During recent testimony before the Internal Revenue Service (IRS), the American
Benefits Council (www.americanbenefitscouncil.org)
recommended changes to proposed regulations on supplemental wage withholding
requirements.
The proposed regulations state that, after 2004, an employee who receives more
than $1 million in supplemental wages, such as bonuses and commissions, is subject
to mandatory income tax withholding at the highest applicable income tax ratecurrently
35 percent.
(This rate applies to the amount in supplemental wages that exceeds $1 million.)
Melissa Davis Hartranft, senior legal counsel at Fidelity Investments, represented
the council and discussed administrative challenges posed by
the proposed regulations. For example, all employers would have to revise their
payroll
practices to identify, track,
and withhold the appropriate amount of taxes on all supplemental wage payments.
Employers that don't comply with the new 35 percent mandatory rate may
be liable for the missed withholding, in addition to reporting, withholding,
and deposit penalties plus interest, according to Hartranft.
Hartranft recommended that the final regulations include a delayed effective
date, permanent good-faith relief from reporting and withholding penalties,
and a choice of safe harbor approaches for compliance pertaining to all supplemental
wage payments over $1 million.
