more-arw search

Q&A Forum

Signing Bonus Whithholding

signing bonus withholdingA new hire has requested we withhold taxes on her sign on bonus based on 400 dependents on her w4. Can anyone advise?

There does not seem to be an actual limit in the regs but I would think I am I obligated to be reasonable. My system is limited to 99 but do I have to do 400 if requested? I do think this would be just for this first payment and then the w4 would be changed back to something more reasonable. Thank you for any insight.

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anon,

That seems far past odd...and limiting to what the system can handle seems pretty basic. I would instead direct her to the box where you can specify a specific amount to withhold, or to the Exempt box if she wants nothing withheld. I assume the goal is that she wants just a few $ taken out, and the "specific" box is designed for that.

Cheers,

KP

Anonymous
(Finance Director) |

Thank you very much. I also would like to see the use of the exempt if that is what she is trying to do.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

There is a reason that the Form contains this statement above the Employee Signature....

"Under penalties of perjury, I declare that I have examined this certificate and, to the best of my knowledge and belief, it is true, correct, and complete."

It would be wise to remind the employee of the risks.

The IRS may request a copy of the W-4 from the employer at any time. If they feel that there is an attempt to avoid withholding of tax from wages, they can assess a $500 administrative penalty for filing a fraudulent Form W-4.

The IRS can also issue a Lock Letter to the employer, forcing withholding at a level set by the IRS, regardless of what the employee might legally be entitled to. The employee may get locked at a certain rate for as long as the IRS decides is appropriate; they typically won't entertain requests for release form it for at least 2 full years.

Here is an EY (2014) primer on w4 that MAY help
http://www.ey.com/Publication/vwLUAssets/EY-Top-10-Form-W-4-questions-for-2014/$FILE/EY-Top-10-Form-W-4-questions-for-2014.pdf

Anonymous
(CFO/Board Advisor) |

I would think the sign-on bonus would fall under the minimum tax withholding rule, e.g. 25% for Federal, state tax withholding % varies.

Topic Expert
Christie Jahn
Title: CFO
Company: Prime Investments & Development
(CFO, Prime Investments & Development) |

I like Emerson's approach. I would advise them of the consequences and research submission requirements. At one time the employer was supposed to send all forms with exempt status to the IRS, but not sure if that is still a rule. If that still applies you can simply tell her you would have to submit the form to the IRS so she is aware.

Anonymous
(Manager) |

If the bonus is being paid separate from regular wages, I would also use the flat 25% method for supplemental wages. If that's not the method your organization uses, you could consider making it the policy going forward to avoid situations like this.

As far as the W-4, I would consider it invalid. If the employee indicates in any way that the information on the W-4 is false, then that form is considered invalid and you should request a valid form. If the employee does not provide a valid form, then you are to withhold taxes as single and no allowances until it is provided, or if a previous W-4 is in effect you are to keep using the previous W-4 until a new valid form is provided.

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

Emerson is correct that the employee is the one taking the risk as long as you have secured a properly completed W-4. I have an employee with legitimately similar withholding claims because he has considerable NOL carry-forwards. The employee was not required to provide me with an explanation for his election but he volunteered it when I asked him to confirm the extraordinary figure (I wanted to make sure his intent was truly 400 exemptions rather than $400). It is more dangerous to challenge the employee on the legitimacy of the claim and put yourself in the position of providing tax advice than to simply explain the risks to the employee.

J.G. Collins
Title: Managing Director
Company: The Stuyvesant Square Consultancy
(Managing Director, The Stuyvesant Square Consultancy) |

The W-4 is possibly - and likely is - false on its face.

You should withhold according to the form, but before accepting it, you should advise the employee that the IRS may direct you, as the employer, to "lock in" the number of exemptions the employee can claim in the future (usually, IRS directs you to withhold the wages as if the employee is a single individual claiming no exemptions; the highest withholding.)

Once IRS has locked in the employee's W-4, neither you nor the employee can change the W-4 exemption amount without authorization from the IRS.

Claiming multiple exemptions used to be a fairly common practice by people who had bought into any one of the numerous tax protester / "sovereign citizen" scams that were floating around on the internet and elsewhere a few years ago, but those were mostly shut down (and their purveyors sent to prison and / or fined.) One rarely sees them these days.

Back then, though, employers were on hook and were required to send W-4's claiming more than ten exemptions to the IRS. It put the employer and their staff at no small risk with employees who were of a mind that bought into such scams as though they were legitimate tax advice.

Thankfully, the rules have changed and you no longer have to be the IRS' "enforcer".

If possible, I'll post a link supporting these instructions in a separate post.

J.G. Collins
Title: Managing Director
Company: The Stuyvesant Square Consultancy
(Managing Director, The Stuyvesant Square Consultancy) |

This should respond to your questions. Good luck!

http://www.irs.gov/Individuals/Withholding-Compliance-Questions-&-Answers

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

1. Inform the employee that 99 is the highest available deductions on your system. The only other alternative is to complete the form as "exempt" from income taxes. There are 2 stipulations to being able to claim the "exempt" status. It is not your job to determine if the employee is telling the truth by claiming the exempt status.
2. Make sure they read the legal language on the W-4 and sign and date the form.
3. It is not your duty to give tax advise to employees. (Do not talk to them about "lock in" letters or anything else that would be considered tax advise. You can always urge them to consult their tax professional, but nothing more.)
4. Process the form as properly completed.

Too often we believe we have a duty to protect our employers from under withholding. This is not our job!!!!!!

PS - Assuming your payroll system only has one place to put in deduction elections, you will need another W-4 to reset the deductions after the bonus is paid.

J.G. Collins
Title: Managing Director
Company: The Stuyvesant Square Consultancy
(Managing Director, The Stuyvesant Square Consultancy) |

Scott, IRS instuctions are clear that you are to inform the employee of the possibility of the "lock in". See the link I provided. It does not fall within the definition of "tax advice" within Circular 230.

2926 views

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.