deduction withholding order adjusting tax withholding severance payments

Deduction Withholding OrderAdjusting Tax Withholding

Severance PaymentsUpdated December 18, 2009

Order in Which Deductions are Processed

Paying Off a Contract – Employee Requests Money Go

into Annuity

Payoff Contract Example

• Brian Able is leaving the district and the contract is being paid off. Brian wants as much of the payment to go to a 403b annuity as possible. Below is the payoff of accrued wages for Brian in UPDCAL_CUR.

Reminder

• Full payment can NOT go to annuity– USPS can only create zero payroll checks for

full docks

Withholdings

• Retirement annuities are withheld first by the system

• (590/591) withholding = 526.24

• 5,262.37 minus 526.24 = 4,736.13

Annuity Withholding

• In our example, since 4,736.13 is left after the retirement deduction, we could put most of it into the annuity

• The employee MUST receive a small amount

PAYRPT shows warnings that the 003 and 692 deduction were missed

Federal and State

• After the annuity, the Federal and State tax are calculated

• Since the annuity affects the taxable amount, nothing is calculated to withhold

City DEDNAM Record

If the city doesn’t honor the annuity being processed then tax will be calculated. You can see that this city tax does NOT honor the 403b annuity type, therefore, the system tries to calculate the tax.

Calculate City Taxes

• City tax is calculated on the full gross unless the employee has an annuity withholding that is honored by the city. In this situation, the full gross is taxed.– 5,262.37 x 1.5% = 78.94

• Medicare is also taxed on the gross so the system also calculates the tax– 5,262.37 x 1.45% = 76.30

• Gross = 5,262.37

• Minus 526.24 (retirement)

• Minus 4,736.12 (annuity)

• Net = .01

• 003 Missed (78.94)

• 692 Missed (76.30)

Can I ignore the warnings?

• If you ignore the errors you can process the payroll but you will receive a fatal error on W2PROC of– Medicare amount does not equal 1.45% of Medicare

Gross

• You will need to collect the money from the employee and manually update the Medicare deduction record.

• The employee will owe tax to the city when they file

Adjust to Withhold Taxes

• The other option is to adjust the annuity amount in order to withhold the taxes– Problem with this is that Federal and State are

withheld before city and Medicare– If we subtract out City and Medicare from the

calculation there is 4,580.89 remaining– If we setup the annuity for 4,580.88, you will

notice that Federal and State deductions are now withheld but Medicare is now missed.

The Medicare (692) was still missed because Federal and State were now deducted because

they are calculated before Medicare

Calculation to withhold taxes

• If you add the City and Medicare taxes together it totals 155.24

• Looking at the Federal Tax withholding tables in IRS Publication 15 find the minimum tax rate and multiply by it– In our example, the minimum tax rate is 10%

• 155.24 x 10% = 15.52• Decrease the annuity amount by this amount from

4,580.88 to 4,565.36

All of the taxes are now being taken and the employee will receive a net of 7.27

Contract Payoff, No Annuity

Adjusting Tax Withholding

• Large Payoff on contract, accrued wages

• Not diverting to annuity

• This is money that would normally be paid over the remaining pays

• Paying in one lump sum

• A large payment amount will be taxed at a high Federal and State tax rate due to bi-weekly or semi-monthly pays

Adjusting Tax Withholding

• Recommend new Federal W4 form and State IT4 form from employee to adjust tax rate– Can set to specific percentage rate– Can use IRS and State Tax tables– Consult tax preparer

• Modify 001 and 002 DEDSCN record to specific percentage

• Or modify to zero percentage and enter calculated tax in additional withholding field

PAYRPT Prior to Updating 001 and 002 DEDSCN records

001 DEDSCNZero Percentage record and

calculated tax

002 DEDSCN Zero Percentage record and

calculated tax

PAYRPT After Updating 001 and 002 DEDSCN records

Paying Severance

Paying Severance

• Limitation in UPDCAL– Amount field cannot exceed 9,999.99– Breakdown by using units

• i.e. $10,000 severance payment enter as 2 units of $5,000

• Per IRS Publication 15 (Circular E)– Severance is considered supplemental wages– Taxed at higher rate

Limitation in UPDCAL

Severance – Paying to Annuity

• Full payment can NOT go to annuity

• Enter amount to withhold for annuity less a small amount to pay to employee– Don’t forget amounts for taxes/retirement if

applicable

• Place stop dates on any DEDSCN records that should not withhold

Severance – Paying to Annuity

• Severance on Separate Check– Create job for severance payment– Pay as MIS or TRM pay type on primary job

• JOBSCN record must have pays and days remaining• JOBSCN record equal pays flag must be ‘N’• If the payment is NOT subject to retirement, remove the

retirement code in JOBSCN

– Special pay• Use period begin and end date equal to non-work day

Questions?