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Withholding Taxes

Withholding Taxes. KATHLEEN L. MIZEJEWSKI , CPP, GBA March 22, 2014 E-Mail: kathmiz@msn.com Phone: 708-363-5986. Constructive Payment of Wages 6-2. Wages made available to EE Without “ substantial limitation or restriction ”

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Withholding Taxes

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  1. Withholding Taxes KATHLEEN L. MIZEJEWSKI, CPP, GBA March 22, 2014 E-Mail: kathmiz@msn.com Phone: 708-363-5986

  2. Constructive Payment of Wages 6-2 • Wages made available to EE Without “substantial limitation or restriction” • Employer makes payment and Wages become available to EE = constructive payment: • Cash – Paid to EE • Available at office – To Pick Up • Direct deposit – EE Account Credited • Mail – Check Delivered to Home

  3. Social Security Numbers 6-5 • SSN Verification> • Internet Verification Process - Online– • Social Security Number Verification Service (SSNVS) • Registration required • Register to use SSNVS at: www.socialsecurity.gov/bso/bsowelcome.htm • Request access and activation code from BSO homepage • 10 EE’s per screen (immediate results), or • up to 250,000 per file submitted – results next business day. Must register first.

  4. Social Security Numbers 6-6 • SSN Verification> • Effective September 2011, SSA stopped using a person’s gender as part of the verification process. • Each SSN sent to the SSA through the SSNVS will be returned with 1 of 6 verification codes – see P. 6-6. Only the last 4 digits of the will be returned if the SSN matches the SSA’s database • SSN is required – even if there is no withholding

  5. Social Security Numbers 6-7 • Name changes (Marriage, divorce) • Employee should promptly complete Form SS-5 - Application for Social Security Number (New or Change) and submit to SSA. Request form by calling SSA at 800–772–1213 or download from www.socialsecurity.org • Employer should refuse to make name change until EE provides new SS card with new name

  6. Form W-4 6-11Employee Withholding Allowance Certificate • Original, complete, valid, signed • Single-zero, if no W-4 on file • Before first day of work • Within 10 days after decrease • Effective W4-Form - 6-8 • New EE- first payroll period ending after filing • Current EE - first payroll ending 30 days after filing

  7. Form W-4 6-10Employee Withholding Allowance Certificate • Exempt if: • Employee had no liability in prior year • Expects no liability in current year • Not Exempt if: • EE can be claimed as a dependent on another person’s return • Income >$950 which includes >$300 in non-wage income (e.g. interest and dividends) • Exemption effective for one year only - must re-file each year - by February 15th of next year

  8. Form W-4 6-11Employee Withholding Allowance Certificate • Invalid W-4 • Altered in Any Way • Strike outs or Changes to Form • Additions - Written in – Not Allowed • Invalid: (Must be allowances + $) • Flat Dollar Amount Only • Percentage Only • False Info on Form – Invalidates Form

  9. Form W-4 6-11Employee Withholding Allowance Certificate • Perjury Statement – Beginning 2005 • Employee Examines & Acknowledges all Information on W-4 Form is Correct: • Allowances • Social Security Number • Exemptions • Name, Address, Marital Status

  10. Form W-4 6-12Employee Withholding Allowance Certificate • Submit copy of W-4 to IRS • Only upon written notice to Employer from IRS • W-4’s Sent to IRS – EE Withholding: • Withhold based on W-4 on file until notified by IRS • IRS Lock-In-Letter will specify maximum number of exemptions employee can claim • ER must give EE copy of IRS notice

  11. Form W-4 6-14Employee Withholding Allowance Certificate • Retention - 4 years after date of last return filed, using info on the W-4 • Successor / Predecessor • Standard procedure – Predecessor reports and continues to maintain W-4’s • Alternate procedure – Successor reports and maintains W-4’s

  12. Form W-4 6-15Employee Withholding Allowance Certificate • W-4 - Electronic filing – Must meet requirement of Paper W-4 Form filing with perjury statement and signature • W-4 - Also used for New Hire Reporting for Child Support • With additional information such as Employer Name, Address and EIN • Aids Fed and States to increase Child Support withholding

