10 application scenarios for the new IRS withholding tax model
Posted: Thu Dec 26, 2024 3:39 am
What does the new IRS withholding tax model consist of?
The new IRS withholding tax tables and the new Withholding Tax Model (marginal rate) are mandatory to apply from 01/07/2023, but companies may apply them before this date.
1. Bring the monthly withholding closer to the annual withholding due
This model aims to bring the monthly withholding as close as possible to the india whatsapp number database due annually by taxpayers to prevent more value being withheld throughout the year than will be due at the end.
2. Avoid reductions in the monthly net amount in cases of income bracket increases
On the other hand, the aim is also to avoid situations in which a salary increase, and consequent increase in the income bracket and IRS withholding rate, result in a reduction in the net amount that the employee receives monthly, which could occur in the previous model.
10 application scenarios for the new IRS withholding tax model
The new IRS withholding tax model is a significant milestone in the field of taxation. This new model, as it is essential for the way taxes are withheld, promoting an equitable distribution of the tax burden and simplifying the fulfillment of tax obligations by taxpayers, can be applied in different ways in specific scenarios.
1. Number of dependents equal to or greater than 3
According to Order No. 4930/2023, of April 26 , "For holders of income from dependent employment with three or more dependents who fall within the tables approved by paragraphs a) and b) of No. 1 of Order No. 14043-B/2022, of December 5, a reduction of one percentage point is applied to the maximum marginal rate corresponding to the bracket in which they are included, with the portion to be deducted and the additional portion to be deducted per dependent remaining unchanged.
2. Supplementary Work
According to art. 257 of Law no. 71/2018, of December 31, which approved the State Budget for 2019 and which amended art. 99.º-C of the CIRS, the amounts relating to overtime are, since 01/01/2019, subject to autonomous withholding at source for IRS purposes:
"When remuneration is paid for overtime work, the retention rate to be applied is that which corresponds to the monthly remuneration for dependent work for the month in which it is paid or made available (Art. 99.º-C, n.º 8 CIRS)".
Therefore, amounts relating to overtime are always subject to autonomous withholding and cannot, for the purpose of calculating the tax to be withheld, be added to the remuneration of the months in which they are paid or made available .
Therefore, when values relating to overtime are being processed in a given period, these will not contribute to determining the monthly income bracket and classification in the respective line of the table applicable for withholding tax purposes.
Furthermore, it is important to highlight point 5, paragraph e) of the Orders that approved the new regime in the different tax domiciles, which states:
"When remuneration is paid for overtime work, the effective monthly withholding tax rate corresponding to that resulting, after applying the maximum marginal rate, from the portion to be deducted and, if applicable, the additional portion to be deducted per dependent, for the monthly remuneration for dependent work relating to the month in which it is paid or made available, is applied, in accordance with paragraph 8 of article 99.º-C of the IRS Code”.
Example
€1000 salary and €100 overtime.
After applying the maximum marginal rate , the portion to be deducted and, if applicable, the additional portion to be deducted per dependent , the resulting value for the salary was 125.1444.
The effective rate is 12.51% (125.1444/1000 x100).
Then, this effective rate is applied to the total income of €1100.00: 1100 x 12.51% = 138.061.
Rounded to the nearest unit, this results in a total retention of €138. The effective rate to be shown on the receipt is 12.55%, corresponding to (138/1100) x 100.
It should be remembered that, since 01/01/2023, the addition of no. 10 to art. 99.º-C has been in force, which states that "the autonomous retention rate to be applied to remuneration relating to overtime, under the terms of no. 5 and 8, is reduced by 50% from the 101st hour, inclusive ".
This rule continues to be considered in the new IRS model.
3. Christmas and Holiday Allowance
According to art. 99.º-C of the CIRS, holiday and Christmas bonuses are subject to autonomous taxation:
· No. 5 - " Holiday and Christmas bonuses (...) are always subject to autonomous withholding and cannot , for the purpose of calculating the tax to be withheld , be added to the remuneration of the months in which they are paid or made available .”
· No. 6 – "When holiday and Christmas bonuses are paid in installments, the proportional part of the tax calculated under the terms of the previous number must be withheld from each payment .”
In other words, when the values of the Holiday and Christmas Allowances are processed in full or in fractions (twelfths, 50%/50% tranche or others), with the activation of the new IRS Model, the new base rule for calculating withholding at source is used:
[Monthly Remuneration x Maximum Marginal Rate] - ( Portion to be deducted - Portion for disabled spouse ) - [( Additional portion to be deducted per dependent x No. of dependents) - ( Portion for disabled dependent x No. of disabled dependents)]
In relation to the values of these subsidies, this formula is applied separately from the other values included in the month's processing.
In the case of split payments , the same rule is followed, that is, the effective monthly rate is calculated and applied to the subsidy as if it were paid in full and, subsequently, this effective rate is applied to the split amount.
The difference is that in the previous model the rate resulted directly from the Table, while in the new model the effective monthly rate is applied .
4. Lower Retention Rate for Workers with Home Loans
This regime was created by the Law that approved the State Budget for 2023.
However, according to Point 5, paragraph g) of the Orders, "under the conditions of application, provided for in the State Budget Law for 2023, of the reduction in withholding taxes for housing credit holders, the reduction in the maximum marginal rate must be two percentage points , with the portion to be deducted and, if applicable, the additional portion to be deducted per dependent remaining unchanged.”
