One State, Two State, Three State Withholding

Q. I have a question regarding payroll tax withholding, and personal income tax reporting. When an employee is a resident of state X, but works in state A, B anc C, as a travelling consultant. And where B has reciprocity agreement with state X. What are the employees income tax reporting responsibility. Does the employee have to file income tax in all 4 states, assuming the income threshold is satisfied? Can the employee,claim tax credits for taxes witheld from other states?What are the employer’s state payroll tax responsibility, does the company have to withold payroll taxes based on where the employee is working (A, B, and C)?

A.  This is a great question.  At my day job at Symmetry Software, we try to come up with scenarios like you described that are as difficult as possible to test the accuracy of our withholding calculations.  We have no idea if they really exist outside the theoretical realm.  If this situation is true, we’ll have to add this to the list that we test with for new versions.

To answer your question, yes, no and maybe for both scenarios.  Let’s tackle these situations one at a time.  If an employee is working in a state that has a reciprocal agreement with the state of the employee’s residence, the employer does not withhold, and the employee has no filing obligation in that state.  A good example of this is Indiana and Ohio.  The requirement is that the employee file a certificate of Non-Residence with the employer in the state where they do not live.  Withholding in this situation would only be in the resident state of the employee.  Certain situations cloud this answer but those go beyond the scope of this blog.  You can find copies of these non-resident withholding certificates on StateW4.

As for the other states without reciprocity with your home state, your employer should withhold in the state where you perform the work.  If you have taxes withheld for work performed in a state, you need to file a tax return in that state for those wages.  Depending on the amount of earnings, you may get a refund for all of that withholding.  Your home state obviously requires a tax return and may give you credit for taxes paid to the other states on those wages.  Much depends on the states involved.  Tax returns with the level of complexity you described are very involved and may require that you work with a professional tax preparer to make sure you aren’t paying too much in taxes.

Payroll and Filing Status

Q. The Indiana State Form WH-4 doesn’t have a place for the employee to indicate Married or Single.  However, our payroll system (ADP Enterprise) requires us to complete this with entering state tax information. The employee has indicated Married on the Federal W4 form so should we also use Married for the state?

A. State W-4 forms are so much fun.  Some of them follow the format of the federal form W-4.  Others have a completely unique format.  The main thing to keep in mind when dealing with State W-4 forms is that they are asking only for information that is necessary to calculate payroll withholding correctly for that state.  For the state of Indiana, the WH-4 form does not ask for marital status because there is only one withholding formula in that state.  Marital status is irrelevant to the calculation for state purposes.  While I am not an ADP expert by any means, it is very likely that you could pick either filing status in the program and get the same withholding result.  Is there some way you can run a sample calculation for that employee without actually running payroll to see the difference?

On a broader note, some employers use the filing status found on W-4 forms to keep track of the marital status of their employees.  While this has potentially questionable legality, the employee is under no obligation to actually select their filing status on this withholding form.  If your married employee has a lot of non-wage income, he/she may need to have a large amount of additional withholding.  Choosing the single filing status will cause his withholding calculation to come from the “Single” status withholding formula.  This method and the use of the “Additional Withholding” line on federal and State W-4 are ways for your employees to plan their tax payments throughout the year.

Finally, with another successful tax season behind me, I get a little bit of free time back.  Thanks to those readers who have submitted questions over the last couple of months.  You’ll see discussions of those questions start appearing over the next few weeks.

W-2 questions

Q1. If I was paid a cash bonus in 2010 and 2011, can my employer report both years of bonus on my 2011 w-2?

A. The answer to your question is really quite simple.  When did you receive the money?  Payroll taxes are calculated like cash accounting.  When funds are “constructively received,” they become taxable.  If your employer gave you a check in 2011 and you didn’t deposit it until 2012, those funds are still taxable in 2011.  If your employer pays you a bonus in 2010, it is to be reported and taxed in 2010.  The only way a 2010 bonus could be added into a 2011 W-2 would be if the bonus was announced, but not actually paid until the following year.

