Does anyone know if any states mandate the use of the aggregate method when calculating bonus tax withholding? Your time and assistance is much appreciated.
The aggregate method is the default method for most states. Under the aggregate method, all compensation paid during the pay period is combined or aggregated to compute the total withholding required for the pay period. Some states also identify a flat rate for withholding on supplemental pay, but usually also provide that the supplemental may can be combined with regular pay and the tax computed as if it were a single payment (aggregate method). States that do not have graduated tax rates usually allow their flat rate to be applied to gross supplemental pay. Other states have withholding computations that are specified as flat rates. For example PA applies a flat rate to gross pay for all payments (regular or supplemental). GA applies graduated supplemental pay withholding rates based on annual gross pay:
If the annual income is... withhold at a rate of...
In any case, what the aggregate method is intended to avoid is insufficient withholding due to applying withholding exemptions, and in the case of graduated rates, the lower tax brackets, to both the regular pay and supplemental pay during the same pay period. For example, if there are three allowances allowed for state purposes, withholding computed separately for regular pay and supplemental pay without aggregation effectively applies six allowances for the pay period.
For example, monthly pay period, 3 allowances at $100/month = $300. Employee is paid $ 2,400/ month and receives a 3,000 bonus during the month. Aggregate method computes tax on $5,200-$300 = $4,900.
Separate payment without aggregation computes tax on $2,400-$300 = $1,900 and $3,000 - $300 = $2,700 for a total of $4,600.
Patrick, thank you for your response. Understand the aggregate when used generally results in a different tax result. I was looking for documentation stating the aggregate method "must" be used. I have pulled info from BNA and have run other searches and have not find any state "mandating" the aggregate method, Or stating it is the default method. When reviewing the bonus setup on the payroll system, some states are setup with aggregate, others set to supplemental. States with flat rates are not a concern. It is may practice to provide supporting documentation for my answers when asked a question. When calculating tax on 6 or 7 figures bonuses the difference in the two methods can be significant. Want to ensure we have the proper answer for employees.
Keep in mind that the "aggregate method" is a creature of federal law created to avoid withholding issues related to the graduated income tax rates. Under federal law, it has not been "declared" the default method, but, unless the mandatory flat rate method applies, it is the only method described under the supplemental pay rules that can be used if the optional flat rate method cannot be used because the conditions to use it are not met. Think of it this way, you can unscrew the cap on a glass beer bottle unless it is not a screw off cap. Then you are left with using a "church key" or similar type of bottle opener, such as the notched screw driver on my Boy Scout knife that pries off the cap - Such opener can also be used to remove a screw off cap. That is, the church key can always be used, screwing the cap off is a reasonable alternative when certain conditions exist. In other words, when removing a bottle cap, being as old as I am, my first, or default, inclination is to pry it off. Younger people walk over to me and twist of the cap of a similar bottle. I have seen some other methods used that are not really advisable, such as holding the bottle in one hand, placing the edge of the cap on a stone window sill and hitting the hand holding the bottle with a downward stroke of the other hand - or simply breaking off the top of the neck of the bottle.
I don't know of any case where there is a statement that the aggregate method must be used. Usually where there is an actual choice, the way it is presented is -- This is how you compute withholding, If these conditions exist, you may also compute withholding this way - or - here are the methods you may use to compute withholding. If only one method is allowed, then you won't be given a choice.
Also, at the federal level, the aggregate method is not really a withholding method (like the percentage or wage bracket methods - or any of the alternative methods such as cumulative wage or part year employment methods - most all of which, when used, would be applied to the aggregate wages for the pay period. This is similar to having a pry off method for bottle caps where there may be many ways to pry the cap off.