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Talking to employees: How to address withholding on bonuses

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in Office Management,Payroll Management

Employees often have one question for you upon being told that they’ll receive bonuses: Can I avoid income tax withholding? Opinions vary about whether you should answer at all, since it’s received wisdom that you shouldn’t give tax advice. But is that all there is to it? Maybe not.

The scenario. An employee says to you, “I was wondering if it’s possible to reduce my federal income tax withholding to $0 for the remaining two paychecks (possibly three with the bonus?) this year, and reinstate withholding next year.” She adds that she didn’t earn any taxable income prior to her start date on Nov. 1. The bottom line, according to her, is that she believes her withholding to date satisfies her annual tax liability. Finally, she says that she’d like to contribute into her IRA, and the extra cash would help with her liquidity.

Your response. The safest course of action is to sidestep the issue by telling her that you can’t give her tax advice. After all, it’s not up to you to determine whether she has met her tax liability. You can direct her to the IRS’ withholding calculator at tinyurl.com/wagecalc. She can then determine her tax liability and make a better decision.

On the other hand, the employee seems to be indicating to you that she wants to claim an exemption from income tax withholding for which she’s not really eligible. You’re not required to accept any refiled W-4, if you know or have a reason to know it’s false.

Assuming you don’t reject the refiled W-4, the recommended approach is to stick to the book: Suggest that the employee refile her W-4 to claim exempt for the remainder of the year, and refile before the start of the first pay period of the next year to reinstate withholding.

You can also point out that the W-4 instructions state the conditions under which an employee may claim the exemption and that “my liability this year has already been withheld” isn’t one of them.

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