Payroll 101: Income Tax Withholding Part 3

Posted on February 22, 2012 by Matthew Kinney

As a staffing employer, you must file returns with the appropriate federal, state, and local authorities reporting the amount of wages paid to and amount of taxes withheld from your employees. There are also several different rules which complicate things depending on the types of employees you employ and which information returns are required. A list of the major returns and a brief description of each are outlined below:

Form 941, Employer’s Quarterly Federal Tax Return —shows federal taxes withheld during the calendar quarter and the employee/employer portions of FICA.
Form 941-M, Employer’s Monthly Federal Tax Return—reports taxes on a monthly basis; you are not required to file this unless notified by the IRS, usually for a past compliance issue (and thus no direct link to it).
Form 942, Employer’s Quarterly Return for Household Employees —reports federal taxes withheld as a result of a voluntary withholding agreement with domestic employees.
Form 943, Employer’s Annual Tax Return for Agricultural Employees—as one would expect, for reporting federal taxes withheld on compensation paid to agricultural workers.
Form 944, Employer’s Annual Federal Tax Return –used in place of Form 941 when you owe less than $1,000 in employment taxes for the year.
Form 945, Annual Return of Withheld Federal Income Tax– reports tax liability for backup withholding and withholding on items such as gambling winnings, annuities, and pensions.
Form 1099-MISC, Miscellaneous Income –reports miscellaneous income such as royalties, commissions, fees, rents, and awards of at least $600.00 paid to non-employees.
Form 1099-INT, Interest Income–generally for reporting payments of interest of $10 or more on earnings from savings, CDs, etc. Also used for interest of $600.00 or more from other sources.

There are other types of returns such as the 1099-R, Form 5498, etc., but these aren’t very common in most staffing company payroll situations.

It is important to note that any payments made to independent contractors (not incorporated) of at least $600.00 must be reported on a Form 1009-Miscellaneous Income. Generally speaking, these payments aren’t usually handled by payroll, but via accounts payable in most situations and they also usually handle the 1099. In the event that the independent contractor (IC) has not provided their taxpayer identification number (TIN) and you expect to compensate the IC more than $600.00, you are required to withhold taxes of 28% of payments made until the IC provides the TIN to you. It is important to note that if you fail to withhold this amount, you, the payer, could be liable to the IRS for the 28% in question!

In the event that you have more than 250 Forms W-2 or other information returns (for each type of return), you are required to file the forms electronically with the IRS. The employer must complete a Form 4419, Application for Filing Returns Electronically in order to file the returns electronically. For more information on electronic filing, go to Electronic Filing for Businesses.

Many states also have their own income tax regulations which are further complicated if you have employees in multiple states or via reciprocity withholding agreements. If you are located in one of the nine lucky states (as of this writing) that do not have a state income tax—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—this isn’t something you have to worry about. Generally speaking, state income tax is withheld based on where the services are performed, but there are several states where this does not apply. This point is further complicated if the employee lives in one state and works in another, particularly in the absence of a reciprocal withholding agreement between the states. While BWSI handles payroll in all 50 states, getting into the various regulations and reciprocal agreements are outside the scope of this blog post. For the most part, if state income tax exists, you are required to withhold and report in a very similar manner to federal taxes. Each state will have its own reporting requirements and forms and it is imperative that you as the employer become familiar with the tax regulations of the state(s) in which your business is located AND the states in which your employees reside. Many states participate in the Combined Federal/State Filing Program, which enables you to file your information returns with the federal government and consent to release of the information to the applicable states. You must first receive permission from the IRS to participate in this program, but it is quite a time savings if you are filing the returns yourself.

In next week’s post we will be delving into Unemployment Compensation Taxes and the Federal Unemployment Tax Act. There are also state unemployment compensation laws which we will touch on as well. As you would expect, this introduces a whole new set of tax forms to contemplate and deposit requirements!

Content Matters!

Posted on February 15, 2012 by Matthew Kinney

One of the things we are working through at BWSI is how to best leverage social media and do so on a limited budget. Given that all we do is staffing software, we often get questions from our clients on how to best leverage social media in their businesses. There are so many options, platforms, and things are constantly changing; however, one key thing we have learned is that no matter the outlet, content matters. The big question is how to make content matter and make it matter on a budget. As with any marketing expenditure, you want to target the right mix of things to get the most bang for your buck AND turn those browsers/surfers into customers.

