 Hello and welcome to the session in which we would look at payroll taxes and specifically we're going to be looking at 4W4 which is the employee withholding certificate. Now if you are in the U.S., you should be familiar with the Form W4. Simply put, every time you get a job you have to fill out a Form W4 so you tell your employer, your company that you work for, how much they will need to take from your paycheck and form of taxes. In the U.S., what happens is this, as you work, you pay your taxes. It's pay as you go system. So what happens is, if you don't pay enough, you will be penalized at the end of the year and you owe money and you might be penalized. If you pay too much over what you need to do, then you'll get a refund. However, understanding the W4 will minimize underpaying or overpaying. So you really don't want to underpay because you might be subject to a penalty but also you don't want to overpay because then you're given your money to the government which you can use now. So in this session, we'll go over the W4 and how does it work. Now before we start, I would like to remind you that if you are an accounting student or a CPA candidate to strongly check out my website, farhatlectures.com. If you are a CPA candidate, I don't replace your CPA review course. I can be a supplement to your CPA review course. And by doing so, I can help you improve your grade. I do have resources for other accounting courses. If you're an accounting student or CPA candidate, check out the CPA exam score for your college. Connect with me on LinkedIn if you haven't done so and check out my LinkedIn recommendation. Like this recording, share it. Connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at W4. So let's have a macro look at this form because we're going to use it later. So the W4 basically has one, two, three, four, five parts. Let's take it part by part. They call it step one, step two. The old form, they used to call it parts. I'm still used to the old form. So part one, it's basically your information. Name, last first name, last name, social security address. And this is important here. What is your tax filing status? Is it single or married filing separately? Married filing jointly or qualify with a widow or a head of a household? So this is your filing status. You have to check one box. Complete, well, let's take a look at the old form. Form two, if you have multiple jobs or your spouse works. So when do you get into this step two? Well, if you have more than one job, for example, I always held more than one job. If that's the case, you have to look at this, examine this step and look at this step later. Part three is your dependence. If you have any dependence, for example, if you have children for each child, you'll have 2000. And if you have other dependent, you will get $500 for each dependent. A part four is other adjustments. If you have other income, what could be other income? For example, you might have money in the bank that earns interest. You might have stocks that gives you a dividend. You might have retirement income. You might have income from other sources. And as a result, you want to let your employer knows. Therefore, why do you want to let them know? That's the reason. You want to let them know because you want them to withheld money from your paycheck. OK. Otherwise, if you if you're earning interest, the bank will not take the money. We will not take will not take taxes unless you don't have your W8. But that's a different story. Same thing with dividend deductions. If you if you expect to claim deductions other than the standard deduction and want to reduce your withholding, then you will use the deduction worksheet, which would look at this shortly. That's not that important. We don't worry about this. And for any reason, you want to have extra withholding. You want you want your employer to take an additional $200 per check. You will have this on 4C. Why would you do so? Because you might have other income. And because of that, you want to pay the taxes from what you are doing as a job. And obviously, part five is pretty easy. You sign, you date, and that's that. OK. And those are the five parts. So let's go through each one of them separately. So when do you complete part two or step two? You hold more than one job or you are married and your spouse is working. So you have two jobs. Here's what you have to do is you have to do only one of the following. Under those circumstances, the amount of the withholding depend on the income earned from these jobs. Obviously, the more you make, the more you're supposed to pay. You could use the IRS estimator. I'm not going to look at the IRS estimator, but you can look at it. If you want to see, you could use this method to determine how much they should pay from your paycheck. Or you could use the multiple jobs worksheet, which is page three of this form and would look at page three of this form because you are learning how to do this as a college students. Or what you can do, you can simply check this box, which is three. You will do one of those. And what does that mean? See, it means let's assume you're making $80,000. You're telling also you're telling your employer, my spouse also makes $80,000. If you have two jobs, one is 40 and you check this box. It means you have another job that you're also making $40,000. That's what it is. So tell your employer how much you are making in total. Therefore, they