Vision Payroll

This week’s question comes from Burt, an office manager. An employee filled out a Form W-4 and now is not having any federal income tax (FIT) withheld from his check. He wants to have $20 withheld each week since he thinks he’ll owe about $1,000 in FIT. How does an employee increase the amount of FIT withholding? Workers who wish to adjust their withholding should file a revised Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to adjust their withholding. Line 6 may be used to increase the amount withheld for FIT from each paycheck. If the employee files Form W-4 and claims the same exemption and enters $20 on line 6, $20 will be withheld each paycheck unless earnings increase such that FIT must be withheld. In that case, the withholding will be the calculated amount, plus $20. Contact Vision Payroll if you have any question on FIT withholding.

In IR-2009-050, the Internal Revenue Service (IRS) has announced the release of Notice 1036-P, Additional Withholding for Pensions for 2009, in order to help some pensioners avoid a smaller refund or a balance due when filing their 2009 Form 1040.

Although using the new tables is not required, recipients from plans that adopt the new tables will not need to take any further action to have their withholding adjusted. The IRS is encouraging pension payors who choose to use the new withholding tables to notify pension recipients who requested additional withholding on Form W4-P, Withholding Certificate for Pension or Annuity Payments, after the February tables were released.

The IRS is recommending certain types of taxpayers should consider filing revised forms, especially if they use the IRS withholding calculator and determine that their withholding may be insufficient. Those types of taxpayers include the following:

• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some social security recipients who work
• Workers who do not have valid social security numbers

Workers who wish to adjust their withholding should file revised Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to adjust their withholding.

Contact Vision Payroll if you have any questions on Notice 1036-P.

Under the American Recovery and Reinvestment Act of 2009 (ARRA), the first $2,400 of unemployment benefits received by a taxpayer during 2009 are not subject to federal income tax. The Internal Revenue Service (IRS) recently released IR-2009-29, First $2,400 of Unemployment Benefits Tax Free for 2009, to help taxpayers understand the new rules.

“This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by [ARRA], which includes making the first $2,400 of unemployment insurance exempt from tax,” said IRS Commissioner Doug Shulman. “I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.”

Married couples who are both collecting unemployment benefits may each claim exemption for up to $2,400 thereby allowing up to $4,800 to be received tax-free in certain circumstances.

Individuals who are working and receiving unemployment benefits should consider filing a revised Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to reflect both the exemption from tax for some unemployment benefits as well as the reduced withholding under ARRA.

Contact Vision Payroll if you have any questions on the taxation of unemployment benefits under ARRA.

This week’s question comes from Jerri, an HR director. I know federal income tax withholding is supposed to change because of the new tax law. Do employees need to file a new Form W-4? Answer: Employees are not required to file a revised Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to see the impact of the American Recovery and Reinvestment Act of 2009 (ARRA). The Internal Revenue Service (IRS) provided new tax tables in Publication 15-T that adjust withholding for most workers. Employers must begin using the tables no later than April 1, 2009.

Workers may file a new Form W-4 or Formulario W-4(SP) if they do not wish to have their withholding reduced. Employees may wish to review Publication 919, How Do I Adjust My Tax Withholding or use the IRS withholding calculator. The IRS also recommends that employers provide a copy of the notice on page 73 of Publication 15-T to employees to help them understand the changes.

Contact Vision Payroll if you have further questions on the impact of ARRA on federal income tax withholding.

The Internal Revenue Service (IRS) has released Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables (For Wages Paid Through December 2009). Publication 15-T contains revised withholding tables to implement changes mandated by the American Recovery and Reinvestment Act of 2009 (the Act) as well as information on other changes required by the Act such as increased commuter exclusion amounts and changes required to the adjustment to taxes withheld on nonresident aliens.

The IRS recommends making a copy of the notice provided on page 73 of Publication 15-T available to all employees so that they may understand the change in withholding. Employees are not required to file a new Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to see the impact of the tax law change, but may wish to do so to ensure the correct amount of tax is withheld.

Vision Payroll implemented the revised withholding tables last week and eligible employees should notice an increase in net pay with their current paycheck.

Over the next several days, Vision Payroll will be posting additional articles on changes to payroll and HR by other sections of the Act. We’re also planning a seminar on implementing these changes, so contact Vision Payroll if you’d like to attend.

As part of the American Recovery and Reinvestment Act of 2009, the Internal Revenue Service (IRS) has released updated withholding tables. Though they won’t be published until new Publication 15-T is made available later this week, the IRS has released Notice 1036, Early Release Copies of New Wage Withholding and Advance Earned Income Credit Payment Tables and encouraged employers to start using them as soon as possible. The deadline for implementation of the new tables is April 1, 2009.

Workers are not required to file a new Form W-4, Employee’s Withholding Allowance Certificate or its Spanish equivalent, Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to see the impact of the tax law change. The Making Work Pay credit is equal to 6.2% of earned income, up to a maximum of $400 for single taxpayers and $800 for those filing joint returns. Phaseouts of the credit begin at $75,000 of adjusted gross income (AGI) for singles and $150,000 AGI for those filing joint returns and the credit is eliminated for singles with more than $95,000 of AGI and joint returns with more than $190,000 of AGI. Taxpayers in this phaseout range or above due to multiple jobs, a spouse’s income, or unearned income should consider an amended Form W-4 or Formulario W-4(SP).

Vision Payroll has already implemented the revised withholding tables and eligible employees should start seeing an increase in take-home pay as early as today. Contact Vision Payroll if you have any further questions on the impact of the Making Work Pay credit.

