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The amount of federal income tax withheld is based onwithholding tables published by the Internal Revenue Service (IRS)and the information provided on each employee's Form W-4, Employee'sWithholding Certificate. The IRS redesigned Form W-4 for 2020 and subsequent years.Before 2020, the value of a withholding allowance was tied to theamount of the personal exemption. Due to the Tax Cuts andJobs Act of 2017 (TCJA) (Pub. L. 115-97), however, taxpayerscan no longer claim personal or dependency exemptions; therefore,Form W-4 no longer asks employees to report the number of withholdingallowances that they are claiming. Employees who submitted a Form W-4 in any year before2020 are not required to submit a new form merely because of the redesign.Employers can continue to compute withholding based on the informationfrom the employee’s most recently submitted Form W-4. However, new hires now must use the redesigned form,along with existing employees who wish to adjust their withholding.An employer may ask existing employees to submit a new Form W-4 usingthe new version, but must also explain that they are not requiredto do so and that, if they do not, withholding will continue basedon the form they previously submitted if it is valid. Each new employee should fill out a W-4 when hired. Ifa new employee does not provide a completed W-4, they should be treatedas if they had checked the box for “single or married filing separately”in Step 1(c) and made no entries in Steps 2, 3, or 4. A W-4 remains in effect until the employee provides anew one. Revised withholding must begin no later than the first payrollperiod ending on or after the 30th day after the date the revisedW-4 was received. Employers may establish systems that let employeeschange their W-4 information electronically. Regulations finalized October 6, 2020 (85 Fed. Reg. 63019), updated the federal withholding rules to reflect the TCJAchanges and accommodate the redesigned Form W-4. The redesigned Form W-4 no longer uses an employee’swithholding allowances, which were tied to the value of the personalexemption, because the TCJA suspended personal and dependent exemptionsthrough the end of tax year 2025. Instead, income tax withholdingusing the redesigned Form W-4 is generally based on the employee'sexpected filing status and standard deduction for the year. Employees can choose to have itemized deductions, thechild tax credit, and other tax benefits reflected in their withholdingfor the year. Employees can choose to have an employer withhold aflat-dollar extra amount each pay period to cover, for example, incomethey receive from other sources that is not subject to withholding.Employees also may request that employers withhold additional taxby reporting income from other sources not subject to withholdingon the Form W-4. Employers may use computationalbridge entries to avoid having to maintain two different systems tocompute withholding from old and new Forms W-4. In certain circ*mstances, the IRS may direct an employerto submit copies of Forms W-4 for certain employees in order to ensurethat the employees have adequate withholding. Employers are now requiredto submit the Forms W-4 to the IRS only if directed to do so in awritten notice or pursuant to specified criteria to be set forth infuture published guidance. If the IRS determines that an employee does not haveenough withholding, it will notify the employer to increase the amountof withholding tax by issuing a lock-in letter that specifies theemployee’s permitted filing status and provides withholding instructionsfor the specific employee. The employer will also receive a copy forthe employee that identifies the permitted filing status and how theemployee can provide additional information to the IRS for determiningthe appropriate withholding and/or modifying the filing status specified.If the employee still works for the employer, the employer must furnishthe employee copy to the employee. If the employee no longer worksfor the employer, the employer must send a written response to theIRS office designated in the lock-in letter indicating that the employeeis no longer employed. The employee will be given time before the lock-in ratetakes effect to submit a new Form W-4 and a statement supporting theclaims made to the IRS office designated in the lock-in letter. Unlessotherwise notified by the IRS, employers are required to begin withholdingbased on the lock-in letter for any wages paid after the date specifiedin the notice. Once a lock-in rate is effective, an employer cannotdecrease withholding without IRS approval. After the receipt of a lock-in letter, employers mustalso disregard any Form W-4 that decreases the amount of withholding.The employee must submit any new Form W-4 and a statement supportingthe claims made that would decrease federal income tax withholdingdirectly to the IRS address in the lock-in letter. The IRS will notifythe employer to withhold at a specific rate if the employee’s requestis approved. If, at any time, the employee furnishes a Form W-4 thatresults in more withholding than required by the lock-in letter, theemployer must increase withholding based on that Form W-4. Employers that do not follow the IRS lock-in instructionswill be liable for paying the additional amount of tax that shouldhave been withheld. Employers are not required to check the validity of anemployee's W-4. If an employee files a W-4 and indicates that it isfalse, the W-4 is invalid. In this circ*mstance, an employer may requesta new W-4 with valid information. If one is not provided, the employershould continue to use the previous W-4. If there is no previous W-4,and the employee was paid wages before 2020, withholding should beat the rate for a single person with no allowances on the 2019 FormW-4. Otherwise, withholding should be done as if the employee hadchecked the box for Single or Married filing separately in Step 1(c)and made no entries in Step 2, Step 3, or Step 4 of the current FormW-4. There is a $500 penalty that applies if an employee filesa false Form W-4. There is also a criminal penalty for supplying falseor fraudulent information on a W-4 or failing to supply informationthat would increase the amount withheld. Employees may want to change the entries on Form W-4for any number of reasons when their personal or financial situationchanges. There is no limit on the number of times an employee mayfile a new W-4 form. Employers are not permitted to charge a fee forprocessing revised W-4 forms. A revised W-4 must be put into effectno later than the start of the first payroll period ending on or afterthe 30th day after the new form is filed. Tax equalization is a payroll procedure or