will adjust separately. So this is, again, step two. If you have multiple jobs, if you don't have multiple jobs, you just claim you're dependent. And if you want, again, this is optional extra. OK, again, as we go further, I'm going to be referring to box for C, box for B, box for A. So those are optional. Here, box three is basically the total dependent because they may ask you, they will need this information to fill out before. So this is basically what you need to know about W-4. Based on this information, you will furnish this to your employer and your employer will compute your federal income tax with holding per pay period. Based on this information, they will determine the amount of taxes they will need to take from you. So this is what page three looks like. Remember, we talked about page three, the worksheet. Remember here? Use the multiple worksheet on page three and enter the result in step four C below for roughly accurate withholding. So what you do is you go to page three, you will fill out page three. And as a result, you will put this number here. You'll put this number in line four C, the extra withholding. So what is page three? What's this worksheet in case you need to complete this worksheet? Again, when do you do this? Is when you have two jobs or more. So we're going to assume two jobs. We're going to assume three jobs. So we're going to kind of skip this anyway. We did tell you to skip this, skip this part because we're going to be dealing with two jobs. And let's take a look at it. If you have two jobs and you are married, and you are married filing jointly, and your spouse each have one job. OK, let's do this again. If you have two jobs or you're married jointly and you and your spouse each have one job. So simply put, you either have two jobs or your work and your spouse work. Find the amount of the appropriate table on page four. This is page four. Using the higher paying jobs row and the lower paying jobs row column, find the value at the intersection of the two household salaries and enter the value on line one. Then skip to line three. So just for the sake of illustration, let's assume you are making between 80 and 99,000 right here. And your spouse is making between 20 to 29,000. Therefore, this is the amount. It's intersect and we're assuming married filing jointly here because that's what they're asking us. It intersect at $5,010. Let's go to line three. Enter the number of pay period per year for the highest paying job. For example, if that job pays weekly, we're going to assume weekly, we're going to put 52. Divide the annual amount on line one or line two C, which is line one here. We don't have to worry about two C by the number of pay period on line three. Enter this amount here and on N and step four C. So simply put, I'm going to take $5,010 divided by 52. $5,010 divided by 52. I guess my son was using the computer because he used this big calculator. So $100 and 20 cents. Okay, let me just reduce the calculator size. And this way I know when he's using the calculator again, my son loves the calculator. He's only five and a half years old, but this is what he likes to play with calculators. Okay, now this is what goes online. Again, this is the, because you want to tell your employer about this. So this is what goes online for C, $100 and 20 cents. This is the extra withholding because the other amount is based on, based on step two and step three, but if you want extra withholding, this is how you figure out the extra withholding. Okay, now deductions. If you have any deductions here, again, if you want to have any deductions, you will compute this based on your standard deduction or itemized deduction and it goes online for B. So this is going to reduce your taxes. Line four B would reduce your taxes. Again, let's go through it real quick and enter an estimated amount of your 2021 itemized deduction. Most people don't itemized. If you itemize, most likely you'll have your own CPA doing this, but let's assume it's, you can itemize for, just for the sake of illustration, you are single, you only have itemized of 10,000. Well, the standard deduction is 12,000. 12,000, five, 50, it means you're not going to use the itemized deduction. F line one is greater than line two, subtract line two from line one and enter the results. If line two is greater than line one, enter zero. Line two is greater, enter zero, that means you're going to be taking the standard deduction. Enter an estimate of your student loan interest, deductible IRA contribution, deductible IRA contribution, inserting other adjustments. Simply put, we're going to assume you don't have any. Add lines three and four, it's zero. So we're going to assume you have no extra deduction for the sake of simplicity. So simply put on four B, you have zero, but it just showed you, if you have any additional deduction, any additional deduction like student interest loan, deductible IRA, your employer will take that into account when they take the money out of your paycheck. So this W-4 is more involved than the old W-4. The old W-4, they did not really look at your student loans interest in deductible IRA and other adjustments, which is part of your, part two schedule one of form 1040. This one it does. Now, again, we know what it is because we need to use this information. Now your employer, now here we go. Now your employer will have several methods in computing your tax withholding, and