Withholding Taxes KATHLEEN L. MIZEJEWSKI, CPP, GBA March 5, 2011 E-Mail: [email protected]@msn.com Phone: 708-363-5986.

Withholding TaxesKATHLEEN L. MIZEJEWSKI,

CPP, GBA

March 5, 2011

E-Mail: [email protected]: 708-363-5986

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 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.

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/SSN’s: 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 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

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

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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

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

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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:– 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-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

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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 6-16Employee Withholding Allowance

Certificate

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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 Support» With additional information such as

Employer Name, Address and EIN

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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

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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)

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Federal Withholding Methods 6-20

Useful 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 period– Married, Single

» Pay periods– Weekly, 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

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 > 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

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Federal Withholding Methods Percentage Method 6-25

» 2010 Payroll Period - One Allowance – Weekly 70.19 x 52 = 3,650– Biweekly 140.38 x 26 = 3,650– Semimonthly 152.08 x 24 = 3,650– Monthly 304.17 x 12 = 3,650– Quarterly 912.50 x 4 = 3,650– Semiannually 1,825.00 x 2 = 3,650– Annually 3,650.00 – Daily or Misc. 14.04

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Federal Withholding Methods Percentage Method 6-25

Example using 2010 biweekly % table:» Harvey’s biweekly taxable compensation is

$2,300. He is married and claims 3 allowances.– $ 140.38 x 3 = $ 421.14– $2,300.00 - $ 421.14 = $1,878.86– $1,878.86 - $ 942.00 = $ 936.86– $ 936.86 x 15% = $ 140.53– $ 140.53 + $ 41.30 = $ 181.83

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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

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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

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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 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

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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

– 2010 Mandatory tax rate is 35% on Supplemental Wages over $1 Million.

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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)

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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

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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

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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 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. The 2010 EIC rates are:» 7.65% of $5,980 (max $457) - no qualified dependent

children

» 34% of $8,970 (max $3,050) - one qualified dependent child

» 40% of $12,590 (max $5,036) - two or more qualified dependent children

» 45% of $12,590 (max $5,666) – three or more qualified dependent children

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Federal Withholding Earned Income Credit 6-43

EIC Phases Out as Modified Adjusted Gross Income Increases. Max AGI Amounts are:

Special Eligibility Rules – Must meet other requirements: Must be > 25 and < 65, Live in US for ½ of year, cannot be claimed as a dependent on another return, etc.

Maximum AGI Single Married

No dependents $13,460 $18,470

One dependent $35,535 $40,545

Two dependents $40,363 $45,373

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Federal Withholding 6-44Advanced Earned Income Credit

Advance payments» Form W-5, Earned Income Advanced Payment

Certificate (expires 12/31) must be filed by EE» 60% may be received in advance up to max

annual amount. 2010 is $1,830.– Wage bracket or percentage tables are in Circular E.– Add amount to net pay

Required to provide notice to employees IRS offers EITC Website for Employers:

– www.irs.gov/individuals/article/0%2C%2Cid=118888%2C00.html for forms, pubs, schedules, online tools

34

Social Security and Medicare

Taxes 6-47 FICA (Federal Insurance Contribution

Act) - Social Security & Medicare

» Social Security– OASI (Old Age and Survivors

Insurance)– DI (Disability Insurance)

» Medicare– HI (Health Insurance)

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Social Security and Medicare Taxes 6-47

Employee share withheld from employee wages

Matching amount paid by employer

Fixed rate – Same since 1990» 6.2% of wages to Social Security wage limit» 1.45% of wages - No Medicare wage limit

No rounding on SS or Medicare

36

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 6-50

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

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Social Security and Medicare Taxes 6-51

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

39

Self –Employment Tax 6-52

SE Individuals Pay both Employer and Employee shares of Social Security and Medicare – Rate is 12.4% for SS Tax up to Base. For Medicare 2.9% on total wages (to total of 15.3%).

Tax Determined and Paid with Personal Income Tax Return (Form 1040)

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Social Security and Medicare Exempt Wages 6-52

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-

52 & 6-53

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Social Security and Medicare Exempt Employment 6-53

Employment exempt:

» 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 6-54 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 6-56

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

44

State and Local Withholding 6-57

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 5, 2011E-Mail:

[email protected]: 708-363-5986