Section 6 Witholding taxes Flashcards
*What is the principle of Constructive Payment?
Employers must withhold federal income tax, social security tax, and medicare tax when the employee is actually or Constructively paid.
An Employee is considered to be paid wages When the wages have been made available to the employee without “substancial limitation or restrictions”
Are paychecks sent through mail “contructively paid”?
No, the wages are not available until the check is delivered.
Regardless of the date printed on the check, the date of constructive payment is when employer’s withholding and deposit obligations are triggered.
What is the purpose of Social security number/SSN?
- to establish an account for individual for posting income for receiving social security retirement benefits
- Identification number used by IRS
- Indentification when reports of wages paid and taxes withheld are made to social security administration IRS
How many digits does SSN number have?
9 digits
Format:
000-00-0000
What is the policy for SSN and entering in Records?
- Employers must enter each new employee’s name and SSN into its records exactly as shown on the SSN card
- Employees are required to show their social security card on the first day of work if it is available
- If an employee does not produce a SSN card on the first day of work, the employer must ask to see it
- If the employee does not hava SSN card: The employer must tell the employee that he/she is required to file an applicate with the SSA
*Where to get SSN?
Submit Form SS-5, application for SSN card to social security administration (
Employer should keepi a stock of SS-5 for new employees who do not have a SSN card
How does employer verify SSNs?
Internet verification
- through the social security number verification service (SSNVS)
- Available at WWW. SSA.Gov
- Immediate response for up to 10 SSNS, next business day for files up to 250,000
What is another name for Form W4?
Employee’s Withholdings Allowance Certificate
What is W4 information used for?
W-4 information is used to calcualte the correct amount of FIT to withhold
For each withholding allowance claimed, the employee reduces the amount of wages subject to federal income tax withholdings
If an employee does not provide an orginal, complete, valid, signed W-4 consider him/her single with 0 withholdings
When must newly hired employees sumbit W4?
On or before the fist day of work
Within how many days must amended W-4s be submitted after a DECREASE in the number or allowances
10 days
Within how many days must amended W-4 be submitted after a INCREASE in allowances?
any time
When is the W4 election effective?
The first payroll period ending after the form is filed
An amended W-4 no later than the beginning of the first payroll period ending on or after 30th day after the form is filed.
How many years must employers retain a copy of employees W4?
To be kept on file for at least 4 years since the last return was filed.
When should employers submit W-4 to the IRS?
Only if the IRS request it in writing
What is a W4-P form?
Withholdings certificate for Pension or annuity payments.
for Retirees
What is a W-4S form?
Request for Federal Income tax withholidngs from sick pay
-When being paid by a 3rd party insurer
What are other alternative withholdings methods for Withholding FIT?
Annualized wages
- Based on annual payroll period than divided among the actual payroll periods
Average estimated wages
-Based on employees estimated wages during a quarter
Cumulative wages
- Useful for adjusting withholdings amounts for employees who wage payments are inconsistently high or low
Part-year employment
-Reduces withholdings for employees who work only during part of calendar year on a seasonal basis or because they have been unemployed
other alternatives
What are supplemential wage payments?
Payments that are not part of the employee’s ordinary wages (ex bounus)
What are the rules for withholding Federal income tax for suplemental wages?
When payments are combined (ordinary wages & bounus) and amounts of each are not clearly indicated.
-FIT must be withheld as if all were regular paymenst
When a supplemental payment is paid seperately or is clearly indicated
-Flat withholding rate
(FIT may be withheld at 25% unless totla of supplemental wages to the employee is greater than $1million)
Aggregate method
-an option for employers
-must be used if the employee had no FIT withheld on the most recent paycheck, due to allowances
(more beneficial form employee)
Are distributions from an employers retirement or deferred compensation plan subject to federal income tax?
yes
What are methods and ruls for withholding federal income tax for pension and annuities?
Method of withholding depends on the type of payment
-periodic or nonperiodic
The amount of withholding cannot exceed the amount of money distributed plus the value of any property distributed
No withholdings if distribution consist soley of the employers securities and up to $200 in case representing fractional shares.
(Pension and Annuities)
What are periodic payments?
payments made over a period of more than one year.
When is Federal income tax withheld for periodic pension/annuities payments?
Withhold FIT as if payments were wages.
The payroll period is the frequency of the payments.
Recipients can submit W-4p. If not W-4P calculate as if recipient claimed married with 3 allowances.
Restrictions on right to refuse withholdings if recipients:
-has payments mailed outside the U.S.
