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Social Security and Year End Check Reversals
OSPA will not completely process a check reversal until a subsequent run of payroll. For the average employee who earns less than $106,800 per year, this does not cause problems. However, what does this mean for employee's earning more than $106,800 per year?
Social Security withholding stops once an employee earns $106,800 for the 2009 and 2010 tax years (this amount, $106,800, is referred to as the Social Security wage base.) With an employee tax rate of 6.2% of gross earnings, the yearly maximum withheld is $6,621.60 ($106,800 X .062).
If payroll reverses a check at year end, OSPA still reads the Social Security withheld on that check reversal. As a result, when requesting a new check, the P370 may under withhold Social Security tax.
How does payroll ensure proper withholding of Social Security from this manual check request and thereby eliminate the possibility of a net pay negative due to under withheld Social Security?
If payroll reverses a system produced payroll check, or a manual check that has already processed through a regular payroll run, you must view the P090 screen and note the TAXABLE INCOME. From that amount, deduct the gross amount of the reversed check. Why? Remember; OSPA has not "read" the check reversal yet, so P090 is not displaying gross wages correctly.
If the resulting gross amount is below the Social Security wage base, you will need to calculate Social Security tax on the balance owed up to the Social Security wage base of $106,800.
To illustrate:
John Gross earns a monthly salary of $9,400. Katie Payroll realizes that his November 1, 2009 check is incorrect and she must therefore cancel it and request a manual check. John's yearly gross earnings before the cancellation are $112,800, so John has already paid the maximum of Social Security tax for the 2009 tax year ($106,800 X 6.2% = $6,621.60.) After Katie reverses the check, enters the corrections, and produces a new P370 for the manual check request, she notes that there is no Social Security tax withheld. What does she do?
Katie reviews the P090 screen and notes that his taxable income is listed as $112,800. She cancelled his last system issued check, so she deducts the gross amount of the reversed check, $9,400, from the taxable income listed on P090. The resulting figure is $103,400. For this manual check request, John must pay Social Security on the first $3,400 of the gross amount.
$106,800(Social Security wage base) - $103,400(his actual earnings after the check reversal) = $3,400
The P370 check request is for a gross amount of $8,936, so Katie calculates the Social Security due at $210.80 ($3,400 X .062). She deducts this amount from the net amount on the P370 and requests a check for the balance.
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