The revenue ruling addresses the lump sum payment of an annual vacation and sick leave allowance. The arrangement described in the revenue ruling involves an allowance that is intended to compensate employees for unpaid vacation or sick leave previously taken during the year, but which is paid regardless of whether the employee was actually absent during the year.
The revenue ruling concludes that such an allowance is a supplemental wage payment because it was not paid at a regular rate for the current payroll period. The other example in the revenue ruling involves a situation in which an employer pays its employees at a different rate of pay while they are absent because of sickness than the rate paid for regular worked time. The revenue ruling concludes that the fact that the sick pay is paid at a different rate causes it to qualify as supplemental wages.
Payouts of Accumulated Leave. Many governmental employers allow employees to accumulate unused annual leave from year to year. This unused leave is then paid out typically in a single lump sum at the time the employee retires or otherwise terminates employment. The revenue ruling confirms that such a payout of earned but unused accumulated leave should be treated as a supplemental wage payment. As a result, the payout can be aggregated with regular wages for withholding under the aggregate method.
In addition, if the employer separately states the leave cash-out amount in its payroll records and has withheld income tax from regular wages paid to the employee in the current or the preceding year, the employer may also withhold tax using the optional flat rate method.
The revenue ruling provides some helpful guidelines for determining the appropriate income tax withholding methods for certain types of payments.
In addition, the ruling provides insight as to how to analyze whether other types of payments should be treated as supplemental wages. Employers should review their existing withholding procedures to confirm that those procedures are appropriately structured to identify payments that are supplemental wages. In addition, employers should confirm that their procedures are designed to properly determine the required amount of income taxes that must be withheld from those payments.
Back to News. PDF Print. Income Tax Withholding Basics Employers are required to withhold income tax from all wages that are actually or constructively paid to their employees.
Under this method, withholding is computed without regard to any exemptions or allowances claimed by the employee. This method in effect combines the supplemental and regular wages into a single wage and requires withholding based on the method of withholding applicable to regular wages.
United States Government Accountability Office. Accessed Jan. Social Security Administration. Library of Congress. Tennessee Department of Revenue. New Hampshire Department of Revenue Administration. New Hampshire Department of Revenue. Income Tax. Social Security. Actively scan device characteristics for identification. Use precise geolocation data.
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Filing Status. Types of Income. Tax Types and Terms. The state incidence of taxation can differ from that of federal tax in some states. Thus, employers must be vigilant in keeping abreast of regulatory requirements and changes in each state in which they are required to withhold on equity - based awards. While this is difficult, given employee mobility in the current COVID - 19 environment, instituting a system of tracking employee mobility in real time, or at least regularly, is critical.
Further, tying employee mobility data to taxability and nexus considerations is equally important. Given the outlook of an increasingly remote workforce, this could be the only way to ensure compliance with ever - changing state laws and regulations.
Calculating the correct withholding amount on equity awards and making a timely deposit is challenging. Penalties for a late deposit up the ante, and the Service has recently signaled an increased focus on timely deposits for equity compensation.
Now, in the time of COVID - 19 , where employers may increasingly turn to equity compensation to save on cash compensation expenses and employees are increasingly mobile, there is increased risk for employers. Editor Notes. For additional information about these items, contact the authors at Chris. DAvico rsmus. Pillai rsmus. Bushman rsmus.
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Revisiting withholding on equity compensation By T. Christopher D'Avico, J. Federal tax withholding overview Federal taxation and withholding on equity compensation can often be overlooked at the employer's peril due to: 1 relative infrequency of, and unfamiliarity with, the reporting; 2 potentially very tight timing to make the employment tax deposit; and 3 harsh penalties. Further complexity with remote workers in multiple jurisdictions State taxation of equity - based compensation involves layered complexities that employers must consider.
New challenges amid COVID Calculating the correct withholding amount on equity awards and making a timely deposit is challenging.
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