Page 209 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
One approach for avoiding the excessive amount of tax withholdings
is to separate the supplemental pay from the base pay and issue two sep-
arate payments to an employee. Under this approach, the percentage
withheld will likely be smaller than if the pay had been combined into

a single paycheck. Another approach that is acceptable to the IRS is to
combine the payments and then withhold a flat 27 percent rate from it.
For most computerized payroll systems, it is easier to implement the
first approach.

Sick Pay

In general, sick pay made to employees requires all of the Social
Security, Medicare, and income tax withholdings that are calculated for
normal wages; however, there are a few exceptions. For example, if an
employee dies and sick pay is made to his or her estate in the follow-
ing calendar year, this amount is not subject to any of the usual payroll
withholdings or taxes. The same rules apply if sick payments are made
to an employee who has been absent from work for at least six months.
If employees contribute to a sick pay plan with after-tax dollars,
then any payments made to them from that plan will not require any

withholdings or payroll taxes, on the grounds that the employee already
paid those taxes on the initial cash used to fund the plan. Alternatively,
if the sick pay plan is funded with pretax dollars (as can occur through
a cafeteria plan),then any pay from the sick pay plan will require income
tax withholdings and all other normal payroll taxes, on the grounds that
the employee would otherwise never pay taxes on the wages paid.
If employees are paid sick pay through a third party, such as an

independent insurance company, the third party has no obligation to
withhold income taxes, though it can do so if an employee submits to it
a Form W-4S that states how much is to be withheld. The minimum
amount that can be withheld in this manner is $20 per week.

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