Income Tax Withholding Chapter 4

Mandi Robinson, married with 3 allowances, earns a monthly salary of $2,400. She also receives a quarterly bonus on sales that exceed her quota. For the first quarter, her bonus amounts to $4,600. Robinson's employer pay her the regular monthly salary and the bonus together on her March paycheck. This withholding for the March pay is computed on the total amount of $7,000 ($2,400 + $4,600). After deducting the allowances, using the percentage Tax Table, the amount to withhold is:

$563.70 [$7,000 - 3($350) = $5,950 - $2,600 = $3,350 x 12% = $402 + $161.70]

Special gross up formula

(Intended payment) divided by 1 - Applicable tax rate (FICA, 22% federal income tax rate, and state tax rate)

Benefits that MAY be included in cafeteria plan

-accident and health insurance -self-insurance medical reimbursement plan -group-term life insurance, first $50,000 of coverage -dependent care assistance, first $5,000 -health savings accounts

Benefits that CAN NOT be included in a cafeteria plan

-transportation fringe benefits -education assistance -scholarship and fellowship grants -meals and lodging for the convenience of employer -dependent group-term life insurance -deferred compensation except for 401K contributions

3 different methods of State Tax Withholding

1. Full Taxation- both resident's state and work state calculate the taxes without any credits 2. Leftover taxation- pay the full tax to the work state, and then pay the rest to the resident state 3. Reciprocity- withhold only for the work state or resident state depending on the reciprocal agreement between the states

4 Main Types of State Income Returns or Reports

1. Periodic withholding returns report the wages paid and the state tax withheld during the reporting period 2. Reconciliation Returns. compare the total amount of state tax paid as shown on the periodic returns with the amounts of state tax declared to have been withheld from employees' wages 3. Annual Statements to employees showing the amount of wages paid during the year and the state tax withheld from those wages 4. Information returns used to report payments to individuals that are not subject to withholding and/or not reported on the annual employee wage and tax statements

Individual Retirement Account and Belongs to Another Qualified Plan full and partial tax-free deductions are allowed if:

1. The employee is single of HOH and has modified AGI less that $64k with phaseout at $74k 2. The employee is married, filing a joint return and has a modified AGI less that $103k with phase out at $123k 3. The employee is married, filing separately and has zero AGI with phaseout at $10,000

Employers must also be informed about each state's regulations regarding:

1. The required frequency of making wage payments 2. The acceptable media of payment 3. The maximum interval between the end of a pay period and the payday for that period 4. The time limits for making final wage payments to employees who are discharges, are laid off, quit, or go on strike 5. How often to inform employees of the deductions made from their wages 6. The maximum amount of unpaid wages to pay the surviving spouse or family of a deceased worker

Steps to Withholding income tax on reported tips:

1. the employer collects the tax from the employee's wages or form other funds the employee makes available 2. When tips are reported in connection with employment where the employee also receives a regular wage, compute the withholding tax on the aggregate- treat tips as supplemental wage payment 3. if the withholding tax exceeds the amount of wages paid to the employee the employee must pay the uncollected portion of the taxes directly to the IRS when filing the annual income tax return form 1040 4. the employer is not required to audit or verify the accuracy of the tip income

Employer is not considered a pension plan sponsor and is not subject to ERISA as long as

1. the employer makes no matching contributions 2. Participation is not mandatory 3. the employer does not endorse any IRA sponsors

Coverage Under Federal Income Tax Withholding Laws

1. there must be, or have been, an employer-employee relationship 2. the payment received by the employee must be defined as wages under the law 3. the employment must not be exempted by the law

Wage-Bracket method and having more than 10 Allowances

2 choices 1. Withhold as if the employee claimed only 10 allowances OR 2. Multiply the value of one allowance for the applicable payroll period by the number of withholding allowances exceeding 10; subtract this amount from the employee's gross wage that is subject to federal income tax withholding. Use the resulting amount and column 10 for allowances in the wage-bracket table to determine the tax to withhold.

