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Earnings
Compensable Time
Bonus
Supplemental Wages
Moving Expenses
Group Term Life
Business Expense Reimbursement
Employee Loans
Deductions
Pretax Deductions
Voluntary Deductions
Involuntary Deductions
Taxes
Federal Income Tax

Social Security and Medicare (FICA)

State Income Tax

Local Income Tax

State Disability Insurance Tax
DirectDeposit
ACH



Compensable Time

An employer is required to compensate an employee for all hours he or she works or is under the employer's control as long as that time is spent for the employer's benefit. The time to be paid may include travel time, on-call time, time spent at meetings and training sessions, and time spent receiving medical attention.

For more information refer to The Payroll Source distributed by the American Payroll Association.


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Bonus

Nondiscretionary bonus. A bonus that is a contractual or agreed upon bonus related to production. This bonus must be used to calculate the regular rate of pay in the work week the bonus was earned. The calculated rate of pay is used to determine the overtime rate.

Discretionary bonus. The employer has the discretion whether to pay the bonus and to determine the amount. There must not be any contract or agreement concerning the bonus. This bonus is not used to calculate the regular rate of pay.

For more information refer to The Payroll Source distributed by the American Payroll Association.

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Supplemental Wages

Payments to employees that are not ordinary wages such as:

  • Bonuses
  • Commissions
  • Tips
  • Retroactive pay
  • Overtime pay
  • Severance pay
When supplemental wages are paid with regular wages, the total paid must be taxed as if the total payment were for that period.

When the supplemental payment is made separately, or the supplemental and regular payment amounts are defined, the employer may withhold at the rate of 28% if federal income tax was withheld from the last regular wage payment. Some states also have supplemental wage rates.

For more information go to the Internal Revenue Service Web site.

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Moving Expenses

There are two types of deductible moving expenses:

1) transportation and in-transit storage of household and personal goods; and

2) travel and lodging expenses from the old residence to the new residence (does not include meals).

Deductibility is determined by time and distance. The new workplace must be 50 miles further from the old residence than the former workplace. If there was no former workplace, the new residence must be 50 miles from the old residence. The employee must work fulltime for 39 weeks at or near the new workplace. These conditions do not apply in case of the employee's death, disability, or involuntary termination of employment (unless willful misconduct is involved) or transfer for the employer's benefit.

For more information refer to The Payroll Source distributed by the American Payroll Association.


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Group Term Life

The value of group term life insurance in excess of $50,000.00 minus any amount paid by the employee is included in the employees income and is considered taxable wages for federal, social security or Medicare. This is reported in Boxes 1,3,5, and 12 (with Code C) on the employee's Form W-2. The portion included in income is subject to social security and Medicare tax withholding, but not federal income tax. The employer may withhold federal income tax on the amount or the employee must pay the federal income tax owed with his or her personal income tax return. The group-term life taxable amounts are also not considered FUTA taxable wages or subject to withholding for FUTA. The excess group term life is calculated using an IRS Section 79 Table 1. The calculation is made by multiplying the rate per $1,000.00 excess coverage times the rate, which is based on the employee's age.

For more information go to the Internal Revenue Service Web site.


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Business Expense Reimbursement

If reimbursements are made to an employee under an accountable plan, the reimbursement is not considered income and is not taxable. The reimbursement must not be more than the employee reports or the excess is taxable. Expenses reimbursed must be incurred away from home and be for a temporary period of time, less than one year, to qualify as non taxable. To be an accountable plan the expenses must be incurred while performing services for the employer, the employee must furnish proof of the expenses, and any excess amount received by the employee must be returned to the employer.

If the plan is a non-accountable plan, the money received by the employee is taxable.

For more information refer to The Payroll Source distributed by the American Payroll Association.

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Employee Loans

If an employer loans money to an employee at less than the federal interest rate, the amount that is the difference between the two rates is income to the employee when the amount of all loans exceeds $10,000.00. This amount is not subject to federal income tax, but is subject to social security, Medicare and FUTA taxes and must be reported on the employee's W-2.

