Deduction Withholding Order Contract Payoffs ~Paying To Annuity ~Adjusting Tax Withholdings Severance Payments ~Paying To Annuity

Order in which deductions are processed This chart shows the order that the system will process deductions. The chart is located in the USPS Reference manual at the end of the USPSCN chapter.

Contract Payoff Employee Requests Money Go into Annuity I am going to go over a common example of when the deduction processing order can get confusing. In this example we will be paying off an employee’s contract with the employee requesting that the money go into an annuity.

Payoff Contract Example Brian Able is leaving the district and the contract is being paid off. Brian wants as much of the payment to go to a 403b annuity as possible. Below is the payoff of accrued wages for Brian in UPDCAL_CUR.

Reminder Withholdings Annuity Withholding Full payment can NOT go to annuity USPS can only create zero payroll checks for full docks Withholdings Retirement annuities are withheld first by the system (590/591) withholding = 526.24 5,262.37 minus 526.24 = 4,736.13 Annuity Withholding In our example, since 4,736.13 is left after the retirement deduction, we could put most of it into the annuity The employee MUST receive a small amount

PAYRPT ** WARNINGS ** 003 & 692 Missed deductions On this PAYRPT you can see that we withheld 4,736.12 on the annuity and the employee will only receive a net of 1 penny. But you can see that there are two warnings for missed deductions for the 003 (city) and 692 (Medicare) records.

Federal and State After the annuity, the Federal and State tax are calculated Since the annuity affects the taxable amount, nothing is calculated to withhold Per the withholding order chart, after the annuity, the Federal and State tax are calculated next. Since the annuity amount affects the taxable amount for Federal and State tax nothing can be calculated to withhold.

City DEDNAM Record Looking in DEDNAM at the city tax record we can see that the city doesn’t honor the 403b annuity that we processed. Therefore, the full gross is taxable to the city. This is why a warning was received on PAYRPT. If the city does not honor the annuity being processed then tax will be calculated. You can see that this city tax does not honor the 403b annuity type, therefore, the system tries to calculate the tax.

Calculate City Taxes City tax is calculated on the full gross unless the employee has an annuity withholding that is honored by the city. In this situation, the full gross is taxed 5,262.37 x 1.5% = 78.94 Medicare is also taxed on the gross so the system also calculates the tax 5,262.37 x 1.45% = 76.30 Gross = 5,262.37 Minus 526.24 (retirement) Minus 4,736.12 (annuity) Net = .01 003 Missed (78.94) 692 Missed (76.30)

Can I ignore the warnings? If you ignore the errors you can process the payroll but you will receive a fatal error on W2PROC of Medicare amount does not equal 1.45% of Medicare Gross You will need to collect the money from the employee and manually update the Medicare deduction record. The employee will owe tax to the city when they file Adjust to Withhold Taxes The other option is to adjust the annuity amount in order to withhold the taxes Problem with this is that Federal and State are withheld before city and Medicare If we subtract out City and Medicare from the calculation there is 4,580.89 remaining If we setup the annuity for 4,580.88, you will notice that Federal and State deductions are now withheld but Medicare is now missed.

The Medicare (692) was still missed because Federal and State were now deducted because they are calculated before Medicare

Calculation to withhold taxes If you add the City and Medicare taxes together it totals 155.24 Looking at the Federal Tax withholding tables in IRS Publication 15 find the minimum tax rate and multiply by it In our example, the minimum tax rate is 10% 155.24 x 10% = 15.52 Decrease the annuity amount by this amount from 4,580.88 to 4,565.36

All of the taxes are now being taken and the employee will receive a net of 7.27

Contract Payoff No Annuity Now we will go over a situation where an employee is being paid off on their contract for a large amount and they do not want the money to go to an annuity.

Adjusting Tax Withholding Large Payoff on contract, accrued wages Not diverting to annuity This is money that would normally be paid over the remaining pays Paying in one lump sum A large payment amount will be taxed at a high Federal and State tax rate due to bi-weekly or semi-monthly pays Recommend new Federal W4 form and State IT4 form from employee to adjust tax rate Can set to specific percentage rate Can use IRS and State Tax tables Consult tax preparer Modify 001 and 002 DEDSCN record to specific percentage Or modify to zero percentage and enter calculated tax in additional withholding field When there is a large payoff on an employees contract to pay accrued wages and the employee is not diverting that money to an annuity, there will be a very high amount withheld for taxes. This is money that would normally be paid to the employee over the remaining pays and is now being paid in one lump sum. This large payment will be taxed at a higher rate than normal due to them being on bi-weekly or semi-monthly pays.

PAYRPT Prior to Updating 001 and 002 DEDSCN records

001 DEDSCN Zero Percentage record and calculated tax

002 DEDSCN Zero Percentage record and calculated tax

PAYRPT After Updating 001 and 002 DEDSCN records

Paying Severance

Paying Severance Limitation in UPDCAL Amount field cannot exceed 9,999.99 Breakdown by using units i.e. $10,000 severance payment enter as 2 units of $5,000 Per IRS Publication 15 (Circular E) Severance is considered supplemental wages Taxed at higher rate

Limitation in UPDCAL

Severance – Paying to Annuity Full payment can NOT go to annuity Enter amount to withhold for annuity less a small amount to pay to employee Don’t forget amounts for taxes/retirement if applicable Place stop dates on any DEDSCN records that should not withhold Severance on Separate Check Create job for severance payment Pay as MIS or TRM pay type on primary job JOBSCN record must have pays and days remaining JOBSCN record equal pays flag must be ‘N’ If the payment is NOT subject to retirement, remove the retirement code in JOBSCN Special pay Use period begin and end date equal to non-work day