Larry White, CPP Dir. Payroll Training American Payroll Association 1 HOW MAKE FORM W 4 FIT AN EXECUTIVE S REQUEST 2 FLEXIBLE FORM W 4: For regular wages, withholding must be based on allowances you claimed and may not be a flat amount or percentage of wages. 3 4 1
FLEXIBLE FORM W 4: MR. BIGG: Annual salary: $338,000 4 FIT per B/W pay period = $3,030.16 5 6 I need 38% in Federal Income Tax to be withheld from each paycheck! MR. BIGG: Wants 38% in FIT withheld each pay period 4 1673.02 FIT per B/W pay period = $4,703.18 7 8 2
I only need $3,000 in Federal Income Tax to be withheld from each paycheck! MR. BIGG: Wants only $3,000 in FIT withheld each pay period 6 72.66 FIT per B/W pay period = $3,000.00 9 10 Remember: DO NOT give tax advice to employees IRS Withholding Tax Calculator: apps.irs.gov/app/withholdingcalculator/ IRS Publication 505, Tax Withholding and Estimated Tax HOW CALCULATE A REFERRAL BONUS 11 12 3
This is Marvin 13 14 Marvin is a nonexempt employee who works for Umart Umart offers a $1,000 bonus to any employee who refers a person who is hired by Umart 15 16 4
and remains employed for at least 6 months Marvin referred 17 18 Donnell to Umart who just exceeded 6 months of employment at Umart 19 20 5
which means Marvin gets a bonus! 21 22 This is Mindy, the Payroll Manager at Umart Mindy will pay Marvin his bonus, but first she must recalculate any overtime paid to Marvin for the past six months 23 24 6
This is because the FLSA requires overtime pay based on the regular rate of pay and Marvin s bonus actually increases his total pay over the past six months 25 26 Mindy must adjust Marvin s pay for any week he worked overtime for the past 26 weeks Mindy identified 6 of Marvin s 26 weeks that included overtime Wk Hours Pay Rate Regular Pay OT prem pay 5 45 $9.50 $427.50 $23.75 11 47 $9.50 $446.50 $33.25 15 45 $9.50 $427.50 $23.75 26 50 $9.50 $475.00 $47.50 27 28 7
Marvin s bonus must be divided over the 26 weeks applied to each overtime week and recalculated 29 30 with the difference for each week totaled and added to the bonus payment Wk Hours Pay Rate Regular Pay OT prem pay Addtl OT 5 45 $9.50 $427.50 $23.75 2.14 11 47 $9.50 $446.50 $33.25 2.86 15 45 $9.50 $427.50 $23.75 2.14 26 50 $9.50 $475.00 $47.50 3.85 31 32 8
To avoid all those recalculations, Umart could have offered a % of Marvin s total wages instead of a flat dollar amount Marvin s bonus: $1904.75 x 53% = $1,009.52 33 34 Mandatory Tax Withholding On supplemental wages over $1 million HOW TAX SUPPLEMENTAL WAGES USING THE AGGREGATE METHOD 35 36 9
Supplemental Wage Tax Withholding Optional Flat Rate Optional flat rate method Aggregate method $1,000,000 or less 37 38 Optional Flat Rate $2,000 bonus $2,000 x 25% = $500 (FIT) Aggregate Based on an employee s $50 bonus $50 x 25% = $12.50 (FIT) 39 40 10
Choosing the Aggregate Method: Employer s choice 1) Add the supplemental wages to the regular wages 2) Calculate the FIT on the combined total 41 42 Choosing the Aggregate Method: Employee is paid $2,000 biweekly claiming Married and 0 allowances on Form W 4 Employee receives a $500 bonus in same pay period Calculate taxes on aggregate total of $2,500 Tax amount (wage/bracket method) = $292 (Compare to using optional flat rate total of $342) 43 Choosing the Aggregate Method: Employee is paid $2,000 biweekly claiming Married and 0 allowances on Form W 4 Employee receives a $500 bonus as a separate off cycle payment Calculate taxes on aggregate total of $2,500 Tax amount (wage/bracket method) = $292 Subtract tax deducted from regular $2,000 payment = $217 Subtract $217 from $292 = $75 (FIT to withhold from separate $500 bonus) 44 11
Aggregate method must be used: If taxes have not been withheld from regular wages during the current or past year. If the optional flat rate tax amount cannot be specified separately on the employee s payment information report HOW GROSS UP EMPLOYEE PAYMENTS 45 46 THE FORMULA: THE FORMULA: Dividend Divisor Quotient Desired Pay Tax% Gross Up 47 48 12
