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Personal exemptions reduce the employee's taxable income on the employee's Form 1040 (US Individual Income Tax Return). Withholding allowances free approximately the same amount of wages from income tax withholding and therefore approximate the employee's tax liability at the end of the year. Exemptions and allowances may be used synonymously.
An employee is entitled to federal withholding allowances for himself, his spouse, and his dependents. The value of a personal exemption for 2004 for federal income tax purposes is $3,000. The value of the exemption used by upper income persons is reduced and phased out when adjusted gross income reaches specified levels.
Exemptions are determined by the Federal W-4 Form that you must file with your employer annually. Back to top.
Supplemental wages are compensation paid to an employee in addition to regular wages and include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increases, and payments for nondeductible moving expenses. Back to top.
Cafeteria plans, or flexible benefit plans, are employee benefit plans, authorized by Internal Revenue Code Section 125, under which employees may choose from among two or more benefits (consisting of cash and qualified benefits) offered by an employer. Employee deductions to fund the benefits are exempt from federal income tax, FICA, and, in some states, state income tax, withholding.
Benefits that may be offered under a cafeteria plan include accident and health insurance, dependent care assistance, group legal services, group term life insurance (although life insurance in excess of $50,000 is includible in gross income), and additional vacation days. Back to top.
An amount that is or may be subtracted from an employee's paycheck. They can be taken pre-tax or after tax depending on the type of deduction. The employee must agree to have deductions withheld from their paycheck. Back to top.
Deferred Compensation Plan (401k)
Deferred compensation plans are employee benefit plans, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan.
Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax withholding but are not exempt from FICA withholding. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings thereon accumulate tax free until distributed to the employee at retirement.
The maximum amount that an employee can elect to defer for 2004 under a 401(k) plan in which the employee participates is $13,000. The limit is adjusted annually for inflation. The amount that an employee may actually defer, however, is usually lower as typical plan terms limit contributions to the lower of a specified percentage of current wages or the statutory maximum. Back to top.
A person who is claimed as a dependent must:
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be a child of the employee who is either under 19 or a full time student under 24, or
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be a child of the employee who is a full time student over 24 who is reasonably expected to receive less than $3,000 of income during the taxable year, or
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be reasonably expected to receive less than $3,100 of income during the taxable year, or
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be permanently and totally disabled and receive income for services performed at a sheltered workshop operated by a charity or government
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receive more than half his support from the employee;
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be a citizen, national, or resident of the United States, or a resident of Canada or Mexico, or an alien child adopted by and living with a United States citizen abroad;
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and be either:
(1) a child, grandchild, stepchild, parent, grandparent, stepparent, brother, sister, stepbrother, stepsister, in law, aunt, uncle, nephew, or niece of the employee, or
(2) a member of the employee's household for the taxable year and have the employee's home as his principal place of abode; and not file a joint return. Back to top.
Federal Insurance Contributions Act (FICA)
The taxes imposed under this law fund social security. The employer is required to match the 6.2% social security tax rate imposed on the employee's first $84,900 of taxable wages as well as the 1.45% Medicare tax rate imposed on all of the employee's taxable wages. No credits or withholding exemptions are permitted for the calculation of FICA taxes. When there is more than one employer, each must withhold FICA tax from the employee up to the taxable wage base.
Federal Insurance Contributions Act (FICA) - Medicare
Employee |
1.45% on all wages |
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Employer |
1.45% on all wages |
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Self Employed |
2.9% on net earnings |
Federal Insurance Contributions Act (FICA) - Old Age, Survivors, and Disability Insurance (OASDI)
Employee |
6.2% on first $84,900 of wages |
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Employer |
6.2% on first $84,900 of wages |
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Self employed |
12.4% on first $84,900 of net earnings |
Official IRS publications Requires Adobe Acrobat Reader (Download)
Pub 15 Circular E Employer Tax Guide
Pub 15T New withholding tables for 2004
Filing or Marital Status (Form W-4)
Single, Married Filing Jointly, Married Filing Separately, Head of Household and Exempt
Employees must indicate their status on, the employer must withhold according to the correct employee table. Back to top.
A garnishment is a court action initiated by a creditor in an effort to obtain a part of an employee's earnings before the earnings are turned over to the employee. Back to top.
Wages, before necessary deductions and taxes have been withheld. Back to top.
Net Pay
Also known as Take Home Pay, it is income after necessary deductions and taxes have been withheld. Back to top.
An employee who receives cash tips of $20 or more in a month must report them to his employer by the 10th day of the following month. Employers are subject to FICA taxes on the reported tip income.
If a tipped employee also earns regular wages, the amount to withhold on tips should be figured as if the tips were a supplemental wage payment. If income tax was withheld from regular wages you may withhold on the tips at a flat 27% rate or you may add them to the regular wages and withhold as if the total were a single wage payment. If income tax was not withheld from regular wages, the 27% supplemental rate may not be used. Back to top.
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