Gross pay is the total amount an employee earns before taxes are deducted. Employers are required to deduct federal withholding tax, social security tax, and Medicare tax from employees' paychecks. Social security tax pays for retirement benefits and Medicare tax pays for health insurance. The amount of federal withholding tax deducted is determined using tax tables that consider the employee's marital status, number of exemptions claimed, and pay frequency.

2.  Gross Pay is the total amount an employee
earns
 Gross Pay is NOT the amount an employee’s
paycheck is written for. Why? TAXES
 All employers in the U.S. are required to
deduct at least 3 taxes from employees
◦ Federal Withholding Tax
◦ Social Security Tax
◦ Medicare Tax
 Some states also require additional taxes
(Michigan requires Michigan Withholding Tax)

5.  Based on marital status and allowances
claimed
 Employee reports marital status and
allowances on Form W-4
◦ Single persons tax rate is higher than Married
◦ The more allowances claimed, the less tax deducted
◦ General rule—you can claim an allowance for every
person you legally support (family of 4—4
allowances)
 When you hear that someone has gotten a tax
refund, this is the tax being refunded

6.  Federal government provides charts for
employers to use to figure out tax to deduct
 Must know how often employees are paid
◦ Weekly, Biweekly
◦ Semimonthly, Monthly
◦ Separate chart for each time frame
◦ Separate chart for Married and Single
 Tax tables are provided online
◦ Circular E (pages 38-57 for 2012)
◦ Also called Publication 15

7. Married, 2 Allowances, $865 weekly gross pay = _________
Married, 0 Allowances, $950 weekly gross pay = _________

8. Single, 2 Allowances, $865 weekly gross pay = _________
Single, 0 Allowances, $950 weekly gross pay = _________

9.  Federal Insurance Contribution Act (FICA)
passed in 1935
 Provides retirement funds when an employee
reaches age 62, or becomes disabled, and a
health insurance program after an employee
reaches age 65
 Social Security pays for retirement funds and
disability
 Medicare pays for health insurance

10.  Deductions are taken out of current
employees to pay for current retirees. Can
you foresee the problem with this?
 2011-2012 Congress changed the rate to
4.2% to give a break to employees
 For these assignments, we will use 6.2% of
earnings because that was the traditional rate
and WILL BE the Social Security tax rate again
in 2013

11.  Deductions are taken out of current
employees to pay for current retirees health
care. Can you foresee the problem with this?
 The current tax rate for Medicare is 1.45% of
total earnings