Todd Thompson’s weekly gross earnings for the week ended May 23 were $1,400, and his federal income tax withholding was$247.90. Assuming the social security rate is 6% and Medicare is 1.5% of all earnings, what is Thompson’s net pay?

Marvin Turner was discussing summer employment with Tina Song, president of Motown Construction Service:

Tina: I’m glad that you’re thinking about joining us for the summer. We could certainly use the help.

Marvin: Sounds good. I enjoy outdoor work, and I could use the money to help with next year’s school expenses.

Tina: I’ve got a plan that can help you out on that. As you know, I’ll pay you $14 per hour, but in addition, I’d like to pay you with cash. Since you’re only working for the summer, it really doesn’t make sense for me to go to the trouble of formally putting you on our payroll system. In fact, I do some jobs for my clients on a strictly cash basis, so it would be easy to just pay you that way.

Marvin: Well, that’s a bit unusual, but I guess money is money.

Tina: Yeah, not only that, it’s tax-free!

Marvin: What do you mean?

Tina: Didn’t you know? Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn’t know about the income—hence, it’s the same as tax-free earnings.

a. Why does Tina Song want to conduct business transactions using cash (not check or credit card)?

Bella Chen’s weekly gross earnings for the week ended October 20 were $2,600, and her federal income tax withholding was$554.76. Assuming the social security rate is 6% and Medicare is 1.5% of all earnings, what is Chen’s net pay?

A borrower has two alternatives for a loan: $\left(\text{1}\right)$ issue a $240,000, 60-day, 8$\left(2\right)$issue a$240,000, 60-day note that the creditor discounts at 8%.

a. Calculate the amount of the interest expense for each option.

Ehrlich Co. began business on January 2, 2013. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in 2014, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.

None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5%. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:

Instructions

1. Calculate the amounts to be reported on each employee’s Wage and Tax Statement (Form W-2) for 2013, arranging the data in the following form:

$$\begin{array}{lcccc} \textbf{}&\textbf{Gross}\hspace{10pt}&\textbf{Federal Income}\hspace{10pt}&\textbf{Social Security}\hspace{10pt}&\textbf{Medicare}\hspace{10pt}\\ \textbf{Employee}\hspace{10pt}&\textbf{Earnings}\hspace{10pt}&\textbf{Tax Withheld}\hspace{10pt}&\textbf{Tax Withheld}\hspace{10pt}&\textbf{Tax Withheld}\hspace{10pt}\\\hline \end{array}$$

2. Calculate the following employer payroll taxes for the year: (a) social security; (b) Medicare; (c) state unemployment compensation at 5.4% on the first $10,000 of each employee’s earnings; (d) federal unemployment compensation at 0.8% on the first$10,000 of each employee’s earnings; (e) total.