Section 457(b)

A plan for employees of state and local governments and of tax-exempt organizations other than churches

Section 403(b) Plan

A plan for employees of tax-exempt organizations

Defined Contribution Plan

A retirement plan that provides future benefits based solely on the amount paid by each employee and employer into the account, plus investment gains

401(k) Plan

A standard tax-deferred retirement plan. A set % of an employee's wages is contributed on a pretax basis. Employers can limit the % of an employee's pay that can be contributed. This limit can be lower that the maximum set by law. Employees can add after-tax contributions to this total, and the employer can contribute to the employees' plan.

Gross- Up Example Cotter Company wants to award a $4,000 bonus to Donna D'Amico. In addition, it wants the next bonus payment to equal $4,000. Assuming D'Amico is still under the OASDI/FICA limit, the calculation would be

A) $4000/[ 1-.22(supplemental W/H rate) - 0.062 (OASDI) - 0.0145 (HI)] B) $4000/ .7035 = $5,685.86 grossed-up bonus C) Gross Bonus Amount ............$5,685.85* Federal IncomeTax Withheld $1250.89 OASDI Tax Withheld ...................$352.52 HI Tax Withheld ..................................82.44 Take-Home Bonus Check ........$4,000 * need to subtract $0.01 from $5685.86 in order to arrive at $4k due to rounding

Supplemental Wages Paid Separately from Regular Wages Method A

Add the supplemental wages and regular wages for the most recent payroll period, then figure the income tax as if the total were a single payment subtract the tax already withheld from the regular wage withhold the remaining tax from the supplemental wage

9 States Without income tax on wages

Alaska Florida Nevada New Hampshire South Dakota Tennessee Texa Washington Wyoming

Traveling Expenses- Nonaccountable Plan

All amounts under this plan are considered wages and are subject to income tax withholding

Direct Sellers and Qualified Real Estate Agents

Are considered nonemployees by statue are treated as self-employed for ALL federal tax purposed

Percentage Method

Basica income tax rate for 2019 = 10%, 12%, 22%, 24%,32%, 35% and 37%

Carl Jamison, an employee for the Scharman School, belongs to a tax-deferred retirement plan to which he contributes 3% of his pay which is matched by the school. His biweekly pay is $2,500.

Because of the deferral (3% x $2,500 =$75), $2,425 is subject to federal income tax withholding

Method B Example The tax withheld on Lousi Ernst's June 14, 20** bonus of $500 is computed as follows

Bonus ...........................$500 Tax Rate...........................22% Tax withheld on bonus..... $110

Employers distribute Form W-2 copies as follows

Copy A- to the SSA by the end of January following the year for which Form W-2 is applicable Copy 1 - to the state, city, or local tax department Copy B- To employees for filing with their federal income tax return Copy C- To employees for their personal records Copy 2- To employees for filing with their state, city, or local income tax returns Copy D- Retained by the employer If 250 or more Forms W-2 are being filed reporting must be done electronically

% Method Step 1

Determine the amount of gross wages earned, marital status, number of allowances and frequency of pay. NOTE: if the wage ends in a fraction dollar amount, the wage may be rounded to the nearest dollar. However in this text exact wages are used. EX: Wilson Goodman, single, claims two allowances and earns $915.60 semimonthly

% Method Step 4

Determine the withholding tax on the excess of wages over allowances claimed by referring to the appropriate percentage method withholding table EX: Compute tax from Tax Table 3(a) $565-$563=$2.60x12%=$0.31+$40.50) = $40.81

Individual Retirement Account Qualification

Either: 1. The individual does not belong to a company-funded retirement plan 2. The individual has modified adjusted gross income less that $64,000 ( if married combined AGI must be less than $103,000)

Special Period Rule- Fringe Benefits

Employers can use October 31st as a cutoff date for valuing the noncash fringe benefits November and December can be claimed/taxed on the following year If this rule is used it must be used for all employees receiving the benefit Employee must be notified of this before starting their W-2

Withholding from Sick Pay

Form W-4S request for federal income tax withholding from sick pay must be filed with the payer of sick pay if the employee wants federal income taxes to be withhled from the payments Form W-4s is filed only if the payer is a 3rd party , it should not be filed with the worker's employer

Withholding on government payments

Form W-4V can be used to request federal income tax withholding on government payments, this is voluntary Ex: SS benifits/ Unemployment

While preparing her personal income tax return, Connie Becker, an employee of Trident Mills, discovered that she had lost her From W-2. What procedures should the company follow to prepare a new Form W-2 for Becker?

