Obtain employer guide for witholding from each state to ensure compliance
Canadians measure speed and distance in kilometres, Americans use miles. North of the border, the prime minister is the head of government. South of it, it’s the president. The divide continues into payroll — there are some significant differences in handling payroll in the United States, something important for Canadian payroll professionals to be aware of in the event they need to pay employees in the U.S.
Federal tax
As with all payrolls, U.S. or Canadian, it must first be determined whether the person to be paid is an employee in the eyes of the Internal Revenue Service (IRS).
IRS form SS-8 is commonly used to assist employers in determining whether the person is an employee or an independent contractor. Every employee must have a social security number — similar to a social insurance number — to be paid in the U.S. The IRS is also the agency that publishes the tax rates and determines what are considered taxable wages.
Probably the most important publication used by the payroll professional is IRS Publication 15, also known as Circular E. Various payroll tax rates and methods are described in this publication.
There are also several additional publications in the Publication 15 series that detail certain types of pay and payment rules. An employer must also have each employee fill out an IRS form W-4 (similar to a TD1) to establish filing status and number of exemptions as well as any additional Federal Income Tax (FIT) requested by the employee to be withheld.
Also on a Federal level are employment taxes also commonly referred to as FICA, or Federal Insurance Contributions Act. These are administered by the Social Security Administration.
The FICA rate consists of two parts, social security and medicare. Each of those parts has an employee and an employer portion which normally are the same rates. The social security tax rate is 6.2 per cent up to the taxable wage base of $106,800 but, for 2011, the employee rate was reduced by two per cent to 4.2 per cent.
Taxes collected on each employee’s behalf are used to pay benefits once she retires from service. Medicare tax is 1.45 per cent each portion on unlimited taxable wages.
As for what constitutes taxable wages, that can vary by the type of tax as well as any legislated pre-tax items, such as retirement plan contributions, with IRS section 401(k) being the most common plan available for public companies.
Finally, Federal Unemployment Tax Act tax is paid by the employer on an annual basis with a rate up to 6.2 per cent, but most states, as long as they contribute to their own state fund, get a credit of 5.4 per cent effectively making the rate 0.8 per cent up to the taxable wage base of $7,000. This tax is to fund the federal unemployment insurance.
State tax
State level taxes and deductions become much more complicated. Consider yourself lucky that, in Canada, all provincial income tax withholding and tax rates are published and collected by the Canada Revenue Agency.
In the U.S., there are 50 states, five territories and the District of Columbia that can each establish their own tax rules, tax rates and what constitutes taxable wages.
In addition, they may not release their tax rates on Jan. 1 and July 1 as in Canada, but can be on any date throughout the year, and it is not uncommon for states to release updated tax rates several times during the year.
If you have employees working in more than one state during the year, there are various reciprocal agreements between most states, but not always, so you must know how each state handles employees who live in one state and work in another, as well as services that are performed in multiple states.
All states also have an unemployment tax employers are required to contribute to up to an annual taxable wage base. Several states also have an employee deduction for this type of tax.
There may also, in some cases, be a deduction for a disability insurance fund that could affect both the employer and the employee. In addition, many states have local income taxes on a city or county level.
Deductions
Once all of the various federal and state level taxes have been mastered, there can also be various deductions, some mandatory and others voluntary. Some examples of mandatory deductions are: tax levy for unpaid federal or state income taxes, child support order and wage garnishments in some states for personal debt such as unpaid medical bills, utilities or credit cards.
Voluntary deductions can take the form of health insurance, dental benefits, charities, savings bonds, company stock purchase and union dues.
Keep in mind there are laws that must be followed as to how much can be deducted from a person’s pay for some garnishments, but the federal government can and frequently does mandate nearly 100 per cent of an employee’s net wages to pay unpaid tax levies with a small portion allowed to be kept by the employee.
At year end, all employers must furnish each employee with an IRS form W-2 (similar to a T4 slip) showing wages, taxes withheld and various other deductions with their appropriate codes.
The W-2 must be distributed to employees no later than Jan. 31 following the taxable year. Certainly, there are many more issues that face U.S. payroll professionals such as minimum wage, overtime, regular rate of pay, timeliness of payments and many duties required at termination. If you are paying U.S. employees, the best practice would be to obtain from each state’s website an employer guide for withholding as well as from each state’s department of labor website any minimum wage requirements and review each to familiarize yourself with their procedures and regulations.
If you are faced with a compliance challenge and are unsure how to resolve it, all states, as well as the IRS, offer an email address for questions. It is always safest to have a written confirmation from each agency to ensure 100 per cent compliance.
