In this edition, we will review a previous question on gross up calculations and get into another question on involuntary deductions.
In a previous edition of the Certified Payroll Professional (CPP) Corner, we talked about gross ups.
Gross ups. In certain cases, an employer may wish to pay an employee’s federal income tax withholding (FITW) and FICA (Social Security and Medicare) taxes without deducting them from the employee’s pay or getting a reimbursement from the employee. This may be desirable, for example, when the employer wants to give an employee a “net” bonus or cover an employee’s relocation expenses in full.
In Payroll Guide ¶4115, we discuss the IRS’s formula for completing a gross up. Since there are payroll calculators to calculate gross ups, like the ones in Checkpoint, it is not as common for payroll professionals to have to make this determination manually. However, this will be on the CPP exam, so best to understand the formula and practice. There might even be a more complicated gross up question on the test with voluntary and/or involuntary deductions so be prepared for either option.
Previous question. We asked you to try to calculate a gross up at the federal level for the following example: An employer wants to give a $500 bonus to one of its employees using the federal income tax withholding rate for bonuses.
Here’s how such a gross up would look:
- Step 1. 100% – 29.65% (7.65% + 22%, the federal tax withholding rate for bonuses) = 70.35%.
- Step 2. $500 ÷ 70.35% = $710.73.
- Step 3. $710.73 × 29.65% = $210.73 ($710.73 − $210.73 = $500 (desired net)).
It is a good idea to test yourself on gross ups at least once a week so the process becomes more familiar. Remember, the CPP exam is a timed test.
Involuntary deductions. Involuntary deductions are amounts that are required to be withheld from an employee’s paycheck. Employers must withhold and pay certain taxes (federal income tax, FICA, state, local) from an employee’s paycheck. However, there are other circumstances where an employer is required to withhold from an employee’s pay. These are involuntary deductions, as opposed to voluntary deductions where an employee elects to have items deducted from his or her pay (i.e., 401(k), cafeteria plan benefits, etc.).
Involuntary deductions are also referred to as wage garnishments, which are types of deductions through which a portion of an employee’s wages is required to be withheld for the payment of a debt. Most garnishments are made by court order. Other types of legal or equitable procedures for garnishment include IRS or state tax collection agency levies for unpaid taxes and federal agency administrative garnishments for non-tax debts owed to the federal government.
Wage garnishments do not include voluntary wage assignments, which would be a situation where employees voluntarily agree that their employers turn over a specified amount of their earnings to a creditor.
Consumer Credit Protection Act. Title III of the CCPA (Title III) limits the amount of an individual’s earnings that may be garnished and protects an employee from being fired if pay is garnished for only one debt. The U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) administers Title III, which applies in all 50 states, the District of Columbia, and all U.S. territories and possessions. Title III protects everyone who receives personal earnings.
The CCPA defines earnings as compensation paid or payable for personal services, including wages, salaries, commissions, bonuses, and periodic payments from a pension or retirement program. Payments from an employment-based disability plan are also earnings.
Limits on the amount of earnings that may be garnished. The amount of pay subject to garnishment is based on an employee’s “disposable earnings,” which is the amount of earnings left after legally required deductions are made. Examples of such deductions include federal, state, and local taxes, and the employee’s share of Social Security, Medicare and State Unemployment Insurance tax. It also includes withholdings for employee retirement systems required by law.
Deductions not required by law usually may not be subtracted from gross earnings when calculating disposable earnings under the CCPA. Title III sets the maximum amount that may be garnished in any workweek or pay period, regardless of the number of garnishment orders received by the employer.
CPP exam question. For ordinary garnishments (i.e., those not for support, bankruptcy, or any state or federal tax), what is the weekly amount that may not be exceeded?
- 15% of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 20 times the federal minimum wage.
- 25% of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage.
- 30% of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 35 times the federal minimum wage.
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