If Form W-2 has been destroyed or lost, employers are authorized to furnish substitute copies to the employee. Trident should provide a substitute form to Becker. The form should be clearly marked "Reissues Statement" and the company should not send the substitute statement to the SSA

Gringle's terminated 10 of its employees on July 5, 20**. The company informed each employee that it may rehire them again during its peak season in September. When should the company furnish each employee with a W-2 statement?

If an employee leaves the service of the employer, the employer may furnish Form W-2 any time after employment ends. If the employee requests Form W-2, the employer should give it to him/her within 30 days of the request or final wage payment, whichever is later. If there is a reasonable expectation that the employees may be rehired before the end of the year, the employer may delay providing Form W-2 until January following the close of the calendar year

Gross- Up Supplemental

In order to give an employee the intended amount of a supplemental payment, the employer will need to gross up the payment so that after the appropriate payroll taxes are withheld, the net amount left is equal to the original intended payment

Jack Matthews decreased the number of allowances on his Form W-4 on April 4, 20**. How many days does the employer have to make the certificate effective?

Jack Matthews' employer has to make the certificate effective no later than the start of the first payroll period ending on or after the 30th day from the date the replacement Form W-4 was received.

Part - year Employment Method Example

Jack Matthews, previously unemployed for the calendar year, has agreed to begin temporary employment on September 9th, 20**. He has made a written request for the part-year employment method of withholding. He claims single with zero allowances on his W-4. For the biweekly period from September 9 to September 20, he earns a total of $7,600 Step 1: Wages for the current pay period are added to the wages paid previously $7,600 + 0 = $7,600 Step 2: The number of payroll periods worker in step 1 is added to the number of payroll periods between the employee's past and current employment 1 + 18=19 Step 3: Divide the step 1 amount by the total number of payroll periods $7,600 / 19 = $400 Step 4: Tax on the step 3 amount (from wage-bracket table for single/biweekly, zero allowances) $26 Step 5: Total number of payroll periods from step 2 multiplied by step 4 equals the withholding for the pay period 19 x $26 = $494

Quarterly Averaging Example

Jackson, INC. estimates that Cal Hudson will be paid $6,690 during the second quarter of the year. Hudson is married, claims 2 withholding allowances, and is paid semimonthly Step 1: Divid the estimated quarterly wages by 6 (the number of semimonthly pay periods in the quarter) $6,690 / 6 = $1,115 Step 2: Find the amount of federal income tax to withhold from each semimonthly payment Married Persons- Semimonthly Payroll Periods Wages at least $1,102 but not more than $1,122for 2 allowances = $27 The withholding is based on the average payment instead of the actual payment

Roth IRA

Make annual nondeductible contributions of up to $6k ($7k if age over 50) the amount that may be contributed is reduced by the amount contributed into other IRAs Allowable contributions are phased out with AGI between $122k - $137k for single $193k-$203 for joint taxpayer $0-$10k for married filing separately Distributions made out of the fund at retirement are tax-free

Annualizing Wages Example

Marc field, married with three allowances, receives $1,350 semimonthly. Under the annualizing method, do the following: Step 1: Multiple the semimonthly wage by 24 pay periods to compute his annual wage. $1,350 x 24 = $32,400 Step 2:Subtract withholding allowances of $12,600 (3 x $4,200) $32,400 - $12,600= $19,800 Step 3: Use Tax Table and apply the percentage method to the taxable wages $19,800 - $11,800 = $8,000 x 10% = $800 $800/24 semimonthly payrolls = $33.33 per paycheck

Memberships in the local country club for department managers

Memberships in social or country clubs are taxable fringe benefits and are subject to withholding

