How to Handle Supplemental Wages

Basically, supplemental wages include a variety of items paid in addition to regular wages. Whereas regular wages constitute straight-time hourly pay or fixed salary, supplemental wages include:

  • Bonuses.
  • Back pay.
  • Commissions.
  • Overtime pay.
  • Lump-sum vacation payments.
  • Retroactive pay increases.
  • Severance pay.
  • Accumulated sick leave payments.
  • Taxable fringe benefits and expense allowances paid via a nonaccountable plan.
  • Awards and prizes.
  • Reimbursements for nondeductible moving expenses.

Supplemental wages are subject to Social Security tax, Medicare tax, federal income tax, and applicable state and local taxes, and there are some special twists.

Social Security and Medicare taxes. Withhold these two taxes from supplemental wages as you would regular wages.

Federal income tax. If the supplemental wages exceed $1 million for the year, withhold federal income tax on the amount over $1 million at the highest tax bracket of 37 percent. If the supplemental wages are less than $1 million, federal income tax withholding is based on whether the supplemental wages are paid with regular wages.

  • If the supplemental wages are combined with regular wages — that is, paid as one amount — withhold federal income tax as you normally would for the regular pay period, using the employee’s Form W-4 and IRS Publication 15.
  • If the supplemental wages are paid separately from regular wages and you withheld federal income tax from the employee’s regular wages in the current or prior year, you may withhold federal income tax on supplemental wages at 22 percent. There’s another, more complicated, alternative for withholding federal income tax in this scenario. However, it’s much easier to withhold at the flat percentage.
  • If the supplemental wages are paid separately from regular wages and you didn’t withhold federal income tax from the employee’s regular wages in the current or prior year, the more complicated alternative method mentioned above kicks in. This method can be found in the “Supplemental Wages” section of Publication 15.

State and local income taxes. The rules for withholding state income tax from supplemental wages vary by state. For instance, Alabama has a supplemental tax rate of 5 percent. In New York, it’s 9.62 percent. There may also be special rules, depending on the type of supplemental wage. For instance, in California the supplemental tax rate is 6.6 percent, except for bonuses and earnings from stock options — in which case the rate is 10.23 percent.

If the state doesn’t charge an income tax on wages, no state income tax should come out of supplemental wages. Some states, such as Arizona and Connecticut, impose a state income tax but do not have a supplemental withholding rate. In these circumstances, supplemental wages are taxed at the same rate as regular wages are taxed.

If local income tax applies, withhold supplemental wages according to the rules of the local revenue agency. Also note that rates can change frequently, so keep a close eye on state and local rules and regulations.

Be sure to reach out to us if you have any questions about the supplemental wages you pay your employees.

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Back Pay and Form W-2

Back pay, or back wages, is the difference between what an employee was actually paid and what should have been paid. Maybe you inadvertently made a payroll mistake, but regardless of how the situation was created, you should know that there are several recourses available to your employee. You have to make it right, and make sure the Form W-2 reflects any change.

Back Pay Recovery Under the Fair Labor Standards Act

If an FLSA-covered employee was paid less than the federal minimum wage or overtime rate, he or she can file a complaint with the U.S. Department of Labor to recover back wages.

When a wage claim is filed through the DOL, the agency launches an investigation and supervises the payment of wages due under the FLSA. If appropriate, the DOL will bring a lawsuit against the employer for back wages, an equal amount of liquidated damages, and civil money penalties.

If the employer is found to have intentionally broken the law, criminal penalties — including fines and imprisonment — may apply.

Note that if the wages are not regulated by the FLSA, the employee cannot recover them through the DOL. For instance, vacation, holiday, severance and sick pay; fringe benefits; and premium pay weekend or holiday hours cannot be recouped through the DOL, as they are not governed by the FLSA.

Private Lawsuit

The employee can file a private lawsuit for back wages, liquidated damages, and attorney fees and court costs. However, the employee cannot file a lawsuit if he or she has already received back wages resulting from the DOL’s intervention, whether through supervision or litigation. The employee also cannot file a private lawsuit if the DOL has already initiated a lawsuit for back wages on his or her behalf.

