
OASDI Taxes: ____$
Almost everybody has to pay Medicare taxes. Medicare taxes pay for medical costs for the elderly and the disabled. Medicare tax is calculated at 1.45% on all your wages.
Medicare Taxes : ____$
Alex’s employer also has to pay in the same amount of OASDI and Medicare Taxes. This is called the employer’s share and does not directly affect Alex’s paycheck. The employer pays Federal Unemployment Tax and State Unemployment Tax once a quarter. The tax rate is determined by the employer’s record of former employees drawing unemployment and a base rate set by the State.
Federal Income Tax (FIT) withholding. This is the Federal Income Tax that almost everyone (see Taxable and Non Taxable Compensation) is required to pay. It runs from 0% to 39.5 % based on a number of factors. The witholding system is designed to withhold the amount that will be due on your Federal Income Tax Return when you file your â€œ Form 1040 Federal Income Tax Returnâ€ for the year. For a student working at an average job, witholding will be about 10%. (See Circular E for withholding tables) You file a Form W-4 with your employer that determines what your withholding amount will be.
Federal Income Tax Withholding : ____$
OASDI, Medicare and FIT are paid to the IRS monthly, semi weekly, or the day after payday depending on the amount. The taxes are reported on Form 941 that is filed every quarter. Forty Six States have a State Income Tax, leaving four that do not. This tax can run from 0% to as much as 20% depending on the States, how much income you make, and a few other factors. Again it is designed to approximate how much you will have to pay when you file your State income tax return. For this example we will use a flat 3%.
State Income Tax Withholding : ____$
In California, New Jersey, New York, and Rhode Island you may be required to pay into a mandatory short-term or temporary disability insurance ( SDI ) under rules set by law. Check your State if shown
- New Jersey
- Rhode Island
Mandatory State Disability Insurance : ____$
In a number of States there are local income taxes that are assessed by Counties, Cities, townships and other municipal bodies. They may run as high as 5% of your wages, again depending on a number of factors and where you live.
List percentage if any ____%
Local Income Tax Withholding : ____$
Other Involuntary deductions can include:
Student Loans Collections____$
Federal Agency Debt Collections____$
Other Involuntary Deductions : ____$
Voluntary deductions can include:
Credit Union Deductions____$
Section 401 (k) Deductions____$
Other Retirement Savings____$
Group Medical Insurance____$
Supplemental Insurance Coverage____$
If offered in a Cafeteria or other qualified plans, certain voluntary deductions may reduce your OASDI , Medicare and or Federal Income Taxes.
Voluntary Deductions : ____$
Net Pay to Alex : ____$
At the end of the year Alex will receive a Form W-2 detailing his earnings, taxes withheld, and amounts paid to the Federal and State government on his behalf. He will need that Form W-2 to complete his Form W-2 Federal Tax Return by April 15th following the end of the year that his earnings were paid to him.
Based on the information provided above,
In order for Alex to make a Net Pay of ____$ , he has to work ____ hours.
Thanks to Lorinda Holland and Monica Blaylock, educators at Lake Dallas High School, for their help with this page.