Withholding Taxes

Actual or Constructive Payment Actual Payment Cash or Check Given to employee on payday Constructive Payment Date when wages are made available to the employee Wages are available without substantial limitation or restriction Mailed checks are not considered constructive payment Date on the check or file is not considered constructive payment Payment is the date when withholding or deposit is triggered

Social Security Numbers 9-digit number XXX-XX-XXXX Randomization is used for issuance as of June 2011 Prior issuance was based on geography Invalid SSN Issuances None begin with the number “9” Positions 1 – 3 will not have “666” or “000” Positions 4 – 5 will not have “00” Positions 6 – 9 will not have “0000” SSN 123-45-6789 does not exist

Application for Social Security Card Form SS-5 submitted to Social Security Administration (SSA) Give SS-5 to employee if they do not have a social security card Verification of birth records database done by SSA Social security card normally issued at birth Name changes Do not change name in payroll system until a new card has been received Alien issues Can be delayed due to new security procedures Social security number cannot be required as right to work

Verifying Social Security Numbers Up to $270 for each incorrect name and SSN match on Form W-2 Online – SSN Verification Service Employer registration to use SSNVS at Business Services Online of SSA website SSNVS returns a verification code indicating reason for failure. No code returns indicated information was verified as accurate. Social security card may be photographed to make sure properly recorded on all forms Social security number is required even if there’s no withholding

Employee Withholding Allowance Certificates Form W-4 Electronic form can be used Required on or before first day of work Special nonresidents alien requirements (refer to Section 14) Exemption must be claimed each year - new forms by February 28th Used 2017 form since 2018 form was released late Invalid if writing below dotted line IRS lock letter - indicates required withholding allowances - employee cannot change until release is received from IRS No Form W-4 received, use single and 0 allowanced

Employee Withholding Allowance Certificates Form W-4P Electronic form can be used Used for pension and annuity payments (retirees) No form W-4P received, use married and 3 allowances Form W-4S Third-party sick pay payments Minimum amount that can be withheld is $20 per week and employee must receive at least $10 State withholding certificates - state specific must be used

Federal Income Tax Withholding Calculation is based on the following information: Payroll frequency Employee’s wages subject to federal income tax Martial status claimed on Form W-4 Personal allowances claimed on Form W-4 Additional withholding notated on Form W-4 Withholding Tables and Rates can be found in IRS Publication 15, Circular E, Employer’s Tax Guide Revised each year

Federal Income Tax Withholding Wages paid / received by employee incurs a withholding liability Various withholding methods Wage-bracket method Percentage method Annualized wages method Average estimated wages method Cumulative wages method Part-year employment withholding method Supplemental wages method

Wage-Bracket Withholding Method Single and married tables for each payroll period Table amounts are expressed in whole dollars

Percentage Withholding Method Determine allowances from Form W-4

Percentage Withholding Method Single and married tables for each payroll period Read table from right to left

Percentage Withholding Method Employee is paid biweekly and has claimed married and 3 allowances on the Form W-4. Federal income taxable wages equal $2,300. Calculate the federal income tax withholding? Allowances: $159.60 x 3 = $478.80 $2,300.00 - $478.80 = $1,821.20 (locate tax bracket) $1,821.20 - $1,177.00 (excess wages) = $644.20 $644.20 x 12% = $77.304 $77.30 + $73.30 = $150.60

Annualized Wage Withholding Method Used by many automated payroll systems Withholding is calculated based on an annual payroll period and then divided among the actual payroll periods using the following steps: Multiply the employee’s federal income taxable wages for a payroll period times the number payroll periods in the calendar year. Determine the amount that would be required to be withheld from the result based on the annual payroll period using the percentage method. Divide the amount of withholding determined by the number of payroll periods in the calendar year to reach the withholding amount for each payroll period.

Average Estimated Wage Withholding Employers may withhold based on an employee’s estimated wages for the quarter. The employer must make adjustments each quarter to bring the withholding on estimated wages in line with actual wages paid. Estimate the employee’s total federal income taxable wages for the quarter. Divide the result by the number of payroll periods during the quarter to determine the estimated average wage. Calculate the tax to be withheld from each estimate average wage payment as if that were the amount actually paid and withhold tax from actual payment.

