| To: | All State Payroll/Personnel Technicians |
| Subject: | Correction to Supplemental Taxing - Changes to Special Pay Action in IPOPS |
| Sent Date: | 01/03/2006 |
The State Controller's Office is making changes to the Special Payment Action in IPOPS to accommodate the federal income tax withholding rules for supplemental wages.
Beginning with pay date February 10, 2006, all payments made to an employee on a special payment action (example: one-time payment paid on a separate warrant) will be taxed at the percentage based supplemental tax rate. For calendar year 2006, this is 25% for Federal Taxes and 7.8% for Idaho State Taxes.
This modification will be implemented to production on 1/20/06. Any Special Payments processed prior to the implementation date beginning with payroll #06003 will be required to have ADV in the "TAX PCT" field.
Following are the IRS rules for Supplemental Wages from IRS Publication 15, page 12 as well as their examples for your information.
Supplemental Wages
Supplemental wages are compensation paid in addition to an employee’s regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for current employees, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages.
Withholding on supplemental wages when an employee receives more than $1,000,000 of supplemental wages from you during the calendar year. Special rules apply to the extent that supplemental wages paid to one employee during the calendar year exceed $1,000,000. If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1,000,000, the excess is subject to withholding at 35 percent (or the highest rate of income tax for the year). Withhold using the 35% rate without regard to the employee’s Form W-4. In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. This provision applies to payments made after December 31, 2004. The Internal Revenue Service expects to provide final regulations about this provision in the near future.
Withholding on supplemental wage payments to an employee who does not receive $1,000,000 of supplemental wages during the calendar year. If the supplemental wages paid to the employee during the calendar year are less than or equal to $1,000,000, the following rules apply in determining the amount of income tax to be withheld.
Supplemental wages combined with regular wages. If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period.
Supplemental wages identified separately from regular wages. If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee’s regular wages.
1. If you withheld income tax from an employee’s regular wages, you can use one of the following methods for the supplemental wages.
a. Withhold a flat 25% (no other percentage allowed).
b. Add the supplemental and regular wages for the most recent payroll period this year. Then figure the income tax withholding as if the total was a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages
2. If you did not withhold income tax from the employee’s regular wages, use method 1-b above. This would occur, for example, when the value of the employee’s withholding allowances claimed on Form W-4 is more than the wages.
Regardless of the method that you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes.
Example 1. You pay John Peters a base salary on the 1st of each month. He is single and claims one withholding allowance. In January of 2006, he is paid $1,000. Using the wage bracket tables, you withhold $52 from this amount. In February 2006, he receives salary of $1,000 plus a commission of $2,000, which you include in regular wages. You figure the withholding based on the total of $3,000. The correct withholding from the tables is $354.
Example 2. You pay Sharon Warren a base salary on the 1st of each month. She is single and claims one allowance. Her May 1, 2006, pay is $2,000. Using the wage bracket tables, you withhold $198. On May 14, 2006, she receives a bonus of $2,000. Electing to use supplemental payment method 1-b, you:
1. Add the bonus amount to the amount of wages from the most recent pay date ($2,000 + $2,000 = $4,000),
2. Determine the amount of withholding on the combined $4,000 amount to be $604 using the wage bracket tables,
3. Subtract the amount withheld from wages on the most recent pay date from the combined withholding amount ($604 – $198 = $406), and
4. Withhold $406 from the bonus payment.
Example 3. The facts are the same as in Example 2, except that you elect to use the flat rate method of withholding on the bonus. You withhold 25% of $2,000, or $500, from Sharon’s bonus payment.
If you have any questions about this change please contact Leslie Mickelsen at 334-2394.
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