Withholding Taxes
ANGELA PELLERITO, CPP
February 21, 2015
E-Mail:
chicago_chapter_apa@hotmail.com
Phone: 773-631-8480
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 6-4/6
 SSN Verification>
 Effective September 2011, SSA stopped using a
person’s gender as part of the verification process.
 Each SSN sent to the SSA through the SSNVS will
be returned with 1 of 6 verification codes – see P.
6-6. Only the last 4 digits of the will be returned if
the SSN matches the SSA’s database
 SSN is required – even if there is no withholding
3
Social Security Numbers 6-5
 SSN Verification>
 Internet Verification Process - Online–
 Social Security Number Verification Service (SSNVS)
 Registration required
 Register to use SSNVS at:
www.socialsecurity.gov/bso/bsowelcome.htm
 Request access and activation code from BSO homepage
 10 EE’s per screen (immediate results), or
 up to 250,000 per file submitted – results next business day.
Must register first.
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.gov
 Employer should refuse to make name change until
EE provides new SS card with new name
5
Form W-4
6-11
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 in # of withholding
(divorce, death, life event, etc.)
 Effective W4-Form - 6-8
 New EE- first payroll period ending after filing
 Current EE - first payroll ending 30 days after filing
6
Form W-4
6-10
Employee Withholding Allowance Certificate
 Exempt if:
 Employee had no liability in prior year
 Expects no liability in current year
 Not Exempt if:
 EE can be claimed as a dependent on another
person’s return
 Income >$1,000 which includes >$350 in non-wage
income (e.g. interest and dividends)
 Exemption effective for one year only - must
re-file each year - by February 15th of next year
(15th is a holiday or week-end, the next business day)
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Form W-4
6-11
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 + $)
 Flat Dollar Amount Only
 Percentage Only
 False Info on Form – Invalidates Form
8
Form W-4
6-11/12
Employee 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
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Form W-4
6-12
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
6-12
Employee Withholding Allowance Certificate
11
Form W-4
6-12
Employee Withholding Allowance Certificate
12
Form W-4
6-14
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
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Form W-4
6-15
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
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Form W-4
6-16
 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 min $20
individual must be paid @ least $10
15
Form W-4
6-16
 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. 6-17)
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Federal Withholding Methods 6-18
 Useful link:
 http://www.paycheckcity.com - free paycheck calculation – registration

required
IRS Withholding Calculator
http://www.irs.gov/Individuals/IRS-Withholding-Calculator
 Wage Bracket method
 Percentage method
 Supplemental
 Annualized
 Cumulative
17
Federal Withholding Methods
Wage Bracket Method 6-18
 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 6-21
 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
19
Federal Withholding Methods
Wage Bracket Method 6-21
 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
20
Percentage Method 6-23
 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 6-23
 2014 Payroll Period - One Allowance > $3,950
 Weekly
76.00 x 52 = 3,950
 Biweekly
151.90 x 26 = 3,950
 Semimonthly
164.60 x 24 = 3,950
 Monthly
329.20 x 12 = 3,950
 Quarterly
987.50 x 4 = 3,950
 Semiannually
1,975.00 x 2 = 3,950
 Annually
3,950.00
 Daily or Misc.
15.20
22
Federal Withholding Methods
Percentage Method 6-23
 Example using 2014 biweekly % table:
 Harvey’s biweekly taxable compensation is $2,300.
He is married and claims 3 allowances – Ex. 6-23
 $ 151.90 x 3
= $ 455.70
 $2,300.00 - $ 455.70 = $1,844.30
 $1,844.30 - $ 1,023 = $ 821.30
 $ 821.30 x 15%
= $ 123.20
 $ 123.20 + $ 69.80 = $ 193.00
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Federal Withholding Methods
Alternative Methods 6-23/24
 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
24
Federal Withholding Methods
Alternative Methods 6-24/25
 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 6-26
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 6-26)
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Federal Withholding 6-28
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
27
Federal Withholding
Supplemental Wage Payments 6-28
 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 39.6% on Supplemental
Wages over $1 Million. ( % Increased in 2013 – was
35%)
28
Federal Withholding 6-27
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
 If EE claims “Exempt” then Supplemental wages less
than $1,000,000 should not have withholding
providing YTD is not over $1,000,000 (39.6%)
 See 2008 IRS Guidelines for treating certain
payments – 9 Situations
(p. 6-29 to 6-32)
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Federal Withholding 6-34
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 6-35
 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
31
Federal Withholding
Backup Withholding 6-39
 Tax rate of 28% required on payments if:
 No TIN furnished (TIN = SS#, ITIN, EIN)
 TIN is obviously incorrect (ex. Wrong # of digits)
 IRS Notification that TIN is incorrect (through a “B”
Notice)
 The payer does not receive a certification that the
payee is not subject to withholding
 Online TIN Matching is available- payers can verify
TIN’s through either Interactive (25 Tin’s) or Bulk
(up to 100,000 TIN’s) Matching Systems
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Federal Withholding
Earned Income Credit 6-40
 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
Federal Withholding
Earned Income Credit 6-40
EIC is a tax credit that reduces the taxes owed
by the employee.
ER’s must notify EE’s earning less than $52,427
in 2014 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. (Ee claim credit when filing
personal return)
34
Social Security and Medicare
Taxes
6-41
 FICA (Federal Insurance Contribution Act) Social Security & Medicare
 Social Security
 OASI (Old Age and Survivors Insurance)
 DI (Disability Insurance)
 Medicare
 HI (Health Insurance)
35
Social Security and Medicare
Taxes
6-41
 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
36
Social Security and Medicare
Taxes
6-41
 2011 – Change in SS Tax Rate: Tax Relief
Unemployment Insurance Reauthorization and
Job Creation Act of 2010 – TRA 2010
 Employee’s rate: 4.2%
 Employer’s rate: 6.2%
 TRA 2012:
February 17, 2012 – TRA2012 –
extended the the SS tax rate reduction through the end
of 2012.
 SS Wage Base for 2014 is 117,000
37
Social Security and Medicare
Taxes
6-42
 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).
 Filing Status
Threshold Amount
Married-Joint
$250,000
Married-Separately
125,000
Single
200,000
Head of Hs – w/qualifying person
200,000
Qual.Widow(er) w/dep child
200,000
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Social Security and Medicare
Taxes
6-43
 SS Wage Base – SS tax is applied only up to a
certain wage base. For 2014 that is $117,000
 EE Rate – 6.2% X 117,000 = $7,254.00
 ER Rate – 6.2% X 117,000 = $7,254.00
 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
39
Social Security and Medicare
Taxes
6-46
 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
40
Social Security and Medicare
Taxes
6-47
 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
41
Social Security and Medicare
Taxes
6-47
 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
42
Self –Employment Tax
6-48
 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%).
 2014 Add’l .9% Medicare
 Tax Determined and Paid with Personal Income
Tax Return (Form 1040)
43
Social Security and Medicare
Exempt Wages
6-48
 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 6-47 &
6-48
44
Social Security and Medicare
Exempt Employment 6-49
 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
45
Social Security and Medicare 6-50
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
46
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
47
State and Local Withholding 6-54
 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 6.5
48
Federal Withholding
QUESTIONS ?????????????
49
Thank You and Good Luck !
Angela Pellerito, CPP
February 21, 2015
E-Mail:
chicago_chapter_apa@hotmail.com
Phone: 773-631-8480
50