INCOME TAX WITHHOLDING

2.  EE-ER relationship must exist Taxable Wages for FIT Withholding Purposes Wages/Salaries Vacation Supplemental wages Bonuses Taxable fringe Tips Cash awards

3. Fringe Benefits Noncash fringe benefits 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] Specifically excluded fringe benefits include: De minimis and working condition fringe Reduced tuition, qualified transportation fringes, meals & lodging if for ER benefit Complete list on p. 4-6

4. How to Withhold FIT on Noncash Fringe Benefits Value and withhold like supplemental wages (flat 25%) ER must figure value of fringe benefits no later than 1/31 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

5. FIT Withholding on Tips Employee must report tips to ER by 10th of each month Employer must withhold based on this information (called “reported tips”) Employer is not required to withhold on allocated tips (see chapter 3) - only reported tips

6. FIT Withholding on Tips (continued) 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. Traveling Expenses 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. What is Exempt from FIT Examples include: Ministers’ wages/salaries 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 4-8 for comprehensive list

9. What is Exempt from FIT[Pretax salary reductions] Contribution to flex plans or cafeteria plans Known as “Section 125” 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. What is Exempt from FIT[Pretax salary reductions] Contributions to tax-deferred retirement accounts are exempt from FIT 401(k), 403(b), 457 or SIMPLE plans These are types of retirement plans Contributions are made pretax for FIT purposes However, ER must still withhold and match FICA Make up amounts allowed if over 50 years old IRA For certain taxpayers, lesser of $4000 or 100% of earned income may be contributed pretax to a retirement account Roth IRAs accommodate nondeductible contributions

11. How Does an Employer Know Amount to Withhold Best for EE if FIT withholding = tax liability (goal is no refund and no tax due) W-4 (figure 4-3 on page 4-12) 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 (itemized deduction, other compensation, tax credits, etc. – use worksheet on back of W-4 to calculate)

12. W-4 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) Can’t claim exempt if: Dependent on someone else’s tax return and Income exceeds $850 including more than $300 unearned income Some individuals are automatically exempt Never advise employee as to how many allowances to claim

13. Other Situations on W-4 If EE doesn’t provide a completed W-4, ER withholds as if single and 0 EE can change W-4 When ER receives new 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 Don’t have to do if lose allowance due to death Unauthorized changes/additions invalidate W-4

14. FIT Withholding on Other Income Sources 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)

15. Employer Calculates FIT Withholding Use Circular E and find correct withholding Either wage-bracket method (easiest) or Percentage method, only use if 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 or annualizing wages method

16. Example #1 - Calculating FIT Withholding 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 = $41

17. Example #2 - Calculating FIT Withholding 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 137.50) = $3,379.17 FIT equals $344.25 + (.25)(3,379.17 – 2,835.00) = $480.29

18. Example #3 - Calculating FIT Withholding 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 = $153

19. Example #4 - Calculating FIT Withholding 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 275.00) = $27,450.00 FIT equals $3139.55 + (.33)(27,450.00 -13,054.00) = $7890.23

20. Example #5 - Calculating FIT Withholding 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 137.50) = $19,658.33 FIT equals $3,793.61 + (.35)(19,658.33 – 14,315.00) = $5,663.78

21. Supplemental Wages Withholding Example include: Vacation Pay [treated differently than other supplemental wages] Severance pay 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)

22. Gross-Up Supplemental 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 gross paycheck less taxes = $700 net bonus Note: in many states there is a required withholding rate for state income tax!

23. Advanced EIC To get part of earned income credit 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 $4,536/year with 2 qualifying children Advanced EIC does not change amount employers must withhold from wages This amount is treated as having been paid to the IRS (on Form 941 shows up as a payment) Only one certificate on file at a time If married, both spouses can have certificate Have to refile each year and have to revoke in 10 days if ineligible

24. Wages and Tax Statements W-2 Hard copy to EE by 1/31 (or can post on secure web site so EE can access individual W-2) To SSA by 2/28 W-3 is transmittal form W-2c and W-3c (if correcting) If issuing 250+ W-2s must use magnetic media and have until 3/31 to electronically file 941s must tie to W-3

25. Information Returns Employers must file information returns for compensation paid to independent contractors 1099-MISC with 1096 as transmittal* Backup Withholding Contractors must submit taxpayer ID number on W-9 *See figure 4-16, p. 4-33

26. Withholding State and Local Income Taxes In states with state income tax and localities with local income tax, generally, payroll department must: Withhold and deposit accordingly Periodically report tax withheld Reconcile withholding to deposits Complete annual statements showing wages and withholding