Question

Sky Co. employed Tom Mills in Year 1. Tom earned $5,900 per month and worked the entire year. Assume the Social Security tax rate is 6 percent for the first $110,000 of earnings, and the Medicare tax rate is 1.5 percent. Tom’s federal income tax withholding amount is $910 per month. Use 5.4 percent for the state unemployment tax rate and .6 percent for the federal unemployment tax rate on the first $7,000 of earnings per employee. Required a. Answer the following questions.

a1. What is Tom’s net pay per month?

2. What amount does Tom pay monthly in FICA payroll taxes?

3. What is the total payroll tax expense for Sky Co. for January Year 1? February Year 1? March Year 1? December Year 1?

b. Assume that instead of $5,900 per month Tom earned $9,400 per month. Answer the following questions.

1. What is Tom’s net pay per month?

2. What amount does Tom pay monthly in FICA payroll taxes?

3. What is the total payroll tax expense for Sky Co. for January Year 1? February Year 1? March Year 1? December Year 1?

Answer 1

a-1)The Total earning for the year : 5900*12= 70800 which is below the FICA social security limit of 110000 thus all of the earnings are subject to social security tax.

Gross earnings		5900
Less:
FICA-social security (5900*6%)	354
FICA-Medicare (5900*1.5%)	88.5
Federal income tax withholding	910
Total withholdings		(1352.5)
Net pay per month		4547.5

a-2) Tom pay monthly in FICA payroll taxes =FICA-social security+FICA-Medicare

                  = 354+88.5

                    = $ 442.5

a-3)

	Jan	Feb`	Mar	Dec
FICA-social security	354	354	354	354
FICA-Medicare	88.5	88.5	88.5	88.5
state unemployment tax	5900*5.4%= 318.6	1100*5.4%= 59.4	0	0
Federal unemployment tax	5900*.6%= 35.4	1100*.6%= 6.6	0	0
Total payroll tax expense	796.5	508.5	442.5	442.5

For month of Feb ,Earnings subject to unemployment tax will be 7000 maximum limit- 5900 already taxed in Jan = 1100

b)The Total earning for the year : 9400*12=112800 which is below the FICA social security limit of 110000 .

So for first 11 months ,all Earnings are subject to FICA -social security (9400*11= 103400)and for month of December earnings subject to FICA= 110000-103400= 6600

	Jan -Nov	Dec
Gross earnings	9400	9400
Less:
FICA-social security	(9400*6%)=564	6600*6%= 396
FICA-Medicare	(9400*1.5%)=141	9400*1.5%=141
Federal income tax withholding	910	910
Total withholdings	(1615)	(1447)
Net pay per month	7785	7953

2)Tom pay monthly in FICA payroll taxes   =FICA-social security+FICA-Medicare

                          = 564 +141

                             = 705

3)

	Jan	Feb`	Mar	Dec
FICA-social security	564	564	564	396
FICA-Medicare	141	141	141	141
state unemployment tax	7000*5.4%= 378	0	0	0
Federal unemployment tax	7000*.6%= 42	0	0	0
Total payroll tax expense	1125	705	705	537