Tax Wage Basis Rules for the US

Tax wage basis rules determine those employee earnings that are subject to a tax. For deductions, they determine the elements that reduce the amount subject to tax.

Each wage basis rule is associated with a primary or secondary element classification. When you define a tax wage basis rule, you can associate it with up to six references that define the context for the rule.

When working with wage basis rules, you need to understand several areas.

• How element classifications and wage basis rules work together

• What are the predefined wage basis rules

• How to define wage basis rules for local taxes

• How you can create wage basis rules

• How to use the Use the Wage Basis check box

• Sample wage basis rule configurations

Element Classifications and Wage Basis Rules

The wage basis rules act differently depending on the element's classification.

• Deduction element classifications identify whether they reduce the subject wages. When you view wage basis rules through the Component Group Rules task, a check mark indicates the deduction doesn't reduce.

• Earnings element classifications identify which earnings are subject to the tax.

There are predefined wage basis rules for these element classifications.

Primary classification	Secondary classifications
Imputed Earnings	Cash Tips Reported Domestic Partner Dependent Domestic Partner Nondependent Group Term Life Moving Expense Nonqualified and Taxable Moving Expense Qualified and Nontaxable Noncash Award Personal Use of Company Car Third-Party Long-Term Disability Third-Party Short-Term Disability
Pretax Deductions	Adoption Deferred Compensation 401k Deferred Compensation 401k Catch-Up Deferred Compensation 403b Deferred Compensation 403b Catch-Up Deferred Compensation 457 Deferred Compensation 457 Catch-Up Dental Care 125 Dependent Care 125 Flexible Spending Account Health Care 125 Health Savings Account Health Savings Account Catch-Up Vision Care 125
Supplemental Earnings	Adoption Awards and Prizes Bonus Cafeteria Plan Commission Deferred Compensation Distribution Dismissal Payments Moving Expense Nonqualified Moving Expense Qualified Paid Time Off Payout Pensions and Annuities Tips Supplemental Travel Taxable Reimbursement

Predefined Wage Basis Rules

The predefined wage basis rules help determine the taxation of earnings at the federal and state levels. There are no predefined wage basis rules at the local level.

They include rules for primary classifications of supplemental earnings, imputed earnings, and pretax deductions along with the corresponding secondary classifications.

Note: Involuntary deductions have their own wage basis rules. For further info, see Involuntary Deduction Wage Basis Rules for the US in the Help Center.

To view wage basis rules:

1. From My Client Groups, click Show More.

2. Under Payroll, click Component Group Rules.

3. Select your US legislative data group (LDG).

4. Select Federal.

5. In the tree structure, expand the Federal and Wage Basis Rules nodes. Select No References.

6. View the wage basis rules for Imputed Earnings, Pretax Deductions, and Supplemental Earnings as they relate to each federal-level tax.

   For Earnings, a check mark indicates the earning is subject to that tax. The Not Withholdable Federal Tax column indicates the earning is subject to federal tax but no tax is withheld.

   For Pretax Deductions, a check mark indicates that the deduction is subject to taxation and doesn't reduce subject wages. If no check mark is present, then the deduction isn't subject to taxation and does reduce subject wages.

7. Select Regional.

8. In the tree structure, expand the Regional and Wage Basis Rules nodes. Select State.

9. View the wage basis rules for Imputed Earnings, Pretax Deductions, and Supplemental Earnings as they relate to each state-level tax.

10. Due to the large volume of data, you can filter the data to view a state. Enter a search string in the field above the State column. If no field is available above the State column, click Filter.

To edit the predefined wage basis rules:

1. Start the Component Group Rules task, and select your US LDG.

2. In the tree structure, navigate to the appropriate Wage Basis Rules node.

3. Select Create from the Actions menu.

4. Enter an effective date.

5. If you're updating the State node, select the appropriate state.

6. Select a primary classification and secondary classification.

7. For Subject to wage basis rule, select No and click Submit. This suspends the predefined rule.

8. Navigate to Federal Tax or State Tax under Related Deductions, and select Wage Basis Rules.

9. Select Create from the Actions menu.

10. Enter an effective date.

11. If you're updating the State node, select the appropriate state.

12. Select a primary classification and secondary classification.

13. Mark the Subject to wage basis rule as Yes, and click Submit. This creates the rule.

For example, for Group Term Life (GTL) for applicable federal and some state components, the default rule is Not withholdable. You may want to change this to Withholdable.