Ray Krause is the senior Tax Research Analyst for Ultimate Software in Weston, Fla.
Federal tax
As with all payrolls, U.S. or Canadian, it must first be determined whether the person to be paid is an employee in the eyes of the Internal Revenue Service (IRS).
IRS form SS-8 is commonly used to assist employers in determining whether the person is an employee or an independent contractor. Every employee must have a social security number — similar to a social insurance number — to be paid in the U.S. The IRS is also the agency that publishes the tax rates and determines what are considered taxable wages.
Probably the most important publication used by the payroll professional is IRS Publication 15, also known as Circular E. Various payroll tax rates and methods are described in this publication.
There are also several additional publications in the Publication 15 series that detail certain types of pay and payment rules. An employer must also have each employee fill out an IRS form W-4 (similar to a TD1) to establish filing status and number of exemptions as well as any additional Federal Income Tax (FIT) requested by the employee to be withheld.
Also on a Federal level are employment taxes also commonly referred to as FICA, or Federal Insurance Contributions Act. These are administered by the Social Security Administration.
The FICA rate consists of two parts, social security and medicare. Each of those parts has an employee and an employer portion which normally are the same rates. The social security tax rate is 6.2 per cent up to the taxable wage base of $106,800 but, for 2011, the employee rate was reduced by two per cent to 4.2 per cent.
Taxes collected on each employee’s behalf are used to pay benefits once she retires from service. Medicare tax is 1.45 per cent each portion on unlimited taxable wages.
As for what constitutes taxable wages, that can vary by the type of tax as well as any legislated pre-tax items, such as retirement plan contributions, with IRS section 401(k) being the most common plan available for public companies.
Finally, Federal Unemployment Tax Act tax is paid by the employer on an annual basis with a rate up to 6.2 per cent, but most states, as long as they contribute to their own state fund, get a credit of 5.4 per cent effectively making the rate 0.8 per cent up to the taxable wage base of $7,000. This tax is to fund the federal unemployment insurance.
State tax
State level taxes and deductions become much more complicated. Consider yourself lucky that, in Canada, all provincial income tax withholding and tax rates are published and collected by the Canada Revenue Agency.
In the U.S., there are 50 states, five territories and the District of Columbia that can each establish their own tax rules, tax rates and what constitutes taxable wages.
In addition, they may not release their tax rates on Jan. 1 and July 1 as in Canada, but can be on any date throughout the year, and it is not uncommon for states to release updated tax rates several times during the year.
If you have employees working in more than one state during the year, there are various reciprocal agreements between most states, but not always, so you must know how each state handles employees who live in one state and work in another, as well as services that are performed in multiple states.
All states also have an unemployment tax employers are required to contribute to up to an annual taxable wage base. Several states also have an employee deduction for this type of tax.
There may also, in some cases, be a deduction for a disability insurance fund that could affect both the employer and the employee. In addition, many states have local income taxes on a city or county level.
Deductions
Once all of the various federal and state level taxes have been mastered, there can also be various deductions, some mandatory and others voluntary. Some examples of mandatory deductions are: tax levy for unpaid federal or state income taxes, child support order and wage garnishments in some states for personal debt such as unpaid medical bills, utilities or credit cards.
Voluntary deductions can take the form of health insurance, dental benefits, charities, savings bonds, company stock purchase and union dues.
Keep in mind there are laws that must be followed as to how much can be deducted from a person’s pay for some garnishments, but the federal government can and frequently does mandate nearly 100 per cent of an employee’s net wages to pay unpaid tax levies with a small portion allowed to be kept by the employee.
At year end, all employers must furnish each employee with an IRS form W-2 (similar to a T4 slip) showing wages, taxes withheld and various other deductions with their appropriate codes.
The W-2 must be distributed to employees no later than Jan. 31 following the taxable year. Certainly, there are many more issues that face U.S. payroll professionals such as minimum wage, overtime, regular rate of pay, timeliness of payments and many duties required at termination. If you are paying U.S. employees, the best practice would be to obtain from each state’s website an employer guide for withholding as well as from each state’s department of labor website any minimum wage requirements and review each to familiarize yourself with their procedures and regulations.
If you are faced with a compliance challenge and are unsure how to resolve it, all states, as well as the IRS, offer an email address for questions. It is always safest to have a written confirmation from each agency to ensure 100 per cent compliance.
Ray Krause is the senior Tax Research Analyst for Ultimate Software in Weston, Fla.
