Handling payroll tax rules can be daunting, especially when your company brings in new hires or when existing employees’ personal situations change. As employers, we often find ourselves with many questions about record keeping and withholding requirements. Here are some common inquiries that employers face, along with helpful answers:
Question: What are the limitations on how much retirees hired for part-time work can earn, and should we withhold FICA from their paychecks if they already receive Social Security and Medicare benefits?
Answer: When hiring retirees who receive Social Security benefits, income limits are imposed by the “earnings test.” For those reaching their full retirement age (FRA) in 2023, the annual exempt amount is $56,520, which will increase to $59,520 for those reaching FRA in 2024. Retirees will forfeit $1 for every $3 earned over this limit. If retirees begin collecting Social Security benefits before their FRA, they can earn up to $21,240 for 2023 and $22,320 for 2024 before benefits are withheld. In this case, they’ll forfeit $1 for every $2 earned over these limits. It’s important to note that even if retirees receive Social Security and Medicare benefits, their earnings are still subject to withholding and FICA, with no exemptions.
HIRING MINOR CHILDREN
Question: What are the legal and tax consequences when hiring a 16-year-old child for part-time work in my landscaping business?
Answer: Hiring a minor child comes with certain regulations. The Fair Labor Standards Act (FLSA) governs the employment of minors, but there are exemptions if the minor child is employed by their parents in a nonhazardous occupation like agriculture. However, this exemption applies only to parents, not extended family members. Wages paid to a child, regardless of age or family relationship, are subject to federal income tax withholding. If your child is under 18 and your business is a sole proprietorship or a partnership, they are exempt from FICA tax. In contrast, FICA still applies if your business operates as a corporation. Wages paid to children under 21 are exempt from FUTA if the parent’s business is unincorporated. State child labor laws may have different requirements, so it’s essential to check your state’s specific regulations.
RETAINING W-4 FORMS
Question: How long should we keep old W-4 forms when an employee submits a new one?
Answer: According to IRS Publication 15, employers must retain Form W-4 for four years after an employee has completed and submitted it. This means you must keep the W-4 for each employee for at least four years, even if it’s no longer valid. An employee’s W-4 remains in effect until they submit a new one. It’s crucial to note that a new W-4 cannot retroactively adjust withholding for a prior pay period.
MANAGING CHANGES IN TAX FILING STATUS
Question: How should we handle changes in tax filing status for employees, such as those going through a divorce?
Answer: According to IRS Publication 504, employees must provide new W-4s within ten days of a divorce or separation. As an employer, you must implement the new W-4 no later than the start of the first payroll period ending on or after the 30th day from when you receive the new form. Avoid offering guidance to employees when filling out new W-4s, as this could lead to errors. Instead, direct them to the W-4 instructions or encourage them to seek professional assistance. The IRS website offers estimating tools to help taxpayers with their withholding.
HANDLING FEDERAL TAX LEVIES
Question: How do we determine the amount of a federal tax levy for an employee who claims joint-filing status?
Answer: To determine the exempt amount for a federal tax levy, refer to IRS Publication 1494, specifically the “Married Filing Joint Return” filing status table. Calculate the employee’s take-home pay, which is gross wages minus taxes and deductions, including voluntary and involuntary deductions. If the take-home pay exceeds the exempt amount, remit the difference to the IRS; otherwise, pay the entire amount to the employee as it is exempt from the levy.
WITHHOLDING FEDERAL TAX LEVY VS. CHILD SUPPORT
Question: What should we do if we receive an IRS levy and a child support income withholding order for the same employee?
Answer: The priority between an IRS tax levy and a child support order depends on which was established first. If you received and processed the IRS tax levy before the child support order was established, the tax levy takes precedence. If the child support order existed first, funds withheld according to it are exempt from the federal tax levy. In such cases, contacting the child support agency is advisable to ensure proper procedures are followed. They can help determine the establishment order and, if necessary, work with the IRS to modify the levy for withholding child support. Navigating the complexities of payroll tax rules and regulatory obligations can be challenging. If you need further assistance or have unique situations, consul an R+R tax advisor – their expertise can provide valuable guidance for your specific needs.
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