Payroll Taxes 101 Presented by Larry Holmes
What is payroll? The total amount of money paid by a business to its employees are payroll taxes? Taxes levied by a government agency on employees wages, tips, and other compensation
Today s Agenda 1. How to calculate taxes for employees who live in 1 state and work in another 2. What makes a W-4 valid 3. Changing tax-exempt status 4. Calculating withholdings 5. How pretax deductions work 6. Calculating withholdings on deceased employees 7. Calculating tax on multiple checks in the same pay period 8. Penalties for miscalculations
Identify Legal Obligations 2 Methods: 1. Aggregate or tax table + Regular checks 2. Supplemental + Compensation in addition to regular wages
Calculate tax withholdings. 1. IRS and state tax tables 2. Tax exemption status 3. County, local, or other state taxation that might apply Identify Legal Obligations
Total wages Pretax deductions Taxable earnings Taxable Earnings
Identify Legal Obligations Taxable benefits: Personal use of company vehicle Will be included on the employee s W-2 Consider using payroll systems software to reduce mistakes and make payroll easier.
State Tax Reciprocity Headquarters in Georgia Lives in Maryland Works in Virginia
State Tax Reciprocity State unemployment Wages and tax withholding Works in Virginia Lives in Maryland Wages and tax withholding
State Tax Reciprocity» Reciprocal agreements make it easier on both the employee and employer.» Most states that have reciprocal agreements have a form that the employee can complete to claim exemption in his or her work state.
Guidelines for Employment vs. Residence States For states with no reciprocity, if the state withholding tax is higher in the residential state than the work state, the employer must withhold the additional taxes. This is only required if the employer already does business in the residential state. This relationship is a nexus. The State Tax Nexus Checklist Practice Guide is available by calling the AICPA at 1-888-777-7077.
Guidelines for Employment vs. Residence States Temporary assignment 1. Same location, 1 year or less 2. Returns to original location
Guidelines for Employment vs. Residence States Series of relocations Employer reports employee wages and withheld taxes to all various states. 3 months 3 months 3 months
Guidelines for Employment vs. Residence States 4 Main Points 1. Where the employee works is most important. 2. States have reciprocal agreements to make it easier for the employee and the employer. 3. It s possible for the employer to withhold taxes for a residential state if it is higher than the work state. 4. Temporary assignments are 1 location for 1 year or less. The employee must return to the original location.
Tax Calculation Method Aggregate or tax table The employer applies the amount of employee earnings and his or her exemption status to the appropriate tax table.
Calculate Withholdings From W-4 Forms Employee: Submits W-4 when hired + Single and zero is the default status. Submits new W-4
Calculate Withholdings From W-4 Forms The employer must accept a new W-4 unless: IRS federal tax levy against employee + Federal exemption status frozen while levy is active Written instruction from the IRS to change employee s exemptions + Lock-in letter remains active until IRS notifies otherwise
Calculate Withholdings From W-4 Forms Valid W-4 Employee s name Social Security number Signature Date signed Valid exemption status claimed + Single + Married + Number of exemptions
Calculate Withholdings From W-4 Forms Invalid W-4 Flat fixed amount Fixed percentage Any unauthorized changes or additions written on the form The employee indicates the information is false.
Calculate Withholdings From W-4 Forms The employee submits a W-4 claiming 10 exemptions. Should the employer challenge it? Should the employee prove he or she was legally entitled to that status? Employers should not provide tax advice, but providing education may be a good idea.
Calculate Withholdings From W-4 Forms» Any employee who chooses to submit a new W-4 must be allowed to.» The employer can have an internal policy to process W-4s on a certain day each month. IRS Publication 15 (Circular E) section 9
Calculate Withholdings From W-4 Forms» The employee can only have one W-4 in place at a time.» A W-4 never expires. Exceptions: + Exempt from withholding + Resubmit annually + By February 15 If the employee does not submit a new form, he or she returns to default status.
Calculate Withholdings From W-4 Forms By default, the state exemption status is the same as federal. Federal W-4 with written request W-4 equivalent called a DE-4
Identify Legal Obligations» The IRS focuses on taxes withheld rather than number of exemptions claimed.» As long as the employer correctly calculates withholding from the W-4, it is not liable.» Some states require employers to submit W-4s if the employee claims excessive exemptions.
Calculate Taxes in a Multiple-Check Pay Period Have you ever had an employee ask you to write his or her base wages in 1 check and overtime in a separate check to reduce the withholdings?
Tax Methods Aggregate tax method: Sum of the parts Supplemental payment: Any type of payment or wages that is not related to a specific pay period
Tax calculation: Flat fixed rate 25% FICA tax State tax Supplemental Method
Bonus Check» The exemption status on their W-4 is irrelevant and ignored.» The employer must withhold the flat rate regardless of claimed tax status.» The only relevant W-4: Exempt from all withholding
Pretax Deductions Employee deductions: Retirement + 401(k) + IRA + 403(b) Medical and dental + 125(d)
Pretax Deductions Employee contribution to pretax retirement plan: Reduce: + Federal + State Not reduce: + Social Security + Medicare + Federal unemployment + State unemployment (depending on the state)
Deceased Employees 3 sets of criteria: 1. The employer has already prepared payroll checks. + Taxed just like the employee was still living 2. Final check for hours and unused vacation after employee s death + Federal tax is not withheld. + FICA is withheld. + State tax is not withheld. 3. The employer at year-end reports wages from the final check on a 1099 form. + Any bonus check for the next calendar year is tax-free. + The 1099 goes to the executor of the estate.
Employee Tax Withholding Guidelines for Noncitizens Legal to work Valid temporary work visa Exemption status defined by their country of origin Visit IRS.gov and download Publication 515.
Tax Miscalculation Penalties No liabilities if employer:» Correctly calculates taxes based on employee s exemption status» Uses a legal method to calculate withholding taxes on a bonus and the employee ends up under withheld
Tax Miscalculation Penalties» If the employer does not correctly calculate an employee s taxes from regular or bonus earnings, the employer is liable.» See IRC section 6656 for details on IRS penalties.
The best method is to only use legally required methods of tax calculation.
Tax Miscalculation Penalties» If the IRS thinks the employer should have known better, it is a different matter.» The Trust Fund Recovery Penalty applies to any person who collects or pays taxes and willfully neglects to collect or pay them.
Common Payroll Errors» Employee misclassification» Errors filling out W-2s 1-800-772-6270» Missing deadlines» Errors on the 1099-MISC form» Miscalculation of state unemployment tax» Poor record keeping The biggest mistake is claiming ignorance.
Resources IRS.gov is your go-to resource. IRS Publication 15 (Circular E) Taxadmin.org State Department of Revenue Websites Payroll-taxes.com