State Remedies

Many states have remedies in place for employees to claim unpaid wages, including state-mandated minimum wage and overtime pay, fringe benefits, and more. These claims can be filed through the state labor department.

Statute of Limitations

Under the FLSA, the employee has two years from when the wage violation occurred to file a wage claim for back wages. If the employer intentionally violated the FLSA, the employee has three years to file a claim. The statute of limitations for filing a private lawsuit or a claim with the state labor department varies by state.

Effect on Form W-2

For income tax purposes, the Internal Revenue Service treats “all back pay as wages in the year paid,” even when the wages relate to an earlier tax year. For example, an employee earns $60,000 in 2018 and in that same year receives a back-pay settlement of $50,000 for the year 2015. This employee’s 2018 W-2 form should reflect not only the $60,000 but also the $50,000.

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Employee Loans and Their Tax Consequences

A salary or wage advance is a type of short-term loan from an employer to an employee. The employee receiving the advance must pay back the money within a specified time frame, as dictated by the company’s salary advance policy.

Under federal law, employers can make payroll deductions for salary advances even if the transaction causes the employee’s pay to drop below the minimum wage. Many states follow this precedent as well.

No taxes should come out of the actual advance, but you must withhold taxes from the repayment. This way, the employees’ wages will be taxed as normal.

For instance, an employee who earns taxable wages of $1,200 biweekly takes a salary advance of $200. When deducting the repayment from the employee’s next paycheck, withhold federal income tax, Social Security tax, Medicare tax, and any state and local income taxes from the $1,200. Then deduct the salary advance of $200.

Draws against commissions

A draw against commission is essentially a payment advance to a commissioned sales employee. Draws can be recoverable or nonrecoverable.

With a recoverable draw, the employee receives a fixed amount of money in advance and agrees that the draw will be deducted from his or her future commissions. These types of draws are based on a predetermined amount that is paid out regularly.

For instance, a salesperson — whose commissions are paid at the end of the month — receives a draw of $1,000 biweekly. At the end of the month, you would subtract $2,000 in draws from the employee’s commissions and then pay the employee the difference. In the end, all draws taken must be paid back.

With a nonrecoverable draw, the commissioned employee gets a guaranteed periodic amount that the employee repays if the commissions for the pay period exceed the draw amount. If the employee does not earn enough commissions to cover the draw, the employee owes the employer nothing.

If you offer draws against commission, you will need to ensure that the policy complies with the minimum wage requirements. Also, the IRS considers commissions as supplemental wages, which are taxed differently than regular wages. Your payroll provider or CPA can help you navigate the complexities of withholding taxes on draws against commissions.

Compensation-related loans

If a loan from an employer to an employee exceeds $10,000 and is given at a below-market interest rate, then the loan is “compensation related.” This type of loan is usually extended by employers who want to attract and retain key executives and employees.

The difference between what you charged the employee in interest and the applicable federal interest rate is treated as taxable wages paid to the employee and must be reported to the IRS as additional compensation.

No matter which loan structure you choose, be sure to seek legal or financial counsel so that sound policies and procedures can be established. Feel free to reach out to us at Payroll Dynamics with any questions or concerns!

 

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ACA Affordability Threshold to Rise in 2019

The ACA requires that employers with 50 or more full-time-equivalent employees provide minimum essential coverage that is affordable — or face a penalty for not complying. The affordability requirement is satisfied if an employee’s premium for self-only coverage does not exceed a specific percentage of their household income or a certain safe harbor amount.

Percentage increase for 2019

Each year, the affordability percentage for health coverage is adjusted for inflation. For 2018, the rate is 9.56 percent of the employee’s household income, down from 9.69 percent in 2017.

On May 21, 2018, the IRS released Revenue Procedure 2018-34, which states that for plan years starting in 2019, the affordability percentage will increase to 9.86 percent — the highest amount since the ACA’s passage. This means that employees’ premiums for the lowest-cost self-only coverage cannot be more than 9.86 percent of their household income.

Three safe harbor options

As noted, the affordability percentage threshold applies to employees’ household income. But since it’s difficult for employers to know their employees’ household income, the ACA provides three safe harbor alternatives, which can be used instead of household income. You do not have to meet all three requirements; just one will do.

