EPY: How does PeopleSoft calculate cumulative taxes? [ID 607100.1]

EPY: How does PeopleSoft calculate cumulative taxes? [ID 607100.1]
		Modified 13-AUG-2008     Type PROBLEM     Status ARCHIVED

In this Document
  Symptoms
  Cause
  Solution

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Applies to:

PeopleSoft Enterprise HRMS Payroll for North America - Version: 8 - Release: 8

Information in this document applies to any platform.

This document was previously published as Customer Connection Solution 11808

Symptoms

Please see below.

Cause

Not Applicable

Solution

Document:607100.1: How does  PeopleSoft calculate cumulative taxes?

SPECIFIC TO: Enterprise North American Payroll 8.x

ISSUE:

I had a client that paid an employee $30,000 for a commission, and wanted to tax it at the cumulative tax method.  She found the following paragraph in PeopleBooks, but not nearly enough info to manually calculate the tax.  I then went to the BNA guide for the formula.  With this additional information, client was able to balance to the federal and state cumulative tax calculations.  

SOLUTION:
From PeopleBooks- Understanding Tax Options:
Cumulative
When you choose the Cumulative Tax Method, the system adds together your year-to-date earnings and the earnings for this pay period, annualizes the result, and calculates the annualized tax.  The system de-annualizes the tax by dividing it by the number of tax periods you have specified on the paysheet.  It then compares the result to your year-to-date withholding; if it is greater than your year-to-date withholding, the difference becomes your withholding for the pay period.

You generally use this for employees whose wages vary significantly from pay period to pay period, such as salespeople on commission.

From the BNA guide:
Cumulative Wages Method
This method may be used only upon written request from the employee and only if payroll periods have been uniform since the beginning of the year.  This method especially is advantageous for minimizing over withholding when a large wage payment has been followed by substantially, smaller ones.  Steps in the cumulative method include:
(1)  Total the wages paid during the current calendar year, including the wages to be paid for the current payroll period.
(2)  Divide this total by the number of payroll periods that already have elapsed, including the current payroll period.   This gives you an average wage payment.
(3)  Using the percentage method (see 111:2051 ), calculate the amount of withholding that applies to the
average wage payment. Multiply that amount by the number of payroll periods that have occurred this year.
(4)  Subtract the amount of taxes already withheld this year from the amount determined in the above step.
The remainder is the amount of income taxes to be withheld in the current payroll period.

EXAMPLE:  Will is paid $2,500 semimonthly. As a married employee with three allowances, $330.83 is withheld for  federal income taxes (under the percentage method) each pay period. With his second February payment, Will receives a bonus of $6,800, and $2,524.90 is withheld from the combined payment of $9,300. Pursuant to a written request by Will, the employer begins, starting with the first payroll period in March, to compute withholding under the cumulative wages method. The computations are as follows:


Including the first March paycheck-
(1)  Will's wages for the year-to-date total $19,300.
(2)  There have been five payroll periods so far this year, and the average wage payment is $3,860.
(3)  Under the percentage method, withholding on the average amount for a married employee with three
allowances, from Table 3(b), would be $711.63 over five payroll periods that would amount to $3,558.15.
(4)  Through the first four payroll periods, $3,517.39 already has been withheld from Will's pay. Therefore,
withholding required from the first March paycheck is $40.76 ($3,558.15 - $3,517.39).

This process is repeated for the following payroll periods. For the second March payroll period, a total of $21,800  has been paid to Will this year, for an average of $3,633.33 over six periods. Withholding on that average payment would be $648.16, and a total of $3,888.96 for the six periods. Since $3,558.15 already has been withheld through  five periods, withholding for the second March paycheck is $330.81.

Once the cumulative wages method has been requested by an employee and used to calculate withholding, the employer must continue to use the method until the employee revokes, in writing, the earlier request. A written request from the employee to use the cumulative method must be given effect immediately; a revocation must be honored no later than the first payroll period that ends 30 days after the notice of revocation.

PeopleSoft Setup Procedures:

1. On the Earnings table, set up the commission earnings to be taxed as follows: 'Specified on Paysheet'.  
2. On the paysheet, check on the cumulative button for ' Tax Method'.  
3. Enter the number of payrolls already paid this year, including this one, in the 'Tax Periods' field.


Tax Periods and Frequency work together on paysheets to determine how earnings should be taxed.  The Tax Period refers to how many pay periods these earnings covers; the frequency options refer to the pay frequency for the employee.  Usually you should leave the taxing period and frequency as the paysheet default.  However, in some cases, such as when an earnings covers a larger period of time than a standard pay period, you may want to change the way you want an earnings taxed.  

For example, Jan Gregory is normally taxed based on the annualized method, and she received a $3,000 bonus on the March 31 monthly payroll for her outstanding performance during the first quarter.  You can elect to have the system calculate her withholding as though Jan received the $3,000 in three $1,000 monthly increments.  Simply set the Tax Periods to 3 and the Frequency to Monthly.   Likewise, if the period were semimonthly, you would set the Tax Periods to 6 and the Frequency to Semimonthly.

4. Check the appropriate pay frequency that is also located in the 'Tax Period' box.  

NOTE:

From PeopleBooks:
In addition to these fields, you'll also find a series of messages that may appear on each pay earnings indicating either the status of the pay earnings or what the pay earnings represents.  You'll see the first four during normal processing of your payroll.  The remainder reflects special situations.

My experience:

In working with this client, found another item that is worth mentioning.  EE was normally paid monthly (through 6/30) , but weekly for the commission wages.  At first, the client  indicated cumulative, 6 tax periods and weekly, since after all, she has processing a weekly payroll.  The calculations were not correct.  Once she changed the frequency to 'monthly' and recalc'd, the calculation are now correct.  Seems the frequency must reflect the normal, assigned pay frequency.

WORKAROUND:
N/A

KEYWORDS:
Cumulative

Related Products PeopleSoft Enterprise > Human Capital Management > North American Payroll > PeopleSoft Enterprise HRMS Payroll for North America