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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11577
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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We have a new employee that started this month. She showed

Customer Question

We have a new employee that started this month. She showed me her pay stubs from her previous employer, where she had clearly gone over the $118,500 threshold. I called the IRS and they told me that since she had met the max for social security at her previous employer and was able to show proof, we should not withhold social security taxes. However, the citations they gave me (publications 15 and 505) do not exactly spell this out. Also, we were separately referred to IRS code section 3121, and our payroll tax manual says the opposite. Should we withhold for social security and should we be paying the employer portion on her wages as well? Can you provide an iron clad citation that spells this out?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I hold J.D. (Duris Doctorate -a Doctoral degree in the law), MBA (Finance & Tax specialization), a BBA from Mercer University's Stetson School of Business & Economics, as well as CFP and CRPS (Chartered Retirement Plans Specialist) designations - I can help.

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I would disagree that the publications you mention don't spell this out. The social security wage base is what it is and withholding (AND matching) on wages over that amount is called an employer error. See this from : https://www.irs.gov/taxtopics/tc608.html

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"Employer's error - If any one employer withheld too much Social Security or RRTA tax, you cannot claim the excess as a credit against your income tax. Your employer should make an adjustment of the excess for you. If the employer does not make an adjustment, you can use Form 843 (PDF) to claim a refund."

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Is some of the confusion caused by the fact that there is no wage base for medicare and/or that the additional rate for the "additional" Medicare withholdiing of .9% starting at 200,000 both still apply here?

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For social security itself the wage base IS where withholding AND employer match stops.

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Let me know if that helps while I pull the ACTUAL CODE CITATATION for you

Customer: replied 1 year ago.
No confusion on the medicare. The textbook we are reading says that regardless of what was withheld at the previous employer, we should still withhold and pay social security taxes on their payroll without regard to their pay during the year with the previous employer...
What you are referring to above "employer's error" appears only to apply when a single employer withholds too much for the year.
Expert:  Lane replied 1 year ago.

First if, in Pub 15, you'll go here: https://www.irs.gov/publications/p15/ar02.html#en_US_2015_publink1000202402 you'll see this spelled out rather flatly ,,, now they don't go into coordination with a previous employer's withholding (but the reasonable inference here is that the tax is specific to the person and the wage base is applied to the person) and to withhold more than that when you have evidence that the withholding for that same tax year for that person has already satisfied the liability there is no reason to withhold.

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"Tax rates and the social security wage base limit. Social security and Medicare taxes have different rates and only the social security tax has a wage base limit. The wage base limit is the maximum wage subject to the tax for the year. Determine the amount of withholding for social security and Medicare taxes by multiplying each payment by the employee tax rate. There are no withholding allowances for social security and Medicare taxes.

For 2015, the social security tax rate is 6.2% (amount withheld) each for the employer and employee (12.4% total). The social security wage base limit is $118,500. The tax rate for Medicare is 1.45% (amount withheld) each for the employee and employer (2.9% total). There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax."

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Your manual is doing what many do, erring on the safe side, becasue it is not always possible to get this information ... and the previous employer has no obligation to ... AND you have no actual OBLIGATION to stop the withholding either ... BUT, when you know WHAT you know, the best practice here is to stop the withholding and matching

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Expert:  Lane replied 1 year ago.

Legally, you have no obligation not to withhold ... your manual or text is, again, saying only what is applicable to the largest audience (and likely in the majority of situations a new employer cannot get credible information about previous withholding ... and given the ability of an employee to "create" a pay-stub, you may want to withhold from a "risk management" perspective).

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But the law is that there is only a liability up to the wage base for that individual

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You are not going to find anything in IRS literature or title 26 about the decision you must make about whether or not you have good information.

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But if you can verify that the information is correct, IT IS CLEAR in ALL of the literature that you have no LIABILITY to withhold either.

Expert:  Lane replied 1 year ago.

I think what might actually help you more here is the anecdotal information ... again, because the law (and in this case the IRS interpretations of it in it's publications) only spell out your only legal liability ... to withhold social security taxes and deposit the employer match as well on the wage base for any tax year for an individual.