One of the big turnarounds we are trying to navigate at BWSI is, while we are a customer-service company that offers staffing software solutions, we are also a content company—a resource to not only our customers, but potential customers and consumers at large. We are very fortunate to work with hundreds of staffing agencies/personnel services and get to learn how they do business, see the best practices, and we handle payroll and billing in all 50 states. Given this breadth of knowledge we have gathered (personally, I have been used as a subject matter expert in numerous books and articles), we should be able to easily generate valuable content and keep our search engine rankings….well, that is only part of the story. What kinds of content would attract more prospects? What kinds of content would nurture those leads? How can BWSI be a better member and, more importantly, supportive member of the staffing community at large?

Fortunately for us, a company called Focus Research did a study on just these questions. Their research report (which is INCREDIBLY insightful and chock full in information) called Marketers’ Benchmarks 2011: A Survey of Marketers’ Priorities & Challenges has insights into the mix of content that can be used to attract customers. From a staffing agency standpoint, you have a business to business aspect where you look for prospects to sell your services to, as well as a business to consumer bent—sourcing applicants to fill those placements.

According to the report, one of the best content platforms is what you are reading currently—our blog. Their data show that for business to business (B2B) respondents said that blogs were 39% most effective, whereas the blog was also 37% effective in business to consumer (B2C). Webinars/Virtual events also proved very useful—as a staffing agency you could offer a B2B (38%) webinar on something like personnel outsourcing, and a B2C (34%) webinar on interview techniques and resume tips. The key is to not shill or promote your own services, but produce valuable content that can position your agency as a trusted and reliable source of information. One of the things we consistently hear at BWSI is the difficulty in getting to a ‘yes’ from a prospect to place a job with an agency—i.e. getting them comfortable with outsourcing the placement to you. The Focus report showed that whitepapers, particularly for B2B, were very effective (31% most valuable); as a staffing agency, you could generate a white paper on certain metrics and successes for the staffing industry. Some of this research is readily available from the American Staffing Association for its members (if you aren’t a member, we at BWSI highly recommend it!).

This is just the tip of the iceberg to say the least. The key is to create and present content that businesses and candidates would find useful–deepening your relationship with them and upping the probability that they will become customers/placements. Keep in mind that content you generate today can still pay off a couple of years from now—how many other marketing platforms can you say that about? I will be writing future blog posts as we deepen our relationship with social media and other content platforms, particularly how we think they can help staffing. While it is always easy to write about the successes, I also will cover our failures as we encounter them—and I am sure there will be some given the ever-changing nature of this topic. As always, if you have any questions or comments, please don’t hesitate to contact us!

Payroll 101: Income Tax Withholding Part 2

Posted on February 14, 2012 by Matthew Kinney

This week’s Payroll 101 post will deal with supplemental wage payments, gross-up supplemental payments, and the basics of the wage and tax statement, otherwise known as the Form W-2. In addition to this, we will briefly discuss the Form W-3.

Supplemental wages include items such as commissions, bonuses, vacation, exercise of nonqualified stock options and dismissal pay. They are considered supplemental by the IRS because they are separate, in a sense, from an employee’s regular income. When you pay supplemental wages, you have the option to pay it with an employee’s regular wages or pay separately from an employee’s regular wages. The second option is common among our clients dealing with bonuses and commissions as they prefer to pay supplemental wages with a separate check. When you elect to pay the supplemental pay with an employee’s regular wages, you can elect to withhold income tax (federal only, as some states have differing regulations for state tax) as follows:

If you pay the supplemental wages but do not specify the type of wage (i.e. a lump sum), you must withhold income taxes as if the amount were a single payment for a regular pay period. It is important to note that this can result in regular wages being more highly taxed than usual, which can cause some consternation/misunderstandings among your employees.
If you specifically state the amount of each payment—regular earnings and then the supplemental wages (i.e. a bonus or commissions), you can withhold a flat 25% rate on the supplemental wages. This is provided that the income tax is withheld at the appropriate rate on the employee’s regular wages.

