CHAPTER 4 INCOME TAX TAXWITHHOLDING Developed by Lisa Swallow, CPA CMA MS

Taxable Wages for FIT Withholding Purposes xWages/Salaries xCash xBonuses xProfit sharing xSupplemental Wages xSeverance pay xRetroactive increases xVacation Pay xHow to withhold: xwith regular pay (treat as one paycheck and withhold accordingly) xalone - 28% flat supplemental withholding

Fringe Benefits xNon cash fringe benefits xER must withhold FIT unless specifically excluded xExamples include: xtickets to athletic events xathletic club membership xpersonal use of corporate car xfrequent flier miles xstock options(when option exercised) xSpecifically excluded fringe benefits include: xde minimis and working condition fringe xreduced tuition, qualified transportation fringes, meals & lodging if for ER benefit

How to Withhold FIT on Noncash Fringe Benefits zWithhold like supplemental (28%) zWith regular pay - treat as one paycheck and withhold accordingly (for example - country club membership valued at $2000/year - can put $500 on 4 paychecks) xFor FICA/FIT, ER must withhold on fair market value of benefit > amount employee paid towards benefit xDon’t have to withhold FIT on personal use of corporate car if ER chooses - but must always withhold FICA on personal use of corporate car xStill, the fair market value is on W-2 and EE has to pay FIT at year end xER must figure value of fringe benefits no later than 1/31

FIT Withholding on Tips zER receives form 4070 from EE by 10th of each month zER must withhold based on form 4070 (reported tips) zEmployer is not required to withhold on allocated tips (see chapter 3) - only reported tips

FIT Withholding on Tips (continued) zWhat if taxes withheld > hourly wages to be paid? yFor example blackjack dealer reported tips = $2000 for one week; her FIT/FICA withholding will exceed her paycheck x EE gets no paycheck and pays balance with form 1040 or can make quarterly estimated tax payments

What is Exempt from FIT zMinisters z< 18 newspaper carriers zMoving expenses if EE will deduct zEducational assistance if it maintains/improves job status zTravel Reimbursements but only if made under an “accountable plan” yER has drafted IRC-approved plan; if there is not a plan in place, travel reimbursements are made under a non-accountable plan, considered wages, and therefore ER must withhold FIT

What is Exempt from FIT (continued) zContributions to deferred compensation plan y401(k) or SEP or SIMPLE contributions xThese are retirement plan contributions that are made pretax for FIT purposes; however, ER must still calculate/withhold/match FICA zContribution to flex plans or cafeteria plans ySection 125 xThese are salary reductions whereby EE puts pretax dollars into a trust account to be used for health care and dependent care; these dollars do not have FIT or FICA withheld on them

How does ER know how much to withhold yBest for EE if FIT withholding = tax liability (goal is no refund and no tax due) yW-4 How many withholding allowances yOne allowance for self (if not claimed by other person) yOne for each dependent ySpecial allowances (itemized deduction, other compensation, tax credits, etc. – use worksheet on back of W-4 to calculate)

W-4 ySingle or married or “married but tax withheld at higher single rate” box - why would an EE choose this? yBecause possibly other sources of taxable income yExempt status yCan claim if taxpayer had no income tax liability last year and none expected this year yCan’t claim exempt if dependent on someone else’s tax return and earn $700 and have unearned income * never advise employee as to how many allowances to claim*

Other Situations on W-4 yIf EE doesn’t provide a completed W-4, ER withholds at single rate, 0 allowances xEE can change, when ER receives new W-4, has 30 days xEE must change within 10 days for decrease in # of allowances  Lose child as an allowance (custody)  Become single  Don’t have to do if lose allowance due to death yUnauthorized changes/additions invalidate W-4 yFile in personnel file – only send to IRS if: xEE claims 11+ withholding allowances xClaims exempt and is earning more than $200/week

How does ER find what amount to withhold? yUse Circular E and find correct withholding yEither Wage Bracket (easiest) or yPercentage Method, only use if: yhighly compensated or y10+ allowances or ycompensated annually, semiannually or quarterly yNeed to know: xSingle/married xHow often paid xGross pay xNumber of allowances

