Withholding Taxes

KATHLEEN L. MIZEJEWSKI, CPP, GBA

March 10, 2012

E-Mail: kathmiz@msn.comPhone: 708-363-5986

Constructive Payment of Wages 6-2Wages made available to EE Without

“substantial limitation or restriction”

Employer makes payment and Wages become available to EE = constructive payment:

Cash – Paid to EEAvailable at office – To Pick UpDirect deposit – EE Account CreditedMail – Check Delivered to Home

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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.

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Social Security Numbers 6-5SSN 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

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Social Security Numbers 6-7Name 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

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Form W-4 6-10 Employee Withholding Allowance Certificate

Original, complete, valid, signedSingle-zero, if no W-4 on fileBefore first day of workWithin 10 days after decrease

Effective W4-FormNew EE- first payroll period ending after filingCurrent EE - first payroll ending 30 days after filing

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Form W-4 6-13Employee Withholding Allowance Certificate

Exempt if:Employee had no liability in prior yearExpects no liability in current yearCan be claimed as a dependent on another person’s

returnIncome >$950 which includes >$300 in non-wage

income (e.g. interest and dividends)

Exemption effective for one year only - must re-file each year

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Form W-4 6-13Employee Withholding Allowance Certificate

Invalid W-4Altered in Any Way

Strike outs or Changes to FormAdditions - Written in – Not AllowedInvalid: (Must be allowances + $)

Flat Dollar Amount OnlyPercentage Only

False Info on Form – Invalidates Form

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Form W-4 6-13Employee Withholding Allowance Certificate

Perjury Statement – Beginning 2005

Employee Examines & Acknowledges all Information on W-4 Form is Correct:AllowancesSocial Security NumberExemptionsName, Address, Marital Status

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Form W-4 6-14 Employee Withholding Allowance Certificate

Submit copy of W-4 to IRSOnly 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 IRSIRS Lock-In-Letter will specify maximum number

of exemptions employee can claimER must give EE copy of IRS notice

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Form W-4 6-16Employee Withholding Allowance Certificate

Retention - 4 years after date of last return filed, using info on the W-4

Successor / PredecessorStandard procedure – Predecessor reports and

continues to maintain W-4’sAlternate procedure – Successor reports and

maintains W-4’s

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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 SupportWith additional information such as Employer Name,

Address and EINAids Fed and States to increase Child Support

withholding

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Form W-4 6-17Form W-4P - Pension

Withholding Certificate for Pension or Annuity Payments – Retirees must complete

Form W-4S - Sick PaySubmit 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

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Form W-4 6-18State 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)

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Federal Withholding Methods 6-20Useful link:

http://www.paycheckcity.com - free paycheck calculation – registration required

Wage Bracket method

Percentage method

Supplemental

Annualized

Cumulative

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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 periodMarried, Single

Pay periodsWeekly, Biweekly, Semimonthly, Monthly,

Quarterly, Semiannual, Annual or Daily/Misc.

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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

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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

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Federal Withholding Methods Percentage Method 6-24

Automated systems – easily programmed – use Annual

More Flexible

More Unusual Payroll FrequenciesQuarterly, Semiannual, Annual, Daily/Misc

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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

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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

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Federal Withholding Methods Alternative Methods 6-25

Annualized wagesCalculate on annual payroll periodUsed by automated systems

Cumulative wages – Inconsistent $$CommissionsBonusesEmployee must request in writingSame frequency for entire year

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Federal Withholding MethodsAlternative Methods 6-26

Average estimated wagesTipped employees

Part-year employmentSeasonal, unemployedRequest in writing-expires at year endTerm of Continuous employment

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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)

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Federal Withholding 6-30 Supplemental Wage Payments

Taxed as regular payment ifSupplemental pay combined with regular wage and

amounts not indicated separately

Flat rate - 25% - Allowed whenAmounts indicated separately (Regular pay &

Supplemental Pay) Combined payment with amounts listed separatelyOnly if Fed Tax was withheld from last regular wage

payment

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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.

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Federal Withholding 6-32 Supplemental Wage Payments

Aggregate methodUse if employee has no federal tax withheld from

regular wages due to # of allowancesCombine supplemental and regularCalculate 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)

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Federal Withholding 6-37 Pensions and Annuities

W4-P – For Pension and Annuity Payment

Depends on type of paymentPeriodic vs. non-periodic

Periodic (payments made over period of one year). Indicate on W4-P:Can request no withholding on W4-PMarital status, allowancesAdditional amount to withhold

If No W-4P - Use Married 3 allowances

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Federal Withholding Pensions and Annuities 6-38

Non-periodicNot eligible for rollover and > $200

Withhold 10%

Eligible for rolloverMandatory Withholding of 20% unless rolled to

another qualified plan, IRA or §403(b) annuity

Tax is withheld by plan administrator or payer

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Federal WithholdingBackup Withholding 6-42

Tax rate of 28% required on payments if:No TIN furnished (TIN = SS#, ITIN, EIN)TIN is obviously incorrectIRS CP2100 notice received – issued annuallyIRS Notification that TIN is incorrectNo certification from payee receiving interest /

dividend payments (certification means they signed Form W-9 – Request for Taxpayer Identification Number and Certification)

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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.

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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

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Social Security and Medicare

Taxes 6-43FICA (Federal Insurance Contribution Act) -

Social Security & Medicare

Social SecurityOASI (Old Age and Survivors Insurance)DI (Disability Insurance)

MedicareHI (Health Insurance)

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Social Security and Medicare Taxes 6-45

Employee share withheld from employee wages

Matching amount paid by employer

Fixed rate – Same 1990 to 20106.2% of wages to Social Security wage limit1.45% of wages - No Medicare wage limit

Note: No rounding on SS or Medicare

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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 2010Employee’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

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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)

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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 $106,800EE Rate – 4.2% X 106,800 = $4,485.20ER 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

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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

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Social Security and Medicare Taxes 6-49

Subject to tax when deferred: (not when paid)Elective deferrals to §401(k) & other deferred

compensation plansNon-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

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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

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Self –Employment Tax 6-50SE 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)

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Social Security and Medicare Exempt Wages 6-51

All compensation is taxable unless specifically exempted under IRC:Workers compensation paymentsSick / disability payments - after 6 mo.§125 flexible benefit plan contributionsQualified moving expense reimbursementsCash tips <$20 per monthWages paid after year of deathSee List of Additional Exempt Wages on page 6-51

& 6-52

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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

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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

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Failure to Withhold Penalties 6-54No 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 returnsResponsible person10 year time limit to collect taxes

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State and Local Withholding 6-55All 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@msn.com

Phone: 708-363-5986

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