How to calculate Federal Tax with Dependent Claim Amount

In this blog I am addressing a frequently asked question we see about how Dynamics GP calculates Federal Tax when Dependent Claim Amount is present.

Dependent Claim Amount began in 2020, W4-instructional blog.

Does Microsoft Dynamics GP calculate tax correctly?

To demonstrate how Dynamics GP calculates Federal Tax with Dependent Claim Amount, I have used the scenario outlined below. You may use this as a guideline to help you back into your specific calculation needs.

Scenario: We are using a Federal Filing Status of Head of Household with a higher WH (HOHHR), claims zero exemption and no tax-sheltered deductions. The following pay transactions included in the pay run is a bi-weekly hourly transaction = $2400.00 gross pay ($30/hr. x 80 hr.)

First, we need to back into the federal tax amount just like we normally do (do not include any dependent claim amounts in the annualized calculation, just back into federal tax without doing anything at all with dependent claim amount). The Dependent Claim calc happens after you have backed into the federal tax for the pay run.

Here is the way to back into federal tax amount on an employee’s pay record for the scenario stated above:

1. All wages are annualized, based on the pay period frequency $2400 x 26 pay periods = $62,400.00 total annualized wages
2. Annualize Deductions that are sheltered from Tax = $0.00
3. Subtract the exemption amount (personal exemption amount $0000.00 x # of exemptions) $62,400.00 – $0.00 = $62,400.00 (This can be found at Administration >> Setup >> System >> Payroll Tax >> Click on Filing Status button >> select the filing status for this scenario)

       4. Subtract all Tax-Sheltered Deductions = $0.00. So, $62,400.00 – $0.00 = $62,400.00 annualized taxable wage. This puts you in the tax table of $6,854.00 at 24% (From Tax Tables).

       5. Now take 62,400.00 annualized taxable wages – 54,225.00 On Excess Over from the table = 8,175.00

       6. Taxable excess $8,175.00 * 24% = 1,962.00 tax amount

       7. Tax Amount $6,854.00.00 + $1,962.00 = $8,816.00 / 26 pay periods = 339.08

Second, now calculate the Dependent Claim Amount after you have backed into the federal tax for the pay run:

1. Take the amount that’s in the Dependent Claim Amount field and divide it by the pay frequency.

       2. In this scenario the pay frequency is bi-weekly; 26 pay periods. So, we’d take whatever is in the Dependent Claim Amount field and divide that by 26.

       3. Then, subtract that result from the federal tax you calculated for the pay run.

       4. Take the amount that’s in the Dependent Claim Amount field and divide it by the pay frequency $3,000 / 26 pay periods = $115.38

       5. Then, subtract that result from the federal tax you calculated for the pay run $339.08 - $115.38 = $223.69 

I hope you find this useful, and happy calculating!

Margi Jandro | Support Engineer | Microsoft Dynamics GP