those are the methods. We're going to be actually looking at method one, percentage method table for automated payroll system. We'll look at briefly with the wage bracket and we'll simplify this. Again, this is from the employer perspective. We'll also look at four percentage method table for manual payroll system with form W-4 from 2020 or later, which is the new form. Again, there are other forms, but this is what we're going to be using for the sake of illustration. So for the sake of illustration, we're going to be using the first method, which is the percentage method table for automated payroll system. Now in my class, most likely we'll be using this method unless you are told to use the other methods, you will use the other method. For the sake of illustration, let's compute one, fill out one just to see how this all works. Step one, this is again from the employer perspective. This is, here we are dealing from the employer perspective. Enter the employees total taxable wages for this payroll. Well, we're going to assume it's $1,000 for the sake of illustration. Enter the number of pay period you have per year. So we're going to assume it's weekly, 52. Multiply the amount on line one A by the number of line one B, which is 1,000 divided by 52 equal to 52,000. This is your year, basically, this is your yearly salary. If the employee has submitted a form W4 for 2020 or later, figure the adjusted annual wage amount. So we have to figure out something called the adjusted annual wage amount. This is what they try to figure out. Enter the amount from step four A of the employer W4. Let's go back to step four A and four A we're going to assume you don't have anything for four A. Okay, just I don't want to show you where it's coming from. This is just so you know what it's coming from. Now, if they refer to step four A, I'm not going to go back every time, but you know where to find it, zero. Add line one C and one D. One C and one D, well, it's going to keep us at 52,000. Enter the amount from step four B of the employee form W4. These are their deductions. You have no deductions. We're going to assume zero. If the box in step two, a form W4 is checked, enter zero. If the box is not checked, enter 12,900. If the taxpayer is married, filed in Joanie or 8,600 otherwise. So we're not going to assume it's checked. We're going to enter 8,600 here. 8,600 and this amount is given to you. It might change from year to year. One H, add lines one F and one H. One F is zero, one H is 8,600. It's 8,600, 8,600. Subtract line one H from line one E. One H and one E. So 52,000 minus 8,600. That's going to give us 43,400. My pen is very big. That's why I can't write otherwise. So this is the adjusted annual wage amount. If the employee has not submitted the W4, we're not going to use this because we submitted, figure the adjusted annual wages, follow. So there's another way if the employee did not, which is it will take more money, but we're not going to do this. Now let's go to look at the tentative withholding amount. Now we need to find out how much they're going to take from this individual. To enter the employee annual adjusted amount, which is right here, 43,400. Find the row and the appropriate annual percentage table in which the amount on line 2A is at least the amount in column A, but less than the amount in column B than enter the amount. Okay. So now we're going to go to this table here. Okay. Percentage method table for automated payroll system. This is what we are using. Make sure you are using the right table. Students, you know, they use their own table and they don't get the right amount. And they have A, column A, column B, column C, column D and column E. And we are dealing with person who is married finding jointly. Okay. So you have to make sure you are using the right table. You're using the right table. And the first thing they want us to do is find the column B. So we're looking in column B here. And the amount is 43,400. And we're going to assume this individual is single. So we're using the right table. So we're looking in column B here. And the amount is 43,400. This is single. So we're using single. 43,400 folds right here in column. I'm sorry. We're going to assume this individual is single. Yeah, single. Single. So for single individual. Let's see. For single individual, actually 43,400 folds between 13,000, 75 and 43,925. So we're going to input the number in column B to B. Let's see. Find the row. Online 2A is at least the amount. Okay. So we are working with this one. Let me just make, let me highlight it in yellow. Okay. This one, we're dealing with this line here. Okay. So line 2B, on line 2B entered the amount from column A of that row. Okay. Which is column A, 13,675. 13,675. It's this number here. 13,675. Line 2C entered the column from line, column C. Column C is 98750. Again, all what I'm doing is I'm taking the numbers, 98750. Enter the percentage from column D. Percentage, it's 12%. Enter the percentage, subtract line 2B from 2A. If we take 43,400 minus 13,650, it's going to give us 29,725. 