% Method Step 2

Multiply the number of allowances claimed by the amount of one allowance for the appropriate payroll period EX: Table of allowance values for semimonthly payroll period shows $175 multiply $175 x 2 = 350

Nonpayroll Reporting Form 945 Annual Return of Withheld Federal Income Tax

Nonpayroll items include backup withholding and withholding on pensions, IRAs, gambling winnings, and military retirement pay Generally all income tax withholding that are reported on Form 1099 or Form W-2G belong on Form 945

Work-out room for employee use during lunch hours

Not Subject to Withholding: the use of an on-site athletic facilities by employees is considered a nontaxable fringe benefits

Company- provided lunches at the plant to reduce tardiness by keeping employees on the premises

Not subject to withholding: Meals provided to employees for the convenience of the employer on the employer's premises

Travel advances to salespersons for overnight sales calls out of town

Not subject to withholding: advances for business expenses reasonably expected to be incurred

Meals provided by a local restaurant for its employees

Not subject to withholding: non-additional-cost meals provided to employees at an employer-operated eating establishment

Method A Example: Louis Ernst, married with two allowances, is paid $985 semimonthly. The tax to be withheld under the wage-bracket method on each semimonthly pay is $17. Ernst is paid his regular wage on June 14, 20**, on June 17, he receives a bonus of $500. The tax on the bonus is computed as follows:

Regular wage payment $985 Bonus 500 Total $1,485 Tax on total $65 Less: tax already withheld $15 Tax to be withheld from $500 bonus = $50

Wages

Remuneration paid on an hourly, weekly, or piece-work basis, total compensation paid to employees for service

NonTaxable Fringe Benefits

Services provided at no additional cost Qualified employee discounts working condition fringes qualified transportation fringes Use of on-premises athletic facilities reduces tuition for education job-placement assistance

Employer-paid sick pay

Sick pay is subject to withholding

Withholding State Income Tax

State income taxes should be withheld based on where the services are performed unless there is a reciprocal agreement between states, if there is not an agreement then laws of both states must be considered

Tiffany Moulder, married and claiming 3 allowances, receives a salary of $1,100.25 each week. Compute the amount to withhold for federal income tax using Table of Allowance Values and the percentage method tables.

Step 1: Determine gross wages, marital status, number of allowances, and frequency of pay. $1,100.25, married, 3 withholding allowances, paid weekly Step 2: Multiple the number of allowances by the weekly allowance amount: 3 x $80.80 = $242.40 Step 3: Subtract the value of the allowances from the gross pay: $1,100.25 - $242.40 = $857.85 Step 4: Compute the tax from the percentage tax table for weekly marries person: Over $600 but not over $1,745 ....12% of excess over $600 plus $37.30 $857.85 - $600 = $257.85 x 12% = $30.94 + $37.30 Total tax to be withheld = $68.24

Steps To Wage- Bracket Method

Step 1: Select the withholding table that applies to the employee's marital status and pay period Step 2: Locate the wage bracket (the first two columns of the table) in which the employee's gross wages fall Step3: Follow the line for the wage bracket across to the right to the column showing the appropriate number of allowances. Withhold this amount of tax

Fringe Benefits

Subject to Federal Income Tax Withholding, fair market value Cars Free or Discounted Flights Discounts on property or services Vacations Memberships in social or country clubs Tickets for entertainment and sporting events Flexible reporting ( as long as they are claimed by the end of the year frequency of claim doesn't matter)

Year-end bonuses to managers and supervisors

Subject to withholding: bonuses to managers and supervisors are considered compensation for services renders as employees.

% method Step 3

Subtract the amount for the number of allowances claimed from the employee's gross pay to find the excess of wages over allowances claimed EX: Gross Pay - $915.60 Less: Allowances - 350 Excess wages - $565.60

Marquat Company deducts union dues from its employees' paychecks each month during the year and send them to the local union office. How should the company report this deduction on the employees' Form W-2?

The company should report the total amount deducted from each employee in Box 14 of Form W-2. This box is to provide "other" information the company wants to give the employees. The company should label the amount as "union dues" in Box 14.