policy usedmost frequently when an employee lives in one taxing jurisdictionbut works in another. The purpose is to make the net compensationof employees equal no matter whether they’re working in a high taxjurisdiction or a low tax jurisdiction. Thus, it is often used whenan employee is asked to work in another country. While more commonin Europe where it is likely that an employee could live in one countryand work in another, it is applicable to U.S. border areas, particularlywith Mexico, because the Mexico nonresident income tax rate is higherthan the income tax rate in the United States. An example of tax equalization would be a company thathas two facilities, one on each side of the Texas/Mexico border. Anemployee who lives in Texas and has been working in Texas is neededto do the same job in the facility in Mexico. An individual commutingdaily from the United States to Mexico to work is subject to the Mexicononresident income tax. As a resident of the United States, the employeeis also subject to U.S. income tax but can credit the amount paidto Mexico against this U.S. tax. Because the U.S. tax is lower, theemployee will have less net income, although the two facilities maybe very close to each other. Tax equalization would restore the employeeto the same net financial situation they would be in if not transferredto the Mexican facility. The most common form of tax equalization in this situationinvolves estimating an individual's taxes for the year and adjustingpay so that the net is the same as it would have been if the employeeweren’t transferred. At the end of the year, the expected and theactual tax amounts are further reconciled. Whenever an employee fillsout a W-4, they are making an estimate of how much tax they will owebased on their circ*mstances. This amount is reconciled after theyear is over when the employee files a tax return and gets a refundor pays or owes money to the IRS. Adjusting withholding quarterlycould result in a somewhat more accurate estimate of taxes owed butis generally not necessary unless there has been a significant changein an employee’s tax status (such as getting married or having a child). Payroll equalization also has application where an employeeis transferred from a low cost-of-living area to a high cost-of-livingarea. Payroll equalization, particularly tax equalization, is a potentiallycomplex accounting practice and should be worked out by a tax practitionerwho specializes in this area. Employers must deduct from employees' wagesfor Social Security tax and for Medicare tax. There is a ceiling onthe amount of annual wages that are subject to Social Security taxthat is adjusted annually, but there is no limit on the amount ofwages subject to Medicare tax. The tax rate for Medicare is 1.45 percent(amount withheld) each for the employee and employer (2.9 percenttotal). All covered wages are subject to Medicare tax. In additionto withholding Medicare tax at 1.45 percent, employers must withholda 0.9 percent Additional Medicare Tax from wages the employer paysto an employee in excess of $200,000 ($250,000 for married taxpayerswho file jointly; $125,000 for married taxpayers who file separately)in a calendar year. An employer is required to begin withholding AdditionalMedicare Tax in the pay period in which the employer pays wages inexcess of $200,000 to an employee and continue to withhold it eachpay period until the end of the calendar year. Additional MedicareTax is imposed only on the employee. There is no employer share ofAdditional Medicare Tax. All wages that are subject to Medicare taxare subject to Additional Medicare Tax withholding if paid in excessof the $200,000 withholding threshold. In 2023, employers and employees each contribute6.2 percent of the first $160,200 an employee earns during the yearfor Social Security, and each contribute 1.45 percent of all taxableearnings for Medicare. Employers must notify employees who have no federal incometax withheld that they may be able to claim a tax refund because ofthe EIC. This requirement may be met with a Form W-2 that has theEIC notice on the back of Copy B, or a substitute W-2 with the samestatement. For 2022, the IRS encouraged employers to notify any employeeswhose wages were less than $53,057 ($59,187 if married filing jointly)that they could be eligible. Supplemental wages are wages paid in addition to regularwages, including, but not limited to, overtime pay, sick leave pay,vacation pay, bonus payments, commissions, severance pay, awards,prizes, back pay, retroactive pay increases for current employees,payments for nondeductible moving expenses, and tips. Withholdingpractices vary depending on how the wages are paid. If an employee receives supplemental wages exceeding$1 million in a calendar year, the excess is subject to a tax withholdingof 37 percent (or the highest income tax rate in effect for that year).Employers must use the 37 percent rate regardless of the informationon the employee's Form W-4. The following rules apply when an employee receives lessthan or equal to $1 million in supplemental wages in a calendar year. Unidentified supplemental wages. When supplemental wages are combined with regular wages without identification,employers should withhold taxes as if the total were a single paymentfor a regular payroll period. Identified supplemental wages. When supplemental wages are identified separately from regular wages,the income tax withholding method will depend on how income taxesare withheld from the employee's regular wages. Employers that withheld income tax from an employee'sregular wages can either: 1.Withhold a flat22 percent; or 2.Add the supplementaland regular wages for the most recent payroll period, calculatingthe withholding as if the total were a single payment, and then subtractthe tax already withheld from the regular wages and withhold the remainingtax from the supplemental wages. Employers that do not withhold income tax froman employee's regular wages should use method 2, above. Note: According to the IRS, supplemental wages are subject to SocialSecurity, Medicare, and Federal Unemployment Tax Act (FUTA) taxes regardless of the withholding method used. Whether severance pay is subject to Federal Insurance Contributions Act (FICA) taxes has oftenbeen a source of confusion for employers. However, the U.S. SupremeCourt clarified the issue in U.S. v. Quality Stores, Inc.,holding that generally, severance pay is subject to FICA tax withholding(134 S. Ct. 1395 (2014)). Quality Stores, Inc., made severance payments to employeeswho were involuntarily terminated as part of its bankruptcy. The severancepayments were not tied to the receipt of state unemployment insuranceand varied based on job seniority and time