 In this presentation we will calculate federal income tax FIT using the percentage method. We currently have our payroll register here where we're focusing in on Pam who's the bigger earner here and therefore the one that's going to need to be calculated with the percentage method rather than just using the tables. She's going to be married for allowances. She's got a salary pay which is going to be this 3653 since there's a weekly pay and that of course will be the total earnings. Our focus then here is on the FIT calculation. So we're looking for the FIT calculation. Therefore we're going to need to know what the FIT wages are which could differ from this total wages. This is what she's getting paid. We'll typically be reduced by those types of things that could be reduced in say our 1040 adjusted gross income things like a cafeteria plan or a retirement plan like a 401k. So if we say here that the cafeteria and retirement plan are these numbers then we can say that her total earnings are going to be or the FIT earnings are going to be this 3653 so we're going to say 3653.85 minus and then we have the cafeteria and retirement plan of 280 minus 185 and that'll give us the 318885. So that's 318885 that we're going to basically be using here. We're focusing in on this on this number on Pam's wages because that's the one we're going to be focusing on for the FIT. So here we are at the circular E. The circular E can be found on IRS.gov the IRS website IRS.gov the circular E to get the most current tables. We need to go down to the tables to calculate the payroll withholdings. These are not going to be the the normal just tables that we can look up. They're going to be the percentage calculations typically used if the wages are too high. For example if we went and found this number in the tables we'd say oh the tables aren't big enough to find that number and therefore typically that's when we would have to go to this method the percentage method in essence calculating what the wages are going to be. Now this is an important method to do and it's useful to do because we get a better understanding of what the progressive tax system is. What are these tiers doing? How complex is it to calculate these taxes and why is it that format? So to do this first we got to look at the table on the circular E to see what the allowance is. So we need to know what pay period we're using. We're currently in weekly and then we're going to say okay that's $779.80 is how much money per allowance that we get. So $79.80 once we have that we can then take our federal income tax pay. This is how much we started with from our table. That's how much we earned after the retirement plan and the cafeteria. Then we're going to calculate the allowances which is going to be the $79.80 that we just looked at times the number of allowances which for her is $4 which is going to give us $79.80 times $4 or $319.20. Then we're going to take the FIT wages minus the $319.20 for the allowances to give us this $2,869.65. This then is the number we're going to use for our percentage tables. So now we're back to the circular E and we're still in the percentage areas. This isn't like the tables where we would just look up the number. Notice what we're going to have our our calculations will have to do. We've got to find the right bracket that this is in and then we'll have to calculate the top tier and add it to the tier below. So let's see if we can kind of break this down and why this happens. This is closer to us actually having to calculate what the tax is on a progressive system. And remember it doesn't mean if we're say in this tax bracket that all of our money is taxed at 22%. It means that some of it's taxed at 10%. Some of it's taxed at 12%. Some of it's taxed at 22%. So it's just it's a it's the top portion that's taxed at 22%. So we need to go through this whole thing and say well this much is taxed at 10% and this much is taxed zero this much is taxed at 12%. And to do that we can shortcut it a little bit by saying for example we are in this bracket and that's going to be between 1,711 and 3,395 that's the number we're using because this falls in between there. And so we can basically say that this number up to the bottom level of 1,711 has already been calculated. We can calculate that on the table. A table can give us that because that's a set point in time it knows exactly where that is. It can't give us the number of tax at the highest bracket because it's somewhere between here. So we'll have to figure out what that is because it's we don't the table obviously doesn't know exactly what that how much is going to be taxed at 22% but it knows exactly how much is taxed at 10% and how much is taxed at 12%. So we can take that floor number and the table can just give us this 171,36 which is in essence the amount taxed at either 0, 10 or 12%. So we have we have that and then we just need to figure out how much is going to be taxed at the 22%. To do that we're going to take our number 2,869 minus the floor number typically the bottom number which they give us over here excess over 1,711 the difference then will be taxed at the 22% the highest tax bracket and then we add to it the 171,36 which is the table already calculating the tax on the 1,711 the floor which is the 10% and 12% brackets that we don't need to recalculate because the table can give us those. So it looks basically like this we've got the federal income tax here and then this this is our tax our taxable wages and then we've got the lower limit on the table this number this number and that will give us the amount to be taxed at the highest bracket so we subtract these out that's the amount the highest rate which is 22% so the amount taxed at the highest rate times 22 gives us $254.90 then we add to it the 171 given to us by the table which is in essence the tax on the lower portion and if we add those together we get 426 which is going to be our work withholding amount. So this is basically the full breakout that we'll take from the table it's nice to have a format like this you can kind of think through it if you do it a few times if you have some of these calculations and you set the table up then you can go through and just fill out the format of the calculation and fill out what's the appropriate amount what's the appropriate table that you're looking at just make sure you're picking up the correct table ours was for weekly if you're bi-weekly semi-weekly or semi-monthly or monthly another table and make sure we're picking up the single versus the married side of it so then we can basically use all that in order to fill out our number here in our FIT federal income tax withholdings.