Income Tax Withholding Chapter 4

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Questions and Answers

What does the term 'wages' include?

Overtime pay
Commissions only
Only base salary
Total compensation paid to employees for services (correct)

What types of employee compensation are subject to withholding?

Wages and salaries, vacation allowances, supplemental payments, bonuses and commissions, taxable fringe benefits, tips, cash awards

What are fringe benefits?

Additional employee benefits paid for by the employer

What is flexible reporting?

Allows employers to use any basis as the time period for payment of noncash fringe benefits Signup and view all the answers

What are nontaxable fringe benefits?

Services provided at no additional cost, qualified employee discounts, working condition fringes, use of on-premises athletic facilities, reduced tuition for education, job-placement assistance Signup and view all the answers

What is a de minimis fringe benefit?

Any property or service the value of which is so small that accounting for it would be unreasonable or impractical Signup and view all the answers

How may tip allocation be made?

Hours worked, gross receipts, good faith agreement Signup and view all the answers

What is an accountable plan?

An employer's reimbursement plan requiring documentation for expenses Signup and view all the answers

What is a nonaccountable plan?

An employer's business expense reimbursement plan that does not meet certain requirements Signup and view all the answers

What are pretax salary reductions?

Withholdings from gross pay that reduce the amount of pay subject to federal income tax Signup and view all the answers

What is a cafeteria plan?

An employee benefit program that allocates a certain amount of money to each employee to spend on benefits Signup and view all the answers

What benefits are included in a cafeteria plan?

Accident and health insurance, health savings account, group-term life insurance, dependent care assistance Signup and view all the answers

What benefits cannot be included in a cafeteria plan?

Transportation fringe benefits, educational assistance, scholarships and fellowship grants Signup and view all the answers

What is a flexible spending account?

Employee-controlled pretax earnings set aside for eligible expenses Signup and view all the answers

What is a health savings account?

A tax-advantaged personal savings account for medical expenses Signup and view all the answers

What is an archer medical savings account?

Individual accounts set up by self-employed individuals for medical expenses Signup and view all the answers

What is a defined contribution plan?

A pension plan that establishes the basis for employer contributions Signup and view all the answers

What is a tax-deferred retirement account?

Accounts allowing employees to contribute from their wages, reducing taxable income Signup and view all the answers

What is a 401k plan?

A tax-deferred investment and savings plan acting as a personal pension fund Signup and view all the answers

What is a Section 403(b) plan?

A plan for employees of tax-exempt organizations Signup and view all the answers

What is a Section 457(b) plan?

A plan for employees of state and local governments and certain non-profits Signup and view all the answers

What is a Simple Plan?

A plan for small employers allowing employee contributions towards retirement Signup and view all the answers

What is an Individual Retirement Account (IRA)?

A qualified retirement plan providing individuals a deferred federal income tax benefit Signup and view all the answers

What is a Roth IRA?

A personal savings plan with tax-free earnings, not tax-deductible contributions Signup and view all the answers

What is a withholding allowance?

An allowance claimed on Form W-4 used to calculate income tax withholding Signup and view all the answers

What is a personal allowance?

A deduction allowed in computing taxable income, also known as a personal exemption Signup and view all the answers

What is a special withholding allowance?

Allowance claimed by employees so wages below income tax level are not withheld Signup and view all the answers

What is Form W-4?

Used to compute the amount of income tax to withhold from employees' wages Signup and view all the answers

What is Form W-4P?

Withholding Certificate for Pension or Annuity Payments Signup and view all the answers

What is Form W-4S?

Request for Federal Income Tax Withholding From Sick Pay Signup and view all the answers

What is Form W-4V?

Voluntary Withholding Request for federal income tax on government payments Signup and view all the answers

What is the percentage method for withholding?

A method using Tables of Allowance Values and Percentage Method Withholding Table Signup and view all the answers

What is the wage-bracket method?

A method to determine withholding from an employee's gross pay based on wage-bracket tables Signup and view all the answers

What is a standard deduction?

An amount used to reduce an individual's adjusted gross income for tax computation Signup and view all the answers

What is quarterly averaging?

Method estimating an employee's average wages for tax withholding purposes Signup and view all the answers

What is annualizing wages?

Method of determining withholding by multiplying one payroll period's wages by the number of periods in the year Signup and view all the answers

What is part-year employment?

A method for calculating the withholding of federal income tax from an employee's pay Signup and view all the answers

What are supplemental wage payments?

Additional compensation such as vacation pay, bonuses, and commissions Signup and view all the answers

What is Gross-up?