  13. Form W-4 6-16 • Form W-4P - Pension • Withholding Certificate for Pension or Annuity Payments – Retirees must complete • Form W-4S - Sick Pay • Submit for Federal Income Tax W/H From Sick Pay (Non Job Related Sick) • 3rd Party Sick Pay – No withholding unless W-4 filed by EE. Flat dollar amount only

  14. Form W-4 6-16 • State Withholding Certificates • More than 40 States have Withholding Tax and require withholding from wages • Approximately 50% will accept Federal W-4 Form – others required their own Withholding Certificate (Table p. 6-18)

  15. Federal Withholding Methods 6-18 • Useful link: • http://www.paycheckcity.com - free paycheck calculation – registration required • Wage Bracket method • Percentage method • Supplemental • Annualized • Cumulative

  16. Federal Withholding MethodsWage Bracket Method 6-18 • Tables issued by IRS in Publication 15, Circular E, Employers Tax Guide • Based on Employer pay period or frequency • Two tables for each payroll period • Married, Single • Pay periods • Weekly, Biweekly, Semimonthly, Monthly, Quarterly, Semiannual, Annual or Daily/Misc.

  17. Federal Withholding Methods Wage Bracket Method 6-21 • Daily or Miscellaneous • (1) Number of days in that misc period – Not the Payroll Period (Includes Sat, Sun, Holiday) • (2) Daily wage rate (Taxable Wage / # of days) • (3) Daily withholding rate (Per Tables in Circular E) • Multiply daily withholding rate (3) by number of days (1) and withhold from Taxable Wages

  18. Federal Withholding Methods Wage Bracket Method 6-21 • Payments above max table amount – use Percentage Method • Payments equal to bracket amount – use next higher wage bracket • More than 10 allowances : • use 10 allowances column (may result in over withholding), or • multiply # of allowances > 10 by value of one allowance and then subtract from EE wages

  19. Federal Withholding Methods Percentage Method 6-23 • Automated systems – easily programmed – use Annual • More Flexible • More Unusual Payroll Frequencies • Quarterly, Semiannual, Annual, Daily/Misc

  20. Federal Withholding Methods Percentage Method 6-23 • 2013 Payroll Period - One Allowance > $3,900 • Weekly 75.00 x 52 = 3,900 • Biweekly 150.00 x 26 = 3,900 • Semimonthly 162.50 x 24 = 3,900 • Monthly 325.00 x 12 = 3,900 • Quarterly 975.00 x 4 = 3,900 • Semiannually 1,950.00 x 2 = 3,900 • Annually 3,900.00 • Daily or Misc. 15.00

  21. Federal Withholding Methods Percentage Method 6-23 • Example using 2013 biweekly % table: • Harvey’s biweekly taxable compensation is $2,300. He is married and claims 3 allowances – Ex. 6-23 • $ 150.00 x 3 = $ 450.00 • $2,300.00 - $ 450.00 = $1,850.00 • $1,850.00 - $ 1,006 = $ 844.00 • $ 844.00 x 15% = $ 126.60 • $ 126.60 + $ 68.70 = $ 195.30

  22. Federal Withholding Methods Alternative Methods 6-23/24 • Annualized wages • Calculate on annual payroll period • Used by automated systems • Cumulative wages – Inconsistent $$ • Commissions • Bonuses • Employee must request in writing • Same frequency for entire year

  23. Federal Withholding MethodsAlternative Methods 6-24/25 • Average estimated wages • Tipped employees • Part-year employment • Seasonal, unemployed • Request in writing-expires at year end • Term of Continuous employment

  24. Federal Withholding 6-26 Supplemental Wage Payments • Paid at same time as regular or any other time • Supplemental Wages Include: • Reported Tips, Overtime Pay, Bonuses, Back Pay, Commissions, Expense Allowance, Non Qualified Deferred Comp, Non-cash Fringe, 3rd Party Sick Pay, Amounts under Sec. 409A (see full list on Page 6-26)

