Withholding Taxes
KATHLEEN L. MIZEJEWSKI,
CPP, GBA
March 20, 2010
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”

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
2
Social Security Numbers 6-5

3 - SSN Verification methods: Phone, Paper
and Internet
» To verify up to five names/SSNs: Employers
can telephone 1-800-772-6270 or 1-800-7721213
» 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
3
Social Security Numbers 6-5
» SSN Verification methods (continued)
» 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
» 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
4
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
5
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
6
Form W-4
6-13
Employee 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 nonwage income (e.g. interest and dividends)

Exemption effective for one year only must re-file each year
7
Form W-4
6-13
Employee 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 + $)
»Only a Flat Dollar Amount
»Only a Percentage
» False Info on Form – Invalidates Form
8
Form W-4
6-13
Employee Withholding Allowance Certificate

Perjury Statement – Beginning 2005
» Employee Examines & Acknowledges
all Information on W-4 Form is Correct:
– Allowances (previous to 2005)
– Social Security Number
– Exemptions
– Name, Address, Marital Status
9
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
10
Form W-4
6-16
Employee 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
11
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
12
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
13
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)
14
Federal Withholding Methods 6-20

Useful link:
» http://www.paycheckcity.com - free paycheck calculation –
registration required

Wage Bracket method

Percentage method

Supplemental

Annualized

Cumulative
15
Federal Withholding Methods
Wage 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.
16
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
Circular E)
(Per Tables in
» Multiply daily withholding rate (3) by number of
days (1) and withhold from Taxable Wages
17
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
18
Federal Withholding Methods
Percentage Method 6-24

Automated systems – easily
programmed – use Annual

More Flexible

More Unusual Payroll Frequencies
» Quarterly, Semiannual, Annual,
Daily/Misc
19
Federal Withholding Methods
Percentage Method 6-25
» 2009 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
20
Federal Withholding Methods
Percentage Method 6-25

Example using 2009 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 - $ 921.00 = $ 957.86
– $ 957.86 x 15%
= $ 143.68
– $ 143.68 + $ 61.30 = $ 204.98
21
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
22
Federal Withholding Methods
Alternative Methods 6-26

Average estimated wages
» Tipped employees

Part-year employment
» Seasonal, unemployed
» Request in writing-expires at year end
» Term of Continuous employment
23
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)
24
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
25
Federal Withholding
Supplemental 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
– 2009 Mandatory tax rate is 35% on
Supplemental Wages over $1 Million.
26
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)
27
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
28
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
29
Federal Withholding
Backup 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)
30
Federal Withholding
Earned Income Credit

EIC is a tax credit that reduces the taxes
owed by the employee. The 2009 EIC
rates are:
» 7.65% of $5,970 (max $457) - no qualified
dependent children
» 34% of $8,950 (max $3,043) - one qualified
dependent child
» 40% of $12,570 (max $5,028) - two or more
qualified dependent children
31
Federal Withholding
Earned Income Credit 6-43

EIC Phases Out as Modified Adjusted Gross
Income Increases. Max AGI Amounts are:
Maximum AGI
No dependents
One dependent
Two or more dependents

Single
$13,440
$35,463
$40,295
Married
$16,560
$38,583
$43,415
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.
32
Federal Withholding 6-44
Advanced 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. 2009 is $1,826.
– 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
33
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)
34
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% - Social Security wage limit
» 1.45% - No Medicare wage limit

No rounding on SS or Medicare
35
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
36
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
37
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
38
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)
39
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
40
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 years41
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
42
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
43
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
44
Thank You and Good Luck !!!!
Kathleen L.
Mizejewski, CPP,
GBA
March 20, 2010
E-Mail:
kathmiz@msn.com
Phone: 708-363-5986
45