Bob Bradley is upset because his paycheck on February 8, 20**, has federal income tax withheld, even though he filed a W-4 claiming exemption from withholding earlier in the same year. What should the payroll manager say to Bradley?

The payroll manager must inform Bradley that an employee may claim exemption from withholding for only 1 tax year at a time. The exemption must be claimed each year by February 15. If a new certificate is not filed, the employer must withhold at the single rate with zero withholding allowances.

Grace Kyle submitted a new Form W-4 claiming one additional withholding allowance. Kyle also requested to be reimbursed for the over withholding prior to the change. How should the payroll manager respond to Kyle?

The payroll manager should inform Kyle that the company cannot reimburse her for any over-withholding that may have occurred prior to her submitting a new W-4. The only circumstances that allow the employer to reimburse an employee for over withholding is if the employer failed to put a new W-4 into effect that resulted in withholding.g

Form W-4 (Employee's Withholding Allowance Certificate)

Used to compute the amount of income tax to withhold from employees' wages Employee completes the form when they begin working for employer remains in effect until another is filed If number of allowances decreases the employee has 10 days to file a new W-4

Deferred Arrangements

Usually set up as a retirement plans most common is the Defined Contribution Plan- it provides benefits based solely on the amount paid by each employee and employer into the account and investment gains

Employee Compensation Subject to withholding include

Wages and salaries Vacation Allowances Supplemental payments Bonuses and commissions Taxable fringe benefits Tips Cash awards

Supplemental Wages Paid Separately from Regular Wages Method B

Withhold a flat 22% (37% if over $1 Million) on the supplemental pay

Personal Allowance

a deduction allowed in computing taxable income; also know as a personal exemption

Simple Plans

a small company plan for a company with up to 100 employees. The employer can offer a SIMPLE plan as part of a 401(k) plan. This plan allows employees to contribute a % of their pay toward retirement.

supplemental wage payments

additional compensation such as vacation pay, bonuses, and commissions paid to employees exercised nonqualified stock options and dismissal pay Employer decides whether to lump the regular wages and supplemental wages together or withhold from the supplemental wages separately

Payment Exempt from Withholding

advances accident and health insurance payments deceased person's wages dependent care assistance domestic service educational assistance employee business expense reimbursements employee-safety and length-of-service awards employer-frovided parking foreign service by US Citizens Group-term life insurance cost Health reimbursement arrangement HRA Indivuals under 18 long-term care insurance minster of churches moving expenses reimbursements public officials retirement and pension plans sickness or injury payment transportation

Special withholding allowance

allowance claimed by employees so that wages which are below the level subject to the income tax will not be subject to the income tax will not be subject to withholding

backup withholding

amount of income tax withheld by payers of taxable interest, dividends, and certain other payments made to payees who have failed to furnish the payers with correct identification numbers If the independent contractor does not provide their TIN then the employer must withhold 24% of payments

Standard deduction

an amount of money used to reduce an individual's adjusted gross income in computing taxable income

part-year employment

another method of calculating the withholding of federal income tax from an employee's pay.

De minimis fringe benefits

any property ir service the value of which is so small that accounting for it would be unreasonable or impractical Ex: Coffee and Donuts

Reciprocal agreement

arrangement entered into by two or more states whereby the resident of one state working in another state will not be subject to the withholding of income taxes by the state in which the person is employee if that state has entered into a similar agreement with the employee's resident state

Choosing Percentage Method VS Wage-Bracket Method

both distinguish between married and unmarried both provide the full benefits of the allowances claimed by the employee choice of method is usually based on the number of employees employer can change from one method to another at any time different methods may be used for different groups of employees Both take Standard Deduction into account

Privately Printer Forms

employers may use their own forms by obtaining specifications for the private printing of Forms W-2 from any IRS center or district office

Archer Medical Savings Accounts

for employees of small business (at or under 50 employees) employees can deduct the contributions on their tax return and have full control over the account Employer contributions are not subject to tax withholding Unused money carry over year to year

information returns

forms upon which an employer reports compensation paid to individuals who are not employees Employer sends copies of the returns to the payee by the end of January Form 1099 To transmit Form 1099 employer uses From 1096 Annual Summary and Transmittal of US Information Returns

gross-up

gross-up amount of supplemental payment so that after the appropriate payroll taxes are withheld, the net amount left is equal to the original intended payment

