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Withholding Taxes. KATHLEEN L. MIZEJEWSKI, CPP, GBA March 10, 2012 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

Withholding Taxes

KATHLEEN L. MIZEJEWSKI, CPP, GBA

March 10, 2012

E-Mail: kathmiz@msn.com

Phone: 708-363-5986

constructive payment of wages 6 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
social security numbers 6 5
Social Security Numbers 6-5
  • 3 - SSN Verification methods: Internet, Phone and Paper
    • Internet Verification Process: New June 2005 – Registration Required - Social Security Number Verification Service (SSNVS) –
      • 10 EE’s per screen (immediate results), or
      • up to 250,000 per file submitted – results next business day. Must register first.
    • TNEV –Telephone Number ER Verification (11/2009) - Automated Phone Service - To verify up to 10 names/SSNs: Employers can telephone 1-800-772-6270 or 1-800-772-1213. Must register first. 24/7.
social security numbers 6 51
Social Security Numbers 6-5
  • SSN Verification methods (continued)
  • To verify up to 50 names/SSNs: Employers can submit the names/SSNs on paper lists to the local Social Security office. Some offices accept faxed lists
  • For 51 to 300 Names/SSN’s: An employer or 3rd Party Service Provider can register and then submit a paper list for verification to SSA
social security numbers 6 7
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
form w 4 6 10 employee withholding allowance certificate
Form W-4 6-10Employee 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
    • New EE- first payroll period ending after filing
    • Current EE - first payroll ending 30 days after filing
form w 4 6 13 employee withholding allowance certificate
Form W-4 6-13Employee Withholding Allowance Certificate
  • Exempt if:
    • Employee had no liability in prior year
    • Expects no liability in current year
    • 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
form w 4 6 13 employee withholding allowance certificate1
Form W-4 6-13Employee 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
form w 4 6 13 employee withholding allowance certificate2
Form W-4 6-13Employee 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
form w 4 6 14 employee withholding allowance certificate
Form W-4 6-14Employee 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
form w 4 6 16 employee withholding allowance certificate
Form W-4 6-16Employee 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
form w 4 6 17 employee withholding allowance certificate
Form W-4 6-17Employee 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
form w 4 6 17
Form W-4 6-17
  • 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
form w 4 6 18
Form W-4 6-18
  • 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)
federal withholding methods 6 20
Federal Withholding Methods 6-20
  • Useful link:
    • http://www.paycheckcity.com - free paycheck calculation – registration required
  • Wage Bracket method
  • Percentage method
  • Supplemental
  • Annualized
  • Cumulative
federal withholding methods wage bracket method 6 22
Federal Withholding MethodsWage Bracket Method 6-22
  • 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.
federal withholding methods wage bracket method 6 23
Federal Withholding Methods Wage Bracket Method 6-23
  • 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
federal withholding methods wage bracket method 6 231
Federal Withholding Methods Wage Bracket Method 6-23
  • 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
federal withholding methods percentage method 6 24
Federal Withholding Methods Percentage Method 6-24
  • Automated systems – easily programmed – use Annual
  • More Flexible
  • More Unusual Payroll Frequencies
    • Quarterly, Semiannual, Annual, Daily/Misc
federal withholding methods percentage method 6 25
Federal Withholding Methods Percentage Method 6-25
  • 2011 Payroll Period - One Allowance
    • Weekly 71.15 x 52 = 3,700
    • Biweekly 142.31 x 26 = 3,700
    • Semimonthly 154.17 x 24 = 3,700
    • Monthly 308.33 x 12 = 3,700
    • Quarterly 925.00 x 4 = 3,700
    • Semiannually 1,850.00 x 2 = 3,700
    • Annually 3,700.00
    • Daily or Misc. 14.23
federal withholding methods percentage method 6 251
Federal Withholding Methods Percentage Method 6-25
  • Example using 2011 biweekly % table:
    • Harvey’s biweekly taxable compensation is $2,300. He is married and claims 3 allowances.
      • $ 142.31 x 3 = $ 426.93
      • $2,300.00 - $ 426.93 = $1,873.07
      • $1,873.07 - $ 958.00 = $ 915.07
      • $ 915.07 x 15% = $ 137.26
      • $ 137.26 + $ 65.40 = $ 181.83
federal withholding methods alternative methods 6 25
Federal Withholding Methods Alternative Methods 6-25
  • 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
federal withholding methods alternative methods 6 26
