Page 204 - Essentials of Payroll: Management and Accounting

Payr oll Taxes and Remittances
amount from an employee’s base wage that corresponds to the number
of withholding allowances taken, multiply by a base tax rate, and then
reduce the tax rate by a fixed amount to arrive at the income tax.(Note
that these tables do not include the Social Security or Medicare taxes, as

was the case in Exhibit 7.2.) Using Alternative 2 in Exhibit 7.3, subtract
a dollar amount from an employee’s base wage that corresponds to the
number of withholding allowances taken, reduce the taxable wage by a
fixed amount, and then multiply by a base tax rate to arrive at the
income tax. Either method results in an identical income tax.
Example. The Humble Pie Company’s baking division is switching
to an in-house computer-based payroll processing system and wants to

ensure that both IRS formula tables contained within it are correctly
calculating income tax withholdings. As a baseline, they use the $65.57
withholding that was calculated for Storm Dunaway in the previous
example. By netting out the 6.2 percent Social Security and 1.45 per-
cent Medicare taxes that were included in that figure, they arrive at a
baseline income tax of $30.23.
Using the formulas listed under Alternative 1 for a weekly pay peri-
od for a single person in Exhibit 7.3,they first subtract $57.69 from Ms.
Dunaway’s gross pay for each withholding allowance claimed, which

reduces her gross income for calculation purposes to $288.93. They
next multiply this amount by 15 percent and then subtract $13.30 from
it, as specified in the table. This results in a calculated income tax of
$30.04, which is substantially the same figure found under the wage
bracket method.
They then switch to the formulas listed under Alternative 2 for a
weekly pay period for a single person in Exhibit 7.3, which requires the

same deduction of $57.69 from Ms.Dunaway’s gross pay for each with-
holding allowance claimed, once again resulting in gross pay of $288.93.
Under this approach, they subtract $88.67 from the gross pay to arrive

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