Paycheck deductions and W4 exemptions can be a bit confusing. Thankfully, we can provide small business owners with answers to some of the most common and frequently asked questions. As a mass payroll company, we understand that deviations from routines can be confusing when it comes to staff payroll, so this article is meant to help you understand some of the paycheck deduction schemes and W4 exemptions.
Question #1: Why Do Certain Employees Not Get Federal Taxes Withheld?
There can be multiple reasons for some employees not to have their federal taxes withheld.
- The employee may not have made enough money for income taxes to be withheld.
In 2020, the IRS made extensive changes to employee withholding and employee W-4s. These new changes are reflected in the Tax Cuts and Jobs Act. Withholding is now intended to match employee liability. These changes have resulted in many cases where income tax withholding has been reduced or not withheld at all.
Key factors considered in the withholding calculation:
- Rate of pay
- Pay frequency
- The dollar amount of dependents
- Filing status
- The employee may be marked as exempt for withholding.
Something that should be noted is that an employee may be “exempt” from income taxes, but they may not be exempt from taxable wages. Even if the employee did not have any income taxes withheld, their W2 would still display all taxable wages earned by the employee.
- Standard Deduction
The standard deduction is the amount taxpayers can choose to subtract from their income if they do not itemize deductions. Currently, the standard deduction is set for $12,550 for individuals and $25,100 for married couples in 2021, which is an increase over recent years, and it almost doubled in 2017.
The standard deduction also means that employees are not assessed federal income tax on their first $12,550 or $25,100 in earnings depending on their filing status. This income threshold is common for seasonal employees who are onboarded for summer work or part-time positions.
- If the employee lives in a different state than the one they work in, the employer may choose to withhold income taxes.
- There may be special rules applied for state resident nexus and/or reciprocity.
- Some states do not have income tax withholding requirements.
These states include:
- New Hampshire
- South Dakota
Question #2: Why Do Certain Employees Not Get Local Taxes Withheld?
Again, much like with federal taxes, there can be multiple reasons for some employees not to have their local taxes withheld.
- The company tax jurisdiction is set to “no local tax.”
- The employee is set to “exempt” from local taxes.
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Question #3: What is the Difference Between an Exempt and Nonexempt Employee?
An employee must meet these requirements to be considered exempt:
- Must make at least $35,588 per year (or $684 per week)
- Must be paid on a salary basis
- Must have executive, administrative, or professional job duties — these job duties are considered exempt.
If an employee does not meet the above requirements, they are considered to be nonexempt. Nonexempt employees must be paid at least the federal minimum wage as well as overtime wages.
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Question #4: What Taxes Do I Need to Withhold from an Employee’s Paycheck?
The following must be withheld:
- Federal income taxes
- Social Security taxes
- Medicare taxes
It is possible that you may also need to withhold state and local income taxes.
Taxes should only be withheld from employees, not independent contractors. However, some states, including MA, have introduced some rules that may require some 1099 independent contractors to have taxes withheld.
An example would be taxes withheld for paid family and medical leave (PFML) if the contractor opted-in. In some rare cases, the Department of Revenue (DOR) has instructed construction companies to withhold income tax from particular 1099 contractors. This could become more common as time goes on.
If you or your business is looking for help with payroll or just have any general questions about payroll deductions and W4 exemptions, please do not hesitate to reach out!