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Posted by R. C. White on May 29, 2008, 10:20 pm
Please log in for more thread options Hi, John.
> [As I understand what happens for deductions like taxes: your year-to-date
> gross is computed, then the tax you would owe on that ytd gross is
> computed. Then the tax you've already had deducted year-to-date is
> subtracted from the tax you owe year-to-date to determine how much to
> deduct for this paycheck. Better explanations welcomed.]
I really should let someone more familiar with the current rules and
algorithms handle this, but maybe I can nudge the explanation a little
closer to the actual procedure.
First, note that we are talking only Federal income tax withholding here.
Social Security deductions (also known as FICA, for Federal Insurance
Contributions Act, or OASDI, for Old Age, Survivors and Disability
Insurance) are a straight percentage-of-gross-pay calculation, at least
until you reach the annual limit. State withholding rules are too variable
to discuss in a general national forum like this. And, of course, there's
no way we can deal with 401(k) or other deductions here.
There are two basic approaches to determining the Federal income tax
withholding amount. The first involves simply looking it up in a chart or
"tax table". Use a different chart for each filing status (single, married
filing jointly, etc.) and for each pay period (weekly, bi-weekly,
semi-monthly or monthly), and number of exemptions. Then find the gross pay
amount within brackets. No calculations involved; just find the number in
the chart. No way to simply apply a percentage to gross pay because of the
several non-percentage factors.
The other approach is close to what you said, John. The current month's
gross pay is multiplied by 12 (or 52 or 26 or 24, as appropriate) to
estimate the annual total income. This is reduced by amounts representing
the Standard Deduction and personal exemptions (which is why we have to file
the W-4 form each year to tell our employer how many exemptions we expect to
be entitled to claim this year). This should leave a number representing an
estimate of this year's expected "Taxable Income", which is NOT the same as
Gross Income or even Adjusted Gross Income. Appropriate annual tax rates
are applied to the expected annual Taxable Income to calculate the expected
income tax for the full year. This tax amount is divided by 12 (or 52, 26
or 24) to arrive at the amount to be withheld from the current paycheck.
So there's no way to apply a simple percentage to the current gross pay.
And there's no need to calculate the amount previously withheld and deduct
it from a year-to-date tax amount. Each pay period stands on its on. Even
if you didn't get a pay check until December, the calculation would assume
that you had been paid at that rate for the whole year. (Something like
that year-to-date calculation might be used to fine-tune estimated tax
payments for taxpayers whose income is not from paychecks - interest, rents,
capital gains, etc. - and who must write checks 4 times a year, before
settling the final amount when they file their return next year. But it
does not apply to withholding from paychecks.)
The concepts are not hard, but they are not really intuitive, either. And
my explanation has intentionally glossed over the complications of the
actual calculations. It was always easier to use the withholding tax
tables, until computers (and programmers) got smart enough (and fast enough)
to do all the required arithmetic every week.
As you said, John, the entry for each paycheck is really just a Split
transaction in Quicken. My suggestion is like yours, I think: Make one
entry, then Memorize it and use it again each payday, changing the amounts
each time as necessary. (I would memorize the actual split amounts, not as
percentages.) Not much different from recording interest income, which
varies depending on whether the month has 30 or 31 days. When the pattern
for the entry has been memorized, it takes only moments each time to change
the amounts.
RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Currently running Quicken 2008 Deluxe in Vista Ultimate x64 SP1)
> atd1999 wrote:
>> Hi all,
>>
>> I've been using various versions of Quicken for years, the latest
>> being Quicken Deluxe 2007.
>>
>> As far as I know, I have this setup correctly, but just want to make
>> sure with the experts.
>
> I'm no expert.
>
>> I currently work a job that pays hourly so my checks each week vary
>> slightly. I have a paycheck template setup (my fixed deductions).
>> Each week, I have to enter my gross pay and then enter my tax and
>> 401(k) deductions which change.
>> Am I correct in that there is no way to enter a percent instead of a
>> dollar amount when setting up a paycheck? For example, if I have 10%
>> taken out for 401(k), I have to enter the amount each week because it
>> varies - it would be nice if I could set up the percent (10) and have
>> Quicken figure it out from the gross pay entered. Same for the
>> various federal and state taxes.
>
>> I can't understand why Intuit hasn't
>> added this functionality 20 years down the road (ie, be able to enter
>> a percent of gross pay which Quicken then figures the dollar amount
>> for each deduction).
>
> Reading Intuit's mind is not easy to do. But one reason for not providing
> what you've asked for might be that not all deductions are computed by
> multiplying the current paycheck gross by a percentage. My girlfriend's
> deductions are not always the same from paycheck to paycheck, even when
> her paycheck gross is the same.
>
> [As I understand what happens for deductions like taxes: your year-to-date
> gross is computed, then the tax you would owe on that ytd gross is
> computed. Then the tax you've already had deducted year-to-date is
> subtracted from the tax you owe year-to-date to determine how much to
> deduct for this paycheck. Better explanations welcomed.]
>
> You are correct that there is no way to enter a percent to be applied to
> the paycheck "gross" to compute deductions. But Quicken split
> transactions do have the ability to compute the amounts of individual
> split lines by applying a percentage ... to the "net" amount of the
> transaction. [At it's heart, the transaction created by the Quicken
> Paycheck Wizard is just a Quicken split transaction ... with a "form"
> applied to make it easier to understand and work with.]
>
> You're welcome to setup a test to see if that capability would help you.
>
> [If you already have a test Quicken fileset, use that; if not, backup
> before testing.]
>
> Select one of your existing register paycheck transactions, right-click,
> left-click on "Memorize payee". Answer "Yes" when asked if you want to
> "memorize split payees as percentages".
>
> To test, try manually entering "new" paycheck transactions, providing just
> the payee and the "net" amount of the paycheck (use "net" amounts from
> existing paychecks to make verification easier). Quicken should
> (re-)compute ALL the split lines in the new test transactions, including
> the "gross", based on the "net" amount you provided.
>
> [Transactions created this way will not be displayed in your register
> using the Quicken Paycheck Wizard "form": they will look just like other
> Quicken plain split transactions.]
>
> --
>
> John Pollard
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