Income Tax Withholding
As employers, state agencies and institutions of higher education must deduct federal income tax (FIT) from the wages of a state officer or employee. Wages are defined as all remuneration (other than fees paid to a public official) for services performed by an employee for his or her employer, including the cash value of all remuneration (including benefits) paid in a medium other than cash.
Note: There are many exceptions to this definition that are beyond the scope of this policy statement. See also the IRS explanation of wages in the IRS Publication Circular E PDF and the definition of remuneration.
FIT is computed based on current tax tables and on the designations and exemptions claimed by the employee on his or her W-4 form. Generally, most types of payments paid to employees by the state of Texas are considered to be subject to FIT, including base salary, longevity, hazardous duty, overtime and benefit replacement pay.
After the end of the calendar (or tax) year, agencies must report wage and tax information to the Internal Revenue Service (IRS) and the Social Security Administration (SSA) as part of the W-2 process. The IRS and SSA define what information must be reported. All W-2 reports identify the amount of taxable wages paid to each employee, as well as the amount of taxes withheld and remitted to the IRS. Employees receive a copy of this report.
Federal Income Tax Withholding From Payments That Are Not Wages
There are some types of pay (both cash and non-cash) that must be reported as taxable wages, but are not subject to withholding. The most common example for state employees is the imputed value of life insurance in amounts above $50,000.
An employee can have up to $50,000 of life insurance as a tax-free benefit. However, if the value of the life insurance exceeds that threshold, the amount above the threshold is taxed based on the employee’s age, the amount contributed toward the purchase of the life insurance by the employee, and the IRS table for the cost per $1,000 of coverage. The IRS does not require an agency to withhold above $50,000 of life insurance but does require the agency to report the amount as taxable wages.
An agency can allow withholding on payments considered taxable wages but not subject to withholding based on an agreement by the agency and a decision by its employees. The agency can present a statement to its employees offering to withhold on payments that are not considered wages. If the agency and all its employees agree to this arrangement, then the agency will withhold FIT. If any employee does not wish to have the payment withheld, then the withholding will not be applied at the agency. However, the agency must report the wages as taxable on W-2 reports and the Employer’s Quarterly Federal Tax Return 941.
State and Local Income Tax Withholding
State employees who live or work outside of Texas may be subject to state or local income taxes in addition to federal income taxes. Most states have state personal income taxes. Many localities also have income taxes that require withholding. For example, a Comptroller’s office employee working in the Oklahoma area is subject to Oklahoma state income tax, as well as local taxes where required.
State agencies must comply with applicable tax laws and ordinances for each state or municipality where their employees work. To do this, a state agency must establish itself as an employer with the state or local tax authority and calculate and remit taxes appropriately.
For more information on state and local taxes, contact the appropriate state or local taxing authority. Contact information for taxing authorities in a particular state is often listed on the state’s website.
State agencies and institutions of higher education must also honor an employee’s request to withhold more federal income tax than would otherwise be withheld under a given combination of income and exemptions. The extra withholding is a sum-certain amount. The employee’s request is made on a W-4 Form PDF. An amended W-4 filed by an employee must be put into effect no later than the beginning of the first payroll period ending on or after the 30th day after the form is filed with the employer.
Internal Revenue Code, Sections 3401(a), 3402(p)(3)(i)1, 3402(a)(1); Texas Government Code, Section 659.002(d); Treasury Regulations, Section 31.3401(a)-3 (1971) and Section 31.3402(i)-2(a)(1) (1983); IRS Publication A; state law and local ordinances.