1. The employee’s W-2 wages, as shown in Box 1 of the form. For plan years starting in 2019, coverage is affordable if the employee’s premium does not exceed 9.86 percent of the amount in Box 1 of the W-2. Although this method is relatively simple to apply, keep in mind that it uses current-year wages. Therefore, you won’t know whether the affordability requirement for an employee has been met until the end of the year.

2. The employee’s rate of pay. Coverage is affordable if the employee’s premium does not exceed 9.86 percent of their monthly salary or wages. To determine the monthly rate of pay for an hourly worker, multiply the hourly pay rate by 130 hours.

For instance, an employee makes $15 per hour at the start of 2019. Multiply $15 by 130, which equals $1,950. Then multiply $1,950 by 9.86 percent, which comes to $192.27. Coverage is affordable as long as the employee’s premium does not exceed $192.27. For salaried employees, affordability is based on monthly salary.

The rate-of-pay method cannot be used for employees who are paid solely by commission, nor can it be used for tip wages.

3. The federal poverty level. The employee’s premium for the lowest-cost self-only coverage cannot be more than 9.86 percent of the most recently published FPL for a single person.

Applicable large employers should take the affordability standard into account when designing their 2019 health care plans — since pricing below the threshold could trigger penalties, as mandated by Section 4980H(b) of the ACA.

 

 

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Should You Honor All W-4 Requests?

Form W-4 helps employers determine how much federal income tax to take out of their employees’ wages. On the form, employees state their withholding conditions, such as filing status, number of allowances and any additional amount they want withheld. It is the employee’s responsibility to fill out the form so that the right amount is withheld.

As the employer, you must honor all W-4 requests, except if the form is invalid or you’re notified to do otherwise by the IRS.

What is an invalid W-4?

If the employee alters or makes any additions to the IRS’s official W-4 — such as removing the IRS’s language and replacing it with his or her own — then the form is invalid. Further, the form is invalid if on the date that the employee submits the form, he or she clearly indicates that it is false.

A few more instances in which a W-4 is invalid:

  • The form is missing information, such as Social Security number, filing status and signature.
  • The form is illegible.
  • The employee claims both allowances and “exempt” (it must be one or the other).
  • The employee gives you a substitute W-4, developed by him or her.

In such cases, ask the employee to submit a valid W-4. Until the employee submits a valid form, withhold federal income tax from his or her wages based on single filing status and zero allowances. If you have prior valid W-4 on file for the employee, you can use that form instead of withholding at “Single-0.”

What if the employee’s withholding amount appears to be wrong?

From your vantage point, it may seem as though the employee’s withholding conditions are incorrect. For instance, he or she may appear to be claiming too many or too few allowances.

In that situation, withhold federal income tax according to the withholding conditions stated on the form; do not change anything. If the employee seems to have too little taxes coming out of his or her wages, explain to him or her that the IRS might assess the situation and order you to withhold at the appropriate rate. The IRS issues this directive via a lock-in letter.

Depending on the situation, the lock-in letter may state the maximum number of allowances the employee can claim, the permitted filing status or whether the employee is entitled to claim exemption from withholding. Give the employee his or her copy of the lock-in notice and implement the changes according to the instructions in the letter.

The employee cannot decrease his or her withholding once the lock-in letter goes into effect — only the IRS can change the terms of the letter. If you allow employees to make W-4 changes via an online system, make sure those subject to a lock-in letter do not have the ability to decrease their withholding online.

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4 Tips for Successful Absence Management

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Absence management is a strategic weapon that employers leverage to help maximize employee productivity. It involves administering programs designed to reduce absenteeism and return employees to work as quickly and as safely as possible.

Employers are increasingly viewing absence management as a top priority. Per Guardian’s “2017 Absence Management Index and Study,” companies with 250 to 1,000 employees are starting to catch up with larger businesses in realizing the significance of a robust absence management strategy.

Absence management interventions should be tailored to meet the specific needs of the organization. Below are four tips to consider.

1. Develop “caring” leave policies.

According to the Society for Human Resource Management’s “2017 Employee Benefits” report, 96 percent of organizations offered paid vacation leave, 81 percent provided paid sick leave and 33 percent gave paid personal leave.

