 In this presentation, we will take a look at the federal income tax calculation or FIT. Now the federal income tax calculation, first we should define what we're talking about here, because when we hear federal income tax, you may think of that from different contexts. Most likely most people think of federal income tax as what is reported on the 1040 at the end of the year. And that's true. That's what federal income tax is, what we pay, what we have to report, but we don't usually pay it at the end of the year. Most people don't. Most people pay it throughout the year. And if we're W2 employees, we pay it by withholdings that are actually done from the employer. So when we talk about federal income tax here, we're talking about the calculation of those withholdings. Note that we do want to keep in mind this big link. There's a huge link between the withholdings we have here and our reporting of taxes on the 1040 at the end of the year, which is done primarily by the W2 that we will get from our employer, telling us not only what the tax wages are, but how much what was withheld. So the other federal income tax you may think of when we're thinking about the company side is the federal income tax that the company pays. Now I'm not talking about the payroll tax company pays for the employees, but the fact that they, if we're a corporation, a separate legal entity, pay income tax. So in every entity pays tax in some way. So pass through entity still the income would pass through to the owners and they would pay income tax. So in essence, in other words, there is a federal income tax that the company or the business pays in some format as well, a corporation being easiest to imagine, they're going to earn income just like we as individuals do and then pay taxes based on what they have earned. This federal income tax for payroll taxes is not at all related to the taxes for the company, although these taxes are part of payroll and therefore can be deducted as an expense. It's an expense of having a business and paying employees. It's really an employee expense. But in any case, we are talking about federal income tax calculations for withholdings throughout the time period for each of the employees. This is one of the most complicated parts of the taxes. Once we, you know, when we look at social security, it's complicated for a few different reasons. One, that reason that federal income tax will be confused between different types of federal income tax or whose federal income tax are we dealing with and the type of year. When are we dealing with it? We're dealing with the withholding or the federal income tax in the 1040 at the end of the year related, but different. Also one of the most confusing taxes because it's impossible to get it perfect. All we can do is make an estimate on it and the estimate process is going to be structured and formalized through a series of tables. So this will be the most confusing type of tax we do, especially if we do it by hand. If we do it with a computer, then the computer can just generate it, but we probably don't have much idea of what is going on and probably couldn't explain it to anyone else or do much tax planning with it if we didn't have a better understanding of it. So the federal income tax that we're going to need to withhold from each paycheck will be based on a few different things. We're going to need marital status. We're going to need to pay frequency, meaning when does the company pay period? Do they pay weekly, monthly, bi-weekly, semi-annually? And we need the taxable income for this calculation. Now these things are going to be necessary, of course, because if you think about the 1040 at the end of the year, it's based on these things. The tax we pay is a complicated calculation. By the way, we also need the number of allowances. So these four things are going to be types of things that are going to be in our 1040 at the end of the year. So the income tax is not a flat tax. It's a complicated tax to calculate in order to calculate it. We need to know if they married or not. Why? Because marital status will change the tax brackets we're in and how many exemptions we have on the 1040 at the end of the year. And therefore, the withholdings we have will have to be in such a format to kind of line up so that if we add them up, they will cover the tax at the end of the year. The frequency, the pay frequency, that of course, when we look at the tables, which is how we'll have to do these types of calculations, the tables will be broken out by how frequent we pay. So do we pace weekly, semi-weekly, monthly, or bi-monthly? So that'll determine what table we use. And then the taxable income. We need to know the taxable income for the pay period, how much they're getting paid for this particular time period. And that's an indication of what the total tax will be as well. Because obviously we have a progressive tax rate. So if you think about your 1040, the more income you make, then the higher tax bracket your latest dollars will be in. So we need to know that in order to do the calculation for the withholdings throughout the year. And then the number of allowances is going to tie in loosely to the number of exemptions. We know on the 1040 exemptions are like ourselves, our spouse, our dependents. And the allowances may not line up perfectly to that number, but they're kind of based on that number as well to try to calculate what the withholdings will be. These are the types of things we needed in order to calculate withholdings. These are the types of things that were provided to us by the employee on the Form W-4 when they became employed with us. Once we have that into the system, we don't really care about tax planning anymore. We never do as a payroll. We don't do tax planning as payroll side of things because that would be confusing issues. We got to separate that, those duties out. So what we're doing now is just saying, okay, this is the information that was given to us. How much do we withhold? That's the only question here that we need. And we need this information in order to do that. Now to get that, if we were to do this by hand, we would get that or if we do this by a computer, the IRS is going to give that information. And we can do that by using tables which are given to us by the Circular E Employers Tax Guide. This is for 2018. You could look it up, just go to irs.gov and look for the Circular E and within it, we can find the tax tables. Now a computer system will have those tax tables for us already and just pull that number out. But it's really useful to go through the tables at least a few times to see the complexity of it. And even going through the tables, we really don't understand what the table, how did the table get constructed, right? It's not a flat tax. It had to take these into consideration, these calculations into consideration to make the table. So you can tell from a planning standpoint, this is kind of a confusing issue to