29,725. Multiply the amount by line 2D. That's going to give us 3,567. Add line 2C and 2F. 2C is 98750 and 2F 3567. That's going to give us 4,554.50. Now divide the amount on line 2G by the number of periods. If we take this amount, number of periods 52, it's going to come up to $87.59. We're going to assume there is no credit. We're going to assume there is no extra withholding for C. Therefore, we'll take 87.59. This amount is to be withheld from the employee wages for this pay period. Therefore, if you are getting paid $1,000, they're going to take based on the information given. We are dealing with single individual weekly. No dependent, no extra withholding. Therefore, we're going to take $87.50. Another way to do this is to use the wage bracket method table. We're going to simplify this. Make sure you are using it at the right table weekly. Under weekly, here we're going to feed the adjusted wages amount. The adjusted wages amount, we assume it's $1,000. There is no adjustments for this individual. We're dealing with this one here. Again, weekly $1,000. The individual is married filing jointly. The withholding will be $88. The withholding will be, I'm sorry, single. We're dealing with a single individual, not married. Let me highlight it again, because this example is single, not married individual. Single standard withholding. They have no extra withholding. Therefore, it is $88. They have no standard withholding, and they did not check the withholding box. What happened if they check the withholding box? If they check the withholding box, notice it goes to $156. Hopefully, you see that it's almost double. Why? It means this individual has two jobs, has two jobs, as a result, and they have similar salaries. Therefore, it will take more money. We're not assuming this. We're assuming standard withholding. Again, this is a simplified method for the wage bracket, because here the rest is about the adjusted wages amount. Sometimes you have to compute the adjusted wages amount. We're going to assume they have no adjustments here. They're making a thousand. We're not making any adjustments for them. Let's use the percentage method table for the manual payroll system. First, we're just going to work on an example. Somebody who's married filing jointly, they'll get $5,000 per pay period, 24 periods. They have two dependent, which is step 3, $4,000, and they want extra withholding of $50 from Form W4, line 4C. So first, enter the employee total taxable wages for this payroll period. We said it's $5,000. Enter the number of pay period. They're going to be paid 24 times a year. Line 1C, enter the amount from step 4A. We don't have anything. Divide 1C by 1B. There's nothing in 1C. Therefore, there's nothing here, nothing here. Line 1E. Add line 1A and 1D. It's still at $5,000. Enter the amount from... 1E is above the $5,000 is here. Enter the amount from step 4B. We don't have anything. Divide 1F by line 1B. There's nothing. Subtract line 1G. There's nothing line 1G from line 1E. If the amount is zero, if the amount is less than zero, it's not less than zero. The adjusted wages are $5,000. So these are the adjusted wages. Now figure the tentative withholding amount. Now we're going to go to the table. And we are dealing with an individual that's married, filing jointly. Semi-monthly, which is 24 periods. 24 periods. And the amount of the... And the amount of the adjusted wages is between... It's $5,000. $5,000 goes right here. Between $4,377 and $8,160. Therefore, the first thing, we put the amount from column A, which is $4,377. Enter the amount from column C. $384.82. $384.20. Now enter the percentage from column D. This is during the 22%. Subtract line 2A from line 1H. And that's going to have 5,000 minus 4,377. And that's going to have a 623. Now multiply the amount on line 2D, 623 by 2C by 22%. That's going to give us 100, approximately $137. And add line 2B and 2E. 2B and 2E, that's going to give us $521.88. This is the tentative wood holding. Let's see if they have any extra credit. Enter the amount from step 3 of the employees W4. We said on step 3, they have $4,000 in wood holding. And notice what's going to happen as a result. They're going to take less money from their paycheck. Initially, we thought it's going to be 521.88. Now divide the amount line 3A by the number of pay period. The number of pay period is 24. That's going to give us 166.67. Subtract line 3B from line 2F. 3B from 2F. And that's going to give us $355.21. And they want extra wood holding for $50. Then if we take $355.21, which is the tentative wood holding, the new tentative wood holding, plus the $50 that they want extra, they're going to withhold from their paycheck, $405.21. And this is basically, you have to do this computation in the homework. So that's why I went through these forms. Just to give you an idea, how does it work? How does it work? Again, read the line and follow the instruction. The first thing you want to make sure is if you're using this method, percentage method table for manual payroll processing, you are using percentage method table for manual processing. This is one problem students face. The other one is you're dealing with it monthly, weekly, make sure you are using the right pay period. And sometime here's what happened. Some students, they use 2021. While they're supposed to, I'm asking them for year 2020, they're using 2021 tables because they go to the IRS website and they download the table and the IRS table is 2021. The homework is for 2020. I saw this several times. Just make sure you are aware of these things. At the end of this recording, if you're an accounting students or CPA candidate, I'm going to invite you to visit my website, farhatlectures.com. I can help you pass the CPA exam, study hard, good luck and stay safe.