served. Quality Storesinitially paid and withheld FICA taxes, but it later tried to geta refund for itself and its former employees, claiming that the severancepayments should not have been taxed as wages under FICA. The districtand appellate courts both concluded that severance payments were not“wages” under FICA. The Supreme Court disagreed, holding that suchseverance payments are taxable wages for FICA purposes. The Courtnoted that FICA defines the term “wages” broadly, and severance paymentsfit within this definition. It also pointed out that FICA containsno general exception for severance payments. Finally, the Court determinedthat the Internal Revenue Code chapter governing income tax withholdingdoes not limit the meaning of “wages” for FICA purposes. Sick leave and disability pay are subject to federalincome taxation; however, only the first 6 months of sick and disabilitypay are subject to Social Security, Medicare, and federal unemploymenttaxes. Employees may request that third-party payers withhold taxesfrom sick and disability pay. Vacation pay alone is subject to withholding as if itwere a regular wage payment. When vacation pay is in addition to regularwages, it should be treated as a supplemental wage. Federal income tax, FICA tax, and Medicare tax must bewithheld from all supplemental wage payments made to employees. Forbonuses that are less than or equal to $1 million, employers deductincome tax either according to the individual's schedule or at a flat22 percent rate. Some executives may want an even larger-than-normaldeduction to be made for withholding when the bonus is a considerablesum. Any bonus can be paid in a separate check. If combinedwith a regular paycheck, and the portion attributed to the bonus isnot specified, the amount to be withheld on the combined amount mustthen be computed from the regular tables for withholding. Tips are generally subject to withholding. Employeeswill report tips on Form 4070 (Employee's Report of Tips to Employer)when tips received are more than $20 per month. Employers may implementa system that allows employees to report their tips electronically. It is necessary to withhold income tax from students/internson a summer job unless they claim exemption from withholding on theirW-4 form. Even if exempt from income tax, their income may be subjectto Social Security taxes. Complex rules apply to the withholding of taxes on fringebenefits that are taxable. Examples of fringe benefits that may betaxable in whole or in part include cars, free or subsidized parking,mass transit subsidies, airplane flights, discounts, vacations, membershipsin country clubs or other social clubs, and tickets to entertainmentevents that the employer provides. In general, the fair market valueof the benefit less what the employee may have paid for it must beincluded in taxable income. Complex distribution and income tax withholding rulesalso apply to taxable payments from pension, profit-sharing plans,and 401(k) plans. Withholding on periodic payments is done using the samewithholding tables as for wages. Recipients may file Form W-4P, WithholdingCertificate for Pension or Annuity Payments, to claim a deduction,request additional withholding, or make certain other adjustments.If no W-4P is on file, withholding is at the rate for a married personwith three allowances. Individuals who begin receiving pension orannuity payments in 2022 or later and do not complete Form W-4P shouldbe treated as if they left Steps 2 through 4 of the new version blank. Withholding is required on certain lump-sum paymentsthat may be eligible for tax-free rollover treatment made directlyto employees. Beginning in 2023, the new Form W-4R must be used torequest any additional withholding on these payments. Withholdingis not required on direct rollovers from a qualified retirement planto another qualified plan or an Individual Retirement Account (IRA). The taxes employers withhold from employees, along withthe employer's share of FICA and Medicare taxes, must be depositedto an authorized financial institution. Generally, deposits during a calendar year must be mademonthly or semiweekly depending on how much was deposited during thelookback period, defined as a 12-month period ending on June 30 ofthe previous year. Employers that reported $50,000 or less of taxesduring the lookback period deposit monthly; employers that reportedmore than $50,000 deposit semiweekly. New employers deposit monthlyduring their first calendar year. However, if an employer accumulates$100,000 in tax liability on any day during a deposit period, a depositmust be made by the next banking day. Note: Employers accumulating$100,000 in tax liability on any day automatically become semiweeklyschedule depositors on the following day and remain so for at leastthe rest of the calendar year. Employers must use electronic funds transfer (EFT) tomake all federal tax deposits (including deposits of employment taxes,excise taxes, and corporate income taxes). Generally, these paymentsare made using the EFTPS, a free service from the U.S. Departmentof the Treasury. For additional information, employers should contactthe EFTPS at 800-555-4477, or visit them on the Web at http://www.eftps.gov. With some exceptions, employers that pay wages subjectto income tax withholding or Social Security and Medicare taxes arerequired to file Form 941, Employer's Quarterly Federal Tax Return.Employers may qualify to file Form 944, Employer's Annual FederalTax Return. Employers that fail to file a form are subject to a penaltyof 5 percent of the unpaid tax that was due with that form. If anemployer pays the tax late, a penalty is incurred of 0.5 percent permonth of the amount of the tax. The IRS permits employers to filethese forms electronically. For more information, visit https://www.irs.gov/businesses/e-file-employment-tax-forms. Employers that have been filing Form 941 and believetheir yearly employment taxes will be $1,000 or less in the currentcalendar year may contact the IRS to request to file Form 944. Therequest must be made by phone at 800-829-4933 by April 1 or by writtenrequest postmarked by March 15. New employers are also eligible to file Form 944 if theywill meet the eligibility requirements. When filing Form SS-4, Applicationfor Employer Identification Number, indicate the highest number ofemployees expected in the next 12 months, and check the box on line14 to indicate whether you expect to have $1,000 or less in employmenttax liability for the calendar year and would like to file Form 944. Employers are required to provide employees with FormW-2 (Wage and Tax Statement) by January 31 of each year. Employersmay furnish this form to their employees electronically if they obtainthe