1. INCOME TAX WITHHOLDING

2.  EE-ER relationship must exist  See Chapter 3 for how to determine status  Statutory nonemployees (direct sellers and qualified real estate agents) have no federal taxes withheld  Taxable Wages for FIT withholding purposes  Wages/Salaries  Vacation  Supplemental wages  Bonuses  Taxable fringe  Tips  Cash awards

3.  Noncash fringe benefits treated as compensation  ER must withhold FIT unless specifically excluded  Examples include  Tickets to athletic events  Athletic club membership  Personal use of corporate car  Frequent flier miles  Stock options (when option exercised)  Complete list found in Figure 4-1 (page 4-3)  Specifically excluded fringe benefits include  De minimis and working condition fringe  Reduced tuition, qualified transportation fringes, meals & lodging if for ER benefit  Complete list found on page 4-6

4.  Value and withhold like supplemental wages (flat 25%)  ER must figure value of fringe benefits no later than 1/31  Also a special period rule that uses 10/31 as cutoff date  Value and add to regular pay - treat as one paycheck and withhold accordingly  Flexible reporting - can add $500 on 4 paychecks or entire $2,000 with one paycheck and withhold, for example

5.  Employee must report tips to ER by 10th of each month  Employer must withhold FIT and FICA based on this information (called “reported tips” )  Employer is not required to withhold on allocated tips (see chapter 3) - only reported tips  Tip allocation can be done one of three methods

6.  What if taxes withheld > hourly wages to be paid?  For example blackjack dealer reported tips = $2,000 for one week; her FIT/FICA withholding will exceed her paycheck  EE gets no paycheck and pays quarterly estimated tax payments or  Can pay balance of tax with 1040 tax return

7.  Travel reimbursements but only if made under an “accountable plan”  An accountable plan is an IRS-approved plan  If there is not a plan in place, travel reimbursements are made under a non-accountable plan and considered wages  Therefore ER must withhold FIT

8.  Law excludes certain payments including:  Ministers’ wages/salaries  Advances  Educational assistance  If maintains/improves job status  $5,250 per year of employer provided assistance for undergraduate or graduate is tax-free  Qualified moving expense reimbursements See page 4-6 for comprehensive list of exemptions

9.  Contribution to flex plans or cafeteria plans ( known as Section 125 plans )  These are salary reductions whereby EE puts pretax dollars into a trust account to be used for health care, certain insurance premiums and dependent care  These dollars do not have FIT or FICA withheld on them  Health Savings Accounts (HSA)  If EE has high-deductible health insurance, can contribute annually to an HSA pretax to meet out of pocket medical bills  Archer Medical Savings Accounts apply to small employers (50 or fewer employees)

10.  Contributions to tax-deferred retirement accounts  Types of retirement plans  401(k), 403(b), 457 or SIMPLE plans  Contributions are made pretax for FIT purposes  However, ER must still withhold and match FICA  Additional ‘make up amounts’ allowed to be contributed if over 50 years old  Individual Retirement Accounts [IRAs]  For certain taxpayers, the lesser of $5000 or 100% of earned income may be contributed pretax to a retirement account  Conditions must be met for deductibility  Roth IRAs accommodate nondeductible contributions

11.  Best for EE if FIT withholding = tax liability (goal is no refund and no tax due)  Employee completes W-4 S  See Figure 4-3  Employee’s Withholding Allowance Certificate  Identify number of withholding allowances  One allowance for self (if not claimed by other person)  One for each dependent  Special allowances such as itemized deductions, other compensation, tax credits, etc.  Use worksheet on back of W-4 to calculate

12.  Choose “Single” or “Married” or “Married, but withhold at higher single rate” box  Why would an EE choose the option listed above? (line 3)  Because possibly other sources of taxable income  Exempt status  Can claim if taxpayer had no income tax liability last year and none expected this year (line 7)  Valid for one year and must be reclaimed each year  Can’t claim exempt if:  Dependent on someone else’s tax return and  Income exceeds $900 (including more than $300 unearned income)  Some individuals are automatically exempt *Note: Never advise employee as to how many allowances to claim

13.  If EE doesn’t provide a completed W-4, ER withholds as if single and 0 (highest rate)  EE can change W-4  When ER receives amended W-4, has 30 days to change  EE must change within 10 days for decrease in # of allowances  Lose child as an allowance (custody)  Become single  If there’s an increase in # of allowances, can change or leave in effect  Unauthorized changes/additions invalidate W-4

14.  Employers are not required to verify authenticity  If form is altered, ER cannot accept invalid form  Can then ask for new W-4 to be submitted  Or, if a new hire, withhold at “single and 0” rates

15.  Pensions (W-4P) in excess of $19,000 per year  Withhold as if married with 3 allowances unless complete W-4P to change amount of tax withholding  Third party payer of sick pay (W-4S)  Government payments such as Social Security (W-4V) – this request is voluntary