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See this from Thompson Reuters:

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if one employer acquires another employer during the year -- and it continues to employ some of the same workers -- the successor can count the wages paid by the predecessor towards its own Social Security wage base.

To qualify for this payroll tax break, the following conditions must be met:

  • The successor employer obtains substantially all of the property used in the prior employer's business (or in a separate unit of the prior employer's business);
  • The employees worked for the predecessor immediately before the acquisition and for the successor immediately after the acquisition; and
  • All of the earnings were paid in the calendar year of the acquisition.

The tax savings can be significant. For example, let's say that your business absorbs two companies with 50 employees. Assume that the average amount of wages already credited is $30,000 per employee. As a result, your company saves $93,000 in payroll tax (50 employees times 30,000 times.062). Obviously, the exact savings varies in each situation. (There could be state and local payroll tax savings, as well.)

Footnote: An employer may benefit from this tax rule even if is acquiring or consolidating its own subsidiaries. The IRS has said that the method of acquisition is immaterial for this purpose.

Expert:  Lane replied 1 year ago.

This seems to imply that this is some sort of break for employers becasue that have access to the information

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But again, I think that the legal answer is that you will only be held accountable if not enough is withheld to satisfy the liability (6.2 x the wage base)

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What I'm seeing in the literature is that the HR/risk management perspective is that you will not be able to substantiate, so you must withhold to the wage base independent of the other employer.

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What I'm seeing in the law is that it is not addressed.

Customer: replied 1 year ago.
The above example is in regards ***** ***** and acquisitions, or related employers. In this case, we have no relation to the previous employer.
Expert:  Lane replied 1 year ago.

Did you see my last post ... this again (that having those previous record BEAUSE of an acquisition) is from the HR consulting side of the anecdotal literature.

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I can find nothing in any of the IRS pubs (which are not law so cannot be "cited") nor in the code (the law - title 26 of the US Code Anecdotally called the Internal Revenue Code), nor in any treasury regs (which DO hold the authority of law) that says there is a requirement to withhold independently.

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Expert:  Lane replied 1 year ago.

ON the anecdotal side see this (answer written by ADP)

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What is our company's potential penalty exposure if we comply with a request from one of our employees to suppress her Social Security tax withholding because she met the max at her previous employer (and has proved it by showing her last check stub from there)? I would also like to see the actual law showing that employers MUST withhold Social Security tax regardless of year to date deductions made by other employers. I see it referenced on several websites, but I don't see the actual written law anywhere. Thanks.

Correct Answerby rwmorrey on Jun 23, 2014 3:35 PM

In most cases, when employees begin working for a new company (with a different FEIN), prior taxables are not allowed. The employee must begin again. This occurs since both employers are responsible for the employer portion of Social Security and Medicare on all employees, regardless if the employee met the Social Security limit with another employer. Because the employer and employee portions of Social Security must always be in balance, the employee must begin again at each employer. The employee will be able to receive credit back for any overpaid Social Security when a personal tax return is filed.

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ADP cannot advise on whether there are instances where prior taxables should be entered in this situation, therefore if you feel that they should be entered when an employee has moved to a Company code with a different Federal ID Number, please consult with a tax advisor.

Expert:  Lane replied 1 year ago.

And this:

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I may not be able to offer much help, but I can offer an example that I faced a few years ago. We had three separate companies that I processed payroll for that combined into one during 4th quarter. Many of the higher wage earners had already reached the maximum for their social security withholding and we didn't want then to have to start all over again with the new company. We simply input the prior withheld amount in the prior tax and taxable section of their employee file on ADP so that no further taxes were withheld past their maximum. But these were all three companies that we processed for.

Expert:  Lane replied 1 year ago.

Now, back to the law:

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26 U.S. Code Chapter 21 - FEDERAL INSURANCE CONTRIBUTIONS ACT

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When read literally ... All threeof the pertinant parts

prev | next

Expert:  Lane replied 1 year ago.

