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PROCEDURES:
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Departments should follow these steps to calculate the amount of federal tax withholding on compensation paid to a contract employee (i.e. those employees paid as part time adjunct faculty or student academics).
Please note that withholding for each contract agreement is considered without regard to any other contracts agreements the individual may have at the time - unless the individual’s multiple contract agreements contain the exact same number of days.
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Steps
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Example
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1.
Determine the
monthly pay amount
and the number of days in the contract:
a. Divide the contract amount by the number of payments the individual will receive, or
b. Use the monthly payment amount, if known.
c. Count the days between the contract start and end dates.
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1.
An individual is on a $20,000 contract paid in 5 monthly installments from 8/1/2016 to 12/7/2016. The
monthly pay amount
is $4,000. The number of days in the contract is 129 (31+30+31+30+7)
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2.
Annualize
the monthly pay amount:
a. Divide the number of days in the contract by 365
b. Multiply by 12. This is the
number of periods
in the contract.
c. Multiply the
monthly pay amount
by the
number of periods
in the contract.
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2.
Annualized pay
…
a. 129 ÷ 365 = 0.3534
b. 0.3534 × 12 = 4.2411
c. $4,000 × 4.2411 = $16,964.40
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3.
Subtract the appropriate number of withholding allowance based on the most current submitted W-4 from the
annualized pay
. For tax year 2016, the
withholding allowance amount
can be found in Table 5 from
IRS Publication 15
. One
allowance
equals $4,050. The result is
taxable income
.
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3.
The individual has completed form W-4 as a
single taxpayer
with
one allowance
and no additional withholding.
$16,964.40 - $4,050.00 = $12,914.40
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4.
Find the
taxable income
amount on the appropriate section of the
tax rate table
. Follow the instructions on the table to calculate the
annual tax amount
. The
tax rate table
can be found in Table 7 from
IRS Publication 15
(Dec., 2015).
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4.
$12,914.40 is between $11,525 and $39,750, so the annual
tax amount
is…
$12,914.40 - $11,525.00 = $1,389.40
$1,389.40 × 15% = $208.41
$208.41 + $922.50 = $1,130.91
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5.
Divide the
annual tax amount
by the
number of periods
in the contract, then add any additional withholding. The result is the amount of tax withholding per pay period.
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5.
$1,130.91 ÷ 4.2411 = $266.65
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Additional Examples
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1.
Determine the monthly pay and the number of days in the contract
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1.
Monthly pay = $2,000
Days in Contract = 127 (31+29+31+30+6)
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2.
Annualize
the monthly pay amount:
a. Divide the number of days in the contract by 365
b. Multiply by 12. This is the
number of periods
in the contract.
c. Multiply the
monthly pay amount
by the
number of periods
in the contract.
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2.
a. 127 ÷ 365 = 0.3479
b. 0.3479 × 12 = 4.1753
c. $2,000 × 4.1753 = $8,350.60
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3.
Subtract the appropriate number of withholding allowance based on the most current submitted W-4 from the
annualized pay
. For tax year 2014, the
withholding allowance amount
can be found in Table 5 from
IRS Publication 15
(Dec.,2015). One
allowance
equals $4,000. The result is
taxable income
.
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3.
$8,350.60 - $4,050.00 = $4,300.60
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4.
Find the
taxable income
amount on the appropriate section of the
tax rate table
. Follow the instructions on the table to calculate the
annual tax amount
. The
tax rate table
can be found in Table 7 from
IRS Publication 15
(Dec., 2015).
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4.
$4,350.60 is less than $8,550.00 so no tax will be withheld. If the employee determines that she will owe tax when she completes her tax return, she may request additional withholding on Form W-4.
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1.
Determine the monthly pay and the number of days in the contract
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1.
Monthly pay = $2,000
Days in Contract = 304 (31+30+31+30+31+31+28+31+30+31)
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2.
Determine the annualized pay amount:
a. Divide the number of days in the contract by 365.
b. Multiply by 12. This is the
number of periods
in the contract.
c. Multiply the
monthly pay amount
by the
number of periods
in the contract.
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2.
a. 304 ÷ 365 = 0.8329
b. 0.8329 × 12 = 9.9945
c. $2,000 × 9.9945 = $19,989
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3.
Subtract the appropriate number of withholding allowance based on the most current submitted W-4 from the
annualized pay
. For tax year 2016, the
withholding allowance amount
can be found in Table 1 from
IRS Publication 15
(Dec., 2015). One
allowance
equals $4,050. The result is
taxable income
.
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3.
$19,989 - $4,050 = $15,939
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4.
Find the
taxable income
amount on the appropriate section of the
tax rate table
. Follow the instructions on the table to calculate the
annual tax amount
. The
tax rate table
can be found in Table 7 from
IRS Publication 15
(Dec., 2015).
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4.
$15,989 is between $8,600 and $27,050 so the
annual tax amount
is…
$15,939 - $8,550 = $7,389.00
$7,389 x 10% = $738.90
$=738.90
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5.
Divide the
annual tax amount
by the
number of periods
in the contract, then add any additional withholding. The result is the amount of tax withholding per pay period.
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5.
$738.90 ÷ 9.9945 = $73.93
$75.93 + $100.00 = $173.93
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DEFINITIONS:
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Percentage Method
– method prescribed by the IRS based on tables provided by the IRS for withholding calculation purposes for Federal taxes
Annualized pay
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How much the payee would receive if the payment was for an entire year
Number of periods
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The number of months, and fractions of a month, in a contract
Monthly pay amount
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The amount a payee will receive each monthly paycheck during the contract period
Withholding allowance amount/allowance
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An amount equal to one personal exemption for the current tax year
Taxable income
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Total income, less total withholding allowances and before tax deductions (if any)
Tax rate table
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A table published annually by the IRS to assist with determining tax liabilities or withholding
Annual tax amount
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The total amount of tax that would be withheld if the payee received the payment for an entire year
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