1. Payroll Taxes & 941 Quarterly Tax Returns
Created: by : Lynda McKie, CPP & Presented by: Wanda Blunt, CPP, PHR, SHRM-CP

2. Today’s Agenda Social Security
Employee Withholding Allowance Certificate
Methods of Withholding Federal Income Tax
Advance Earned Income Credit
Social Security & Medical Taxes
State & Local Government Employees
Penalties for Failure to Withhold
State & Local Income Tax Withholding
Questions & Exercise

3. 6.2 Social Security
Social security numbers were originally established to create an account for individual's thereby providing a means for deposits to be made and later accessed through social security retirement benefits. Today social security numbers have expanded to serve a vast array of other organizations as a way of identifying individual's. Employer’s are responsible for gathering and using employee’s social security number for the purpose of reporting wages and taxes. And in fact, may be assessed a penalty of up to $ each by the IRS if they fail to provide the correct name and social security number on an employee’s form W Employees are required to show their social security card to their employer on the first day of work if they have it available. If it is not available, they must provide their name and number to the employer exactly as it is shown on their card and show the card to the employer promptly thereafter. Making copies of the card or using electronic verifying systems can help to ensure that social security numbers are properly transcribed on all employment forms and can reduce the probability of making errors when entering numbers into an organization’s payroll system. ALL employees are required to possess, or apply and obtain a social security number. Remember: that requiring an employee to produce a social security card for 1-9 purposes is illegal. Make it clear to the employee that your request is ONLY for tax withholding and reporting purposes. In addition, the federal courts have ruled that requiring a social security number is NOT regarded as religious discrimination. Please keep in mind when using electronic verifying systems that employer’s are only allowed to verify current or former employees, systems should not be used to verify employment prospects. Guidelines are available when failed verifications result using electronic verification methods. Lastly, employers should never make changes to their payroll system with regard to an employee’s name without verifying that the employee has obtained an updated social security card. Employees can make appropriate changes by filing form SS-5. If an employer permits such changes without verification it can cause benefit issues for the employee and penalties for the employer.

4. Social Security - Aliens
If an employee gets a new social security card to show his or her correct name and social security number after an adjustment to the employee’s alien residence status, the employer should correct its records and show the new information on the employee’s for W-2. If W-2’s were filed for previous years showing the old name and social security number the employer should file one form W-2c to correct the name and the social security number. In addition, you should inform your employee to contact the social security administration office no earlier than 9 months after the form W-2c is filed to make sure the records have been updated.
Even if an employee is exempt form federal income tax withholding or social security and Medicare tax withholding (certain nonresident aliens) the employer must require a social security number from the employee to properly prepare and file information, reports, and statements.

