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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12690
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Supplemental wages tax be based on a W4 or do it have to be

Customer Question

Supplemental wages tax be based on a W4 or do it have to be 25% flat rate if the employer agreed in a settlement agreement
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: I was fired but my employer and union came up with an agreement to pay an amount that would be tax . but we agreed that they must used my updated W4 form which is in the supplement agreement but when I got that check I notice they didn't and said they used 25% flat rate and called it supplemental wages
JA: Is there anything else important you think the Accountant should know?
Customer: Can a W4 be used for supplemental wages versus a flat rate . All parties knew this was my only income . I have not work this entire year
Submitted: 10 months ago.
Category: Tax
Expert:  Lane replied 10 months ago.

Hi. My name's Lane ... I can help here.

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There ARE requirements on your employer from IRS about how withholding is done for this.

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Let me show you something from the IRS pub 15 tax guide for employers

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If you pay supplemental wages concurrently with wages for a payroll period and you do not specify the amount of each, you must combine the supplemental wages with the wages paid for the payroll period and withhold as if the total were a single wage payment.

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If you specifically indicate the amount of each payment, you may withhold at a flat 25% on the portion of the payment representing supplemental wages. Beginning in 2005, once annual compensation reaches $1,000,000, supplemental payments must be taxed at the highest bracket rate, 35%.

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Supplemental wages paid separately from regular wages

If federal income tax has not been withheld from regular wages, the supplemental wage payment must be added to the regular wages for the previous payroll period (in the same calendar year) or to the wages to be paid for the current payroll period. Then you should figure the tax as if the total amount were a single wage payment for the payroll period.

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If federal income tax has been withheld from the employee's regular wages you may either combine the supplemental payment with the regular wages and withhold as if they were a single wage payment after subtracting the amount already withheld from the regular wage payment or withhold a flat 25% of the supplemental wages.

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Supplemental wages paid with no connection to regular wages

If a supplemental wage payment is made without any possibility of tying it to a regular payroll period in a calendar year, you must treat the payment as a regular wage payment and withhold accordingly.

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It looks to me, from what you've said, that the company has overstepped their authority here