Ask Payroll Paula
Paula is a dedicated payroll manager from Park Slope, Brooklyn. Just like you, she is incredibly busy, too busy, in her job. She found that peer advice was the single biggest help in making her job easier so she’s paying it forward. Here, Paula answers your payroll questions. Her answers come from her directly and through her extensive network of payroll peers. Think, “Dear Abby” but for payroll peeps. If you have questions or a better answer to one of the questions asked, please share with Paula through our form below. Become part of our network. That’s how we help each other.
Most recent Q&A's
Got a question about payroll for Paula? Ask away!
Q: Dear Payroll Paula,
With the individual tax filing season, employees are calling and messaging our payroll team, saying we messed up with withholding the correct amount of taxes last year. They want us to fix it. I know our systems are set up correctly to follow the instructions given to us by employees on Form W-4, Employee’s Withholding Certificate. There is still confusion about the form’s major change in 2020, obviously. How can I explain to the employees who contact us that this is not our fault? Also, we cannot “fix” their W-4 for them. They must do it themselves. We are not their tax advisors. What can payroll people do to communicate a path for them to provide us the right information on their W-4?
Underwithheld in Wisconsin
A: Dear Underwithheld,
Wow! You have two big questions in that one!
This reminds me of the time my son failed to pay attention when he took a sip out of a small milk bottle I put in with his lunch before school, and then failed to put the lid back on all the way. On the way to school, milk was all over the place! And he was mad at me!
So it is for employees who don’t pay enough attention to their W-4. They dismiss the fact that they left the lid open to underwithholding.
This is the subject of many rants on social media by payroll professionals like yourself. It’s frustrating because you can’t really help them fix their withholding.
You can only say (after checking their withholding and comparing it to the latest W-4 amounts and tax tables) that, based on what they have included on their W-4, they had their taxes withheld correctly. You and your team did nothing wrong. I don’t recommend trying to explain the withholding formulas listed in Publication 15-T to them. Way over their heads!
As for communicating to employees “a path,” as you say, to correct their problem with underwithholding, the IRS has a special web page set up so people can do a “Paycheck Checkup,” and then file a new Form W-4 with your team. It provides a free IRS Tax Withholding Estimator. It’s a bit involved, but the page walks individuals through the process so that they can have amounts withheld that better reflect their federal income tax liability.
I also tell my colleagues to keep a one-sheet IRS publication, Publication 5303, Paycheck Checkup Can Prevent a Tax-Time Surprise handy. It’s listed under Forms and Publications on IRS.gov. If someone asks for Form W-4 help, I email them the link or a copy of the publication, which directs them to get that paycheck checkup. It will help tighten that lid on underwithholding.
Exempt or Not Exempt?
A: Dear Confused,
It is confusing! And payroll always seems to be in the middle of some of the arguments categorizing workers as exempt or nonexempt.
First, know there are separate sets of laws at play here. There is the Internal Revenue Code (IRC) for tax purposes and the Fair Labor Standards Act (FLSA) and corresponding state laws for labor law purposes.
Most of the time when payroll people are talking exempt/nonexempt employment, they are referring to the FLSA and state labor laws that help determine whether the employer can exempt certain workers from the FLSA’s (or a state’s) overtime pay requirement.
Those who are “exempt” must generally be paid a fixed salary that, for the most part, is not impacted by the quality and quantity of their work. They must be paid at least the equivalent of $684 a week, and employers generally cannot reduce their agreed-to full weekly pay amount, even if time off was taken. This is because these employees don’t get paid “by the hour,” so just showing up during the week makes them eligible to get their full weekly pay. The exemption applies to so-called white-collar work, and there are tests to determine if the job responsibilities meet the standard of supervision or professional duties that would exempt the employee from overtime pay. Employers embrace this aspect of the FLSA because exempt workers can work well beyond 40 hours in a work week and will still get the same pay, so long as all the requirements are met. The federal Labor Department has a wealth of information to help guide employers in applying the exempt status to workers.
What this means, then, is hourly workers are “nonexempt” employees under the FLSA and many state laws, meaning they are not exempt from overtime pay.
For tax purposes, the term exempt, or exemption is used a lot, but in the context of employment coverage, it generally can mean the worker is not subject to federal income tax withholding or other payroll tax withholding requirements as an employee would be. An example is someone who is working as an independent contractor, or even someone from overseas who doesn’t pay into our Social Security system. The Internal Revenue Service has a different definition of employment than the Labor Department. IRS Publication 15-A lists all the instances when a worker can be considered exempt from employment-related tax withholding.
Other laws address workers who are deemed exempt from coverage. Provisions of the National Labor Relations Act, for example, help determine if a worker can be eligible to be in a union.
I hope this clears up some of your confusion!