The new IRS withholding tax tables and the new Withholding Tax Model (marginal rate) are mandatory to apply from 01/07/2023, but companies may apply them before this date.
1. Bring the monthly withholding closer to the annual withholding due
This model aims to bring the monthly withholding as close as possible to the india whatsapp number database due annually by taxpayers to prevent more value being withheld throughout the year than will be due at the end.
2. Avoid reductions in the monthly net amount in cases of income bracket increases
On the other hand, the aim is also to avoid situations in which a salary increase, and consequent increase in the income bracket and IRS withholding rate, result in a reduction in the net amount that the employee receives monthly, which could occur in the previous model.
10 application scenarios for the new IRS withholding tax model
The new IRS withholding tax model is a significant milestone in the field of taxation. This new model, as it is essential for the way taxes are withheld, promoting an equitable distribution of the tax burden and simplifying the fulfillment of tax obligations by taxpayers, can be applied in different ways in specific scenarios.
1. Number of dependents equal to or greater than 3
According to Order No. 4930/2023, of April 26 , "For holders of income from dependent employment with three or more dependents who fall within the tables approved by paragraphs a) and b) of No. 1 of Order No. 14043-B/2022, of December 5, a reduction of one percentage point is applied to the maximum marginal rate corresponding to the bracket in which they are included, with the portion to be deducted and the additional portion to be deducted per dependent remaining unchanged.
2. Supplementary Work
According to art. 257 of Law no. 71/2018, of December 31, which approved the State Budget for 2019 and which amended art. 99.º-C of the CIRS, the amounts relating to overtime are, since 01/01/2019, subject to autonomous withholding at source for IRS purposes:
"When remuneration is paid for overtime work, the retention rate to be applied is that which corresponds to the monthly remuneration for dependent work for the month in which it is paid or made available (Art. 99.º-C, n.º 8 CIRS)".
Therefore, amounts relating to overtime are always subject to autonomous withholding and cannot, for the purpose of calculating the tax to be withheld, be added to the remuneration of the months in which they are paid or made available .
Therefore, when values relating to overtime are being processed in a given period, these will not contribute to determining the monthly income bracket and classification in the respective line of the table applicable for withholding tax purposes.
Furthermore, it is important to highlight point 5, paragraph e) of the Orders that approved the new regime in the different tax domiciles, which states:
"When remuneration is paid for overtime work, the effective monthly withholding tax rate corresponding to that resulting, after applying the maximum marginal rate, from the portion to be deducted and, if applicable, the additional portion to be deducted per dependent, for the monthly remuneration for dependent work relating to the month in which it is paid or made available, is applied, in accordance with paragraph 8 of article 99.º-C of the IRS Code”.
Example
€1000 salary and €100 overtime.
After applying the maximum marginal rate , the portion to be deducted and, if applicable, the additional portion to be deducted per dependent , the resulting value for the salary was 125.1444.
The effective rate is 12.51% (125.1444/1000 x100).
Then, this effective rate is applied to the total income of €1100.00: 1100 x 12.51% = 138.061.
Rounded to the nearest unit, this results in a total retention of €138. The effective rate to be shown on the receipt is 12.55%, corresponding to (138/1100) x 100.
It should be remembered that, since 01/01/2023, the addition of no. 10 to art. 99.º-C has been in force, which states that "the autonomous retention rate to be applied to remuneration relating to overtime, under the terms of no. 5 and 8, is reduced by 50% from the 101st hour, inclusive ".
This rule continues to be considered in the new IRS model.
3. Christmas and Holiday Allowance
According to art. 99.º-C of the CIRS, holiday and Christmas bonuses are subject to autonomous taxation:
· No. 5 - " Holiday and Christmas bonuses (...) are always subject to autonomous withholding and cannot , for the purpose of calculating the tax to be withheld , be added to the remuneration of the months in which they are paid or made available .”
· No. 6 – "When holiday and Christmas bonuses are paid in installments, the proportional part of the tax calculated under the terms of the previous number must be withheld from each payment .”
In other words, when the values of the Holiday and Christmas Allowances are processed in full or in fractions (twelfths, 50%/50% tranche or others), with the activation of the new IRS Model, the new base rule for calculating withholding at source is used:
[Monthly Remuneration x Maximum Marginal Rate] - ( Portion to be deducted - Portion for disabled spouse ) - [( Additional portion to be deducted per dependent x No. of dependents) - ( Portion for disabled dependent x No. of disabled dependents)]
In relation to the values of these subsidies, this formula is applied separately from the other values included in the month's processing.
In the case of split payments , the same rule is followed, that is, the effective monthly rate is calculated and applied to the subsidy as if it were paid in full and, subsequently, this effective rate is applied to the split amount.
The difference is that in the previous model the rate resulted directly from the Table, while in the new model the effective monthly rate is applied .
4. Lower Retention Rate for Workers with Home Loans
This regime was created by the Law that approved the State Budget for 2023.
However, according to Point 5, paragraph g) of the Orders, "under the conditions of application, provided for in the State Budget Law for 2023, of the reduction in withholding taxes for housing credit holders, the reduction in the maximum marginal rate must be two percentage points , with the portion to be deducted and, if applicable, the additional portion to be deducted per dependent remaining unchanged.”