Q2. What if I never get my W-2 from my employer for last year’s work?

A2. You need a W-2 to get your tax return right.  No tax preparer should be trying to make a return based on a pay stub.  The IRS has issued Tax Tip 2012-20 to address this issue.

1. Contact your employer to see if the W-2 was even mailed yet.  Employers are required to have these in the mail before February 1st.  Perhaps they have an old address for you?  Once you contact the employer, give them some time to get the W-2 into the mail system.
2. Contact the IRS.  If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you will be asked for your name, address, Social Security number, phone number.  You will be verbally creating a new W-2.  The IRS will ask for the employer’s name, address and phone number, dates of employment and an estimate of wages and withholding.  You may be required to get this from your final pay stub if you still have it.  This will probably initiate some inquiries from the IRS to your employer as to the reason they are ignoring their requirements.
3. File your return using Form 4852, which is the substitute W-2.  This may delay any refunds you are entitled to because of the verification process.
4. If your W-2 unexpectedly shows up after filing your return, examine it to see if it matches the substitute values you reported.  If they are different, you will need to file an amended tax return.

W-2s are a serious business with the IRS, make sure, as an employer, you take care to get them right.  Employees count on them to process a correct tax return and determine their actual legal tax liability.

Medicare Tax Twice From Payroll?

Q. Because of the economic situation, I now have to work two jobs because  my main job cut my hours.  I have Medicare and Social Security tax coming out of both checks.  Isn’t there a way to stop this tax deduction from one of them?

A.  Unfortunately…no.  Medicare withholding is required on all your wages.  It is calculated at 1.45% of taxable gross.  Your employer matches this amount as well.  There is no limit on Medicare withholding tax.  Therefore, it should be withheld from wages at all jobs, even if you are retired.  Those who are self-employed must make estimated tax payments  to cover this obligation as well.  Self-employed individuals should get with a tax preparer or adviser to ensure they are making enough estimated tax payments and to determine what that liability might look like in their situation.

Social Security on the other hand has some different rules.  Like Medicare, Social Security withholding is required to be withheld from every job even if you are retired.  However, there are two quirks to this tax.  For 2011, the most income that can be taxed for Social Security purposes is $106,800.  This number changes almost every year.  In 2011, as the result of a tax cut, employees pay only 4.2% of their taxable wages towards the Social Security liability.  Employers must pay 6.2%.  That means in 2011, 10.4% of all taxable wages go towards Social Security.  Employees, however, pay at most $4485.60 per year.

But wait!  There is a catch.  If you have multiple jobs during the year, and your withholding is more than $4485.60 for Social Security purposes, you can get a refund of the extra Social Security tax you paid during 2011 on your tax return when you file in 2012.  When would this happen?  As mentioned, you could have multiple jobs that push you over the limit. You could also change jobs after meeting the limit.  The employer at your second job would also start withholding as if there was none taken during the year.

The seemingly unfair part about the Social Security tax is the employee gets a refund for overwithheld Social Security tax.  The employer does not.  The employer must pay 6.2% of all wages up to the limit on each employee regardless if they met the withholding limit somewhere else.

Remember, if you want to see how changes in your W-4 status or benefits affect your paycheck, PaycheckCity offers free Paycheck Calculators that are simple to use.  They provide quick, accurate answers to payroll questions.  Check them out.

Did You Tell Your Payroll Department?

This week’s post was inspired by my attendance at the American Payroll Association‘s 29th Annual Congress.  This is the biggest gathering of payroll professionals and vendors anywhere in the world.  The common theme I observed during workshops and networking opportunities was that employees just don’t communicate changes to their payroll system well enough.  Many presenters and attendees experienced the problem of  a significant payroll event that was never given to them for processing.  The demand was that the payroll department “just fix it.”

