Question

Exercise 9-10A Calculating payroll LO 9-5

Old Town Entertainment has two employees in Year 1. Clay earns $4,600 per month, and Philip, the manager, earns $11,000 per month. Neither is paid extra for working overtime. Assume the Social Security tax rate is 6 percent on the first $110,000 of earnings and the Medicare tax rate is 1.5 percent on all earnings. The federal income tax withholding is 13 percent of gross earnings for Clay and 20 percent for Philip. Both Clay and Philip have been employed all year.

Required
a. Calculate the net pay for both Clay and Philip for March.
b. Calculate the net pay for both Clay and Philip for December.
c. Is the net pay the same in March and December for both employees?
d. What amounts will Old Town report on the Year 1 W-2s for each employee?

Answer 1

Old Town Entertainment Requirement a. 4600 Clay - March Gross earnings Deductions: Federal income tax ($4,600 x 13%) FICA tax-SS ($4,600 x 6%) FICA tax - Medicare ($4,600 x 1.5%) Total deductions Net pay 598 270 69 937 3663 11000 Philip - March Gross earnings Deductions: Federal income tax ($11,000 x 20%) FICA tax-SS ($11,000 x 6%) FICA tax - Medicare ($11,000 x 1.5%) Total deductions Net pay 2200 660 165 3025 7975 Requirement b. 4600 598 Clay - December Gross earnings Deductions: Federal income tax ($4,600 x 13%) FICA tax-SS ($4,600 x 6%) FICA tax - Medicare ($4,600 x 1.5%) Total deductions Net pay 270 69 937 3663 11000 Philip - March Gross earnings Deductions: Federal income tax ($11,000 x 20%) FICA tax - Medicare ($11,000 x 1.5%) Total deductions Net pay 165 2365 8635

Requirement d. Amount appearing on W-2s Clay Box 1 Wages, tips, and other compensation Box 2 Federal income tax withheld Box 3 Social security wages Box 4 Social security tax withheld Box 5 Medicare wages and tips Box 6 Medicare tax withheld 4600 x 12 598 x 12 4600 x 12 270 x 12 4600 x 12 69 x 12 55200 7176 55200 3240 55200 828 11000 x 12 2200 x 12 132000 26400 Philip Box 1 Box 2 Box 3 Box 4 Box 5 Box 6 Wages, tips, and other compensation Federal income tax withheld Social security wages Social security tax withheld Medicare wages and tips Medicare tax withheld 110000 x 6% 11000 x 12 165 x 12 6600 132000 1980 Requirement c. Philip's net pay is different in December because he does not pay FICA Social Security tax in December. His year-to-date earnings exceeded $110,000 in November. However, there is no limit on the FICA Medicare tax. Clay's net pay is the same for both March and December because his gross earnings do not exceed $110,000 for the year.