Wages Received in the same payroll period are in part subject to withholding and exempt , then all wages are treated alike

if 1/2 of wages are subject to withholding then withholding is required on all wages, if more than 1/2 of the pay is exempt from withholding then no withholding is required for the total pay

If the employer indicate specifically the amount of each payment then the employer may withhold at a flat 22% rate on the supplemental wages

if the tax is withheld on the employee's regular wages at the appropriate rate

Form W-2 Wage and Tax Statement

is prepare if any of the following items apply to an employee during the calendar year 1. Income tax or SS taxes were withheld 2. Income tax would have to have been withheld if the mployee had not claimed more than one withholding allowance or had not cliamed exemption from withholding on Form W-4 3. Any Amount was paid for Services if the employer is in a trade or business. The cash value of any noncash payments made should be included

Vacation Pay

is withheld as if it were regular pay if vacation pay is in lieu of taking vacation time treat it as a regular supplemental wage payment and calculate the tax on the total as a single payment

Individual Retirement Accounts

may put aside each year the lesser of $6,000 or 100% of their compensation without paying federal income tax on their contributions if employee is age 50 or eolder before year end the most that can be contributed is the lesser of $7,000 or 100% eligible employees may make an additional $6k contribution on behalf or a nonworking or low-earning spouse

annualizing wages

method of determining amount of income taxes to be withheld by multiplying the wages for one payroll period by the number of periods in the year, determining the annual amount of withholding required on the total wages, and dividing the annual withholding by the number of payroll periods

wage-bracket method

method of determining amount of income taxes to be withheld by reading amount from tables provided by the IRS, which take into consideration length of payroll period, gross earnings, marital status, and number of withholding allowances claimed

Percentage method

method of determining amount of income taxes to be withheld using table of allowance values and percentage method withholding table

Quarterly averaging

method of determining the amount of income taxes to be withheld by estimating the employee's average wages for the calendar quarter, computing an average payment, and withholding an amount based on the average payment

Form W-3, Transmittal of Wage and Tax Statements

must be filed with the SSA by employers and other payers as a transmittal for Forms W-2 Employer indicated the # of documents being transmitted is mailed to employers during the fourth quarter

Traveling Expenses - Accountable Plan

not subject to income tax withholding if the employer's reimbursement or allowance meets all 3 1. business connected 2. adequate accounting within a reasonable time period (generally 60 days) 3. Employee return of excess of substantiated amounts (generally 120 days)

Independent Contractor Payments

payments made to independent contractors of at least $600 must be reported on Form 1099- Misc Income this does not apply to contractors who are incorporated unless the payments are medical or health-care realted

Ruml Plan

put the collection of the income tax on a pay-as-you-go basis

Other Methods of Withholding

quarterly averaging annualizing wages part-year employment

wage and tax statements

statements furnished by employers to their employees informing them of the wages paid during the calendar year and the amount of taxes withheld from those wages

Flexible -Spending Account

the deductions from the employees' pay are made with pretax dollars allowed to carryover to following year OR grace period to use until March 15th of following year OR money can just be forfeited 2019 limit was $2,700 per year

Form 4419 Application for Filing information Returns Electronically FIRE

the employer must complete this form and file it with the IRS if they have more than 250 employees they must do it because they have to file electronically

Form W-2c Corrected Wage and Tax Statement

to correct errors in previously filed Forms W-2 Form W-3c should accompany all corrected wage and tax statements unless the correction is for only 1 employee or to correct employees' names, addresses, or SS#

Withholding for Pension or Annuity Payments

treat the payment from any of these as wages for the purpose of withholding, unless the recipient of pension or annuity payments elect NOT to have federal income taxes withheld from such payments Payers must withhold on monthly pensions and annuity payments exceeding $24,396 a year unless payees elect otherwise Payers are required to withhold income taxes if the recipients were married and claiming 3 withholding allowances W-4P to change