If the loan is forgiven, the full amount of the loan must be reported as income and is subject to federal income tax, social security, Medicare and FUTA taxes. Employer provided assistance is not subject to federal income tax, but is subject to social security, Medicare, and FUTA tax if the plan meets the requirements of IRC section 137.

For more information go to the Internal Revenue Service Web site.

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Pretax Deductions

Deductions taken from gross pay that reduce taxable wages such as Dental Insurance, Medical Insurance and 401K. The government has made provisions that some voluntary deductions can be excluded from an employee's taxable wages. These include deductions made to certain insurance plans that qualify under Section 125 of the IRS code and also contributions made to a qualifying 401k plan. Contributions to a 401k plan can be excluded from federal income taxes. There is also a limit to the amount of 401k contribution that can be non-taxable. For 2007, the limit is $15,500 ($20,500 for employees age 50 and older).

For more information go to the Internal Revenue Service Web site.


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Voluntary Deductions

Any deduction an employee is not legally required to have taken from his/her check such as credit union loan repayments, charitable contributions, and 401K, etc.

For more information refer to The Payroll Source distributed by the American Payroll Association.


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Involuntary Deductions

The employer and the employee have no control over these deductions. They may include federal tax levies, garnishment, child support, federal taxes, state and local taxes, bankruptcy, etc.

For more information refer to The Payroll Source distributed by the American Payroll Association.


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Federal Income Tax

An employer is required to withhold federal income tax from an employee's wages. To determine how much federal income tax to withhold from each wage payment, use the employee's Form W-4 and the withholding methods described in Publication 15 from the IRS.

Form W-4 can be obtained at the IRS's Web Site.


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Social Security and Medicare (FICA)

FICA provides for a Federal system of old age insurance (OASI) and health insurance (HI). The old age, survivors, and disability insurance is financed by the social security tax. The health insurance is financed by the Medicare tax. Each of these taxes is reported separately.

Social security and Medicare taxes are levied on both employers and employees (unless you or your employees are not subject to these taxes). An employer must withhold and deposit the employee's withheld social security and Medicare taxes and the employer must pay a matching amount.

The employee tax rate for social security is 6.2% (amount withheld). The employer tax rate for social security is also 6.2% (12.4% total). For 2005, the wage base limit was $94,200. The wage base limit for 2006 was $90,000. For 2007, the wage base is $97,500. Rates remain unchanged.

The employee tax rate for Medicare is 1.45% (amount withheld). The employer tax rate for Medicare tax is also 1.45% (2.9% total). There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

For more information go to the Social Security Administration Web Site.


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State Income Tax

In addition to the federal income tax, state governments can impose an additional state income tax. Currently, all but nine states have state personal income taxes and require employers to deduct and withhold from employees' wages to satisfy these obligations. The nine states that do not impose a state income tax include: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. For more information about rates, forms, exemptions, and withholding, please contact the appropriate state income tax agency


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Local Income Tax

Currently, eleven states have one or more types of local taxes that must be withheld from the employee. Some additional states have payroll-related taxes that are employer paid. The list below may not include every possible local payroll-driven tax imposed on the employer only. Always confirm with the local authorities the full range of taxes, payroll or otherwise, that may impact your business.

Below is a synopsis of basic information relating to each known tax. In most instances, there are no exclusions for 401K contributions, and rarely for Section 125. All earned income is included. It is not permissible to override tax for any bonus or other special payment. If you have any questions about the taxability of sick pay, etc., ask the agency. There are few income types that are excluded from taxable income. Additionally, worksite-based local taxes are normally required to be withheld by the employer. If the employer does not withhold and remit, the employer is liable for the taxes, penalties and interest. Certain residence-based taxes have required withholding, but most do not. 

Alabama

  • Occupational or 'license fees'.

  • Worksite based.

  • Jefferson and Macon counties and several cities have the tax.

  • If the cities within Jefferson County have a tax, then both taxes apply if the business is located within the city limits of the taxing city.

    California

  • Los Angeles and San Francisco have payroll expense tax imposed on the employer only.