This post is to motivate anyone who is an employee to stay on top of changes to their payroll situation.  The following examples can provide a taste of items that you can help with.

1. Getting married. This requires a change to the filing status on the federal and maybe state W-4 forms.  Those with the married filing status often see significantly lower withholding.  If you don’t make this change, you may receive a much larger than is necessary tax refund.
2. Changing state.  Generally, withholding is required in the state where you work.  If you change states, you need to make sure and complete a new federal and state W-4 to notify your payroll department of the change.  Without this change, you may end up with no withholding where payments were required.  This would force you to file a return in the state with incorrect withholding in order to get a refund of this money so you can forward it to the correct location.  This is such a hassle!
3. Garnishments/Levies/Child Support. If you have paid off the amount that was being withheld from your check and you do not follow up with that entity quickly enough, your payroll department will have no idea they are supposed to discontinue withholding.  This means you will end up paying money for something that you don’t owe.  It’s often really difficult to get this money back in a timely fashion.
4. Terminations. This one really is the job of the manager or supervisor of employees.  If you do not complete the necessary paperwork with the payroll department, you could allow an employee to continue to be paid for no work.  That means you as a boss are directly hurting the profitability of your company.  Unless in the case of a mass layoff or headcount reduction policy, employees are normally terminated for cause.  Why pay them extra?  They may already be receiving termination payments at the same time.  It is very difficult for a company to recover these funds.  It’s so much easier just to communicate the event to payroll

These events are more common that most people realize.  By staying on top of these issues before they create a problem you are helping improve company profitability, reduce stress of employees, and reduce confusion with employees.

Health Care and Overtime—Do the Twain Meet in 2014?

This month’s post from guest blogger, Vicki Lambert:

The passage of the Affordable Care Act has certainly generated questions in the payroll
community. Will the taxation of health care change? No it is still nontaxable. Will it need to be
reported on the Form W-2 anyway? Yes, but not mandatory until 2012. But one question is still
outstanding and is in fact not being raised quite as strongly as the other two and that is… Will
health insurance being paid for by employers have to be included in calculating regular rate of
pay under the Fair Labor Standards Act?

The law states that employers must offer their employees’ health care coverage or face a penalty
beginning in 2014. The law does not give a mandate that employers must offer health care, only
that they will be penalized if they don’t. And there is an exception for under a certain number of
employees so small employers will not be penalized at all. This is as close to a mandate on fringe
benefits as we have ever come on the national level.

The question arises because the Fair Labor Standards Act requires that all remuneration for
employment unless specifically excluded be included in the regular rate of pay for overtime
calculations. These excluded items are sometimes referred to as “statutory exclusions” and
they are spelled out in the laws. For example, payments for hours not worked are excluded.
These include the fringe benefits of vacation, sick or holiday pay. But these are specifically
listed and are made in most cases voluntarily by the employer. It also lists payments made to
a bona fide plan providing old-age, life or health insurance. But these are contributions made
on behalf of the employee to the employer’s plan. Does this change if the employer is making
the contribution to avoid a penalty by the government? Does this now make the payment
remuneration?

I contacted the Department of Labor directly to find the answers to these questions. I was
referred to the Employee Benefits Security Administration (EBSA). They’re answer…they don’t
know yet. They are looking into the matter to make a determination. The new law is just not
clear enough right now. This is unchartered territory with a new concept for employers in the 21st
century hitting smack up against a law written in 1938. So we will have to wait and see if we
need to include the payment for health care in the regular rate of pay in 2014.

In the meantime maybe this should open up the debate of whether or not these older wage and
hour laws should be revisited for the 21st century. But that is the topic for another blog.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Mandatory Electronic Filing of FTDs—This is a Good Thing

Today’s edition comes from guest blogger, Vickie, Lambert, CPP:

Effective January 1, 2011, the IRS adopted the Financial Management Service (FMS) decision to discontinue the system of processing federal tax deposit coupons. In other words, the IRS is no longer allowing businesses to make employment tax deposits with PAPER coupons. For this move I say to the IRS—BRAVO! I applaud the IRS for moving forward in using 21st century technology.

