“Flat Tax Withholding” is a flat federal income tax that has a withholding rate of 27% for an employee’s supplementary salary or wage.
According to the Internal Revenue Service, an employer must pay Flat Tax Withholding when offering employees a supplementary wage. So, the withheld tax goes to the IRS and then to the government as income tax.
How is Supplementary Wage Related to Flat Tax Withholding?
Supplementary wage is an employee’s additional remuneration aside from their regular pay. These remunerations include bonuses, tips, overtime, prizes, awards, etc.
Usually, employers pay these supplementary wages separately, but when employees receive these extra compensations with their regular pay, IRS mandates employers to withhold federal income tax.
So, this federal income tax is the Flat Tax Withholding of 27% from the additional wage.
On Which Supplementary Wages Does Flat Tax Withholding Apply?
The Internal Revenue Service only qualifies some specific compensations as supplementary wages, while others (vacation pay, stipends, etc.) are part of the regular pay. The following form part of supplementary wages:
Collected Sick Leave
Can an Employee be Exempt from Flat Tax Withholding?
Employees can prepare the W-4 Form and send it to their employer, asking them not to deduct the federal income tax, which will also include the flat tax withholding, from their paycheck.
However, it can only be done if employees have no tax penalties for the earlier year and expect the same for the current year.
Can an Employer Pay Too Much or Too Little Flat Tax Withholding?
As Flat Tax Withholding is a type of Federal Income Tax, it is mainly based on the information an employee has on their W-4 Form. This W-4 Form is given to all employees when they first join a company.
However, in the case of Flat Tax Withholding, there is no opportunity for an employer to take away too much or too little because the rate is fixed at 27%.
What are the Disadvantages of Flat Tax Withholding?
The Flat Tax Withholding rate is 27% for everyone. The rate will not change for anyone at any time unless the government alters it.
The disadvantage is that many people see the withholding tax as a regressive tax, although it ensures the same tax rate for all employees regardless of their supplementary wages. It can be so because the specified tax rate may burden the employees with lower or middle income than those with a higher income.
Are there Benefits of Flat Tax Withholding?
Flat Tax Withholding is beneficial when an employee gets a tax refund in the long run. It can also motivate employees to work harder to gain more supplementary wages and eventually get a raise in their standard salary.