  25. Federal Withholding 6-28 Supplemental Wage Payments • Taxed as regular payment if • Supplemental pay combined with regular wage and amounts not indicated separately • Flat rate - 25% - Allowed when • Amounts indicated separately (Regular pay & Supplemental Pay) • Combined payment with amounts listed separately • Only if Fed Tax was withheld from last regular wage payment

  26. Federal WithholdingSupplemental Wage Payments 6-28 • Supplemental Wage Payments over $1,000,000 in one calendar year: • Due to American Jobs Creation Act of 2004 (AJCA) • Requires Higher income tax when Supplemental Wages are over $1 Million to one employee in one calendar year • Mandatory tax rate is 39.6% on Supplemental Wages over $1 Million. ( % Increased in 2013 – was 35%)

  27. Federal Withholding 6-27 Supplemental Wage Payments • Aggregate method • Use if employee has no federal tax withheld from regular wages due to # of allowances • Combine supplemental and regular • Calculate on total, subtract previous tax, withhold remaining • If EE claims “Exempt” then Supplemental wages less than $1,000,000 should not have withholding providing YTD is not over $1,000,000 • See 2008 IRS Guidelines for treating certain payments – 9 Situations (p. 6-32 to 6-35)

  28. Federal Withholding 6-34 Pensions and Annuities • W4-P – For Pension and Annuity Payment • Depends on type of payment • Periodic vs. non-periodic • Periodic (payments made over period of one year). Indicate on W4-P: • Can request no withholding on W4-P • Marital status, allowances • Additional amount to withhold • If No W-4P - Use Married 3 allowances

  29. Federal Withholding Pensions and Annuities 6-35 • Non-periodic • Not eligible for rollover and > $200 • Withhold 10% • Eligible for rollover • Mandatory Withholding of 20% unless rolled to another qualified plan, IRA or §403(b) annuity • Tax is withheld by plan administrator or payer

  30. Federal WithholdingBackup Withholding 6-39 • Tax rate of 28% required on payments if: • No TIN furnished (TIN = SS#, ITIN, EIN) • TIN is obviously incorrect (ex. Wrong # of digits) • IRS Notification that TIN is incorrect (through a “B” Notice) • The payer does not receive a certification that the payee is not subject to withholding • Online TIN Matching is available- payers can verify TIN’s through either Interactive (25 Tin’s) or Bulk (up to 100,000 TIN’s) Matching Systems

  31. Federal WithholdingEarned Income Credit 6-40 • EIC is a tax credit that reduces the taxes owed by the employee. • ER’s must notify EE’s earning less than $51,567 in 2013 that they may be eligible to claim EIC. • Required Notice to EE’s on: 1) Copy B of Form W-2; 2) Notice 797; 3) Written statement with exact wording as Notice 797.

  32. Federal Withholding Earned Income Credit 6-40 • Prior to 2011 – Eligible employees could obtain advance payments of a portion of the credit during the year through decreasing the federal withholding owed • Advanced Earned Income Credit was repealed with the Education Jobs Act of 2010 as of January 1,2011 • Form W-5 – Advanced EIC Certificate eliminated

  33. Social Security and Medicare Taxes 6-41 • FICA (Federal Insurance Contribution Act) - Social Security & Medicare • Social Security • OASI (Old Age and Survivors Insurance) • DI (Disability Insurance) • Medicare • HI (Health Insurance)

  34. Social Security and Medicare Taxes 6-41 • Employee share withheld from employee wages • Matching amount paid by employer • Fixed rate – Same 1990 to 2010 • 6.2% of wages to Social Security wage limit • 1.45% of wages - No Medicare wage limit • Note: No rounding on SS or Medicare

  35. Social Security and Medicare Taxes 6-41 • 2011 – Change in SS Tax Rate: Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010 – TRA 2010 • Employee’s rate: 4.2% • Employer’s rate: 6.2% • TRA 2012: February 17, 2012 – TRA2012 – extended the the SS tax rate reduction through the end of 2012. • SS Wage Base for 2012 is 113,700

