Tax administration has numerous components and requirements due to the complexities of calculation, withholding and reporting and the multitude of tax jurisdictions involved. The tax component requires an additional software license for BSI TaxFactory. This is a third-party product from Business Software, Inc. (BSI) that serves as the tax calculation engine for SAP’s US Payroll solution. TaxFactory is a requirement for running SAP in the U.S.
Tax calculations are dependent on configuration of wage types, tax types, tax authorities and taxability models.
The tax component supports all payroll tax authorities at the federal, state, county, city and school district level, if applicable. It also supports different payment types for tax calculation
(i.e. regular, supplemental and non cash) and multiple tax methods for each payment type (graduated tax, aggregate, etc.).
The different types of tax withholding and reporting requirements involve the following tax authorities, types with respect to Infotypes:
• Federal Income Tax
Infotype 0210 (Withholding Information-W-4/W-5)
Infotype 0161 (IRS Limits-Annual Federal and State Exempt Status)
Infotype 0234 (Withholding Overrides-Additional Tax)
• FICA & Medicare tax
Infotype 0235 (Other Taxes) Medicare Only Employees (FED-via use of Employee Subgroup) Student FICA, Non Resident Alien
• Student FICA
• Non Resident Alien
Infotypes 0094, 0048, 0556
• State and City Income tax
Infotype 0207 (Resident Tax Area- multiple state tax administration and multiple city tax administration in Michigan.)
Infotype 0210 (Withholding Information W-4)
• Unemployment Tax
Infotype 0209 (Unemployment State tax)
• Multiple Tax Districts
Infotype 0208 (Work Tax Area- Employee who works in two tax districts)
Note: Tax dates on Infotypes are pay date driven.
Tax compliance reports, printed forms and electronic files will be necessary to satisfy monthly local tax, quarterly local and state, annual state and local tax reporting, and federal tax requirements.
Federal, State and Local W-2 Process:
The federal government requires that payroll information, for tax purposes, be classified and reported by calendar year. SAP supports the ability to work on multiple tax years simultaneously. After the last payroll process for the calendar year and prior to the generation of the IRS Form W-2, Adjustments to the prior calendar year can be made until W-2 processing takes place.
Issuing IRS Forms W-2’s and W-2c’s are a legal requirement for federal and state taxing authorities. The annual process surrounding the W-2 includes its generation, creating corrected W-2c’s, and the associated reconciliation process.
Tax Reporting and Programs
Payroll Reconciliation report Tax reporter (Tax reporter T-code PU19 – the W-2 and 941 program) will provide a report with each payroll process that provides verification that individual payroll records are in balance for W-2 reporting and that all Payroll records are in balance as an organization for Federal Tax reporting. This verification process runs each time the Payroll runs, identifies errors on an on-going basis and allows the ability for correction of errors throughout the year. Examples of errors include FICA and Medicare tax that were not taken and do not balance with FICA and Medicare gross balances. The “uncollected tax report” reflects any employee that is in arrears with respect to Social Security and Medicare tax withholding. An uncollected tax situation creates a wage type for uncollected tax. At the end of the year, this information reports on the W-2 and also is reflected on the 941 report.
Throughout and before the calendar year-end processes, the following will take place to ensure a successful W2 processing:
• A W-2 simulation should be performed against the totals reconciled for 941 processing periodically, helping to identify issues before the final W-2 generation. The SAP reconciliation report will be used to identify mismatches, if any, for social security wages, Medicare wages, EIC etc. It is anticipated that this reconciliation will be performed subsequent to exiting a payroll, so that at any given time, W2 information is in balance.
• BSI Tax updates will be applied when they are available.
• IRS publications for W2 filings will be checked for the latest filing instructions.
• Support Stacks will be applied on a timely basis.
• Perform a Test run of Form W-2.
Supplemental Tax Rates
For state withholding, each state law has requirements with regard to bonus and other payments of taxable employee compensation.
Foreign Income Exclusion
For U.S. citizens working abroad, special tax rules must be applied. If an employee files an IRS Form 673, exempting wages from federal and state tax within prescribed limits ($87,600 for tax year 2008), the Payroll Office will utilize Infotypes 0210 for exemption of federal and state tax and monitor wages through a query run with each payroll. Once the employee has reached the annual calendar year threshold, payroll staff will manually change Infotype 0210 to begin withholding federal and state tax using W-4 on file. Based upon eligibility, employees may renew their annual tax exemption and the process may begin at the beginning of each tax year.
Regular salary payments for federal employees are subject only to Medicare taxes. Identification through the Enterprise Structure (Employee Group/ Employee Sub Group),unique taxability group, and wage type will allow regular salary payments to be assessed only Medicare tax. When a federal employee receives compensation other than regular salary payments, through use of a separate wage type, Social Security tax and Medicare tax can be assessed.