This week’s question comes from Angela, a part-time employee. I only work a few hours each month to help with school expenses. I claimed exemption from withholding when I started work last year. Yesterday’s check had federal withholding for the first time. Why did federal income tax withholding start on my wages? Answer: Employees who have provided a Form W-4, Employee’s Withholding Allowance Certificate, claiming exemption from federal income tax withholding needed to file a new 2009 Form W-4 by February 16, 2009 in order to continue their exemption from federal income tax withholding. Any employee who did not provide a 2009 Form W-4 claiming exemption before last Monday must have tax withheld based on a previously filed Form W-4 not claiming exemption, if available, or using single, zero allowances, if not. File a new Form W-4 or Formulario W-4(SP), Certificado de Exención de la Retención del Empleado to claim exemption from withholding or to correct the number of withholding allowances claimed. Employers may not refund any federal income tax withheld unless the over-withheld tax was due to a calculation error. Tax properly withheld from an employee who failed to file an updated Form W-4 is not considered tax withheld due to a calculation error. Employers should update the allowances claimed by logging in to their company file or providing Vision Payroll with the updated information.

This week’s question comes from Greg, a part-time accounts payable clerk. I made almost the same amount of money in 2008 as I did in 2007, but the amount of my federal income tax (FIT) withheld is significantly lower. Why did my FIT withheld go down? There are several reasons why your FIT withheld could be significantly lower, even though your income was almost the same.

1. Inflation creep. Each year, as inflation reduces the value of the dollar, tax tables in Publication 15 (Circular E) are adjusted so that less tax would be withheld on the same amount of income. This is to adjust for the reduced buying power of the same dollar amount of income.
2. Reduced income. At certain low-income levels, no tax is withheld if the withholding allowances claimed are greater than zero. Even FIT withholding of a few dollars each week can add up to a few hundred-dollar difference at year-end compared to no withholding at certain low-income levels.
3. Increased withholding allowances. Many employees file a revised Form W-4, Employee’s Withholding Allowance Certificate or Formulario W-4(SP), Certificado de Exención de la Retención del Empleado. If the number of withholding allowances claimed increases, the amount of FIT withheld will decrease. Instead of receiving a big refund when a Form 1040 is filed, the employee receives a small net pay increase each week. Some employees also file Form W-4 claiming exemption from all FIT withholding.
4. Claiming Earned Income Credit. Many employees file a new or revised Form W-5, Earned Income Credit Advance Payment Certificate. As in the case of increased withholding allowances, claiming an advance EIC payment will increase net pay received each week, but could reduce the amount of FIT withheld.
5. Increase in pre-tax deductions. Employees who increase the amount of a §125 election or elect to contribute more money to a pre-tax retirement plan such as a SIMPLE plan or §401(k) plan, could have a significantly reduced amount of FIT withheld on the same amount of gross pay. Since those amounts are deducted before FIT withholding is calculated, the FIT deduction should be reduced.

Employees should work with their CPA to project their FIT liability for the current year then assess their progress toward meeting that liability each quarter. If the projected FIT withholding be less than the annualized projected liability a revised Form W-4 or Form W-5 should be filed or the need to pay quarterly estimated tax payments using Form 1040-ES should be considered. Employers should update the allowances claimed by logging in to their company file or providing Vision Payroll with the updated information.

Employees who have provided a Form W-4, Employee’s Withholding Allowance Certificate claiming exemption from federal income tax withholding must file a new 2009 Form W-4 by February 16, 2009 in order to continue their exemption from federal income tax withholding. Employers must start withholding on February 16, 2009 if employees have not provided a 2009 Form W-4 claiming exemption. Even employees who are no longer claiming exemption should file a 2009 Form W-4 so that employers may calculate the proper amount of withholding. If an employee has not provided a 2009 Form W-4 by February 16, 2009, the employer should withhold based on a previously filed Form W-4 not claiming exemption, if available or using single, zero allowances, if not. Spanish-speaking employees may complete Formulario W-4(SP), Certificado de Exención de la Retención del Empleado. Upon request, Vision Payroll can provide employers with pre-printed 2009 Forms W-4 for all active employees. Vision Payroll will not automatically change any employee’s claimed withholding allowances. Employers should update the allowances claimed by logging in to their company file or providing Vision Payroll with the updated information.

This is one in a continuing series on the 2008 Form W-2, Wage and Tax Statement, which employers must generally furnish to employees no later than February 2, 2009. Forms mailed on the due date are considered furnished if properly addressed. Employers unable to meet that deadline may file a request for extension of time to furnish the forms. Today we review Box 2, federal income tax withheld.

Box 2 shows the amount employees must enter on line 62 of Form 1040, US Individual Income Tax Return. Employers determine the amount of withheld federal income tax each pay period by the amount of taxable wages, the pay frequency, and the number of withholding allowances claimed on Form W-4, Employee’s Withholding Allowance Certificate. Spanish-speaking employees may complete Formulario W-4(SP), Certificado de Exención de la Retención del Empleado. Employers may use either the percentage method or the wage bracket method to calculate the amount of tax to withhold. Both methods are explained in Publication 15, (Circular E) Employer’s Tax Guide. Employers should not accept “reverse withholding” where employees write checks to the employer to pay withholding tax. Employees should make such payments using Form 1040-ES. Also, any amounts that employers pay toward an employee’s withholding to “gross-up” non-cash payments such as taxable fringe benefits must also be included as wages in boxes 1, 3, 5, and 7 as required.

The next topic in this continuing series will be Box 3, social security wages. Contact Vision Payroll with any questions on 2008 Form W-2.