26.2 Income Taxes Withheld on Wages

The amount of income tax withheld for your wage bracket depends on your marital status and the number of allowances you claim. You file a withholding certificate, Form W-4, with your employer, indicating your status and allowances. Without a Form W-4, your employer must withhold tax as if you are a single person with no exemptions

Law Alert

Differential Wages Paid to Workers Joining Military

Employees who enlist or are called up to active military service may receive “differential wages” from their former employer to cover the difference between their military pay and the wages that were being received prior to joining the military. Income tax must be withheld from the differential wages, but not FICA tax (Social Security and Medicare).

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Planning Reminder

Adjust Withholdings

If you do not expect withholdings to meet your final tax liability, ask your employer to withhold a greater amount of tax; (26.1). On the other hand, if the withholding rate applied to your wages results in overwithholding, you may claim extra withholding allowances to reduce withholding during the year (26.4–26.5).

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Cash payments or the cash value of benefits paid to an employee by an employer are subject to withholding, unless the payments are specifically excluded.

Income Taxes Are Withheld on:

• Payments by your employer for salaries, wages, fees, commissions, vacation allowances, dismissal pay, etc. (whether paid in cash or goods). You generally may elect to avoid withholding on pensions and retirement annuities (26.10). If bonuses, commissions, overtime pay accumulated, leave, or taxable expense allowances (under nonaccountable plans) are separately identified from regular wages, an employer may withhold at a flat rate of 25% instead of using the regular withholding tables.
• Sick pay paid by your employer. If a third party pays you sick pay on a plan funded by your employer, you may request withholding by filing Form W-4S.
• Taxable group insurance coverage over $50,000.
• Reimbursements of expenses that do not meet qualifying rules of accountable plans discussed in 20.31. Also, reimbursements from accountable plans that exceed federal rates if the employee does not return the reimbursement or show that it is substantiated by proof of expenses.
• Pay to members of the U.S. Armed Forces. Differential wages paid by an employer to a former employee while on active military duty are subject to withholding.
• Prize awarded to a salesperson in a contest run by his or her employer.
• Retroactive pay and overtime under the Fair Labor Standards Act.
• Taxable supplemental unemployment compensation benefits.

Income Taxes Are Not Withheld on:

• Earnings of self-employed persons; they may pay estimated tax installments throughout the year (27.2).
• Payments to household workers. However, although income tax withholding is not required, the worker and the employer may make a voluntary withholding agreement; see Chapter 38.
• Value of tax-free board and lodging furnished by an employer.
• Fringe benefits not subject to tax.
• Substantiated reimbursements for deductible moving expenses or medical care benefits under a self-insured medical reimbursement plan.
• Advances for traveling expenses if the employee substantiates expenses to the employer and if the employee returns any unsubstantiated amount (20.31).
• Pay for U.S. citizen working abroad or in U.S. possessions to the extent that the pay is tax free (36.1).
• Payments to agricultural workers, ministers of the gospel (except chaplains in the Armed Forces), nonresident aliens, public officials who receive fees directly from the public, notaries, jurors, witnesses, precinct workers, etc.
• Pay for newspaper home delivery by children under age 18.
• Death benefit payments to beneficiary of employee; wages due but unpaid at employee’s death and paid to estate or beneficiary.

Form W-2.

By January 31, 2013, your employer must give you duplicate copies of your 2012 Form W-2, which is a record of your pay and the withheld income tax, Social Security and Medicare taxes. If you leave your job or your employment is terminated during 2012 and you request a Form W-2 from the employer, you should receive it within 30 days of the request or, if later, within 30 days of your final wage payment.

Planning Reminder

When To Change Withholdings

Adjust the withholdings that were in effect during 2012 if you expect there to be a significant change in the tax you owe for 2013. For example, if you expect to have lower income or a larger number of dependents, you can reduce your withholdings to increase your take home pay. On the other hand, a withholding increase may be advisable if previously claimed deductions or credits will not be available to you, or if you expect an increase in nonwage income such as capital gains. Check the instructions to Forms W-4 and 1040-ES for 2013 to help you adjust your withholdings for 2013.

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