Employers offer paid time off because it matters greatly to job seekers and employees. But while it’s important to provide this benefit, it’s just as crucial to encourage employees to take time off when appropriate. Employees are likely to feel supported when they know that reasonable requests for time off will be graciously endorsed. If they don’t feel supported, they are more likely to become disengaged — a common reason for absenteeism.

Time off required by federal or state laws should be properly incorporated into your leave policies. Also, try to implement wellness programs that encourage healthy behaviors and less absenteeism.

2. Create a return-to-work program.

Workplace illnesses and injuries impact the bottom line and cause employees to lose wages. A return-to-work program can help reduce workers’ compensation costs while restoring employees’ earning power. Strategies for the program may include:

  • Switching the employee to part time.
  • Providing telecommuting opportunities.
  • Modifying work duties and schedules.
  • Instituting reasonable accommodations for disabled employees.

Though the goal is to bring employees back to work as early as possible, remember to demonstrate empathy towards those recovering from a sickness or injury.

3. Hire the right people.

Sometimes you just don’t see a bad hire coming, as the employee may start off on a promising note only to later disappoint. However, by recruiting candidates who appear to understand the importance of punctuality and showing up, you lower the chances of hiring people who are likely to miss work for no good reason.

4. Outsource absence management.

As leave-of-absence administration becomes more complex, more employers are turning to outsourcing. According to a 2018 article published by HR Dive, 40 percent of businesses with 1,000 or more workers plus 27 percent of businesses with 50 or more employees outsource leave administration.

Outsourcing absence management to an HR solutions firm can help you achieve compliance with leave of absence laws, cost savings stemming from fewer lost-time events and faster returns to work, and prevention via a road map built to thwart absenteeism.

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How to Handle Unemployment Claims

Unemployment benefits are provided through a federal-state unemployment program, which is funded largely by federal and state taxes imposed on employers. The Internal Revenue Service enforces federal unemployment tax laws. The state unemployment agency oversees state unemployment tax as well as the determination and disbursement of unemployment benefits.

When an employee files a claim for unemployment benefits with the state unemployment agency, the latter notifies the employer accordingly. It is then up to the employer to handle the issue appropriately. Consider the following suggestions.

Verify the Claim Notice

The claim notice from the unemployment agency contains information provided by the employee. For this reason, you should make sure the notice is correct. Verify whether—

  • the claimant is a former employee,
  • the wages and employment dates on the notice match your records, and
  • the notice’s description of the events surrounding the termination correlates with your documentation.

Determine Eligibility

Each state has its own guidelines regarding unemployment eligibility plus the amount of benefits eligible claimants will receive and for how long. Typically, claimants must have worked for at least a certain period of time, lost their job through no fault of their own, and met the minimum earnings requirement.

Employees who were laid off are eligible for unemployment benefits. Those who were let go because they were not a good fit may be eligible as well. However, employees who voluntarily left their job or were fired for misconduct generally do not qualify for unemployment.

Respond in a Timely and Adequate Manner

The Unemployment Insurance Integrity Act of 2011 says that employers must respond to requests by the state unemployment agency in a timely and adequate manner so that claimants will receive the benefits to which they’re entitled. Under the Act, if an employer fails to properly respond, the state unemployment agency will charge the company’s account for benefits, even if the claimant is later disqualified.

The Act allows states to make their own determination as to what constitutes a “timely” and “adequate” response. In addition, states can implement stricter standards, such as revoking the employer’s rights to appeal the claim in question.

Decide Whether to Contest the Claim

If, based on your evidence, you believe the employee is not entitled to unemployment benefits, you may dispute the claim by following the unemployment agency’s guidelines. The burden is on the employer to prove that the employee should not receive benefits, so make sure you have credible written evidence supporting your position, such as attendance, disciplinary, and termination records. The state unemployment agency will decide whether the employee should receive benefits.

Often, employers fight unemployment claims because they understand the effect of benefits on their state unemployment tax rate, which is influenced by the number of claims charged to the employer’s account. The more former employees who are receiving benefits, the higher the employer’s state unemployment tax rate. Therefore, it is in a company’s best interest to appeal unwarranted claims.

Contact us today for more information about handling unemployment claims.

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