Deductions by Job Withholding Issue Detected

We have recently verified two related issues in USPS that could impact medicare/FICA and city tax withholding. Both of these issues have to do with annuity amounts being applied incorrectly when withholding medicare, social security or the SAME city deduction multiple times using deductions by job.

If you do not use deductions by job for medicare, social security or city withholding you do not need to read further as this issue will not affect you.

The medicare/FICA issue will be corrected on the December 2015 release, so assuming this is installed prior to running 2016 payrolls the issue should be resolved beginning in 2016. We are still working on the city withholding issue as it is more complex; however we believe the circumstances of this issue also make it less likely to have occurred in practice. We will release an update to correct the city deductions by job withholding issue as soon as work is completed.

Both of these issues appear to have been in the software since deductions by job were first implemented in USPS with the September 2004 release. To summarize the issue, USPS is applying the total annuity amount to each job when calculating its taxable gross. This means if an employee has medicare setup using deductions by job and has 2 jobs and an annuity amount of $100 they are being credited with an annuity amount of $200. This issue is multiplied if more jobs are setup. For instance if the employee had 3 jobs with a separate medicare deduction setup on each they would be credited with $300 in annuities, which would incorrectly lower their taxable gross by $200 in this example. Hopefully, the examples provided below will clarify the issue.

 

Medicare/FICA Example:

In the example below I will demonstrate how this detected issue could affect withholding. For our sample employee we will assume 2 jobs with the following gross and section 125 annuity figures in the payroll. For the sake of simplicity we will assume any gross inflation resulting from medicare pickup has already occurred.

Job 1 – Gross = $1500

Job 2 – Gross = $500

Applicable Annuities = $100

If the employee did NOT have deductions by job configured the system would calculate the following medicare tax.

($1500 + $500) - $100 = $1900 taxable gross

employee and board share = $1900 * .0145 = $27.55

If the employee had the same earnings, but had medicare setup as deductions by job with a deduction for job 1 and 2 the following calculation would occur.

Job 1 = $1500 - $100 = $1400 taxable gross

Job 2 = $500 - $100 = $400 taxable gross

So, in this case the medicare tax would be calculated on $1800, affectively having given the employee credit for the annuity amount twice.

employee and board share = $1800 * .0145 = $26.10

In this example the result would be an under withholding of $1.45.

A similar problem could occur with social security if multiple social security deductions were configured for the same employee on 2 or more jobs.

 

City Example:

The city problem is very closely related, but it would only impact a school that was withholding city using deductions by job and had the same city deduction configured on more than one job. If you have different cities configured on each job the issue will not impact you.

For the example below we’ll assume 003 is a city deduction with a rate of .015 (1.5%) and that this SAME deduction is setup on job 1 and job 2 via deductions by job.

Job 1 – Gross = $1000

Job 2 – Gross = $500

Applicable annuities = $50

If deduction 003 (city) was setup on both job 1 and job 2 below is how the system would calculate the withholding.

Job 1 = $1000 - $50 = $950 taxable gross

job 2 = $500 - $50 = $450 taxable gross

tax withheld = ($950 + $450) * .015 = $21.00

Whereas if deductions by job were not used in this scenario the tax calculated by the system would be:

tax withheld = ($1500 - $50) * .015 = $21.75

So, in this example a .75 cent under withholding would have occurred when using deductions by job.

We want to make sure you understand the problem that we have confirmed in the software since it could impact tax withholding and potentially require you to file corrections with the impacted entities.