How to Withhold Using the Cumulative Wages Method
Author: Alice Gilman
An employer must withhold federal income taxes from employees' pay every pay period. The IRS has developed several methods an employer may use to fulfill this duty. The percentage method of withholding is most commonly used by an employer with automated payroll systems and third-party payroll service providers. Separate tables apply for each pay period and the marital status of employees. The percentage method tables are issued before a calendar year ends and are to be used by an employer in the following year. The IRS publishes the percentage method tables in Publication 15 (Circular E), Employer's Tax Guide.
However, certain employees, such as commission salespeople, may be overwithheld if their employer uses the regular percentage method tables without adjustment for the seasonal nature of an employee's job. These employees may request, in writing, that their employer use the cumulative wages withholding method. The cumulative wages method of withholding can only be used for employees who have regular pay periods.
Step 1: Determine the Value of the Employee's Withholding Allowances
Withholding allowances have dollar values that the IRS adjusts each year for inflation. Different withholding allowances apply to different pay periods. An employee may claim any number of withholding allowances, or none at all, on Form W-4.
To determine an employee's taxable wages, an employer must first multiply the value of one withholding allowance for the pay period by the number of allowances the employee has claimed on his or her Form W-4.
In 2016, Blanche Truman, who is single and paid biweekly, claims two withholding allowances on her Form W-4. The value of one withholding allowance for a biweekly pay period in 2016 is $155.80. Therefore, the total value of Blanche's withholding allowances is $311.60 ($155.80 × 2).
Step 2: Calculate the Cumulative Wages for the Pay Period
To determine the cumulative wages for the pay period, an employer must add the amount of the wages to be paid to the employee for the pay period to the total amount of wages paid to the employee during the calendar year.
In 2016, Blanche is paid the following amounts for these biweekly pay periods:
- July 19: $10,000;
- August 2: $3,000;
- August 16: $3,000;
- August 30: $3,000;
- September 13: $3,000; and
- September 27: $3,000.
On October 11, Blanche is again scheduled to receive $3,000.
To determine Blanche's cumulative wages for the pay period ending on October 11, Acme, Blanche's employer, adds the $3,000 payment to her wages to date: $25,000 + $3,000 = $28,000.
Step 3: Figure the Average Wage for the Cumulative Number of Pay Periods
An employer must determine the average wage for the cumulate pay period by dividing the total wages from Step 2 by the number of pay periods to which the amounts relate.
Acme divides $28,000 by seven, which is the number of biweekly pay periods that have elapsed since July 19. This amount is $4,000.
Step 4: Compute Withholding on the Average Wage for the Cumulative Number of Pay Periods
Using the appropriate percentage method table, an employer must compute the total amount of tax that it would have been required to withhold if the employee had been paid his or her average wages for the number of payroll periods to which the aggregate amount of wages relates. To use the percentage method tables, an employer must take the following steps:
- Find the appropriate taxable wage bracket on the left side of the table.
- Record the dollar amount of the tax to withhold.
- Subtract the amount of the employee's taxable wages that exceed the figure shown in the right hand column.
- Multiply this result by the appropriate percentage.
- Add the results from Steps 3 and 4 to arrive at the amount of income taxes to withhold from an employee's pay under the percentage method of withholding.
- Multiply the result from Step 5 by the number of pay periods in the cumulative period.
In 2016, Blanche's withholding for the seven biweekly pay periods is $5,992.35 and is calculated as follows:
- Figure the total value of her withholding allowances: $311.60.
- Figure her taxable income for one biweekly pay period: $3,688.40 ($4,000 - $311.60).
- Figure withholding for a single employee for a biweekly pay period:
- Looking at the biweekly percentage method withholding table for single individuals, the appropriate wage bracket is over $3,592 but not over $7,400.
- The tax is $713.65.
- Blanche's excess wages are $96.40 ($3,688.40 - $3,592).
- Multiply $96.40 by 28%, which equals $26.99.
- Add $713.65 + $96.40 = $740.64.
- Multiply $740.64 by seven pay periods = $5,184.48.
Step 5: Determine the Amount to Withhold During the Current Pay Period
An employer must compare the amounts that were already withheld from an employee's pay for the year with the amounts that would have been withheld under the cumulative method. The difference is the amount to withhold for the current pay period.
Through September 27, Blanche had a total of $4,973.81 withheld from her pay.
- July 19: $10,000 in pay = $2,535.06 in withholding;
- August 2: $3,000 in pay = $487.75 in withholding;
- August 16: $3,000 in pay = $487.75 in withholding;
- August 30: $3,000 in pay = $487.75 in withholding;
- September 13: $3,000 in pay = $487.75 in withholding; and
- September 27: $3,000 in pay = $489.75 in withholding.
Since the total amount of tax that was withheld for the seven pay periods ending September 27 is $4,973.81, Acme may, if it chooses, withhold $210.67, which is the difference between $5,184.48 and $4,973.81, from Blanche's October 11 paycheck.