An IRS-approved formula to determine taxable gross payment Signup and view all the answers

What is a Wage and Tax Statement?

A form showing gross earnings, FICA taxes withheld, and income taxes withheld Signup and view all the answers

What is Form W-2?

A summary of the income earned during the year and the taxes withheld Signup and view all the answers

What is Form W-2C?

Corrected Wage and Tax Statement Signup and view all the answers

What is Form W-3?

Transmittal of Wage and Tax Statements for verifying W-2s Signup and view all the answers

What is Form W-3c?

Transmittal of Corrected Wage and Tax Statements Signup and view all the answers

What is Circular E?

Employer's Tax Guide sent out prior to the new year Signup and view all the answers

What is an information return?

Used to report compensation paid to individuals who are not employees Signup and view all the answers

What is Form 1096?

Annual Summary and Transmittal of U.S. Information Returns Signup and view all the answers

What is backup withholding?

Required withholding from an investment account due to failure to provide a tax ID number Signup and view all the answers

What is Form 945?

Annual Return of Withheld Federal Income Tax for non-payroll items Signup and view all the answers

What is Form 4419?

Application for Filing Information Returns Electronically Signup and view all the answers

What are the three different methods of withholding?

Full taxation, leftover taxation, reciprocity Signup and view all the answers

What is full taxation?

Both resident's state and work state calculate taxes without any credits Signup and view all the answers

What is leftover taxation?

Pay full tax to the work state, then pay the rest to the resident state Signup and view all the answers

What is reciprocity withholding?

Withhold only for the work state or resident state depending on agreements Signup and view all the answers

What are periodic withholding returns?

Used to report wages paid and state tax withheld during the reporting period Signup and view all the answers

What is a reconciliation return?

Compares total amount of state tax paid with amounts declared withheld Signup and view all the answers

What are Annual Statements?

Given to employees showing amount of wages paid during the year and state tax withheld Signup and view all the answers

What are Information Returns?

Used to report payments to individuals not subject to withholding Signup and view all the answers

What are the four main types of state income tax returns?

Periodic withholding returns, reconciliation returns, annual statements, information returns Signup and view all the answers

Study Notes

Income Tax Withholding Overview

Wages encompass total compensation for employee services.
Employee compensation subject to withholding includes salaries, bonuses, and taxable fringe benefits.

Fringe Benefits

Fringe benefits offered by employers cover various perks such as vehicles, travel discounts, and club memberships.
Nontaxable fringe benefits consist of services at no extra charge, qualified discounts, and educational assistance.

Plans and Accounts

An accountable plan requires employees to provide documentation for expense reimbursements, exempt from tax withholding.
Nonaccountable plans do not meet documentation requirements and result in taxable reimbursement.

Tax-Advantaged Accounts

Flexible spending accounts allow employees to set aside pretax earnings for eligible expenses.
Health savings accounts are tax-advantaged accounts meant exclusively for medical expenses, tied to a high-deductible insurance plan.
Individual retirement accounts (IRAs) provide deferred tax benefits for retirement savings.

Withholding Allowances and Certificates

Withholding allowances, claimed on Form W-4, determine how much tax to withhold from paychecks.
Form W-2 summarizes employee earnings and tax withheld for the year.

Tax Calculation Methods

Methods for calculating tax withholding include the percentage method (using allowance values) and wage-bracket method (based on specific pay periods).
Annualizing wages involves multiplying pay by the number of periods to determine total annual withholding.

Reporting Requirements

Employers use various forms to report withheld taxes, including Form 945 for non-payroll items and Form 1096 for transmitting information returns.
Information returns help the IRS verify taxpayer income, particularly for non-employees.

Withholding Methods Based on State Guidelines

Full taxation involves calculating taxes from both the work and resident states without credits.
Leftover taxation applies full tax to the work state and additional to the resident state.
Reciprocity withholding allows for tax withholding based on agreements between states to avoid double taxation.

Annual Statements and Reconciliation

Annual statements inform employees about total wages and taxes withheld.
Reconciliation returns compare total state taxes paid with amounts declared withheld from wages.

Key Forms and Guidelines

Circular E serves as a tax guide for employers, providing essential withholding information before the new year.
Form W-4P is for pension payments, while Form W-4S relates to sick pay tax withholding.
Form W-4V is used for voluntary withholding on government payments.

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Test your knowledge on Chapter 4 concerning income tax withholding. This quiz covers key terms such as wages, employee compensation, and fringe benefits. Perfect for students and professionals seeking to understand compensation and tax obligations.