Cumulative Wage Withholding Method for Federal Taxes
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The amount of Federal income tax to withhold from an employee's wages can be determined on the basis of cumulative wages. The purpose of this withholding method is to even out the tax burden on certain types of payments to employees.
This may be beneficial to regular employees who also receive periodic supplemental payments during the year, causing more federal tax than necessary to be withheld during the payrolls that include the supplemental payments.
This withholding method cannot be used for employees who do not have a regular payroll period (biweekly, semi monthly, etc.). This would exclude employees who only coach or substitute and are not paid on a regular pay period from requesting this type of withholding method. Refer to section 31.3402(h)(3)-1(a) of the Employment Tax Regulations as well as IRS Publication 15-A, the Circular E Publication, and Revenue Procedure 78-8 for more information.
Please note that this method can only be used if the employee requests it in writing and the employee's wages were paid with the same frequency (i.e., biweekly, semi monthly, etc.) since the beginning of the current calendar year. An exception to this is when a new employee is hired mid-year. In this case the new employee must be paid using the same withholding method since the hire date.
Once the cumulative wage method is used for an employee, all the employee's wages should be taxed using this same method for the remainder of the calendar year to prevent an under withholding situation from occurring.
Calculation of Withholding Amount using the Cumulative Method
The cumulative wage method of withholding involves the following calculation which is processed by the software.
The taxable wages paid to the employee for the current calendar year are added to the taxable wages for the current payroll period.
This total is divided by the number of payroll periods so far this year including the current period.
Taking into consideration the number of exemptions, and using the percentage method of withholding found in the Circular E Publication, the amount of withholding is calculated.
This withholding amount is multiplied by the number of payroll periods used above.
The total withholding calculated is subtracted from the total tax withheld during the calendar year.
The excess is the amount that will be withheld for the current payroll period.
While processing, the software uses the following information for the calculations:
Taxable gross from the current payroll
YTD taxable gross from the federal tax record
Number of pays this calendar year including the current payroll
YTD tax withheld (from the federal record)
In addition to this information, the software performs calculations to obtain additional data:
Total taxable gross for the year
Average taxable amounts
Tax on average taxable amount
Total average tax for the pays this calendar year
Amount of federal tax for current payroll
An Example Using the Cumulative Method
The best way to illustrate the effects of using the Cumulative Wage Withholding Method is by an example.
A teacher with a regular contract on Job 01 is paid biweekly. This employee also receives a supplemental payment (job 02) for which she is paid in one payment.
Applying the cumulative wage calculations to the payment that includes the supplemental using the same steps described above, yields:
$2165.54 = taxable gross from the current payroll
$7902.66 = YTD taxable gross from the federal tax record
6 = number of pays this calendar year including the current payroll
$999.40 = YTD tax withheld (from the federal tax record)
$10,068.20 = total taxable gross for the year calculated as ($2165.54 + $7902.66)
$1678.04 = average taxable amounts calculated as ($10,068.20/6)
$214.51 = tax on average taxable amount. Figured using ($1678.04 minus withholding allowances), then looking that result up in the bi-weekly table for percentage method of withholding
$1287.06 = total average tax for the pays this calendar year calculated as ($214.51 x 6)
$287.66 = amount of federal tax for the current payroll calculated as ($1287.06 minus $999.40
Federal taxes withheld using the cumulative method for the payroll with the supplemental pay are $287.66. Compare this amount to $341.91 which is the federal tax withheld if the standard tax table calculations are used (i.e. the Calculate Option in Payroll Item for the 001 record is set to F). Note that there is a difference of $54.25 in federal tax between the two methods. An even larger difference could be expected if a straight 28 percent taxing option of supplemental wages was chosen.