    Colorado

  • Occupational or "head" tax

  • Worksite based.

  • Three cities in state impose the tax - Aurora, Denver and Greenwood Village.

  • Flat monthly rate imposed on both employer and employee when employee passes wage threshold for the city.

    Delaware

  • Earned Income Tax

  • Only city of Wilmington imposes the tax.

  • Residence and potentially worksite based, depending on location of business.

  • Employers doing business in state must withhold on city residents anywhere they work within the state. For non-residents, only wages earned within the city limits are taxable.

    Illinois

  • Chicago Employers' Expense Tax paid by employer only, no withholding from employees.

    Indiana

  • Local taxes are county taxes

  • Three types: CAGIT - County Adjusted Gross Income Tax; COIT: County Optional Income Tax; CEDIT - County Economic Development Income Tax. Counties can impose any combination of these three.

  • As there are few counties without a tax, almost everyone will be subject to at least one of the above taxes.

  • Residence based - By January 1 each year, employees must provide a completed form WH-4 if residence changed during the year or if principle place of employment changes. The type of local tax withholding is based, for the entire year, on where the employee lives as of January 1 of that year. Instructions are on Indiana Form WH-4. Normal order of withholding is county of residence. If county of residence has no tax, then becomes subject to non-resident rate of county of primary employment.

  • Tax is paid to, and administered by, the state.

    Kentucky

  • License Fee

  • Worksite, with the School District exception for non-residents.

  • Several have complex rules.

  • School District tax may apply IF the employee both works and lives within the taxing authority with a school district tax. The school district tax will not apply to non-residents; i.e. anyone that could not send children to the schools in that district. The school district tax will not apply to a resident if resident does not work in own city/county/SD.

  • If employees work in multiple cities with license fees, income normally must be prorated between the cities as the tax is calculated on money earned within the taxing authority.

    Maryland

  • Maryland local taxes are county taxes. All Maryland counties and the city of Baltimore have taxes.

  • Residence based, but are required withholding, as these are administered by the state.

  • Some Pennsylvania residents working in Maryland are subject to special tax withholding rules.

  • Tax is paid to and administered by the state.

    Michigan

  • Certain cities in Michigan have an income tax. Generally there are resident and non-resident rates.

  • Worksite tax is required withholding. An employer with a worksite within the city limits of any one of the Michigan cities with an income tax must withhold at the resident or non-resident rate for the worksite city.

  • The employer is not required to withhold residence tax for employees working in a location without a tax. The employee, in most cases, is allowed a credit for the tax paid to the worksite city.

  • If the employee works substantial amounts in multiple taxing cities, the income should be prorated for taxation.

    Missouri

  • Only Kansas City and St. Louis have an income tax.

  • Worksite, in that residents and non-residents working within the city are subject to tax on gross earnings.

  • Residence, in that residents working inside or outside the city are subject the tax.

  • St. Louis also has an employer tax on gross payroll.

    Nevada

  • Nevada imposes a tax on businesses based on the average number of employees in the previous calendar quarter.

    New Jersey

  • Only the city of Newark has a tax and it is a worksite tax paid by the employer based on wages earned within the city.

  • There is also an employer paid payroll tax for NY-NJ waterfront workers.

    New York

  • New York City and Yonkers each have income taxes.

  • Depending on the circumstances these may be residence and/or worksite related. For Paymaxx software, the code must always be applied at employee level due to different handling of residents and non-residents.

  • Employers having a place of business anywhere in the State of New York, and employing a resident of the city of New York, must withhold the New York City tax. Non-Resident withholding for persons working , but not living , in New York City has been eliminated.

  • The city of Yonkers has withholding for residents and non-residents. There are special rules for non-resident employees, which may include prorated allocation of income and certain income limitations.

  • These taxes are paid to and administered by the State of New York on the combined return.

  • There is also an employer paid payroll tax for NY-NJ waterfront workers.

    Ohio

  • Many cities or smaller divisions in Ohio collect their own tax. A collector or a larger city may collect for smaller cities.