Has not given a payer resident address for mailing: or
-Has not given SSN, or the IRS has told the payer the SSN provided is inaccurate
(Pension and Annuities)
What are nonperiodic payments that are not eligible for rollover?
Distributions that are not eligible for rollover. Distributions that are not considered periodic are nonperiodic.
Non periodic payments of at lease $200 (made after december 31, 1992) that are not eligible for rollover to another qualified plan are subject to FIT withholdings at the rate of 10%.
Recipient may use form W-4P to elect no withholding or increase withholding by a specific dollar amount. The recipients rights must be spelled out in a written notice.
(Pension and Annuities)
What payments are eligible for rollover distributions?
Nonperiodic payments of all or any portion of the balance of a recipient’s account in a qualified deferred compensation plan under IRC 401(a) {including 401k plane}, 403(b) annuity, a governmental 457 plan, and/or an individual retirement arrangement are eligible rollover distributions.
There are exceptions
4016, 403b, and 457 plans are not required to accept rollovers
(Pension and Annuities)
What are the eligible rollover distributions -withholdings rules?
- Mandatory FIT withholding of 20% unless distribution is directly rolled over to another plan
- Recipients can no longer elect not to have FIT withheld
- Employer are not required to allow more than one direct rollover for each distribution
- No withholding required if total of all payments under one plan in a year is less than $200
What are BackUp Withholdings?
BackUp Withholdings is FIT withheld from non-payroll payments.
Consit of:
- interest or dividends
- payments of wages due a deceased employee made to the employee’s beneficiary or estate
- payments ($600 or more/year) for services rendered by independent contractor
- Royalties
- Broker transaction payments
- Payments to attorneys
- Direct sales of $5,000 or more
A company’s accounts payable department - not payroll department - will typically encounter these types of payments
(Backup withtholdings)
In 2013 what percentage must be withheld for FIT if:
- the payee fails to provide the payer with a taxpayer identification number (TIN)
- The payer is notified by the IRS that the TIN is incorrect
- The payer is notified by the IRS that he payee has underreported interest or dividend payments, or
- The payer does not receive a certification that the payee is not subject to withholding from interest or dividend payments.
Reported to payee on Form?
Reported to IRS on Form?
28%
1099-Misc
Form 945
What is EIC (Earned Income Credit)?
EIC is tax credit that reduces any taxes owed by tax payers earnings less than a certain amount in a year.
Are Employers required to inform potential eligible employees about Earned Income Credit?
Yes,
Most use copy B or Form W-2, although Notice 797 or a written statement with the same wording as Notice 797 can be provided.
In 2013 what is the social security tax rate paid by employees and employers?
Employees = 6.2% Employers = 6.2%
What is another name Social security tax is know for?
OASDI - Old Age, Survivor’s, and Disability insurance
In 2013 what is the medicare tax rate paid by employee and employer?
Employee = 1.45% Employer = 1.45%
Additional medicare tax of 0.9% withheld from employee’s wages over 200,000
What is another name for meidcare tax?
The health and insurance program
What is the name of the law that allows for/requires social secuirty and medicare taxes?
FICA- Federal insurance contributions act (1938)
What is the max social security taxable wage?
$113,700
How is taxes witheld if employee works for mulitple companies?
Each employer is liable for withholding and matching social security and medicare taxes.
Employee can take a credit on their form 1040
If wages are earned in one year, but paid in the next year. When are SS and Medicare taxable?
Wages are taxable for SS and medicare tax purposes in the “next” year (principle of constructive payment).
How are self-employed individuals (independent contractor) taxed?
They must pay both the employer and employee share of SS and medicare taxes- combined rate of:
- 4% SS
- 9% meidcare
15.3% total
Plus 0.9% additional medicare tax, if applicable (over 200,000)
The individual can claim a deduction on their personal income tax return (form 1040) for a protion of the taxes
What wages are expmt from social security and medicare?
- Sick or disability benefits paid more than 6 months
- Payments made under deferred compensation plan, except elective defferals
- Payments made under 125 flexible benefits plan
What are employment types exempt from social security and medicare taxes
- Work performed by non resident aliens under F, J, M or Q visas
- work done by temporary foreign agricultural workers
- work on foreign ship or aircraft outside the US by non-US citizens for a non us employer
- word done by students enrolled into school they are working for, except career employees of the school
What are the penalties for failure to withhold taxes?
Employers are liable for payment of federal income tax deducted and withhelld, while relieved of liability for the withheld amounts to anyone other than the federal government.
Third party liabilities are
=penalties assesed of third parties who supply funds to an employer for the purpose of paying wages to that employer’s employees, knowing that the employer cannot or will not deposit the required withholdings taxes.
