Tom2I recently was asked the question, “How do I modify the taxes for an employee check when they receive bonus or commission wages on a check with regular pay so that they are not hit with a large tax withholding on the check?”

The answer is not necessarily straight forward.

For background, Microsoft Dynamics® GP will annualize the transactions on the employee check (wages, benefits & deductions) based on the Frequency of the transaction (weekly, biweekly, etc.), calculate an annual tax amount, then reverse annualize the tax based on the frequency of the originating transactions to arrive at a per pay period amount. Adjusting the Frequency on the Pay Code Maintenance, Deduction Maintenance and Benefit Maintenance windows is a perfectly acceptable approach for solving this issue so long as it accurately reflects the period of time that the compensation is covering. For example, you may have an employee that gets weekly hourly and overtime pay plus a bonus check once a month. You can set the “Pay Period” of the pay code to Weekly for the hourly/overtime wages and to Monthly for the supplemental wages.

I would caution anyone against using flat tax rates for wages that are not supplemental wages (e.g. bonus/commission types of wages). If you have hourly transactions (regular or overtime), the IRS stipulates that you must use the selections on the employee W-4 for calculating taxes. The W-4 does allow for an “Additional Amount” of taxes to be withheld per pay run, but not for a fixed amount of withholding. Also, the IRS does allow you to withhold taxes from supplemental wages at a flat rate. However, you must withhold at a rate of 25% for employees with wages less than $1,000,000 or 35% for employees with wages at, or in excess of $1,000,000.

Splitting the hourly wages from the supplemental wages across multiple checks is an effective, albeit more time consuming, way to acceptably modify the taxes withheld for an employee as well. Unfortunately, you cannot have multiple checks for an employee in a single Build/Calculate/Print/Post process, so you must separate the checks into different processes.

I know as payroll professionals, our employees are our customers and we strive to keep them happy, but “fiddling” with tax withholding on a per check basis can be a slippery slope; one disgruntled employees phone call to the IRS or DOL and now you have an even bigger headache.

by Tom Franz, Product Manager at Integrity Data