  • Worksite based for required collection. -- In general, cities with a tax collect from both residents and non-residents. If an employer has a business location within a city with a tax, tax must be withheld from all employees.

  • Generally, a credit of some portion of the worksite tax is allowed against the residence tax for employees working in one city and living in another city with a tax. An employer is not required to withhold the residence tax for an employee, with one possible exception. (Employee lives in a city with a tax; works in a city without tax, and employer has a business location in city of residence.)

  • Residence based -- The School District tax in Ohio is very different from Kentucky or Pennsylvania. In Ohio, school districts may or may not have a tax. In each case, it is never related to the work site, but is strictly related to district where employee lives.

  • School District tax is a required withholding, and shares the same ID number and frequency as the OH state tax. It is reported to and collected by a centralized agency, and ultimately administered by the state. If an employee is unsure of SD of residency, there are places employee can call to verify. Zip codes do not identify SD.

    Oregon

  • Oregon has worksite based local transit taxes that are employer paid based on gross earnings paid to employees.

  • Two primary ones are Lane Transit and Tri-Met. These are paid with Oregon Combined Return and administered by the Oregon Department of Revenue.

  • Any others are paid directly to the local tax agency.

    Pennsylvania

  • Pennsylvania local taxes are very complex.

  • In order to determine tax, two things are vital - County and name of municipality with school district.

  • Since all the above information must be completed on the State of Pennsylvania Individual Income Tax Return, any resident or child of a resident should be able to refer to the tax return for the information in case of residence based taxes.

  • There are two basic types: Earned Income Tax and OPT or head count. Employers with a presence in any area with these taxes must withhold and remit to local collecting agency, based on ordinance in effect for the locality. If employer fails to withhold taxes required by law, employer will be held responsible.

  • Depending on specific municipality Earned Income Tax may be worksite based; that is, both residents and non-residents are subject to the tax. Most localities have the worksite based tax.

  • Earned Income Tax may be residence based; that is, only persons living within the specific jurisdiction are subject to the tax. Employers within this type district must withhold and remit to local collecting agency for residents within their employ. Employers are not required by law to withhold taxes for non-residents and pay to appropriate agency for the non-resident in these instances.

  • In many cases, both the earned income tax and the school district tax that may be associated with a particular municipality are quoted as an 'effective rate' and withheld and paid as one amount to the same collection agency. In some cases, they are collected separately and paid to different agencies.

  • In all cases, residents of Philadelphia are subject to all taxes applicable to a resident of Philadelphia. These taxes supercede any other worksite tax.

  • In all cases, residents of the Pittsburgh School District must have the school district tax withheld regardless of what other worksite taxes may be applicable.

  • Very few municipalities in Pennsylvania do not have a tax.

    OPT or head count tax: The majority of municipalities also have a worksite based OPT or head count tax. The tax is generally $10.00 per person per year, and is part school district and part city. It is usually collected and paid to one agency; however, in some cases , as with EIT, it may be reported and paid to two separate agencies. Some municipalities have a wage exclusion so that OPT is not required until wages reach a certain level. However, it is often recommended to collect from everyone at point of hire, and annually thereafter. Some agencies accept pay stub showing deduction as proof of withholding. Others require a special form to be completed for the employee. Contact the collecting agency for specifics.

    Helpful sites for Ohio and Pennsylvania:

    Ohio
    Ohio - local tax section

    Pennsylvania
    Pennsylvania -local tax section


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    State Disability Insurance Tax

    California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island provide temporary disability benefits for employees who are disabled by a non-work related illness or injury through a tax supported state fund. A tax payment similar to the unemployment insurance tax may be required by both the employee and employer. An employer should contact any state in which they have employees to determine the responsibility for paying these taxes.

    For more information on Employer Taxes refer to The Payroll Source distributed by the American Payroll Association or Bureau of National Affairs' Web Site.


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    ACH

    Employers may chose to pay employees by direct deposit rather than by check. This is a process in which money is electronically transfer from the employer's bank account to the employees bank account.

    For more information refer to The Payroll Source distributed by the American Payroll Association.


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