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In the Payroll Mailbag …

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in Office Management,Payroll Management

W-2s for employees who claim exempt on their W-4s

Question: We prepare early W-2s for employees who terminate during the year, so we can get those out of the way first. We just discovered that one of those terminated employees claimed an exemption from income tax withholding on her W-4. We included the wages she earned in Box 1. Should it instead be $0, since she claimed an exemption from withholding?

Answer: This employee claimed an exemption from income tax withholding, not that she didn’t earn any wages. You report in Box 1 the actual wages she earned and then enter $0 in Box 2, Federal tax withheld. She’ll have to square things up when she files her 2017 1040.

Taxable gifts: Does it matter who pays?

Question: Our executives pony up cash, which the company uses to buy holiday gifts. The gifts are raffled off to employees at our Christmas party. It’s great for employee morale. Is the value of the gifts taxable to employees who win? Management says no, because the money to buy them came directly from these executives and not the company. Payroll isn’t so sure. Which is it?

Answer: The value of the gifts is taxable to employees, because the only way they can qualify for them is by being employees. Where the money comes from isn’t relevant—it could have been from an outside donation or vendor—the rule is the same. The value of a gift is also taxable to employees, if, say, their spouses or children win. The key is the employment relationship.

Editor’s Note: Congress has passed the first major overhaul of the U.S. tax code in more than 30 years. The law, colloquially known as the Tax Cuts and Jobs Act, will have a far-reaching impact on both employers and employees. Specifically, employers confront an altered landscape when it comes to certain fringe benefits and pay policies. And, you will have to adjust your payroll system very quickly to accommodate these changes, as no transition relief has been provided.

Fortunately, we’ve put together a 15-page Free Special Report, authored by Alice Gilman, editor of Payroll Legal Alert, which offers a detailed breakdown of the new tax law’s impact on U.S. employers, and more specifically, payroll and HR departments. Download it FREE.

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