In the event that you pay supplemental wages separately from a normal payroll, how you tax the payment is dependent on a couple of factors. Similar to what is outlined above, if you already withheld taxes from the employee’s last regular wage payment, you can add the supplemental pay to the previous payroll and withhold income tax as if it were a lump sum payment. In figuring the withholding, you would subtract the income tax already withheld from the regular wage payment to get the income tax to withhold from the supplemental payment. If you did not withhold income tax from the employee’s last regular wage payment, you must also use the aforementioned method (i.e. treat as lump sum). However, if you did withhold income taxes from the last regular wage payment, you also have the option to simply withhold at a flat 25% rate on the supplemental wages paid. For the sake of completeness, I should probably mention that if the employee has already received supplemental wages in excess of $1 million for the current year, the excess (amount exceeding $1 million) will be taxed at a 35% rate. For more information on supplemental pay and how to handle it, review the appropriate sections in IRS Publication 15 (Circular E).

A question that I am frequently asked is how one can ‘gross-up’ a supplemental wage payment so that the employee actually receives the intended amount. Basically, how much do I have to pay an employee so that after payroll and income taxes are withheld, the net amount of the payment is the intended amount? In order to calculate the gross-up amount, you use a simple formula:

Gross-up amount = Intended Payment

1 – Applicable tax rates (25% Federal Tax Rate, FICA, and State Taxes)

Almost all of us are familiar with our year-end W-2 that we get in order to file our income taxes. As an employer, you must furnish this wage and tax statement to each of your employees, including anyone that worked for you during the calendar year. The W-2 must be in your employee’s hands by the end of January as of this writing. The Form W-2 must be prepared for any employee if any of the following items apply:

Social security or income tax was withheld.
Income tax should have been withheld if the employee had not claimed more than one withholding allowance or not claimed exempt on Form W-4.
Any advance EIC payments made.
If the employer is a trade or business, any payments (both cash and non-cash) for services rendered.

The instructions for filling out a Form W-2 are very straightforward and can be found on the IRS General Instructions for Forms W-2 and W-3. When preparing Form W-2, there are several copies of it that must be distributed as follows:

Copy A—Social Security Administration by the end of February (end of March if you are filing electronically)

Copy 1—State, city or local tax authority

Copy B—Employee to file with their tax return

Copy C—Employee for their personal records

Copy 2—Employee for filing with state, city, and/or local tax returns

Copy D—Employer

If you are filing more than 250 Forms W-2, you must file and report them electronically. As mentioned above, you have an extended deadline of March 31 if filing electronically. In order to file electronically with the IRS, you must complete a Form 4419, Application for Filing Information Returns Electronically. A time-extension can be requested for filing W-2s by sending Form 8809 – Request for Extension of Time to File Information Returns to the IRS OR online via the FIRE (Filing Information Returns Electronically) system by February 28. If you only have a small amount of Forms W-2 to process, you can actually create a fill-in Form W-2 for filing with the Social Security Administration and then print them out for mailing to employees at Employer W-2 Filing Instructions & Information .

A big point to remember is to enter the name on the W-2 exactly as it appears on the employee’s social security card and to not include titles (Mr., Dr., etc.) or suffixes (Jr., Sr., J.D., etc.). Another item that BWSI gets frequently is the need to correct an address on the Form W-2. If this happens, all you need do is re-issue a new W-2 to the employee with the corrected address and mark it “Reissued W-2 Form”. You do not need to send a revised copy A to the Social Security Administration.

Earlier you may have noticed a mention of a Form W-3 that you must also prepare. A Form W-3, Transmittal of Wage and Tax Statements is simply a summary or control sheet of for Forms W-2 being transmitted that includes the number of documents being transmitted as well as the aggregate amounts of wages and taxes withheld by you, the employer. This enables the Social Security Administration and the IRS to compare the totals and amounts to previously filed reports (Form 941s) for the year. You will be required to explain any discrepancies and correct any errors if the totals do not match.

In next week’s posting we will cover the other types of documents that must be completed by an employer including the Form 941, 941-M, 944, as well as documenting independent contractor payments (Form 1099). We will also touch on state and local income taxes—this is an extremely broad topic that varies from state to state and locality to locality so we will not be able to go into great detail. The state and local income tax situation is complicated even further if you are in multiple states and it is your responsibility to understand the regulations and withholding laws of each jurisdiction.