Cumulative Wage Withholding Method Useful for adjusting withholding amounts for employee whose wages are inconsistently high and low. Employee must request in writing. In effect until revoked. Determine the employee’s YTD federal income taxable wages, including the current payroll period to be paid. Divide the result by the number of payroll periods that have already been paid, including the current payroll period. Calculate the amount of withholding that would have been applied to each wage payment using the percentage withholding method. Multiply the result by the number of payroll periods that have already been paid, including the current payroll period. Subtract amount previously withheld from amount - net is amount to withhold.

Part-year Employment Withholding Employee must request in writing. Only good for the calendar year. Applies when the employee has a term of continuous employment lasting no more than 245 days. Determine the employee’s YTD federal income taxable wages, including the current payroll period to be paid. Add the number of previously payroll periods in the current term of employment to the number of payroll periods occurring between the employee’s last employment and current employment. Divide YTD federal income taxable wages results by the payroll period result to get average wage per payroll. Calculate the withholding tax on each average wage payment. Multiply the withholding tax result by the payroll period result. Subtract amount previously withheld from amount - net is amount to withhold.

Supplemental Wage Withholding All non regular wages are supplemental wages Combined wage payments (regular + supplemental) allowed Optional flat withholding rate 22% = $1,000,000 or less accumulative Highest tax bracket (37%) Over $1,000,000 accumulative Employee claiming exempt on Form W-4? Supplemental wage withholding should not be withheld Watch your state supplemental rates!

Supplemental Wage Withholding IRS guidance on specific payments Commissions paid at fixed intervals with no regular wages paid to the employee Commissions paid at fixed intervals in addition to regular wages paid at different intervals Draws paid in connection with commissions Commissions paid to the employee only when the employee’s accumulated commission credit reaches a specific numerical threshold Signing bonus paid prior to the start of employment Severance pay plan paid after the termination of employment Lump sum payment of accumulated annual leave Annual payments of vacation and sick leave Sick pay paid at a different rate than regular pay

Backup Withholding Usually withheld on vendor payments (Accounts Payable) Businesses are required to withhold 24% for federal income tax When Form W-9 not received with tax identification number (TIN) When IRS notifies business of underreported income When business receives B Notice from IRS IRS e-services offers online TIN matching (similar to SSN matching) Reported on Form 1099-MISC Payroll may have to assist Accounts Payable in the calculation of the tax withholding and/or handling the tax payment

Advance Earned Income Credit Employers are required to notify employees with wages less than $54,884 that they may be eligible to claim earned income credit on their personal tax return. Normally handled by providing the employee Form W-2, Copy B. Some states require additional notification (e.g. Texas, Louisiana). Written notice must have exact working of IRS Notice 797.

Social Security / Medicare Taxes Required by the Federal Insurance Contributions Act (FICA) More than one employer in the year are treated separately. Employee files for overage (if applicable) on their personal tax return Social security tax Old Age and Survivor’s Insurance (OASI) Disability Insurance (DI) Employer matches the employee withholding Tax rate is 6.2% on taxable wages up to taxable wage base Taxable wage base is $128,400

Social Security / Medicare Taxes Provides health insurance program (HI) Employer matches the employee withholding Tax rate is 1.45% on taxable wages Additional Medicare tax No Employer match only employee withholding Tax rate is .9% on taxable wages exceeding $200,000 Liability for additional Medicare tax is the employee’s responsibility Actual liability determined by filing status on their personal tax return

Common Paymaster A group of related corporations that pay wages to employees working for two or more of the corporations. Responsible for all payroll records, withholding, depositing, reporting Concurrent employment can exist but not necessary Determine tax withholdings and employment taxes as if only one employer Limits apply to all payments made by common paymaster

Railroad Retirement Tax Act A national railroad retirement program established in 1937 Subject to a separate and distinct system of employment taxes Employment taxes Tier I taxes 6.2% for railroad retirement (RRTA) up to wage base of $128,400 (employer matched) 1.45% for Medicare hospital insurance (employer matched) .9% for additional Medicare tax on compensation over $200,000 Tier II taxes Based on average account benefits ratio Wage base of $95,400 Employer tax rates range between 8.2% and 22.1% Employee tax rates range between 0% and 4.9%

DO YOU KNOW??? How long must the employer keep an employee’s Form W-4 on file? What does the Form W-4 tell the employer? What is backup withholding? What is the employer social security tax rate for wages? Explain the principle of constructive payment. Why is the date of actual or constructive payment of wages important?