Old Town Entertainment has two employees in 2016. Clay earns $4,500 per month and Philip, the manager, earns $10,600 per month. Neither is paid extra for working overtime. Assume the Social Security tax rate is 6 percent on the first $110,000 of earnings and the Medicare tax rate is 1.5 percent on all earnings.

Old Town Entertainment has two employees in 2016. Clay earns $4,500 per month and Philip, the manager, earns $10,600 per month. Neither is paid extra for working overtime. Assume the Social Security tax rate is  6 percent on the first $110,000 of earnings and the Medicare tax rate is 1.5 percent on all earnings. The federal income tax withholding is 16 percent of gross earnings for Clay and 21 percent for Philip. Both Clay and Philip have been employed all year.

Required

a.	Calculate the net pay for both Clay and Philip for March.

Explanation:

a.

Clay - March
Gross earnings				$	4,500.00
Deductions:
Federal income tax ($4,500 × 16%)	$	720.00
FICA tax - SS ($4,500 × 6%)		270.00
FICA tax - Medicare ($4,500 × 1.5%)		67.50
Total deductions					(1,057.50	)
Net pay				$	3,442.50
Philip - March
Gross earnings				$	10,600.00
Deductions:
Federal income tax ($10,600 × 21%)	$	2,226.00
FICA tax - SS ($10,600 × 6%)		636.00
FICA tax - Medicare ($10,600 × 1.5%)		159.00
Total deductions					(3,021.00	)
Net pay				$	7,579.00

  
b.

Clay - December
Gross earnings				$	4,500.00
Deductions:
Federal income tax ($4,500 × 16%)	$	720.00
FICA tax - SS ($4,500 × 6%)		270.00
FICA tax - Medicare ($4,500 × 1.5%)		67.50
Total deductions					(1,057.50	)
Net pay				$	3,442.50
Philip - December
Gross earnings				$	10,600.00
Deductions:
Federal income tax ($10,600 × 21%)	$	2,226.00
FICA tax - Medicare ($10,600 × 1.5%)		159.00
Total deductions					(2,385.00	)
Net pay				$	8,215.00

  
c.

Philip’s net pay is different in December because he does not pay FICA Social Security tax in December. His year-to-date earnings exceeded $110,000 in November. However, there is no limit on the FICA Medicare tax. Clay’s net pay is the same for both March and December because his gross earnings do not exceed $110,000 for the year.

d.

	Amount appearing on W-2 for 2016
Clay
Box 1	Wages, tips, and other compensation	4,500.00 × 12	54,000
Box 2	Federal income tax withheld	720.00 × 12	8,640
Box 3	Social security wages	4,500.00 × 12	54,000
Box 4	Social security tax withheld	270.00 × 12	3,240
Box 5	Medicare wages and tips	4,500.00 × 12	54,000
Box 6	Medicare tax withheld	67.50 × 12	810
Philip
Box 1	Wages, tips, and other compensation	10,600.00 × 12	127,200
Box 2	Federal income tax withheld	2,226.00 × 12	26,712
Box 3	Social security wages		110,000
Box 4	Social security tax withheld	110,000.00 × 6%	6,600
Box 5	Medicare wages and tips	10,600.00 × 12	127,200
Box 6	Medicare tax withheld	159.00 × 12	1,908

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