Examples - Calculating FIT Withholding (#1) FACTS: Annual salary is $16,500 - paid weekly - Single 4 - what is the FIT withholding? zWeekly gross $16,500/52 = $ zCan use wage bracket tables to look up single with 4 allowances z FIT withholding = $7

Examples - Calculating FIT Withholding (#2) FACTS: Annual salary is $84,400 - paid semimonthly - Married 1 - what is the FIT withholding? zSemimonthly gross is $84,400/24 = $ zMust use Percentage of Withholding tables zTo Do: ySubtract (# of allowances x amount from withholding allowances table) from gross: x$ (1 x $116.67) = $ yLook up $ in appropriate table and write formula: x$ ( )(.28) = $ FIT

Examples - Calculating FIT Withholding (#3) FACTS: Monthly salary is $3,000 - paid semimonthly - Single 2 - what is the FIT withholding? zAnnualize salary $3000 x 12 = $36,000 zSemimonthly gross $36,000/24 = $1500 zCan use wage bracket tables to look up single with 2 allowances z FIT withholding = $190

Examples - Calculating FIT Withholding (#4) FACTS: Quarterly salary is $4,000 - paid quarterly - Married 3 - what is FIT withholding? zMust use Percentage of Withholding tables zTo Do: ySubtract (# of allowances x amount from withholding allowances table) from gross: x$4, (3 x ) = $ yLook up $ in appropriate table and write formula: x( )(.15) = $43.05 FIT

Examples - Calculating FIT Withholding (#5) FACTS: Annual salary is $336,000 - paid monthly - Single 2 - what is FIT withholding? zMonthly gross is $336,000/12 = $28, zMust use Percentage of Withholding tables zTo Do: ySubtract (# of allowances x amount from withholding allowances table) from gross: x$28, (2 x ) = $27, yLook up $27, in appropriate table and write formula: x$ (27, – 24,163.00)(.396) = $ FIT

Examples - Calculating FIT Withholding (#6) FACTS: Annual salary is $485,000 - paid semimonthly - Married 4 - what is the FIT withholding? zSemimonthly gross is $485,000/24 = $20, zMust use Percentage of Withholding tables zTo Do: ySubtract (# of allowances x amount from withholding allowances table) from gross: x$20, (4 x ) = $19, yLook up $19, in appropriate table and write formula: x$ (19, – 12,081.00)(.396) = $ FIT

FIT Withholding on Other Sorts of Income yPensions (W-4R) in excess of $14,700 per year  Withhold as if M3 unless complete W-4R to change amount of tax withholding yThird party payer of sick pay (W-4S) ySupplemental Wages

Withholding on Supplemental Wages zItems like vacation pay, retroactive increases and bonuses zCan add to regular wages and utilize wage bracket or % method on total gross or zCan withhold at flat 28% if supplemental wage check issued separately

Earned Income Credit (EIC) yTo get reduction in FIT for low income taxpayers yIn 2001, qualify for EIC if y2 qualifying kids and earned income < ????? y1 qualifying child and earned income < ????? yno kids and earned income < ????? And yinvestment income does not exceed $2400 yEarned income is tips, wages, self employment income (and no deduction for salary deferral)

Advanced EIC yTo get part of this on each paycheck, file W-5 (Earned Income Credit Advance Payment Certificate) xCan only get advanced earned income credit if have kids xThe maximum payment is $1412/year xThis advanced earned income credit does not change the amount that employers must withhold from employees’ wages xThis amount is treated as having been paid to the IRS (on the 941 shows up as a payment) xCan only have 1 certificate on file at a time; if married, both spouses can have a certificate on file xHave to refile each year and have to revoke in 10 days if ineligible

Information Returns zYear end Statements yW-2 to EE by 1/31 and SSA by 2/28 yW-3 yW-2c and W-3c (if correcting) y250+ W-2s must use magnetic media y941s must tie to W-3 y1099-MISC with 1096 as transmittal y1099-DIV with 1096 as transmittal y1099-INT with 1096 as transmittal