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.

Publication 15 is Out!!

Hooray!!  The annual update to the document every employer is anticipating finally occurred. Okay, maybe not all employers were as excited to see this as I was.  Publication 15 should be every employer’s best friend.  This document contains instructions on everything from obtaining an Employer Identification Number (EIN) to withholding, to employer taxes.

How does a business determine if it has employees or contractors? Read page 8 section 2.

What if I want to hire a family member for an employee?  Read page 9 section 3.

How does the IRS define wages?  What is included?  Read page 10 section 5.

How much do I withhold from my employees’ wages?  Read page 39 and 40 if you want to use a formula.  Reference pages 41-60 if you wish to use the charts.  You could also use PaycheckCity.com for this since all the values have already been programmed into all the calculators for the last 10 years.

Have you considered employer costs like FUTA (unemployment)?  Read page 30 section 14.

Do you get the hint yet that this is a very important document?  Some of the most frequent questions I get from employers through the American Payroll Associations member hotline are related to supplemental pay.  This could be bonuses, commissions, overtime pay etc.  There are specific instructions in Publication 15 for the right way to withhold from these types of payments.

Each state that has required withholding will have a similar document.  Employers should also find and download a version of the state document to make sure they understand specific requirements for their state that may be different than the federal information.

Bonus To Me or the IRS?

Q. I just got a bonus from my company and noticed the taxes were way higher than my normal tax bracket.  What is going on?  I live in California.

A. I have good news and bad news for you.  The bad news is, the calculation is probably correct.  You did not supply any numbers with your question, but hopefully, the following example will help to clear some of this up.

Congratulations on your bonus.  Many folks these days would love to be in your situation instead of standing in the unemployment line.

Your payroll department has two ways to calculate withholding on bonuses or supplemental payments as we say in the payroll industry.  They can either calculate using a flat percentage or they can add the bonus to your previous check, calculate taxes on the total and subtract out the values from the last check.  The latter method is called the aggregate method.  What is left after subtracting is nothing more than the bonus and associated taxes.  Because it is much more involved, most employers will choose not to use the aggregate method.  Unfortunately, this is the more accurate method since it aligns with your regular pay to get closer to your actual tax liability.  It is also a better method for higher income individuals whose marginal rate may be higher than the flat rate.

If your bonus is $500, most payroll departments will simply use the flat percentage method to get your withholding.  If you have received less than $1million of bonuses for the year, the federal withholding percentage will be 25%.  That means right off the top, you pay $125 in taxes. Social Security and Medicare remove another 7.65% or $38.25.  In California, there are two percentages possible: 9.3% and 6%.  Bonuses use the 9.3% rate which takes another $23.25.  If you have not reached the limit on California SDI (State Disability Insurance) withholding for the year, this will be calculated at 1.1% for 2009 for another $5.50.  This is a total withholding burden of 43.05%.  You will take home $284.75 unless your employer grosses up the bonus and pays the taxes for you.  Tax withholding on your regular wages may be lower for federal and state purposes which is why this seems so high.

The good news is that if this is actually too much withholding, you will get some of it back when you file your tax returns for federal and state purposes.  But until then, check with your tax planner or CPA, you may be able to adjust your W-4 to have less withholding on your regular wages and reduce the size of your eventual refund.  If you always end up owing extra when you file your tax return, this is a great time to catch up.

Paycheck Deduction For Employer Taxes?

Q. I received a bonus check and the amount that was on the paystub was $500 less than what the bonus came out to. When asking the owner he stated that money was used to pay for the employer’s share of the taxes. On top of that, they took out taxes for my portion as well. On the paystub, it does not show the taxes that were taken out. Did I get cheated?

A. The short answer is Read more »