Payroll insight
Gretchen Inouye CPP, payroll consultant, outlines the rules for withholding federal income tax from supplemental wages Taxing supplemental wages in USA
S upplemental wages are wage wages’. (‘Regular wages’ are generally those wage payments that are paid on a regular, recurring pay period schedule on a predetermined basis, such as salaries and hourly wages.) Bonuses, commissions, overtime pay, awards, prizes, back pay are examples of taxable compensation that would be considered supplemental wage payments. The available methods for withholding federal income tax from supplemental wage payments depend on various conditions including identification of the payments, timing, and amounts. There may be conditions related to whether the employee has had federal income tax withheld on regular wage payments during the year (or during the preceding year in some circumstances). If an employee receives supplemental payments of more than $1 million from the employer during the calendar year, the excess is subject to mandatory withholding. Only the supplemental payments are used to determine whether the employee has reached the $1 million threshold. The employee’s Form W-4 is disregarded if the payment is subject to mandatory withholding. If the employee is to receive a supplemental payment that will cross the threshold, the employer may withhold on the entire amount at the withholding rate or use one of the other methods up to the limit and tax only the excess. If the supplemental wage payments to an employee during the calendar year do not exceed the threshold of $1 million, the rules and conditions that follow should be applied in determining the federal income tax to be withheld. If supplemental wages are paid with regular wages and the amounts of each are not specified, tax is withheld as if the total is a single payment for a regular payroll period. This method would use the employee’s Form W-4 using either the wage-bracket or percentage method of calculating the withholding. payments, including cash and non- cash benefits, that are not ‘regular
If supplemental wage payments are paid separately from regular wages (or are combined with regular wages in a single payment and each of the amounts are specified) the federal income tax withholding method will partially depend on whether income tax has been withheld from regular wages. ...conditions including identification of the payments, timing, and amounts If federal income tax has been withheld from an employee’s regular wages in the current or immediately preceding calendar year, the employer may choose to use one of the following methods for withholding on the supplemental wages: ● Optional flat rate method – Withhold a flat 25% on the supplemental payment subject to federal income tax withholding (no other percentage is allowed under the regulations). The employee’s Form W-4 is disregarded with this method regarding marital status and number of allowances. ● Aggregate method – If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages and calculate the tax on the combined amount using the employee’s Form W-4 and appropriate tax tables. If the supplemental wage payment is not paid with concurrent regular wages, add the supplemental wages either to the preceding regular pay period or the current pay period and calculate the tax as if the payments were combined. When the taxes have been calculated on the combined amount, subtract the taxes on the regular wages and the remainder is the amount of tax to be withheld on the supplemental wage payment. If there is more than one supplemental wage payment
withheld from an employee’s regular wages in the current or immediately preceding year, the aggregate method is used. Withholding social security and Medicare is required on taxable supplemental wage payments to the wage base limits and other regulations without regard to any of the methods and options used for federal income tax withholding. Federal unemployment tax is also applicable to the wage base limit as an employer tax. Tax deposit rules and determination of tax liability are the same for supplemental wages as they are for regular wages. States and localities that have income tax withholding generally have their own regulations regarding tax withholding on supplemental wages. State unemployment tax would also be applicable. n This article was published in the American Payroll Association’s PayTech magazine in April 2015. The American Payroll Association (APA), www.americanpayroll.org, is the USA’s leader in payroll education, publications, and training. This nonprofit association conducts more than 300 payroll training conferences and seminars across the country each year and publishes a complete library of resource texts and newsletters. Representing more than 23,000 members, APA is the industry’s highly respected and collective voice in Washington, DC. The Global Payroll Management Institute (GPMI), www.GPMInstitute.com, spearheads the APA’s global initiatives to provide the world with a leading community of payroll leaders, managers, practitioners, researchers, and technology experts. Subscribers connect with each other through networking discussions, collaborative opportunities, and access to education and publications dedicated to global payroll strategies, knowledge, research, employment, and training. GPMI also publishes several global payroll texts and white papers as a benefit to subscribers.
in the period, add them all together. If federal income tax has not been
27
Issue 26 | December 2016/January 2017
| Professional in Payroll, Pensions and Reward |
Made with FlippingBook Online document