Federal Withholding MethodsAlternative Methods 6-26
  • Average estimated wages
    • Tipped employees
  • Part-year employment
    • Seasonal, unemployed
    • Request in writing-expires at year end
    • Term of Continuous employment
federal withholding 6 28 supplemental wage payments
Federal Withholding 6-28 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 6-29)
federal withholding 6 30 supplemental wage payments
Federal Withholding 6-30 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
federal withholding supplemental wage payments
Federal WithholdingSupplemental Wage Payments
  • 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 35% on Supplemental Wages over $1 Million.
federal withholding 6 32 supplemental wage payments
Federal Withholding 6-32 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
    • Exempt from 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)
federal withholding 6 37 pensions and annuities
Federal Withholding 6-37 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
federal withholding pensions and annuities 6 38
Federal Withholding Pensions and Annuities 6-38
  • 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
federal withholding backup withholding 6 42
Federal WithholdingBackup Withholding 6-42
  • Tax rate of 28% required on payments if:
    • No TIN furnished (TIN = SS#, ITIN, EIN)
    • TIN is obviously incorrect
    • IRS CP2100 notice received – issued annually
    • IRS Notification that TIN is incorrect
    • No certification from payee receiving interest / dividend payments (certification means they signed Form W-9 – Request for Taxpayer Identification Number and Certification)
federal withholding earned income credit 6 43
Federal WithholdingEarned Income Credit 6-43
  • EIC is a tax credit that reduces the taxes owed by the employee.
  • ER’s must notify EE’s earning less than $49,078 in 2011 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.
federal withholding earned income credit 6 431
Federal Withholding Earned Income Credit 6-43
  • 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
social security and medicare taxes 6 43
Social Security and Medicare Taxes 6-43
  • FICA (Federal Insurance Contribution Act) - Social Security & Medicare
    • Social Security
      • OASI (Old Age and Survivors Insurance)
      • DI (Disability Insurance)
    • Medicare
      • HI (Health Insurance)
social security and medicare taxes 6 45
Social Security and Medicare Taxes 6-45
  • 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
social security and medicare taxes 6 451
Social Security and Medicare Taxes 6-45
  • 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 2010: Enacted on 12/17/10 was difficult for employer’s to update Payroll Systems in time for January 1 rate change. Act directed ER’s to update SS rate asap and adjust employee’s taxes and pay by 3/31/2010
social security and medicare taxes 6 452
Social Security and Medicare Taxes 6-45
  • Hire Act – No longer in effect in 2011 – Provided exemption of Employer’s SS tax on certain new hires from 3/19/10 to 12/31/10.
  • 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)
social security and medicare taxes 6 46
Social Security and Medicare Taxes 6-46
  • SS Wage Base – SS tax is applied only up to a certain wage base. For 2011 that is $106,800
    • EE Rate – 4.2% X 106,800 = $4,485.20
    • ER Rate – 6.2% X 106,800 = $6,621.60
  • 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
social security and medicare taxes 6 49
Social Security and Medicare Taxes 6-49
  • 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
social security and medicare taxes 6 491
Social Security and Medicare Taxes 6-49
  • 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
social security and medicare taxes 6 50
Social Security and Medicare Taxes 6-50
  • 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
self employment tax 6 50
Self –Employment Tax 6-50
  • 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)
social security and medicare exempt wages 6 51
Social Security and Medicare Exempt Wages 6-51
  • 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 6-51 & 6-52
social security and medicare exempt employment 6 52
Social Security and Medicare Exempt Employment 6-52
  • 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
social security and medicare 6 53 state and local government employees
Social Security and Medicare 6-53 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
failure to withhold penalties 6 54
Failure to Withhold Penalties 6-54
  • 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
state and local withholding 6 55
State and Local Withholding 6-55
  • 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
thank you and good luck
Thank You and Good Luck !!!!

Kathy Miz, CPP, GBA

March 10, 2012

E-Mail: kathmiz@msn.com

Phone: 708-363-5986