.... you'll see that congress in it's infinite wisdom wrote this for the audience, better said with the asumption, that it is the establishment of the liability that is at issue

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tax on employees, tax on employers, and the general provisions none of the three address your question

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Under tax on employees we see this:

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a) Old-age, survivors, and disability insurance

In addition to other taxes, there is hereby imposed on the income of every individual a tax equal to the following percentages of the wages (as defined in section 3121(a)) received by him with respect to employment (as defined in section 3121(b))—In cases of wages received during:1990 and thereafter, ...6.2 percent.

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Section (B) is the Medicare piece and (c) is Relief from taxes in cases covered by certain international agreements

Expert:  Lane replied 1 year ago.

IN the requirement to withhold you'll see that it is THIS reading ... that is being ta***** *****terally, and in it's strictetst construction by those concerned most with the company's exposure:

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26 U.S. Code § 3102 - Deduction of tax from wages

Section (a)

(a) Requirement

The tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid. An employer who in any calendar year pays to an employee cash remuneration to which paragraph (7)(B) of section 3121 (a) is applicable may deduct an amount equivalent to such tax from any such payment of remuneration,....

(b) Indemnification of employer

Every employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer.

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Expert:  Lane replied 1 year ago.

The coordination is not addressed in the law nor is it addressed on any of the publications

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But anyone concerned with the risk management aspect of this, the company's exposure for withholding enough, can read the requirement paragraph completely literally and say we must.

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But anyone concerned with upholding the law, and erring on the side of giving a (potentially important?) employee the benfit of the doubt will read that same law differently and say, we already know that this requirement has been met.

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Expert:  Lane replied 1 year ago.

I will now proceed to revenue rulings

Expert:  Lane replied 1 year ago.

There is no treasury regulation that requires that a second employer MUST treat the employer as if their wage base started all over, or that the wage base is company specific.

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There IS considerable assumption, as I mentioined before, that, becasue risk exposure is tantamount, companies should not assume that any employee provided information is valid AND , in deed, you saw in 26 U.S. Code § 3102(b) that the employer is indemnified "against the claims and demands of any person for the amount of any such payment"

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Information coming from HR consulting firms leans toward a complete assumption that the wage base is a company specific number, rather than a person specific number (and it would seem that this text you are readin does the same ... preeeeety far ,in this expert's opinion, to the risk management side of the continuum) ... but again the law stops short of that.

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IRS publications are somewhere between the two, and they, in more than one place, provide that the answer to an overwithholding problem is (as you saw in Tax topic 608), "If you had too much Social Security tax or Tier 1 RRTA withheld, you may be able to claim the excess as a credit against your income tax on your income tax return."

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The answer you seek, I do not believe exists, as citing the actual law only provides for (1) a rate and (2) a requirement to withhold. Nowhere is it mandated that a second company may not rely on outside information ... and even (3) goes so far as to indemnify for any overwithholding claims by the employee ... but the law stops short of requiring that you do or do not use tht infomation to satisfy the withholding requirement up to the wage base.... and in deed specifies to the taxpayer that if the employer does not withhold enough, the employee is responsible.

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So you question cannot be answered as asked.

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However, overwelmingly, the most common practice is to set standards based on the assumption that prior withholding is unknown, and withhold to the wage base as if the employee had no prior withholding.

Expert:  Lane replied 1 year ago.

So if your looking for a legal citation that tells you what to do in this situation, the isn't one

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I tend to agree with IRS personnel you consulted, and take a real world, commonsensial approach, especially when you have other data, (pay rate at your organization - as compared to what the employee provided, the time of year, possibility of confirmningwith the other company, etc)

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But if you have have a company manual that says to withhold against a newly established wage base of zero, mycompliance advice to YOU is that this is not out of the ordinary, and that your organization has already made that decision.

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Hope this helps you work through it

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Be glad to confirm or research more here, but I am certain of the bright lines here, in the law, AND in the discrepancy between that and what you are seeing in your company manual and the accepted practice in line with that.

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If this HAS helped, and you If you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Lane

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Expert:  Lane replied 1 year ago.

Hi,

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I'm just checking back in to see how things are going.

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Did my answer help?

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Please let me know if you need more here

And if not, I'd appreciate a positive rating (using the stars on your screen). That's the only way JustAnswer will credit me with a portion of what you've paid them.

Thank you,

Lane

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