But not everyone felt this way when the IRS first announced this planned moved. In the guidelines for this new requirement the IRS explained why the decision was made and addressed the various arguments for moving in this direction.

Three main arguments were offered against this new procedure.

1. Placed an undue burden on small businesses. In this day and age most businesses have computers. And since the IRS offers their Electronic Federal Tax Payment System (EFTPS) for free to all businesses this argument really was not well founded. But even if a business does not have an internet accessible computer it does have a phone line. Again since the IRS offers their ACH deposit method which only requires the use of a phone line to schedule a payment through EFTPS this argument fell flat. To take it one step further to ensure access, the IRS increased their support service for this deposit method to 24/7 year-round.
2. Will increase errors in deposits therefore increase the need for the IRS to respond to requests for penalty abatements thus negating any cost savings to the IRS. This argument was not supported by the IRS’s statistics. In fact, their statistics show that businesses that make their FTDs electronically have significantly lower error rates than paper coupon filers.
3. Why not just continue offering the paper coupon option? What is the drawback to having both? The IRS determined that more and more financial institutions are no longer accepting the coupons so continuing their use simply keeps an archaic system going for no purpose. If they were left as an option it would negate the decision to cease processing them even though they are no longer being used.

The one major change to this new regulatory requirement that will put some burden on former paper files for the short term is the change in the definition of legal holidays. Prior to this change a legal holiday included state-wide holidays since local financial institutions would be closed. Now the definition of legal holiday is consistent with all other returns.

So for once I can actually say good job IRS for modifying and upgrading regulations to keep in line with modern technology and for doing away with old and outdated methods.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

2011 Paycheck Changes

By now, most employees in the United States have received their first paycheck of 2011.  About the same time the first check is received, payroll departments across the country were deluged with questions about the changes on employee checks.  This edition of the blog should help to clear up some of the confusion regarding a couple of these changes.

The Making Work Pay Credit is gone!  The implementation of this tax cut was sloppy anyway.  Single folks received up to $400 of tax cuts per year factored into their withholding.  Married folks received twice this amount or up to $800.  There was an upper limit to allowable income.  The credit itself was described in detail in a blog post almost two years ago.  In the tax cut bill that Congress finally passed in mid December, the Making Work Pay credit was happily missing.  That means however, that employees of nearly every income level will see their Federal Income Tax withholding increase for 2011.  It’s quite a shock in the amount of increase.  However, there are no more funny games to play when preparing your tax return or figuring out your W-4 values.  In summary, most employees will see their Federal Income Tax Withholding line increase.

Part two of the changes to employee checks this year has to do with the Social Security component of FICA withholding.  Normally, Social Security withholding is 6.2% of taxable wages up to a base.  That base is $106,800 per year as it has been for 3 years now.  Employers must match the 6.2% value meaning total Social Security taxes are actually 12.4% of taxable wages up to the base or up to $13243.20 per year per employee.  Self employed individuals paid the entire 12.4%.  This is a lot of money!  The above referenced tax cut bill cut the employee portion of Social Security by 2 percentage points.  Now the total is 4.2% up to the base.  Employers still are required to pay their portion at 6.2%.  Self-employed individuals now pay only 10.4% as well.

PaycheckCity, a site run by Symmetry Software (my day job employer), had implemented these changes and placed them on the site in late December.  To my surprise, the help desk team at PaycheckCity reported that CPAs and payroll staff members were writing with questions on why the Social Security rate was different.  Some even adamantly (and ignorantly) proclaimed that we were wrong and they would never use the site again.  The details of the tax plan have been all over the media in the last month.  Social media has trumpeted the changes as well through the many different outlets.  How anyone can still be unaware of this change just baffles me.  Hopefully,  I have provided some knowledge to those who hadn’t heard yet, while clearing up the confusion for those who had and were surprised at the change on their check.