  36. Social Security and Medicare Taxes 6-42 • Medicare Tax Increase on High Earners – Effective 2013. Medicare rate will increase from 1.45% to 2.35% on wages over $200K for single employees and wages over $250K for married employees. Over and under withholding will be reconciled on personal tax return (1040). • Filing Status Threshold Amount Married-Joint $250,000 Married-Separately 125,000 Single 200,000 Head of Hs – w/qualifying person 200,000 Qual.Widow(er) w/dep child 200,000

  37. Social Security and Medicare Taxes 6-43 • SS Wage Base – SS tax is applied only up to a certain wage base. For 2013 that is $113,700 • EE Rate – 6.2% X 113,700 = $7,049.40 • ER Rate – 6.2% X 113,700 = $7,049.40 • The Wage Base for Medicare taxes was eliminated beginning January 1, 1994 with the Omnibus Budget Reconciliation Act of 1993. Prior to that SS and Medicare had a wage base and a maximum annual tax

  38. Social Security and Medicare Taxes 6-46 • Employees Working for more than one Employer • Credit for tax withheld from employee from previous employer in current year >> NO! • Wages by Common Law ER’s Can’t be Combined • Predecessor / Successor employers • Acquisition of all or substantially all property • Employed by predecessor and successor • Wages paid in next year • Subject to tax rate in effect when actually paid

  39. Social Security and Medicare Taxes 6-47 • Subject to tax when deferred: (not when paid) • Elective deferrals to §401(k) & other deferred compensation plans • Non-qualified deferred compensation that is not subject to substantial risk of forfeiture • Dependent Care Assistance benefits are treated as received in year when benefit costs are incurred, not when paid, for determining how much of benefits are taxable for SS and Medicare

  40. Social Security and Medicare Taxes 6-47 • Common Paymaster for SS & Medicare (Not WH) • Related corporations-must meet one of: • Controlled group - 50% stock owned by one Corporation • Board of directors - 50% voting power on the other Board • Concurrent officers - 50% on other Board • Concurrent employees - 30% by both Corporations • Concurrent employment for two or more related corporations • Then Payroll responsibility - payment, tax withholding, depositing and reporting may be treated as one employer

  41. Self –Employment Tax 6-48 • SE Individuals Pay both Employer and Employee shares of Social Security and Medicare – Rate is 10.4% for SS Tax up to Base. For Medicare 2.9% on total wages (to total of 13.3%). • Tax Determined and Paid with Personal Income Tax Return (Form 1040)

  42. Social Security and Medicare Exempt Wages 6-48 • All compensation is taxable unless specifically exempted under IRC: • Workers compensation payments • Sick / disability payments - after 6 mo. • §125 flexible benefit plan contributions • Qualified moving expense reimbursements • Cash tips <$20 per month • Wages paid after year of death • See List of Additional Exempt Wages on page 6-47 & 6-48

  43. Social Security and Medicare Exempt Employment 6-49 • Employment exempt from SS and Medicare: • Temporary foreign agricultural work • Work by child <18 for parents • Student work for school where enrolled and attending classes • Work by student nurses • Non-resident aliens with F, J, M, Q visas • Domestic service performed if <18 years

  44. Social Security and Medicare 6-50 State and Local Government Employees • Prior to 1986 - §218 agreement to cover under federal system • 4/1/86 hired or rehired - Became covered by Medicare • 7/2/91 - Became covered by Social Security and Medicare • If not members of public employee retirement system or not subject to §218 agreement

  45. Failure to Withhold Penalties 6-52 • No tax withheld by employer: • If employer can prove that employee later paid tax - employer not liable for amount not withheld • Penalties for • Late deposits or returns • Responsible person • 10 year time limit to collect taxes

  46. State and Local Withholding 6-53 • All but 9 States have Personal Income Taxes and require Employers to Withhold • Many Localities also have Income Taxes and require Withholding • Directory of State Agencies – Table 6.3

  47. Federal Withholding QUESTIONS ?????????????

  48. Thank You and Good Luck ! Kathy Miz CPP, GBA March 22, 2014 E-Mail: kathmiz@msn.com Phone: 708-363-5986

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