employees' consent to do so. Employers must annually file Copy A of Form W-2 and FormW-3 (Transmittal of Income and Tax Statements) with the Social SecurityAdministration (SSA) by January 31. These may be filed electronicallyusing the SSA's Business Services Online at https://www.ssa.gov/employer. Employers filing 250 or more W-2 forms must file electronicallyunless they receive a waiver from the IRS. However, beginning with forms filed in 2024 (covering tax year 2023),any employer filing 10 or more in total of certain types of formsmust file all such forms electronically. Under the rule finalizedFebruary 23, 2023 (88 Fed. Reg. 11754), these include FormsW-2 and 1099, as well as Affordable Care Act coveragereports. Waivers may be granted in cases of “undue hardship.” Employers are required to report on FormW-2 the total cost of group healthcare coverage, including the portionpaid by the employer and the portion paid by the employee (IRSNotice 2011–28). How to report. Thevalue of the healthcare coverage is reported in Box 12 of the FormW-2, with Code DD to identify the amount. There is no reporting onthe Form W-3 of the total of these amounts for all the employer’semployees. Calculating the amount to report. In general, the amount reported should include both the portion paidby the employer and the portion paid by the employee. In the caseof a health flexible spending account (FSA), the amount reported shouldnot include the amount of any salary reduction contributions. Theamount of the health FSA that is required to be included in the costreported on Form W-2 is the amount of the health FSA for the planyear that exceeds the salary reduction elected by the employee forthe plan year. Premium charged method. The premium charged method may be used to determine the reportablecost only for an employee covered by an employer’s insured group healthplan. In such a case, if the employer applies this method, the employermust use the premium charged by the insurer for that employee’s coverage(for example, for self-only coverage or for family coverage, as applicableto the employee) for each period as the reportable cost for that period. Modified Consolidated OmnibusBudget Reconciliation Act (COBRA) premium method. An employermay use the modified COBRA premium method only where the employersubsidizes the cost of COBRA (so that the premium charged to COBRA-qualifiedbeneficiaries is less than the COBRA applicable premium) or wherethe actual premium charged by the employer to COBRA-qualified beneficiariesfor each period in the current year is equal to the COBRA applicablepremium for each period in a prior year. If the employer subsidizesthe cost of COBRA, the employer may determine the reportable costfor a period based on a reasonable good-faith estimate of the COBRAapplicable premium for that period, if such reasonable good-faithestimate is used as the basis for determining the subsidized COBRApremium. If the actual premium charged by the employer to COBRA qualifiedbeneficiaries for each period in the current year is equal to theCOBRA applicable premium for each period in a prior year, the employermay use the COBRA applicable premium for each period in the prioryear as the reportable cost for each period in the current year. Employers that charge employeesa composite rate. An employer is considered to charge employeesa composite rate if (1) there is a single coverage class under theplan (that is, if an employee elects coverage, all individuals eligiblefor coverage under the plan because of their relationship to the employeeare included in the elections and no greater amount is charged tothe employee, regardless of whether the coverage will include onlythe employee or the employee plus other such individuals), or (2)there are different types of coverage under a plan (for example, self-onlycoverage and family coverage, or self-plus-one coverage and familycoverage) and employees are charged the same premium for each typeof coverage. In such a case, the employer using a composite rate maycalculate and use the same reportable cost for a period for (1) thesingle class of coverage under the plan, or (2) all the differenttypes of coverage under the plan for which the same premium is chargedto employees, provided this method is applied to all types of coverageprovided under the plan. For example, if a plan charges one premiumfor either self-only coverage, or self-and-spouse coverage (the firstcoverage group), and also charges one premium for family coverage,regardless of the number of family members covered (the second coveragegroup), an employer may calculate and report the same reportable costfor all of the coverage provided in the first coverage group and thesame reportable cost for all of the coverage provided in the secondcoverage group. If an employer is using a composite rate for activeemployees, but is not using a composite rate for determining applicableCOBRA premiums for qualified beneficiaries, the employer may use eitherthe composite rate or the applicable COBRA premium for determiningthe aggregate cost of coverage, provided that the same method is usedconsistently for all active employees and is used consistently forall qualified beneficiaries receiving COBRA coverage. Note: An employeris not required to issue a Form W-2 solely to report the value ofthe healthcare coverage for retirees or other employees or formeremployees to whom the employer would not otherwise provide a FormW-2. In addition, the fact that reporting is not requiredin Box 12, Code DD, has no impact on requirements to report theseitems elsewhere. For example, while contributions to health savingsaccounts (HSAs) are not to be reported in Box 12, Code DD, certainHSA contributions are reported in Box 12, Code W. The IRS has implemented processes for correctingerrors on employment tax returns using the X forms. To correct employmenttax errors, use the X forms as soon as the errors are discovered.For example, Form 941-X, Adjusted Employers Quarterly Federal TaxReturn or Claim for Refund, is used to correct errors on a previouslyfiled Form 941. For overpayments, employers can choose to make anadjustment or claim a refund on the X form. For underpayments, employersmust use the X form. Amounts owed must be paid by the time the X formis filed. Payments can be made using EFTPS, by sending a check, orby credit card. Tax Information for Businesses: https://www.irs.gov/businesses Forms and Publications: https://www.irs.gov/forms-instructions Business and Specialty Tax Line: 800-829-4933 In-person assistance, when necessary, isavailable from local IRS Taxpayer Assistance Centers. The IRS providesan office locator portal for finding the nearest one. Last updated on March 30, 2023.