Taxing Bonus Payments
I’m new to payroll. We are disbursing bonuses to certain personnel, and I want to make sure we do it right for taxes, etc. But I’m not sure where to start. Please help?Uncertain About Taxes on Bonus
- How are bonuses taxed? Bonuses are considered supplemental pay, and the U.S. government and most taxing states provide employers some options for taxing supplemental pay. You likely will be able to apply a flat 22% federal tax withholding rate to the payments, or you could tax as regular wages, using federal Form W-4 information. The federal withholding tax rate is a required, flat 37% once $1 million in supplemental wage payments is reached in a year. See the Supplemental Wage section of IRS Publication 15, Circular E for the options that may be available to calculate federal withholding taxes on the bonus amounts. Then check the state, or even the locality, for taxing requirements on these bonuses.
- Is the amount of money the employee is being given “net” of taxes, or will the awarded bonus amount be the taxable amount? In other words, is your employer promising that the employee will take home, after taxes, $1,000? Or is the $1,000 all the employer will be disbursing for this bonus, and the taxes will come out of that amount? If the employer expects the employee to take home, after taxes, $1,000, then there are gross-up calculations you will need to apply to this payment, as the actual taxable amount will be a bit more that $1,000. Payroll Times provides a link to a Gross-Up Calculator for calculating the bonus tax in its Calculators section.
- Is the bonus payment going to someone who has a child support withholding order? States differ on that too, but there is a tool to check and report these amounts to the proper agency. The federal Office of Child Support Enforcement has a lump-sum payment reporting tool and information on how to report these payments when they come up for those who have a child support withholding order with your employer.
- Is the bonus payment eligible to be added to deferred compensation (i.e., a 401(k)-type plan) amounts? Check your plan. Many plans offer that option to employees.
- If the employer determines the payment is to be taxed as regular wages, and the employee files a modified, but valid, Form W-4, Employee’s Withholding Certificate, know that there may not be time for the change to impact the taxes applied on the bonus payment. Employers have 30 days from the date that the employee files that form to put the change into effect. Otherwise, do not change withholding tax calculations.
- IRS says: “Regardless of the method you use to withhold income tax on supplemental wages, they’re subject to social security, Medicare and FUTA taxes.” So make sure all those deductions are made on the gross bonus amount.
Year-End Payroll Practices
Q: Hi Payroll Paula,
As we enter the holiday/year-end season, how can I best prepare my payroll staff to close out the new year and also be sure we are set up to do payroll right in the new year?
A: Hi Sally!
Year-end is by far the busiest time for payroll professionals. I have several suggestions to help you and your team out, especially since this year is so challenging due to the coronavirus epidemic and additional payroll-related laws that have to be administered.
First, download a year-end checklist. Many organizations, such as Bloomberg Tax, KPMG, Ernst & Young and others have them posted or available through their particular payroll portals or websites and they should be free.
Second, in following the lead of the checklists, you need to have frequent meetings with staff and other stakeholders in your organization (such as HR, IT and the legal team) and any payroll vendors, so you can begin to adjust systems for new policies and requirements. And make sure you test those changes.
Third, as part of these meetings, make sure your payroll group has all the information you need to close out the year. Run a third-quarter reconciliation as if it were a year-end, look for discrepancies, and be sure to consider any additional coronavirus-related issues. Follow-up on accounts payables to staff for expenses that may be employment taxable. Check for federal and state changes in reporting requirements.
In January, you will need to get the filings lined up and make them in a timely fashion. Once that’s over, have a party to celebrate!Paula
Form 941 Changes
Q: Dear Payroll Paula,
Help! I understand that Form 941 has changed and I need to file it properly for my small business. Can you help?
A: Hi Fran!
Awww payroll - forms, forms and more forms indeed! In response to the coronavirus pandemic, Congress passed laws that allow certain small employers to defer payroll taxes and get dollar-for-dollar tax credits for retaining workers during the economic shutdown, among other things. If your company was one of them, Form 941, Employer’s Quarterly Tax Federal Return has been adjusted to claim credits and report amounts deferred.
Let me try to make this easy for you.
The IRS has an entire set of web pages dedicated to explaining to employers what they need to consider, complete with numerous frequently asked questions. I highly recommend you check that out.Paula
These questions come from payroll professionals in companies of all sizes. The advice comes from a payroll expert who has a deep understanding of the issues and a passion for helping payroll teams create a better workplace. If you have a question that you’d like to have Paula address in this forum, please complete this simple form.
The information provided here is for general informational purposes only and not legal, financial or tax advice. The information and services provided herein should not be deemed a substitute for the advice of a payroll, tax or accounting professional who can better address your specific concern and situation. Any information provided here is by nature subject to revision and may not be the most current information available on the subject matter discussed.