5. 6.3 Employee Withholding Allowance Certificates
Form W-4
Form W-4P
FormW-4S
State Employee Withholding Allowance Certificate
This section discusses the forms that employers, payers of pensions and annuities, and third party payers of sick pay use to determine the proper amount of federal income tax to withhold from wages and other payments.
Form W-4 is used to indicate the amount of federal income tax to withhold from an employee’s wages.
Each employee’s W-4 must be kept on file by the employer.
Each newly hired employee should provide a completed form W-4 to their employer. If an employer does NOT receive this form. They must withhold as if the employee is single with zero allowances.
Verbal or other written instructions can not be used in place of a form W-4.
Those who claim exempt must submit a new Form W-4 by February 15 each year if they wish to claim exempt for the current tax year. If a new form is NOT received the employer must begin withholding as if the employee is single with zero withholding allowances.
Employers must enact a newly hired employee’s form W-4 by the first payroll period ending after the form is filed.
Amended forms filed by current employees must be effective no later than the beginning of the first payroll period ending on or after the 30th day after the form is filed.
Forms remain in effect until a new form is provided by an employee, or the IRS informs the employer to withhold on a different basis (commonly referred to as a lock in letter).
An employer may put an amended form into effect earlier than required. However, if an employee submits an amended form indicating changes that will occur during the next calendar year then the form may NOT be put into effect during the current year.
By December 1st of each year, employers should ask their employees to file an amended form W-4 for the next calendar year IF they know the number of allowances has changed or will change at the beginning of the year.
No resident aliens who are not residents of Canada, Mexico, or the Republic of Korea are allowed only one withholding allowance.
A payroll professional should never advise employees when asked how many allowances he or she should claim; instead you can provide them IRS publication 505.
Spanish versions of form W-4 along with instructions are available and may be used in place of the English version.
Non resident aliens should use line 6 to write the words NON RESIDENT ALIEN or NRA above the dotted line.
Employers must reject form W-4 if:
The form has been altered in any way
If the employee indicates either verbally or in writing that the form submitted contains information that is false
If an employee alters the form to indicate a percentage or flat dollar amount withheld instead of an amount based on the number of allowances.
Please note that although the IRS no longer requires employer’s to send copies of employee W-4’s when if and when the employee claims more than 10 exemptions. Some states still require notifications if a certain number of allowances is claimed. Please see Table 3.8 of APA’s Guide to State Payroll Laws.
If and when an employer receives a lock in letter they must give notice to the employee within 10 days of receipt. If the employee is no longer employed employers must send written notification of that fact to the IRS.
If an employee files a new W-4 form resulting in more withholding than would result under a lock in letter then the employer should withhold based on the new form.
A substitute W-4 developed by the employer may be used IF the employer also provides the tables, instructions, and worksheets contained in the original version in effect at the time.
Employers must retain a copy of each employee’s W-4 whether hard copy or electronic for at least four years.
In most instances federal income tax must be withheld from pension and annuity payments made to retired employees. Unless directed otherwise, payers and plan administrators must withhold certain amounts, depending on whether the payments are periodic, non periodic, or eligible rollover distributions. Retirees can have input into the amount withheld if they file a form W-4P. By completing a form W-4P retirees can:
Elect not to have any income tax withheld (except for payments sent to US citizens or resident aliens outside the US)
Designate a certain number of withholding allowances to be used in calculating the amount withheld and
Indicate an additional dollar amount to be withheld
If form W-4P is not submitted the employer must withhold on periodic pension payments as if the payee is married claiming 3 allowances.
When an employee who is disabled by a non job related illness or injury is being paid sick pay by a third party insurer, no federal income tax will be withheld unless the employee requests it by submitting form W-4S to the third party. The employee uses this form to tell the third party to withhold a flat dollar amount. The minimum amount that can be withheld is $20.00 per week and after withholding the employee must receive at least $ If the payment is smaller or larger than a regular payment, the amount withheld must be changed in the same proportion as the payment.
More than 40 states have a state income state and require withholding from wages to collect it. While many of those states allow employers to use the employee’s federal From W-4 to calculate state income tax withholding, others require that a state withholding allowance form be completed and submitted to the employer. Please see Table 6.1 on pg of APA 2014 edition of the Payroll Source for a complete listing of state requirements.

