Withholding Taxes

1
Withholding Taxes

• KATHLEEN L. MIZEJEWSKI, CPP, GBA
• March 10, 2012
• E-Mail kathmiz_at_msn.com
• Phone [phone]

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

• 3 - SSN Verification methods Internet, Phone and
  Paper
• Internet Verification Process New June 2005
  Registration Required - Social Security Number
  Verification Service (SSNVS)
• 10 EEs 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.

4
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/SSNs An employer or 3rd
  Party Service Provider can register and then
  submit a paper list for verification to SSA

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 8007721213 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 6-10 Employee
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

7
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
  persons return
• Income gt950 which includes gt300 in non-wage
  income (e.g. interest and dividends)
• Exemption effective for one year only - must
  re-file each year

8
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

9
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

10
Form W-4 6-14 Employee
Withholding Allowance Certificate

• Submit copy of W-4 to IRS
• Only upon written notice to Employer from IRS
• W-4s 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 6-16Employee
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-4s
• Alternate procedure Successor reports and
  maintains W-4s

12
Form W-4 6-17 Employee
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 6-17

• 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

14
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)

15
Federal Withholding Methods 6-20

• 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
6-22

• 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.

17
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

18
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 gt 10 by value of one
  allowance and then subtract from EE wages

19
Federal Withholding Methods Percentage
Method 6-24

• Automated systems easily programmed use
  Annual
• More Flexible
• More Unusual Payroll Frequencies
• Quarterly, Semiannual, Annual, Daily/Misc

20
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

21
Federal Withholding Methods Percentage
Method 6-25

• Example using 2011 biweekly table
• Harveys 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

22
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

23
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

24
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)

25
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

26
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.

27
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)

28
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

29
Federal Withholding Pensions and Annuities
6-38

• Non-periodic
• Not eligible for rollover and gt 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 6-42

• 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)

31
Federal WithholdingEarned Income Credit 6-43

• EIC is a tax credit that reduces the taxes owed
  by the employee.
• ERs must notify EEs earning less than 49,078
  in 2011 that they may be eligible to claim EIC.
• Required Notice to EEs 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 6-43

• 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

33
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)

34
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

35
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
• Employees rate 4.2
• Employers rate 6.2
• TRA 2010 Enacted on 12/17/10 was difficult for
  employers to update Payroll Systems in time for
  January 1 rate change. Act directed ERs to
  update SS rate asap and adjust employees taxes
  and pay by 3/31/2010

36
Social Security and Medicare Taxes
6-45

• Hire Act No longer in effect in 2011 Provided
  exemption of Employers 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)

37
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

38
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 gtgt NO!
• Wages by Common Law ERs Cant 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
6-49

• 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

40
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

41
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)

42
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 lt20 per month
• Wages paid after year of death
• See List of Additional Exempt Wages on page 6-51
  6-52

43
Social Security and Medicare Exempt
Employment 6-52

• Employment exempt from SS and Medicare
• Temporary foreign agricultural work
• Work by child lt18 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 lt18 years

44
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

45
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

46
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

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Thank You and Good Luck !!!!

• Kathy Miz, CPP, GBA
• March 10, 2012
• E-Mail kathmiz_at_msn.com
• Phone [phone]