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

2. 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.

3. 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.

4. 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.

5. 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 =
5, minus = 4,736.13
Annuity Withholding
In our example, since 4, is left after the retirement deduction, we could put most of it into the annuity
The employee MUST receive a small amount

6. PAYRPT ** WARNINGS ** 003 & 692 Missed deductions
On this PAYRPT you can see that we withheld 4, 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.

7. 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.

8. 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.

9. 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, x 1.5% = 78.94
Medicare is also taxed on the gross so the system also calculates the tax
5, x 1.45% = 76.30
Gross = 5,262.37
Minus (retirement)
Minus 4, (annuity)
Net = .01
003 Missed (78.94)
692 Missed (76.30)

10. 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, 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.

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

12. Calculation to withhold taxes
If you add the City and Medicare taxes together it totals
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%
x 10% = 15.52
Decrease the annuity amount by this amount from
4, to 4,565.36

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

15. 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.

16. 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.

17. PAYRPT Prior to Updating 001 and 002 DEDSCN records

18. 001 DEDSCN Zero Percentage record and calculated tax

19. 002 DEDSCN Zero Percentage record and calculated tax

20. PAYRPT After Updating 001 and 002 DEDSCN records

21. Paying Severance

22. 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

23. Limitation in UPDCAL

24. 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