Wage Basis Rules for Local Taxes

There are no predefined wage basis rules for local taxes. By default, local taxes follow the wage basis rules of their state. However, there are some exceptions.

For example:

• In Colorado, all Pretax elements are taxable at the local levels.

• In Ohio, Deferred Compensation 401k and Deferred Compensation 401k Catch-Up elements are subject to city tax.

• In Kentucky, all Section 125 elements are taxable at the local levels.

If you require different rules, you must define them manually.

If you define wage basis rules at the local level, you must define wage basis rules for all primary and secondary classifications for that locality, including predefined and user-defined classifications.

For info on user-defined wage basis rules, see the next section.

User-Defined Wage Basis Rules

There are no predefined wage basis rules at the local level, such as city, county, or school district. While most local wage basis rules follow their state wage basis rules, there are a few states where the local wage basis rules differ. You must create the local wage basis rules in these cases.

For example, at the Ohio city level, Deferred Compensation 401k and Deferred Compensation 401k Catch Up are subject to tax. At the Kentucky local level, all Pretax Section 125 secondary classifications are taxable, such as Dental Care 125, Dependent Care 125, and Vision Care 125.

Create wage basis rules using the Component Group Rules task.

1. From My Client Groups, click Show More.

2. Under Payroll, click Component Group Rules.

3. In the tree structure, select Regional.

   To define wage basis rules at the federal level, select Federal.

4. Expand Related deductions and then the child node appropriate to the tax.

5. Select Wage Basis Rules.

6. In Wage Basis Rules, click Create.

7. In Create Wage Basis Rule, enter the following.

   Field name	What you enter
   Effective Start Date	Use either the implementation date or the earliest date a pay period exists.
   State	Full state name or the 2-character state abbreviation, such as OH. How you configured you state name settings determines how the values appear in this field. For further info, see Configure State Style Formats in the Help Center.
   County	Specify the appropriate county from the list, such as Franklin.
   City	Specify the appropriate city from the list, Columbus.
   Primary Classification	Select the primary classifications to be used in the wage basis. For example, city tax rules most commonly use: Imputed Earnings Pretax Deductions Supplemental Earnings
   Select all secondary classifications	If you select Yes for Subject to Wage Basis Rule below, you must select No here.
   Secondary Classification	Select an appropriate secondary classification, such as Deferred Compensation 401k and Deferred Compensation 401k Catchup.
   Subject to Wage Basis Rule	If you select Yes here, you must select No for Select all secondary classifications.

8. Click Submit.

   You may need to query by state to view the data you created. If so, enter a value in the field directly above State for the state entered in the previous step. This filters the data in the UI for that state. If a blank field isn't available for entry above State, click Filter.

   These rules are stamped with the LDG and aren't overwritten by subsequent upgrades or patches.

9. Repeat these steps for each combination of primary classification, secondary classification, and jurisdiction (state, county, or city) that needs updating.

10. Complete a review of all secondary classifications impacted to determine which entries require corrections.

    For example, when working with pretax deductions, determine what Section 125 secondary classifications are impacted for a state-county-city or state-county combination. There could be a difference between the treatment of HSAs, FSAs, Dental, Vision, Healthcare, and Dependent Care. One or more may need corrections where others may not.

Use in Wage Basis Check Box

If you're setting up rules for a US LDG, an extra validation step prevents the insertion of a wage basis rule with no secondary classification. You can't select Use in Wage Basis.

Sample Configurations

For examples on how you can configure your wage basis rules, see the following in the Help Center.

• Configure Wage Basis Rules for City Taxes for the US

• Configure Wage Basis Rules for Group Term Life Earnings

• Configure Wage Basis Rules for Hours Worked for the US

• Configure Wage Basis Rules for Pretax Deductions

• Configure Wage Basis Rules for State Family Leave Insurance

• Configure Wage Basis Rules for State Unemployment Insurance Hours Reporting

• Example of State Tax Wage Basis Rules