How does Zenefits Payroll determine what taxes should be withheld?
Zenefits Payroll uses the home address and work location provided when employees are hired into our system. Using a process called geolocation, Zenefits Payroll relies on GPS data to identify a precise location for each address. The geolocation data, in combination with Nexus and Reciprocity data, produces the employee's taxation results.
How does geolocation work?
The system normalizes the address by setting it to the US Postal Service standard format, using the proper abbreviations, correcting any spelling errors, and establishing a full zip code (ZIP+4). Once the address is normalized, the system references GPS data to format the address to a precise location in the form of LAT/LONG coordinates. These LAT/LONG coordinates are compared to geospatial jurisdiction data /shapefiles, which are published by the US Census Bureau, as provided to them by the local jurisdictions. The shapefiles can be compared to tax data, resulting in the proper tax requirements, which also takes into consideration both Nexus and Reciprocity.
What happens if an employee enters a mailing address instead of the actual address where they live?
Because of the way the geolocation process works, the address entered as the home address will be used to configure the employee's taxation. Employees should always use their true lived-in location and ensure the work location assigned to their profile accurately reflects the place where their work is done. Entering alternative addresses will cause incorrect withholding in payroll. If you identify an issue with an employee's withholding, see How can I add or correct historical payrolls? for more details.
If an incorrect address is causing incorrect tax withholding, payroll administrators should make sure the offending address is updated immediately to prevent ongoing taxation errors.
What happens if an employee enters incorrect W-4 information?
As most payroll administrators know well, the federal Form W-4 dictates the Federal Income Tax withholding on each pay run. If an employee has made a mistake while entering their W-4 information (this applies to both Federal or State Forms) into Zenefits, it is likely that the respective withholding will not be as expected.
Payroll administrators should take the following steps when a W-4 entry error is brought to their attention:
- Review the actual W-4 signed by the employee. Employees should provide you with a signed W-4on their hire date so you can meet your recordkeeping responsibilities as an employer. It's best practice to ensure that this W-4matches the entries made into the HCM/ Payroll system. If an employee tells you that the W-4entries are incorrect, review the signed copy of the W-4originally provided. If the actual W-4 matches the system entries, then the employee must provide you with a new, updated, and signed W-4 in order for you to update the system. If the actual W-4 does not match the system entries, you can update the system to reflect the completed W-4.
- Discuss with the employee any need for adjustments on future payroll runs. Depending on the degree of impact to the employee's withholdings, net pay, or other deduction types, the employee may need your help to make adjustments on future payruns to offset the impact. This may include reducing or increasing withholding for a single or multiple pay runs, providing an advance for financial hardship, or making one-time adjustments to any other deductions that may have been impacted.
- Avoid making corrections to historical payrolls for withholding discrepancies. Adjustments to future runs are more timely, and they prevent the need for systematic taxation adjustments in the past, which can cause discrepancies with the corresponding taxing authorities. The administrative burden of retroactive withholding adjustments is likely greater than the steps entailed to adjust a subsequent payroll.
- The IRS and most state agencies don't allow tax and wage statements, and other filings, to be amended only for the sake of withholding adjustments. If the discrepancy is brought to your attention after the tax year is closed and W-2s have been processed, have employees address any discrepancies when filing their personal tax return. You may wish to provide your employee with this IRS link, which provides them with best practices in ensuring their federal tax withholding is correct.
My employee’s address and W-4 data is correct, but the withholding looks wrong.
There are a number of factors that impact the calculation of federal income tax withholding in payroll, in addition to the W-4 data, so determining the accuracy of the calculation also requires review of the following:
- Taxable income changes: If there are changes in the taxability of gross income on an employee’s paycheck, like adding a special income or even small changes to hours or a salary, the withholding calculation may change.
- Benefits or other deduction changes: Did the employee max out their 401K or make changes to their medical insurance elections? These and other pre-tax deduction types impact taxable wages each payroll and income taxes will fluctuate with any changes. Has your employee hit the social security taxation limit? Sometimes employees see their net pay has changed due to tax calculation changes and assume it’s a fluctuation in federal income tax, but social security tax calculations can change for higher income employees.
- Bonus Income: Bonuses, commissions, and other income that classifies as supplemental can automatically increase the rate of income tax calculated. See IRS Publication 15 for more details on withholding taxes from supplemental income payments.
The same tax tables used by Zenefits Payroll can be found on the IRS website. See IRS Publication 15 for details on employer tax responsibilities and current tax tables. Paycheckcity. com is also a great tool for payroll administrators to double check any suspected calculation discrepancies before attempting to make adjustments for an employee.
State and local income taxes may vary in the calculation methods, but many of the same factors that impact federal tax withholding calculations will also calculations for impact state/local income tax withholding.