3 STEPS: 1. Add the Total Tax % 2. 100% Total Tax% 3. Desired Pay Net tax% = Gross Pay GROSSING UP GRISELDA: $1,000 bonus Employer will pay all taxes YTD wages = $40,000 49 50 GROSSING UP GRISELDA: $1,000 bonus = Supplemental wages Use 25% Optional flat rate for FIT YTD wages don t exceed SS limit SS tax @ 6.2% Medicare tax @ 1.45% Tax total: 25% + 6.2% + 1.45% = 32.65% 100% 32.65% = 67.35% THE FORMULA: $1,000 67.35% (.6735) $1,484.78 51 52 13
IF THE BONUS CAUSES THE YTD TO EXCEED THE SS WAGE LIMIT: Determine the amount subject to the SS tax and multiply times 6.2% Add that amount to the desired net Don t include the 6.2% in the net tax GROSS UP CALCULATOR Paycheckcity.com 53 54 Section 125 Benefits Not taxable for FIT, SS, or Medicare withholding HOW CALCULATE PRE TAX BENEFITS 55 56 14
Post tax benefits Action Amount Gross pay $1,000.00 FIT ($150.00) SS ($62.00) MC ($14.50) Insurance (post tax) ($100.00) Net pay $673.50 Pre tax benefits Action Amount Gross pay $1,000.00 Insurance (pre tax) ($100.00) Taxable gross pay $900.00 FIT ($135.00) SS ($55.80) MC ($13.05) Net pay $696.15 57 58 Dare to Compare Post-Tax Pre-Tax Action Amount Action Amount Gross pay $1,000.00 Gross pay $1,000.00 FIT ($150.00) Insurance (pre tax) ($100.00) SS ($62.00) Taxable gross pay $900.00 FIT ($135.00) MC ($14.50) SS ($55.80) Insurance (post tax) ($100.00) MC ($13.05) Net pay $673.50 Net pay $696.15 900.00 135.00 900.00 55.80 900.00 13.05 59 60 15
125 Qualified Benefits More Information Accident and health benefits Adoption assistance Dependent care assistance Group Term life insurance coverage Health savings accounts (HSAs) 401(k) plan (pre taxed for FIT only) 61 62 HOW CALCULATE DEFERRED COMPENSATION Deferred Comp 401(k) for Kay: Kay earns a $1,286.35 biweekly salary She wants to defer 3% of her income into her company s 401(k) plan Over the year, Kay s employer will deduct $1,003.34 from her earnings This amount is not subject to FIT but is subject to SS and Medicare taxes 63 64 16
Kay s biweekly earnings Action Amount Gross earnings $1,286.35 401(k) deduction @ 3% $38.59 FIT taxable earnings $1,247.76 SS & Medicare taxable earnings $1,286.35 Kay s biweekly earnings Action Amount Gross earnings $1,286.35 401(k) deduction @ 3% ($38.59) FIT ($187.16) SS tax ($79.75) Medicare tax ($18.65) Net pay $962.20 65 66 32441.76 33445.10 33445.10 4866.16 2073.60 484.95 KAY D 1003.34 HOW CALCULATE ALTERNATIVE TAX WITHHOLDING 67 68 17
Sometimes the normal way of doing things just doesn t fit ANNUALIZED WAGES 69 70 Employee: Julie Works: Irregularly, 16 to 75 hours per month Rate: $32 per hour W-4: Married, Zero Paid: Biweekly Payroll: Julie, Biweekly January: 0 hours 0 hours 40 hours 17 hours Total pay: $1,824 x 26 = $47,424 FIT (Biweekly Table 2): $188.60 FIT (Annualized Table 7 Month): $111.15 71 72 18
Payroll: Julie, Biweekly TABLE 7 ANNUAL Payroll Period February: 20 hours 0 hours 0 hours 0 hours Total pay: $640 x 26 = $16,640 FIT (Biweekly Table 2): $31.10 FIT (Annualized Table 7 Month): $0.00 73 74 CUMULATIVE WAGES WRITTEN REQUEST 75 76 19
Commissions STEPS: Cumulative Wages 1. Add YTD paid wages to the current pay period amount 2. Divide total by # of calendar year pay periods, including current period 3. Calculate the withholding on this amount 77 78 STEPS: Cumulative Wages 4. Withhold excess amount from current payment PART YEAR EMPLOYMENT 5. Using Percentage Method, subtract total tax already deducted from total tax 6. Withhold excess amount from current payment 79 80 20
WRITTEN REQUEST The request must include: The last day of employment during the calendar year with any employer A statement that the employee uses the calendar year accounting period A statement of reasonable anticipation that employee will be employed no more than 245 days during the calendar year 81 82 1. Add wages already paid to current pay 2. Add the periods in #1 to the periods between the last work date and the current pay date 3. Divide the amount in #1 by the payroll periods in #2 4. Calculate the tax on the #3 amount 5. Multiply the #2 periods by the #4 amount 6. Subtract from #5 the tax already withheld; tax excess to current payment 83 84 21
OTHER METHODS 85 86 You may use other methods for withholding taxes as long as they meet the tolerances provided by the IRS. IRS Tolerance Chart 87 88 22
The final word 89 90 Before my final word 91 Thanks for your part in making this a GREAT Midwest Regional Payroll Conference!! 92 23