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National
The amount of federal income tax withheld is based onwithholding tables published by the Internal Revenue Service (IRS)and the information provided on each employee's Form W-4, Employee'sWithholding Certificate. The IRS redesigned Form W-4 for 2020 and subsequent years.Before 2020, the value of a withholding allowance was tied to theamount of the personal exemption. Due to the Tax Cuts andJobs Act of 2017 (TCJA) (Pub. L. 115-97), however, taxpayerscan no longer claim personal or dependency exemptions; therefore,Form W-4 no longer asks employees to report the number of withholdingallowances that they are claiming. Employees who submitted a Form W-4 in any year before2020 are not required to submit a new form merely because of the redesign.Employers can continue to compute withholding based on the informationfrom the employee’s most recently submitted Form W-4. However, new hires now must use the redesigned form,along with existing employees who wish to adjust their withholding.An employer may ask existing employees to submit a new Form W-4 usingthe new version, but must also explain that they are not requiredto do so and that, if they do not, withholding will continue basedon the form they previously submitted if it is valid. Each new employee should fill out a W-4 when hired. Ifa new employee does not provide a completed W-4, they should be treatedas if they had checked the box for “single or married filing separately”in Step 1(c) and made no entries in Steps 2, 3, or 4. A W-4 remains in effect until the employee provides anew one. Revised withholding must begin no later than the first payrollperiod ending on or after the 30th day after the date the revisedW-4 was received. Employers may establish systems that let employeeschange their W-4 information electronically. Regulations finalized October 6, 2020 (85 Fed. Reg. 63019), updated the federal withholding rules to reflect the TCJAchanges and accommodate the redesigned Form W-4. The redesigned Form W-4 no longer uses an employee’swithholding allowances, which were tied to the value of the personalexemption, because the TCJA suspended personal and dependent exemptionsthrough the end of tax year 2025. Instead, income tax withholdingusing the redesigned Form W-4 is generally based on the employee'sexpected filing status and standard deduction for the year. Employees can choose to have itemized deductions, thechild tax credit, and other tax benefits reflected in their withholdingfor the year. Employees can choose to have an employer withhold aflat-dollar extra amount each pay period to cover, for example, incomethey receive from other sources that is not subject to withholding.Employees also may request that employers withhold additional taxby reporting income from other sources not subject to withholdingon the Form W-4. Employers may use computationalbridge entries to avoid having to maintain two different systems tocompute withholding from old and new Forms W-4. In certain circ*mstances, the IRS may direct an employerto submit copies of Forms W-4 for certain employees in order to ensurethat the employees have adequate withholding. Employers are now requiredto submit the Forms W-4 to the IRS only if directed to do so in awritten notice or pursuant to specified criteria to be set forth infuture published guidance. If the IRS determines that an employee does not haveenough withholding, it will notify the employer to increase the amountof withholding tax by issuing a lock-in letter that specifies theemployee’s permitted filing status and provides withholding instructionsfor the specific employee. The employer will also receive a copy forthe employee that identifies the permitted filing status and how theemployee can provide additional information to the IRS for determiningthe appropriate withholding and/or modifying the filing status specified.If the employee still works for the employer, the employer must furnishthe employee copy to the employee. If the employee no longer worksfor the employer, the employer must send a written response to theIRS office designated in the lock-in letter indicating that the employeeis no longer employed. The employee will be given time before the lock-in ratetakes effect to submit a new Form W-4 and a statement supporting theclaims made to the IRS office designated in the lock-in letter. Unlessotherwise notified by the IRS, employers are required to begin withholdingbased on the lock-in letter for any wages paid after the date specifiedin the notice. Once a lock-in rate is effective, an employer cannotdecrease withholding without IRS approval. After the receipt of a lock-in letter, employers mustalso disregard any Form W-4 that decreases the amount of withholding.The employee must submit any new Form W-4 and a statement supportingthe claims made that would decrease federal income tax withholdingdirectly to the IRS address in the lock-in letter. The IRS will notifythe employer to withhold at a specific rate if the employee’s requestis approved. If, at any time, the employee furnishes a Form W-4 thatresults in more withholding than required by the lock-in letter, theemployer must increase withholding based on that Form W-4. Employers that do not follow the IRS lock-in instructionswill be liable for paying the additional amount of tax that shouldhave been withheld. Employers are not required to check the validity of anemployee's W-4. If an employee files a W-4 and indicates that it isfalse, the W-4 is invalid. In this circ*mstance, an employer may requesta new W-4 with valid information. If one is not provided, the employershould continue to use the previous W-4. If there is no previous W-4,and the employee was paid wages before 2020, withholding should beat the rate for a single person with no allowances on the 2019 FormW-4. Otherwise, withholding should be done as if the employee hadchecked the box for Single or Married filing separately in Step 1(c)and made no entries in Step 2, Step 3, or Step 4 of the current FormW-4. There is a $500 penalty that applies if an employee filesa false Form W-4. There is also a criminal penalty for supplying falseor fraudulent information on a W-4 or failing to supply informationthat would increase the amount withheld. Employees may want to change the entries on Form W-4for any number of reasons when their personal or financial situationchanges. There is no limit on the number of times an employee mayfile a new W-4 form. Employers are not permitted to charge a fee forprocessing revised W-4 forms. A revised W-4 must be put into effectno later than the start of the first payroll period ending on or afterthe 30th day after the new form is filed. Tax equalization is a payroll procedure or policy usedmost frequently