get this federal income tax. There's no guarantee, in other words, that the federal income tax withheld will line up to what will actually be taxable at the end of the year on the 1040 calculation. But we do our best. So the tables will look something like this. If we go into the Circular E and we find the tables, it'll be broken out. We've got to go to the correct table. So for example, this is the table for a single person for a company that pays weekly. So if we pay weekly and we have a single individual, we can go to this table and we can look into whatever the weekly earnings were. If our employee earned zero to $70, that's how much their gross wages were. And they had no allowances. They chose zero. Even though they have one exemption for themselves, they chose zero. Then why would they do that? So they don't have any withholdings typically. So that would be zero would be taken out. Now obviously, as the income goes up, the withholdings would typically go up. So if their wages were between 135 and 140, and they claimed zero, then we would withhold $7. Now, this is only the beginning of the table. That's why there's all zeros here. But as the income goes up, then if they had one exemption, they would pay zero. And as the exemptions go up, of course, if they had zero exemptions, we would withhold more because we would expect them to owe more money at the end of the year when they do their payroll calculation at the end of the year. These tables will go down to a fairly decent amount of income. They will stop at some point. So if someone makes a lot of money, then we won't be able to use these tables and we'll have to use a different method in order to calculate their withholdings. So if they're married and weekly, then once again, we pay weekly and they are married, then we find how much they got paid weekly for that particular pay period and then how many allowances they have from their W-4 and then wherever that lies, if they were at one allowance and they made, let's say here somewhere between 355 and 365, like say 358, then they would go here. Also note that the way the table is, it's got 355 here and 355 here. So we have the question, what if they made 355? Do we pick up the five dollars withholding or the six dollars? Now typically we want to be more conservative. We as the business would rather just withhold more than less. So we'll typically error on the higher withholding because we'd rather have our over withheld and then anything we over withhold like they'll get back on the 1040. So we'd rather have them not owing money on the 1040 than owing money. Obviously a dollar is not going to make a big difference, but typically we'll error on withholding too much rather than too little in this case. So usually that's the case. So then if we have a single person still, but now they pay bi-weekly. Now this bi-weekly is a decision by the company. So obviously the company pays people bi-weekly, which is different than semi-monthly. These tables will differ than semi-monthly, but once we know what table we use, we'll just use the same table each time. So this will be bi-weekly. Again, looking at the paid tables, the only things changing are going to be these, these stats up here and obviously the amounts withhold will change based on the the pay periods, how much was earned in this case bi-weekly. The earnings for employees that get paid bi-weekly, you would think that they would earn you know more than than the weekly table up here. So then we've got, we've got married bi-weekly, same type of idea and obviously the things are going to change. Why? Because marital status will change the amount of withholdings and these tables originally were built on the concept that we only have one income because obviously the employer only knows of that single income. So the tables are kind of constructed as if there's only one income and we know that families typically have more than one income now and other income sources. So these tables are far from a perfect you know estimate unless we make that W4 calculation more accurate in some way. Okay, so then we've got the semi monthly for single. So remember semi monthly is different than bi-weekly. So because there's 24 compared to 26 pay periods. So this table will differ than semi monthly to bi-weekly because there's a slightly different number of pay periods and then married semi monthly. And then then we have single for the monthly if we pay monthly and then married monthly. So note if you're doing this by hand you got to find the right table you got to find you know where they were earned for each employee look at how many allowance are at and then look what the deduction would be. Again most of these all have zeros because we're only looking at the header the first portion and as the wages go up then more withholdings would go up as well. Okay, so we won't go in then we have daily of course. So the other method is going to be the percentage method. So if we can't typically we're going to use the tables but for example if they earn too much money then we can't use the tables we have to use some other method and that would typically be a percentage method. And you can think of the percentage method is kind of like this is kind of how they would create the table. So these are useful to look at and try to calculate just to try to figure out okay you know how are these tables being built. And if you if you look at these of course we know that the tax rates are progressively going up as income goes up. And so if you're trying to build a table you'd basically be and these won't line up with the table exactly but they'll give you an idea of how this is being built. So if they earned between 71 and 254 so what that means is if they if they had less than the 71 they wouldn't pay any taxes but if they had between this amount we're going to have to subtract you know whatever they have if they have 100 minus the 71 that's what they're going to pay taxes on. So we don't we only need to calculate the 10% on that portion and that would be how much tax they would pay. If if we're in this bracket if they made somewhere between 254 and 815 then note we kind of already calculated the tax up to 254 this this lining up to here we've already calculated the tax on that. So we don't need to recalculate that what we need to do is just calculate the tax on the portion above 254 that's below 815 so if it was like 900 900 minus the 254 and then we're just going to take the 18 which is the amount of tax on the 254 plus the difference between you know the 900 minus the 254 and that would that be a 12% rate the rates going up as we make more money. And then if they made something between 815 and 1658 then again we already configured the tax as of this line that's the the last point. So so as of that point they had the tax would be 8562 and then whatever they made above that so if they made a 1200 minus the 815 times the higher tax rate of 22% accounting I don't know anyone in accounting