My boss and I were talking about payroll recently, and I realized that our company withholds a percentage based on pay rate. So for anyone who makes $30/hr, taxes removed from your gross earnings are x%, at $35/hr it’s y%, etc. This is for federal, state, all withholdings from the gross to figure and pay the net.
This seems weird to me since each employee has filled out a W4 and it seems like taxes should be figured individually rather than as a straight percentage of gross.
I am admittedly ignorant here, but I always assumed each employee’s withholding was based on exemptions etc on the W4, so a flat percentage seems wrong.
I am knowledgable (software developer, many acccounting/payroll apps), and can tell you it violates every law of God and man, to say nothing of G(enerally) R(ecognized) A(ccounting) S(tandards).
I don’t want to know what this guy’s quarterly tax filings look like, but I’d suspect plenty of revenue agencies would. And let’s hope we’re not talking unionized payroll or 1099 employees …
Yes, that’s what I thought. We are non-union with no 1099 employees. It’s a pretty small organization (nonprofit, maybe 150 employees), run by the founders but with almost 30 people on the board (doesn’t that seem like a lot?).
I’m not sure what I should do about it, if anything. I’m responsible for a part of the payroll process.
Go to IRS.gov, search on “Publication 15”, and download it. This document covers, in detail, what should be withheld from each paycheck. And Social Security, at 6.2% and Medicare at 1.45% of the taxable income, are easy.
It’s rather fun to set up an Excel spreadsheet to calculate all that stuff, using the information in Pub. 15.
30 people on the Board, wow that does seem like a lot. I work for a nonprofit of about 80 employees and we have 8 board members. They’re picked for their fields of expertise, so for instance we’re a feline rescue and our President is a veterinarian with her own successful hospital, and our Treasurer is a CPA who definitely looks through our books a couple times a year. The Executive Director and a contractor CPA take care of the day-to-day and payroll.
Our payroll definitely uses the employee’s deductions to calculate taxes. Not only the W4 stated exemptions. The tax deductible health insurance and retirement reduces taxable gross for the tax calculations.
The exception is any additional pay. Service Bonuses, Overtime get a flat 25% taken out for Fed taxes. Our people qualify for a $300 service bonus on their 10th anniversary. Payroll gets a lot of calls after the employee gets their actual check. Overtime is the same.
Yeah, this is just plain wrong, at the federal level if not also the state.
There are actually a lot more payroll tax withholding rules/options than most people realize, but they all take the W-4 into account.
Using a fixed percentage like this is not only forbidden for the employer, but an employee can’t even *request *that it be done that way. Employers must follow the information given on the W-4 and one of the valid methods of calculating withholding.
Does anyone know if the IRS can actually penalize them for this? Most of the tax penalties are based around collecting and paying the tax on time, and the IRS would have to do a detailed audit to spot this kind of problem.
Even though not an approved method it would be more accurate than the tables in many cases. Ex.: Second/part-time job…what’s your incremental tax rate…use that. Complicated you say? No more complicated than a W-4.
Here’s a little bit more information, and my piece of the payroll process:
We provide a service, so let’s say we charge the customer $50/hr for that service. When we hire someone and they ask what the pay rate is we tell them it’s $25/hr. Ok, so that’s $50/hr yada yada…taxes…admin fees…your pay rate is $25/hr.
But it turns out that’s their net pay rate, not gross. So my job is to tally up the hours and send them to HR, let’s say you worked 40 hours this week, your paycheck would be $1000.00
Not $1000.00 less appropriate taxes, but $1000.00 “after taxes”.
So all withholdings have been subtracted from the original $50/hr that we charged the customer.
Again, this could be normal and I’m just clueless, but…is it and am I?
No, your employer is clueless. W-4 forms are not a suggestion. Employers are required to offer, collect, and follow them. I don’t know what the penalties are for non-compliance, but I wouldn’t want to find out.