when an employee lives in one taxing jurisdictionbut works in another. The purpose is to make the net compensationof employees equal no matter whether they’re working in a high taxjurisdiction or a low tax jurisdiction. Thus, it is often used whenan employee is asked to work in another country. While more commonin Europe where it is likely that an employee could live in one countryand work in another, it is applicable to U.S. border areas, particularlywith Mexico, because the Mexico nonresident income tax rate is higherthan the income tax rate in the United States. An example of tax equalization would be a company thathas two facilities, one on each side of the Texas/Mexico border. Anemployee who lives in Texas and has been working in Texas is neededto do the same job in the facility in Mexico. An individual commutingdaily from the United States to Mexico to work is subject to the Mexicononresident income tax. As a resident of the United States, the employeeis also subject to U.S. income tax but can credit the amount paidto Mexico against this U.S. tax. Because the U.S. tax is lower, theemployee will have less net income, although the two facilities maybe very close to each other. Tax equalization would restore the employeeto the same net financial situation they would be in if not transferredto the Mexican facility. The most common form of tax equalization in this situationinvolves estimating an individual's taxes for the year and adjustingpay so that the net is the same as it would have been if the employeeweren’t transferred. At the end of the year, the expected and theactual tax amounts are further reconciled. Whenever an employee fillsout a W-4, they are making an estimate of how much tax they will owebased on their circ*mstances. This amount is reconciled after theyear is over when the employee files a tax return and gets a refundor pays or owes money to the IRS. Adjusting withholding quarterlycould result in a somewhat more accurate estimate of taxes owed butis generally not necessary unless there has been a significant changein an employee’s tax status (such as getting married or having a child). Payroll equalization also has application where an employeeis transferred from a low cost-of-living area to a high cost-of-livingarea. Payroll equalization, particularly tax equalization, is a potentiallycomplex accounting practice and should be worked out by a tax practitionerwho specializes in this area. Employers must deduct from employees' wagesfor Social Security tax and for Medicare tax. There is a ceiling onthe amount of annual wages that are subject to Social Security taxthat is adjusted annually, but there is no limit on the amount ofwages subject to Medicare tax. The tax rate for Medicare is 1.45 percent(amount withheld) each for the employee and employer (2.9 percenttotal). All covered wages are subject to Medicare tax. In additionto withholding Medicare tax at 1.45 percent, employers must withholda 0.9 percent Additional Medicare Tax from wages the employer paysto an employee in excess of $200,000 ($250,000 for married taxpayerswho file jointly; $125,000 for married taxpayers who file separately)in a calendar year. An employer is required to begin withholding AdditionalMedicare Tax in the pay period in which the employer pays wages inexcess of $200,000 to an employee and continue to withhold it eachpay period until the end of the calendar year. Additional MedicareTax is imposed only on the employee. There is no employer share ofAdditional Medicare Tax. All wages that are subject to Medicare taxare subject to Additional Medicare Tax withholding if paid in excessof the $200,000 withholding threshold. In 2023, employers and employees each contribute6.2 percent of the first $160,200 an employee earns during the yearfor Social Security, and each contribute 1.45 percent of all taxableearnings for Medicare. Employers must notify employees who have no federal incometax withheld that they may be able to claim a tax refund because ofthe EIC. This requirement may be met with a Form W-2 that has theEIC notice on the back of Copy B, or a substitute W-2 with the samestatement. For 2022, the IRS encouraged employers to notify any employeeswhose wages were less than $53,057 ($59,187 if married filing jointly)that they could be eligible. Supplemental wages are wages paid in addition to regularwages, including, but not limited to, overtime pay, sick leave pay,vacation pay, bonus payments, commissions, severance pay, awards,prizes, back pay, retroactive pay increases for current employees,payments for nondeductible moving expenses, and tips. Withholdingpractices vary depending on how the wages are paid. If an employee receives supplemental wages exceeding$1 million in a calendar year, the excess is subject to a tax withholdingof 37 percent (or the highest income tax rate in effect for that year).Employers must use the 37 percent rate regardless of the informationon the employee's Form W-4. The following rules apply when an employee receives lessthan or equal to $1 million in supplemental wages in a calendar year. Unidentified supplemental wages. When supplemental wages are combined with regular wages without identification,employers should withhold taxes as if the total were a single paymentfor a regular payroll period. Identified supplemental wages. When supplemental wages are identified separately from regular wages,the income tax withholding method will depend on how income taxesare withheld from the employee's regular wages. Employers that withheld income tax from an employee'sregular wages can either: 1.Withhold a flat22 percent; or 2.Add the supplementaland regular wages for the most recent payroll period, calculatingthe withholding as if the total were a single payment, and then subtractthe tax already withheld from the regular wages and withhold the remainingtax from the supplemental wages. Employers that do not withhold income tax froman employee's regular wages should use method 2, above. Note: According to the IRS, supplemental wages are subject to SocialSecurity, Medicare, and Federal Unemployment Tax Act (FUTA) taxes regardless of the withholding method used. Whether severance pay is subject to Federal Insurance Contributions Act (FICA) taxes has oftenbeen a source of confusion for employers. However, the U.S. SupremeCourt clarified the issue in U.S. v. Quality Stores, Inc.,holding that generally, severance pay is subject to FICA tax withholding(134 S. Ct. 1395 (2014)). Quality Stores, Inc., made severance payments to employeeswho were involuntarily terminated as part of its bankruptcy. The severancepayments were not tied to the receipt of state unemployment insuranceand varied based on job seniority and time served. Quality Storesinitially