Holidays and Taxes – Part 1

Greetings readers.  The next three blog posts will discuss some things that will help you during – and right after- the holiday season.  This week, I’ll discuss employee holiday parties and gifts to employees.  Next week, I’ll discuss year end planning tips. The end of the month will be about making some new goals for the new year.  Perhaps there will be time for one more summarizing tax law changes that should have been passed by Congress by that time.

Gift Cards
According to some statistics software attached to this blog, my post a couple years ago on employee gift cards and taxability is consistently the most visited page on this site.  It seems there is a lot of confusion regarding employer responsibility and payments to employees for holiday bonuses and gifts.  Somehow, the notion has entered the minds of the taxpaying public that if you give money or gift cards to employees below $25 or $50 that the amount is not taxable.  That is absolutely false.  The key to withholding on an employee gift is whether or not the value can be tracked easily.  If you give turkeys to all your employees, they cannot exchange that for cash, and determining the value of each turkey as it is given to an employee is nearly impossible.  If you give $25 gift cards to all your employees, it is very easy to determine the value: $25.  This amount should be taxed appropriately.  Likely, you will need to “gross up” the value.  A $25 gift card using supplemental rates could cost the company nearly $50 once payroll, withholding and unemployment taxes are added into it.  There is a simple gross up calculator available at PaycheckCity.com.  It is free to use after  registration.  This tool will tell you the cost from the paycheck perspective.

Holiday Parties
According to the IRS, the cost of  holding an employee holiday party can be deducted 100% as business expense.  As an employer, this can give your employees a chance to relax and talk about non-work topics.  It also causes team building.  Holiday parties should not be overly extravagant.  Think of the old Tyco/Koslowski debacle.  Having a reasonable party that shows your appreciation for their hard work during the year is a great way to give back and avoid the cost of giving out trinkets or gift cards.  You can find many articles that can help you provide guidelines for your employees during one of these parties.  You want it to be the social event of the year, but not because you ended up with a sexual harassment or discrimination lawsuit on your hands.

What if you invited clients to attend the party as well?  This actually takes away part of the deductible nature of the party.  Now it is for advertising purposes which means only 50% of the cost of the party can be deducted.  So you say, “I’ll just send my customers a nice gift like a goodie box from Fairytale Brownies or Rocky Mountain Chocolate Factory.”  Keep in mind that there is a limit on these as well for tax purposes.  For marketing purposes, spend as much as you want on a customer.  For tax purposes, you can only deduct up to $25 of the cost of gifts to your clients/customers.

Should the United States Celebrate Thanksgiving?

This month’s post from guest blogger, Vicki Lambert:

Should the United States Celebrate Thanksgiving?

Or any holidays for that matter? That sounds like I am advocating not celebrating Thanksgiving or Labor Day, or Memorial Day or even the Fourth of July. And that is not the case. What am saying is that if we, as a nation, celebrate a day of Thanksgiving across this great nation, why is it not a national holiday under wage and hour law? Why is it left up to each individual employer whether to allow employees time off to be with their families? And if they are given time off but its unpaid why should the employee be penalized a day pay because the CEO wants time off to be with his (or her) family and gets paid for it anyway?

In other words, if the holiday is so important that we have parades and special concerts, then why don’t non-government workers get the day off with pay to celebrate?

The United States is practically the only industrialized nation that does not have mandated holidays. I can understand not having nationalized holidays that subscribe to one particular religion, (i.e. Christmas) or are based on a calendar change such as New Years.  But on days in which we celebrate our national heritage and history workers should be able have the day off to join in the celebration and to do so without loss of pay.

Just a thought, what do you think?

Vicki M. Lambert, CPP
www.thepayrolladvisor.com