USPS Reminds Employees That The Percentages Used to Tax Supplemental Wages Are Different From The Normal Taxation Percentages

Federal Taxation Percentages for Supplemental Wages

USPS® employees are reminded that the percentages used to tax supplemental wages are different from the nor­mal taxation percentages. Supplemental wages may include, but are not limited to, annual leave exchange, awards, back-pay awards, prizes, severance pay, and reimbursements for moving expenses. The American Jobs Creation Act of 2004 and Section 31.3402(g)-1 of IRS reg­ulations created a two-tiered taxation rate for supplemental wages, effective January 1, 2005. These regulations apply to all supplemental payments received by USPS employ­ees in the United States, as well as the U.S. territories.

These regulations provide for taxation of supplemental wages up to a total of 1 million dollars within a calendar year at a mandatory withholding rate of 25 percent. They also provide for a mandatory withholding rate of 35 percent for any supplemental wages paid in excess of 1 million dol­lars within a calendar year. These rates will remain in effect until taxation percentages are changed by Congress and the IRS.

PEN Ed. Note:
USPS also informs postal employees of the following:

Salary Overpayment Indebtedness — Year End Tax Treatment

When a postal employee is overpaid, USPS® estab­lishes an account receivable for the overpayment and ini­tiates the collection of the debt from the employee through the process described in either ELM 450, Collection of Postal Debts from Nonbargaining Unit Employees, or ELM 460, Collection of Postal Debts from Bargaining Unit Employees. USPS initially bills the employee for the net value of the overpayment, meaning federal, state, and FICA/Medicare taxes are not part of the bill.

However, IRS regulations require that if an employee has not fully repaid the overpayment by the end of the tax year (December 31) in which the overpayment was made, the employer must report the unreturned value of the over­payment as taxable income on the employee’s W-2. Addi­tionally, the employee and employer must pay appropriate federal, state, and FICA/Medicare taxes on the remaining value of the debt.

To administrate this IRS regulation, USPS establishes an additional account receivable at the close of the tax year for the value of the taxes the employee owes related to the unpaid debt. The debt collection processes in ELM 450 and ELM 460 are utilized to collect the additional tax-related debt.

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