paid and withheld FICA taxes, but it later tried to geta refund for itself and its former employees, claiming that the severancepayments should not have been taxed as wages under FICA. The districtand appellate courts both concluded that severance payments were not“wages” under FICA. The Supreme Court disagreed, holding that suchseverance payments are taxable wages for FICA purposes. The Courtnoted that FICA defines the term “wages” broadly, and severance paymentsfit within this definition. It also pointed out that FICA containsno general exception for severance payments. Finally, the Court determinedthat the Internal Revenue Code chapter governing income tax withholdingdoes not limit the meaning of “wages” for FICA purposes. Sick leave and disability pay are subject to federalincome taxation; however, only the first 6 months of sick and disabilitypay are subject to Social Security, Medicare, and federal unemploymenttaxes. Employees may request that third-party payers withhold taxesfrom sick and disability pay. Vacation pay alone is subject to withholding as if itwere a regular wage payment. When vacation pay is in addition to regularwages, it should be treated as a supplemental wage. Federal income tax, FICA tax, and Medicare tax must bewithheld from all supplemental wage payments made to employees. Forbonuses that are less than or equal to $1 million, employers deductincome tax either according to the individual's schedule or at a flat22 percent rate. Some executives may want an even larger-than-normaldeduction to be made for withholding when the bonus is a considerablesum. Any bonus can be paid in a separate check. If combinedwith a regular paycheck, and the portion attributed to the bonus isnot specified, the amount to be withheld on the combined amount mustthen be computed from the regular tables for withholding. Tips are generally subject to withholding. Employeeswill report tips on Form 4070 (Employee's Report of Tips to Employer)when tips received are more than $20 per month. Employers may implementa system that allows employees to report their tips electronically. It is necessary to withhold income tax from students/internson a summer job unless they claim exemption from withholding on theirW-4 form. Even if exempt from income tax, their income may be subjectto Social Security taxes. Complex rules apply to the withholding of taxes on fringebenefits that are taxable. Examples of fringe benefits that may betaxable in whole or in part include cars, free or subsidized parking,mass transit subsidies, airplane flights, discounts, vacations, membershipsin country clubs or other social clubs, and tickets to entertainmentevents that the employer provides. In general, the fair market valueof the benefit less what the employee may have paid for it must beincluded in taxable income. Complex distribution and income tax withholding rulesalso apply to taxable payments from pension, profit-sharing plans,and 401(k) plans. Withholding on periodic payments is done using the samewithholding tables as for wages. Recipients may file Form W-4P, WithholdingCertificate for Pension or Annuity Payments, to claim a deduction,request additional withholding, or make certain other adjustments.If no W-4P is on file, withholding is at the rate for a married personwith three allowances. Individuals who begin receiving pension orannuity payments in 2022 or later and do not complete Form W-4P shouldbe treated as if they left Steps 2 through 4 of the new version blank. Withholding is required on certain lump-sum paymentsthat may be eligible for tax-free rollover treatment made directlyto employees. Beginning in 2023, the new Form W-4R must be used torequest any additional withholding on these payments. Withholdingis not required on direct rollovers from a qualified retirement planto another qualified plan or an Individual Retirement Account (IRA). The taxes employers withhold from employees, along withthe employer's share of FICA and Medicare taxes, must be depositedto an authorized financial institution. Generally, deposits during a calendar year must be mademonthly or semiweekly depending on how much was deposited during thelookback period, defined as a 12-month period ending on June 30 ofthe previous year. Employers that reported $50,000 or less of taxesduring the lookback period deposit monthly; employers that reportedmore than $50,000 deposit semiweekly. New employers deposit monthlyduring their first calendar year. However, if an employer accumulates$100,000 in tax liability on any day during a deposit period, a depositmust be made by the next banking day. Note: Employers accumulating$100,000 in tax liability on any day automatically become semiweeklyschedule depositors on the following day and remain so for at leastthe rest of the calendar year. Employers must use electronic funds transfer (EFT) tomake all federal tax deposits (including deposits of employment taxes,excise taxes, and corporate income taxes). Generally, these paymentsare made using the EFTPS, a free service from the U.S. Departmentof the Treasury. For additional information, employers should contactthe EFTPS at 800-555-4477, or visit them on the Web at http://www.eftps.gov. With some exceptions, employers that pay wages subjectto income tax withholding or Social Security and Medicare taxes arerequired to file Form 941, Employer's Quarterly Federal Tax Return.Employers may qualify to file Form 944, Employer's Annual FederalTax Return. Employers that fail to file a form are subject to a penaltyof 5 percent of the unpaid tax that was due with that form. If anemployer pays the tax late, a penalty is incurred of 0.5 percent permonth of the amount of the tax. The IRS permits employers to filethese forms electronically. For more information, visit https://www.irs.gov/businesses/e-file-employment-tax-forms. Employers that have been filing Form 941 and believetheir yearly employment taxes will be $1,000 or less in the currentcalendar year may contact the IRS to request to file Form 944. Therequest must be made by phone at 800-829-4933 by April 1 or by writtenrequest postmarked by March 15. New employers are also eligible to file Form 944 if theywill meet the eligibility requirements. When filing Form SS-4, Applicationfor Employer Identification Number, indicate the highest number ofemployees expected in the next 12 months, and check the box on line14 to indicate whether you expect to have $1,000 or less in employmenttax liability for the calendar year and would like to file Form 944. Employers are required to provide employees with FormW-2 (Wage and Tax Statement) by January 31 of each year. Employersmay furnish this form to their employees electronically if they obtainthe employees' consent to do