Well, there is a little-known second page to the W-4 designed for second jobs and spouses with jobs. It’s complicated enough that I don’t even recommend using it. People are better off using free calculators on the web to 1) estimate their final income tax for the year and then 2) estimate payroll withholding using payroll calculators. When they find a number of allowances that will produce the desired withholding, just plug that number in.
So it would actually be easier if the IRS would let an employee just pick a fixed percentage rate based on their last tax return, but Publication 15 specifically forbids that.
For an employer to pick a percentage… that’s just wrong on every level.
It’s been over 20 years since I wrote payroll programs and I would have been fired if I did that. I can only imagine that it is more complicated now.
Exemptions were used in the calculations and had to be used correctly by each state formula. Maryland calculated using exemptions similar to the federal method, PA used a totally different method.
Not only that, but percentages vary based on your tax bracket and after a certain income has been reached you stop deducting for social security.
I don’t know how anybody could pick a percentage and say that is what needs to be withheld.
150 employees is not a “small” organization; 50 is the threshold where a lot of mandates kick in.
I find it so difficult to believe that anyone is hand-calculating a payroll that large that I’m suspecting a whoosh.
If not: a payroll stub must accurately show the gross pay and all deductions. Example from the Illinois Department of Labor site:
An employer may make certain deductions from your pay, but the law mandates that each employee shall be furnished with an itemized statement of deductions for each pay period.
You’d be surprised. My company is currently bidding to do payroll for a company with about 70 employees. Their bookkeeper is going to quit doing work for them if they don’t stop doing payroll by hand because it creates too many problems. While the bookkeeper sees the problem, the client is very reluctant to let go of this. It could go either way.
What you’ve just described is pretty much pure illegal in the US. Assuming these are W-2 employees and not 1099 contractors.
What you charge your customers (your e.g. $50/hr.) is totally your business. Your employees don’t need to know or care what that number is.
But if you tell them their pay rate is e.g. $25/hour, that’s before all employee-paid taxes. And you have to provide them an itemization of what taxes you took out with every pay check. And it must comport with the W-4 form they gave you and the regulations as explained in Pub 15.
If you told the employees their pay is $50/hr. less taxes and “expenses”, you’re in a world of hurt.
Rule #1 for regulatory compliance: When you’re in a hole, STOP DIGGING. Cease and desist immediately and get professional (i.e. publicly licensed CPA) help.
This whole thing defies logic. Whe the employees file a tax return they will need a w’2 that shows gross earnings and deductions. Thats a minimum absolute.
It is legal to state a net pay and the “gross up” the taxes. IRS Sch H (for household employees) instructions even talk about how to do this, since many people aren’t doing payroll the ideal way for the nannies and other household employees. It’s still legal for a regular employer to do it that way.
But, as you point out:
they still have to abide by the W-4 when grossing up.
they still have to provide employees with a pay stub or equivalent showing gross pay, hours, taxes, etc.
I’m sure the OP’s employer switched to their flat percentages, ignoring the W-4, because of how step 1 works. Let’s say two guys both get $25/hr “net” and one has a W-4 that’s Single-0 and the other is Married-4. When you gross up the first guy, he has really high income tax withholding, so his gross looks like $35/hr with $10 of withholding. The second guy has very little withholding, so his gross is maybe only $30/hr with $5 of withholding. Somebody realized that this makes payroll unfair because the first guy’s increase in earnings was entirely due to the W-4 rules.
So it sounds like the OP’s employer tried to “fix” their mistake by ignoring the W-4. They’re hoping that two wrongs make a right.
We use the flat 25% for service bonuses and overtime because its just too unwieldy to use the tax calculation.
their taxable gross can’t be accurately calculated. Health insurance and retirement is only deducted for the regular pay. That is used to determine taxable gross. Service bonuses and overtime are on the supplemental payroll.
the tax tables aren’t set up for tiny amounts like a $300 career service bonus or a $200 overtime check. It wouldn’t even calculate anything.
So, we set up an Earnings code for service bonuses and overtime that is taxed at a 25% flat rate.