Payroll in Practice: 3.22.21

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

Question: An employee wants to elect a fixed flat amount of withholding for federal tax of $3,000 per monthly pay period. The employee does not want the payroll system to automatically calculate the federal tax deductions. Does the IRS still allow an employee to elect a flat amount of withholding with the revised Form W-4? If so, what is the best way to have the employee indicate this election on the 2021 W-4?

Answer: The IRS has not allowed an employee to request that a flat dollar amount or a specific percentage to be withheld from wage payments. In some cases that option is allowed, but not for wages.

The special instances are when Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, and Form W-4V, Voluntary Withholding Request, are the appropriate withholding certificates.

Form W-4S may be used to request withholding on sick pay paid by a third party that is not an agent of the employer. The use of Form W-4S assumes payments of the same amount for each pay period. The worksheet for the form is used to calculate the amount to withhold by using graduated tax withholding tables.

Form W-4V is used to request withholding from unemployment and other government payments, such as Social Security. The form allows the recipient to elect that a certain percentage be withheld from the payments though a limited choice of percentages. For example, withholding for unemployment has one option to withhold at 10% while withholding for Social Security and other covered payments may be at rates of 7, 10, 12, and 22%.

If an employee is paid the same amount each pay period, it is possible with the current Form W-4, Employee’s Withholding Certificate, to follow a process similar to the one used for Form W-4S. This involves use of a manual percentage method withholding worksheet for Forms W-4 for 2020 and later that are in IRS Publication 15-T, Federal Income Tax Withholding Methods.

The first step is to compute the amount of withholding from the tables based on the amount of the employee’s taxable compensation. This amount is computed by completing the worksheet, starting with the employee’s gross income tax wages for the pay period and the employee’s marital status. The applicable pay period tax table amounts for the tax bracket base, the base withholding for the tax bracket, and the tax rate for the bracket on the worksheet also are entered on their lines of the worksheet.

Next the worksheet computations are completed to determine the table amount of withholding on the wages. Finally, the computed amount of withholding is subtracted from the desired amount of withholding and the difference is entered on Step 4c of the W-4 as the additional amount to withhold.

For example, assuming a monthly salary of $7,000, married filing joint filing status, and no other Form W-4 entries, the Publication 15-T tables compute withholding of $2,436 for the monthly pay period. An entry of $564 on Step 4c of theW-4 provides the employee with the desired $3,000 withholding.

However, any difference in the amount of compensation for a pay period from the compensation used for the worksheet would result in a different amount of withholding for that pay period.

Question: Our bookkeeper mistakenly issued a W-2 to an independent contractor. No taxes were withheld, but the amount paid was reported in Box 1. The W-2 was filed with the Social Security Administration. As a new company, how do we correct this?

Answer: Prepare Form W-2c, Corrected Wage and Tax Statement, to show the amount reported, the amount that should have been reported ($0), and the difference. The instructions for the form can be used for guidance.

Do not enter other amounts because none were reported and do not change information related to the payer or payee. The W-2c effectively cancels the original Form W-2, Wage and Tax Statement. Submit the W-2c along with the Form W-3c, Transmittal of Corrected Wage and Tax Statements, to the Social Security Administration. Do not send a copy of the original W-2 with the W-3c and W-2c.

Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, also is to be filed for each quarter that amounts paid to the worker were included as wages on Form 941, Employer’s Quarterly Federal Tax Return or Claim for Refund. Unless the total paid to the worker over the course of the year is less than $600, Form 1099-NEC, Nonemployee Compensation, will need to be issued to the worker and filed with the IRS.

At this point, although unlikely for a single late Form 1099, the IRS may propose a penalty for late filing. For corrections made more than 30 days after the Jan. 31, 2021, due date but before Aug. 1, 2021, the penalty is $110. The penalty increases to $280 after Aug. 1.

If you receive a proposed penalty notice, you may be able to establish reasonable cause and avoid the late-filing penalty. In your response to the notice, explain that you were trying to be compliant by issuing and filing timely a Form W-2, that you are in your first year of operation, and mention that you are taking steps to ensure that the mistake would not recur.

By Patrick Haggerty

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.