so. Employers must annually file Copy A of Form W-2 and FormW-3 (Transmittal of Income and Tax Statements) with the Social SecurityAdministration (SSA) by January 31. These may be filed electronicallyusing the SSA's Business Services Online at https://www.ssa.gov/employer. Employers filing 250 or more W-2 forms must file electronicallyunless they receive a waiver from the IRS. However, beginning with forms filed in 2024 (covering tax year 2023),any employer filing 10 or more in total of certain types of formsmust file all such forms electronically. Under the rule finalizedFebruary 23, 2023 (88 Fed. Reg. 11754), these include FormsW-2 and 1099, as well as Affordable Care Act coveragereports. Waivers may be granted in cases of “undue hardship.” Employers are required to report on FormW-2 the total cost of group healthcare coverage, including the portionpaid by the employer and the portion paid by the employee (IRSNotice 2011–28). How to report. Thevalue of the healthcare coverage is reported in Box 12 of the FormW-2, with Code DD to identify the amount. There is no reporting onthe Form W-3 of the total of these amounts for all the employer’semployees. Calculating the amount to report. In general, the amount reported should include both the portion paidby the employer and the portion paid by the employee. In the caseof a health flexible spending account (FSA), the amount reported shouldnot include the amount of any salary reduction contributions. Theamount of the health FSA that is required to be included in the costreported on Form W-2 is the amount of the health FSA for the planyear that exceeds the salary reduction elected by the employee forthe plan year. Premium charged method. The premium charged method may be used to determine the reportablecost only for an employee covered by an employer’s insured group healthplan. In such a case, if the employer applies this method, the employermust use the premium charged by the insurer for that employee’s coverage(for example, for self-only coverage or for family coverage, as applicableto the employee) for each period as the reportable cost for that period. Modified Consolidated OmnibusBudget Reconciliation Act (COBRA) premium method. An employermay use the modified COBRA premium method only where the employersubsidizes the cost of COBRA (so that the premium charged to COBRA-qualifiedbeneficiaries is less than the COBRA applicable premium) or wherethe actual premium charged by the employer to COBRA-qualified beneficiariesfor each period in the current year is equal to the COBRA applicablepremium for each period in a prior year. If the employer subsidizesthe cost of COBRA, the employer may determine the reportable costfor a period based on a reasonable good-faith estimate of the COBRAapplicable premium for that period, if such reasonable good-faithestimate is used as the basis for determining the subsidized COBRApremium. If the actual premium charged by the employer to COBRA qualifiedbeneficiaries for each period in the current year is equal to theCOBRA applicable premium for each period in a prior year, the employermay use the COBRA applicable premium for each period in the prioryear as the reportable cost for each period in the current year. Employers that charge employeesa composite rate. An employer is considered to charge employeesa composite rate if (1) there is a single coverage class under theplan (that is, if an employee elects coverage, all individuals eligiblefor coverage under the plan because of their relationship to the employeeare included in the elections and no greater amount is charged tothe employee, regardless of whether the coverage will include onlythe employee or the employee plus other such individuals), or (2)there are different types of coverage under a plan (for example, self-onlycoverage and family coverage, or self-plus-one coverage and familycoverage) and employees are charged the same premium for each typeof coverage. In such a case, the employer using a composite rate maycalculate and use the same reportable cost for a period for (1) thesingle class of coverage under the plan, or (2) all the differenttypes of coverage under the plan for which the same premium is chargedto employees, provided this method is applied to all types of coverageprovided under the plan. For example, if a plan charges one premiumfor either self-only coverage, or self-and-spouse coverage (the firstcoverage group), and also charges one premium for family coverage,regardless of the number of family members covered (the second coveragegroup), an employer may calculate and report the same reportable costfor all of the coverage provided in the first coverage group and thesame reportable cost for all of the coverage provided in the secondcoverage group. If an employer is using a composite rate for activeemployees, but is not using a composite rate for determining applicableCOBRA premiums for qualified beneficiaries, the employer may use eitherthe composite rate or the applicable COBRA premium for determiningthe aggregate cost of coverage, provided that the same method is usedconsistently for all active employees and is used consistently forall qualified beneficiaries receiving COBRA coverage. Note: An employeris not required to issue a Form W-2 solely to report the value ofthe healthcare coverage for retirees or other employees or formeremployees to whom the employer would not otherwise provide a FormW-2. In addition, the fact that reporting is not requiredin Box 12, Code DD, has no impact on requirements to report theseitems elsewhere. For example, while contributions to health savingsaccounts (HSAs) are not to be reported in Box 12, Code DD, certainHSA contributions are reported in Box 12, Code W. The IRS has implemented processes for correctingerrors on employment tax returns using the X forms. To correct employmenttax errors, use the X forms as soon as the errors are discovered.For example, Form 941-X, Adjusted Employers Quarterly Federal TaxReturn or Claim for Refund, is used to correct errors on a previouslyfiled Form 941. For overpayments, employers can choose to make anadjustment or claim a refund on the X form. For underpayments, employersmust use the X form. Amounts owed must be paid by the time the X formis filed. Payments can be made using EFTPS, by sending a check, orby credit card. Tax Information for Businesses: https://www.irs.gov/businesses Forms and Publications: https://www.irs.gov/forms-instructions Business and Specialty Tax Line: 800-829-4933 In-person assistance, when necessary, isavailable from local IRS Taxpayer Assistance Centers. The IRS providesan office locator portal for finding the nearest one. Last updated on March 30, 2023.
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