Thursday, March 9, 2017

Calculating Supplemental Tax Withholding

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Question:
If we have an employee terminate on 11.15.16 and they begin to receive severance semi-monthly for 6 months starting on 11.16.16, how would you calculate the supplemental tax withholding amount using the aggregate method? The terminated employee has requested to use the aggregate withholding rather than 25%. After the first severance payment, would you assume $0 in regular pay when aggregating with your severance payment since the pay for the pay period directly before was only severance and no regular pay? Or would you use the final regular pay amount in each of the future supplemental payments when aggregating? Also, can you alternate the method of supplemental withholding based on type of supplemental income or even differently for different employees?

Answer:
Severance pay is supplemental wages and it’s up to the employer to choose the method to withhold taxes, not the employee. However, if you choose to withhold using the aggregate method, here’s how it’s calculated. If the termination day and the day when severance begins are within the same pay period, combine the two payments together to determine the taxable amount using the employee’s most recent valid Form W-4. After that, when the former employee is only receiving severance payments, take the total taxable amount of the severance pay for the pay period and calculate the taxes based on the most recent valid Form W-4. If the severance begins in a new pay period, there would be no regular pay to combine. And remember, if in the future, you have other terminated employees receiving severance, you won’t be limited to the aggregate tax withholding method. You can use the aggregate or the optional flat tax method with a current rate of 25%. It’s your choice.

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