COMPLIANCE
Can you withhold more than 22% federal income tax on supplemental wages? GLOBAL PAYROLL
Sally Hilton CPP, director of education services at PayrollOrg (formerly American Payroll Association) explains why caution should be exercised when addressing employee requests to withhold higher federal income tax through payroll *
Y ou’re preparing to process the annual bonus payroll when an employee mentions 22% isn’t sufficient federal income tax (FIT) withholding for them and asks you to withhold a higher percentage. Should you comply with this request? Short answer: no. You may think there’s no harm in withholding more FIT at the employee’s request, but you may open Pandora’s box if you honour their wish. This employee may share your conversation with coworkers, which could trigger other employees to make similar requests. Some might request more withholding than the optional flat rate or a lower percentage of tax. This could become a tedious and manual process. Errors are likely to occur. The Internal Revenue Service (IRS) Publication 15 (Circular E), Employer’s Tax Guide (http://ow.ly/OXuG50Oe2Si), addresses withholding on supplemental wages (see article in the June 2022 issue of Professional magazine: http://ow.ly/ HYlT50Oe3bk). Employers have options on how to calculate FIT on supplemental wages, assuming an individual’s year-to- date taxable supplemental wages don’t exceed $1 million. If conditions are met,
you may (but aren’t required to) use the optional flat rate of 22%. However, Publication. 15 clearly states no other percentage is allowed. You may want to use IRS Publication. 15 as your resource if you’re challenged by your employer (or an employee) to alter the percentage of withholding. Another withholding option is the aggregate method. It’s common for supplemental wages to be identified on employees’ pay statements. However, you must use the aggregate method if supplemental wages are paid concurrently with regular wages but aren’t separately stated on the employee’s pay statement. In our scenario, where an employee asks for a different tax rate to be withheld from their bonus, it may be beneficial to use the aggregate method of FIT withholding. When a bonus or any supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages and withhold FIT as if the total were a single payment for a regular payroll period. If there are no concurrently paid regular wages, add the supplemental wages to either the regular wages paid
– or to be paid – for the current payroll period, or the regular wages paid for the preceding payroll period. Figure the FIT withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax already withheld or to be withheld from the regular wages. Withhold the remaining tax from the supplemental wages. When using the aggregate method, withhold the appropriate amount of tax based on the individual’s Form W-4 – a form likely completed by the employee. If using the aggregate method, verify your system is aggregating with the appropriate regular wages. You should never calculate FIT withholding from supplemental wages using Form W-4 as if the supplemental wage payment was a stand-alone payment. Use either the optional flat rate or the aggregate method. Must you use the same withholding method for all employees receiving a bonus or other supplemental wages? No. The IRS gives us prescribed methods of income tax withholding. It’s the employer’s choice which method to use and not up to the employee. Remember to explore your options. n
PayrollOrg (PAYO), (http://ow.ly/F33R50Oe3Ez) is the leader in global payroll education, publications and training. This non-profit association conducts more than 300 payroll training conferences and seminars across the globe each year and publishes a complete library of resource texts and newsletters. Representing more than 19,000 members, PayrollOrg is the industry’s highly respected and collective voice in Washington, D.C. Get more information at http://ow.ly/F33R50Oe3Ez and http://ow.ly/9XiX50Oe3QA.
* This article relates to US payroll practices.
| Professional in Payroll, Pensions and Reward | June 2023 | Issue 91 18
Made with FlippingBook - Online magazine maker