Old Town Entertainment has two employees in 2016. Clay earns $3,600 per month an

Question

Old Town Entertainment has two employees in 2016. Clay earns $3,600 per month and Philip, the manager, earns $10,800 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 15 percent of gross earnings for Clay and 20 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.

b. Calculate the net pay for both Clay and Philip for December.

c. Is the net pay the same in March and December for both employees? Why or why not?

d. What amounts will Old Town report on the 2016 W-2s for each employee?

Explanation / Answer

1

Calculation of net pay for both Clay and Philip for March:

Clay

Philip

Gross earnings

$        3,600

$        10,800

Less: Social Security tax

$          (216)

$            (648)

(3600*6%)

(10800*6%)

Less: Medicare tax

$            (54)

$            (162)

(3600*1.5%)

(10800*1.5%)

Net Pay for March

$        3,330

$          9,990

2

Calculation of net pay for both Clay and Philip for December:

Clay

Philip

Gross earnings

$        3,600

$        10,800

Less: Social Security tax

$          (216)

$               -  

(3600*6%)

(See note)

Less: Medicare tax

$            (54)

$            (162)

(3600*1.5%)

(10800*1.5%)

Net Pay for December

$        3,330

$        10,638

(Note: In case of philip the Social Security tax shall not be deducted in December, because the mamimum limit is $110000 Gross earninigs. And till the month of December he would earn 10800*11 =118800. )

3

Net pay the same in March and December for Clay but not for Philip, because in case of Philip the annual earnings(10800*12 = $129600) are more than limit of $110000 for Social security tax.)

1

Calculation of net pay for both Clay and Philip for March:

Clay

Philip

Gross earnings

$        3,600

$        10,800

Less: Social Security tax

$          (216)

$            (648)

(3600*6%)

(10800*6%)

Less: Medicare tax

$            (54)

$            (162)

(3600*1.5%)

(10800*1.5%)

Net Pay for March

$        3,330

$          9,990

2

Calculation of net pay for both Clay and Philip for December:

Clay

Philip

Gross earnings

$        3,600

$        10,800

Less: Social Security tax

$          (216)

$               -  

(3600*6%)

(See note)

Less: Medicare tax

$            (54)

$            (162)

(3600*1.5%)

(10800*1.5%)

Net Pay for December

$        3,330

$        10,638

(Note: In case of philip the Social Security tax shall not be deducted in December, because the mamimum limit is $110000 Gross earninigs. And till the month of December he would earn 10800*11 =118800. )

3

Net pay the same in March and December for Clay but not for Philip, because in case of Philip the annual earnings(10800*12 = $129600) are more than limit of $110000 for Social security tax.)

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