6. 6.4 Methods of Withholding Federal Income Tax
The IRS allows employers to choose from several different methods for calculating the amount to withhold from an employee’s wages for federal income tax. The most popular methods are: the wage-bracket method and the percentage method. Alternative withholding methods are also available for special needs and situations (for instance: supplemental wages, or cumulative wages). The withholding method chosen by the employer is then applied to wages earned during the payroll period, or frequency with which it pays its employees to determine the amount to withhold.
Wage Bracket Method: When using the wage bracket method the amount to withhold is taken directly from wage bracket tables issued by the IRS in Publication 15 Circular E. There are a few simple steps to take in calculating an employee’s withholding using the wage bracket method:
Find the table that applies to the employee’s payroll period and marital status
Determine the employee’s wages subject to federal income tax withholding
Locate the taxable wages applicable to the employee on the IRS table
Scroll to the right to locate the applicable tax based on the employee’s claimed allowances
Add any extra dollar amount of withholding indicated by the employee
Special instructions will apply if: an employee is claiming more than 10 allowances, you’re using the daily or miscellaneous payroll period tables, you encounter wage payments above the maximum table amount, or for wage payments that are equal to a wage bracket amount
Percentage Method: The percentage method is somewhat more flexible than the wage bracket method and can be used for more different payroll periods, including quarterly, semiannual, and annual. The percentage method tables are also found in Circular E. There are several steps that must be taken in calculating the amount to withhold using the percentage method first:
Find the number of withholding allowances claimed on line 5 of the employee’s form W-4
Move straight across to the column corresponding to the employee’s payroll period to find the value of the withholding allowances claimed by the employee
Determine the employee’s wages subject to federal income tax
Subtract the value of the withholding allowances
Locate the percentage method withholding table for the employee’s payroll period and married status
Use the formula detailed in the table to calculate the withholding tax
Add any extra dollar amount of withholding from line 6 of the employee’s from W-4
Supplemental Wage Payments: Under the regulations an employee’s pay may consist of regular and supplemental wages, and in general, all wages that are not regular wages are supplemental. Examples of supplemental wages include:
Reported Tips
Overtime Pay
Bonuses
Back Pay
Commissions
Special options for tips and overtime pay: Even though reported tips and overtime pay meet the definition of supplemental wages, the regulations give employers the option of treating such payments as regular wages.
The regulations specify if an employee has not received cumulatively more than $1 million in supplemental wages during the calendar year then there are two methods available to an employer with respect to a payment of supplemental wages.
The aggregate method: Under this method the employer calculates the amount of withholding due using the employee’s current W-4 by aggregating the amount of supplemental wages with the regular wages paid for the current payroll period or for the most recent payroll period of the year of payment and treating the aggregate as if it were a single wage payment for the regular payroll period. If the supplemental wages are paid concurrently with wages for the current payroll period, then they must be aggregated with the wages paid for the current payroll period. The employer must use the aggregate method if the optional flat rate method cannot be used.
For example: Employee Ray wins a $1, prize in 2014 for a money – saving suggestion his employer has adopted. Ray’s employer combines the prize with Ray’s regular biweekly federal income taxable wage payment of $1, for the current payroll period for a total of $2, Because the employer does not indicate the two types of payments it must withhold as if Ray received a regular biweekly wage payment of $2, Ray is married and claims 3 withholding allowances on his form W-4. Under the wage bracket method his employer must withhold $ in federal income tax from Ray’s combined wage payment.
Under the flat rate method the employer uses a flat percentage rate of 25% when calculating the amount of withholding. This method can only be used if two conditions are met:
The employer has withheld income tax from regular wages paid to the employee during the same year as the payment of supplemental wages or during the preceding calendar year.
The supplemental wages are either
Not paid concurrently with regular wages (or)
Separately stated on the payroll records of the employer (i.e. on the employees pay stub)
WATCH OUT: if the conditions for using the optional flat rate method are met, then the decision as to which method to use is discretionary with the employer. If the conditions are not met, then the employer must use the aggregate method.
Employers must use a higher flat rate on supplemental wages over $1 million dollars: The mandatory rate is 39.6%. And lastly, please note that some states have their own provisions pertaining to supplemental wages. For more information please see pg and 6-34 of APA’s 2014 edition of the Payroll Source.
Withholding on Pensions & Annuities: Generally, payments from a retirement or deferred compensation plan are subject to federal income tax withholding. The method of withholding depends on the type of payment – periodic or non – periodic. Whatever method is used the amount of withholding cannot exceed the amount of money distributed plus the value of any property distributed. Also, no withholding is required if the distribution consists solely of the employer’s securities and up to $ in cash representing fractional shares.
Periodic Payments: Generally payments from a retirement or deferred compensation plan are considered periodic if they are made over a period of more than one year. Employers and plan administrators must withhold federal income tax from periodic payments as if the payments were wages using one of the allowable withholding methods. The payroll period to be used is equal to the frequency of the payments (i.e... Monthly, quarterly)
Nonperiodic payments: All distributions that are not considered periodic payments are nonperiodic payments. All nonperiodic payments made after December 31, 1992 that are not eligible for rollover to another qualified plan and are at least $ are subject to withholding at a rate of 10% unless the employee files a from W-4P.

