Payroll News

The IRS has issued a revenue ruling that provides nine examples on the supplemental wage withholding rules.

The topics covered are as follows: (1) commissions paid at fixed intervals with no regular wages paid to the employee; (2) commissions paid at fixed intervals in addition to regular wages paid at different intervals; (3) draws paid in connection with commissions; (4) commissions paid to the employee only when the accumulated commission credit of the employee reaches a specific numerical threshold; (5) a signing bonus paid prior to the commencement of employment; (6) severance pay paid after the termination of employment; (7) accumulated annual leave paid in a lump sum payment; (8) vacation and sick leave paid annually; and (9) sick pay paid at a different rate than regular pay.

The revenue ruling is based on final supplemental wage withholding rules that went into effect on Jan. 1, 2007. Under the final regs, supplemental wages include any wages paid by an employer that are not regular wages. Regular wages are defined as amounts that are paid at a regular hourly, daily, or similar periodic rate, or in a predetermined fixed amount. Wages that vary from payroll period to payroll period based on factors other than the amount of time worked (such as commissions, tips, bonuses, and back pay) are supplemental wages.

Under the final regs, if an employee has not received cumulatively more than $1 million of supplemental wages during the calendar year, the amount of withholding can be determined by (1) adding the supplemental and regular wages for the most recent payroll period in the current year, then figuring the income tax withholding as if the total were a single payment (aggregate method); or (2) withholding on the supplemental wages at a flat rate specified in the regulations (optional flat rate withholding method — currently 25%). There are certain conditions that an employer must meet in order to use the optional flat rate withholding method on supplemental wages.

The examples in the revenue ruling include discussion on: (i) whether a payment is a regular or supplemental wage payment, (ii) the payroll period that should be used in computing withholding, and (iii) whether an employer can use the aggregate method or the optional flat rate withholding method. One example (Situation 5) explains how to compute withholding when an employee is paid more than $1 million of supplemental wages during the calendar year.

For more details visit the IRS.GOV for the full text of this bulletin.
http://www.irs.gov/pub/irs-irbs/irb08-24.pdf

Filed under: Federal News