16.  Use either wage-bracket method (easiest) or  Percentage method (only use if one of the following apply)  Highly compensated or  10+ allowances or  Compensated annually, semiannually or daily  Need to know  Single/married  How often paid  Gross pay  Number of allowances  Or can use quarterly averaging, annualizing wages or part-year employment method (rarely used)

18. FACTS: Annual salary is $40,144 - paid weekly – Married 4 - what is FIT withholding?  Weekly gross $40,144/52 = $772.00  Can use wage bracket tables to look up married, weekly and 4 allowances  FIT withholding = $38

19. FACTS: Annual salary is $84,400 – paid semimonthly – Married 1 - what is FIT withholding?  Semimonthly gross is $84,400/24 = $3,516.67  Must use percentage method  To Do:  Subtract (# of allowances x amount for each allowance) from gross:  $3,516.67 - (1 x $145.83) = $3,370.84  FIT equals $368.55 + (.25)($3,370.84 – 3,006.00) = $459.76

20. FACTS: Monthly salary is $3,000 - paid semimonthly – Single 2 - what is FIT withholding?  Annualize salary $3,000 x 12 = $36,000  Semimonthly gross $36,000/24 = $1,500  Can use wage bracket tables to look up single, semimonthly and 2 allowances  FIT withholding = $150

21. FACTS: Annual salary is $336,000 - paid monthly - Single 2 - what is FIT withholding?  Monthly gross is $336,000/12 = $28,000  Must use percentage method  To Do:  Subtract (# of allowances x amount for each allowance) from gross:  $28,000 - (2 x 291.67) = $27,416.66  FIT equals $3735.45 + (.33)(27,416.66 -17,308.00) = $7,071.31

22. FACTS: Annual salary is $485,000 - paid semimonthly - Married 4 - what is FIT withholding?  Semimonthly gross is $485,000/24 = $20,208.33  Must use percentage method  To Do:  Subtract (# of allowances x amount for each allowance) from gross:  20,208.33 - (4 x 145.83) = $19,625.01  FIT equals $4,032.32 + (.35)(19,625.01 – 15,213.00) = $5,576.52

23.  Examples include :  Vacation Pay (treated differently than other supplemental wages)  Severance pay, bonuses and commissions  Exercised nonqualified stock options  Retroactive increases  How to withhold  With regular pay (treat as one paycheck and withhold accordingly)  Paid Separately  Method A – Add supplemental and regular wages from recent payroll. Calculate FIT and then subtract tax withheld from regular wages.  Method B - 25% flat supplemental withholding (35% for amounts in excess of $1,000,000)

24.  If want to give $700 bonus check (net), employer must ‘gross up’ this amount  Divide net check by total of [1.00 – tax rates]  FIT =.25  OASDI =.062  HI =.0145  $700/[1.0 – (.25 +.062 +.0145)] = $ 1039.35 grossed up bonus less taxes = $700 net bonus Note: in many states there is a required withholding rate for state income tax!

25.  Earned income credit [EIC] is intended to offset living expenses for eligible employees  To get advanced EIC on each paycheck, file Form W-5  Can only get advanced earned income credit if have at least one qualifying child  Can get up to $4,824/year with 2 qualifying children  Advanced EIC does not change amount employers must withhold from wages  Sometimes EIC payments exceeds withheld taxes – employer can handle one of two ways  Reduce each advance EIC payment proportionately or  Fully pay and treat as advance payment of company’s employment payroll taxes

26.  EE may only have one certificate on file at a time  If married, both spouses can have certificate  Have to file a new certificate each year  Have to revoke in 10 days if ineligible  On Form 941 advanced EIC shows up as a reduction from total taxes to calculate net taxes due for quarter  Advanced EIC is treated as having been paid to the IRS

27.  Form W-2  Hard copy to EE by 1/31 or  Can post on secure web site so EE can access individual W-2)  Send to SSA by 2/28  If issuing 250+ W-2s must use magnetic media and have until 3/31 to electronically file  Can request extension of time via FIRE at http://fire.irs.gov  W-3 is transmittal form  941s must tie to W-3  Various penalties for filing incorrect or late W-2s  W-2c and W-3c (if correcting)

28.  Employers must file information returns for compensation paid to independent contractors (IC)  1099-MISC with 1096 as transmittal  See Figure 4-16 (page 4-33)  Must issue to IC paid over $600 that aren’t incorporated  Backup withholding  IC must submit taxpayer identification number (TIN) on W-9  If W-9 not on file, hiring agent must withhold federal income tax = 28% of payments made

29.  In states with state income tax and localities with local income tax, generally the payroll department must  File periodic withholding returns - report wages and withholding  Prepare reconciliation returns – compare deposits to withholdings  File annual statements – annual wages paid and state tax withheld  Issue information returns – used to report payments to individuals not subject to withholding  Three different methods of withholding *Note: all but nine states have a state income tax