7. 6.6 Advance Earned Income Credit
Employees earning less than a certain amount in a year are entitled to the earned income credit or (EIC). The EIC is a tax credit that reduces any taxes owed. Prior to 2011 employees with qualified children who were eligible for the EIC could obtain advance payments of a portion of the credit during the year through decreased federal income tax withholding. To obtain a credit employees has to submit Form W-5. However, effective Jan. 1 of 2011 advance payment of EIC was repealed and is no longer available to employees. Even so, eligible employees can still claim a credit for the EIC when they file their personal income tax return.
Employers are required to supply notification to employees of their possible eligibility for a tax refund as a result of the EIC. To meet these requirements employers may provide employees with:
Copy B of Form W-2 which includes the required EIC statement on the back of the form
Notice 797 (or)
A written statement with the exact wording as Notice 797
Notices should be received by employees by Jan. 31st . Take note * Some states require separate EIC notices (in addition to the federal notification) be sent to employees who are in:
California
Illinois
Louisiana
Maryland
New Jersey
Texas (and)
Virginia
For detailed information on what type of notice is required, how it must be provided, and more please see Table 4.3 of APA’s guide to State Payroll Laws

8. 6.7 Social Security & Medicare Taxes
way more!!
Employers and employees both pay taxes required by the Federal Insurance Contributions Act (FICA) to fund two federal government benefit programs: Social Security & Medicare. Social Security is comprised of Old Age & Survivor’s Insurance (OASI) and Disability Insurance (DI), and Medicare benefits are provided by the Health (HI) program. The employee share of social security and Medicare taxes is withheld from wages and the employer calculates its share, then the employer pays both shares to the federal government. The amount withheld for both social security and Medicare taxes is calculated by applying a fixed tax rate to the employee’s taxable wages. For social security the tax is applied only on wages up to the taxable wage base limit, for 2014 the wage base limit is: $127, Whereas, withholding for Medicare does not have a wage base limit. Currently, both employee and employer pay 6.2% for social security taxes and 1.45% for Medicare taxes. However, after January 2013 employees must pay an additional .9% in Medicare taxes on taxable wages exceeding $200, This is an addition Medicare tax applies to employees ONLY. An employee may NOT request that his or her employer withhold Additional Medicare Tax before the employee’s wages exceed $200, However an employee who anticipates liability for Additional Medicare Tax may submit a new Form W-4 requesting additional income tax be withheld for this reason. In addition, an employer may NOT honor a employee’s request to stop withholding Additional Medicare Tax once their wages exceed $200, The IRS will NOT collect from an employer the amount of Additional Medicare Tax if it fails to properly withhold from employees wages that exceed $200,000.00; the liability will remain with the employee. However, the employer would be become liable for penalties or addition to tax for it’s failure to comply.
Keep in mind: Wages paid by an employer and by a third party need to be aggregated to determine whether the $200, withholding threshold has been met.
When determining the amount of social security and Medicare taxes to withhold and match, employers may round fractions of cents to the nearest cent, but rounding to the nearest dollar is not permitted.
If an employee works for more than one employer during the calendar year each employer is liable for withholding and paying social security and Medicare taxes The earnings from different employers cannot be combined for purposes of determining social security wage base limits. An employee who has had more than the maximum amount of social security tax withheld apply for a refund on his or her personal income tax return for that year. X

9. 6.9 Penalties for Failure to Withhold
The Internal Revenue Code focuses most of its penalties for employers on the failure either to deposit the proper amount of taxes on time or to file correct returns on time. Regarding withholding the Code makes employers liable for payment of federal income tax deducted and withheld from employee wages.
Special rules govern penalties for third parties who supply funds to an employer for the purpose of paying wages to that employer’s employees knowing that the employer cannot or will not deposit the required withholding taxes. In such situations the third party is liable for the amount of taxes not paid plus interest up to a maximum of 25% of the funds supplied to pay wages.

10. 6.10 State & Local Income Tax Withholding
All but nine states have state personal income taxes and require employers to deduct and withhold from employees wages to satisfy those obligations. Many localities also have income taxes and require withholding. The individual withholding methods of these states and localities are beyond scope of this session although most jurisdictions have wage bracket tables and some form percentage method withholding similar to the federal withholding scheme. For more information concerning withholding and other aspects of state taxation see Table of APA’s Guide to Local Payroll Taxes.

11. Exercise
This exercise information is taken from the payroll of Bimms & Ferrow, Inc. for the third quarter of 2015.
The company is a semiweekly depositor and pays wages semimonthly on the 15th and the last day of each month
No employee is subject to additional Medicare tax
The exercise detail information is on the handout