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DS127
January 2, 2025
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QBO Payroll local withholding tax was withheld on SIMPLE IRA item

  • January 2, 2025
  • 1 reply
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SIMPLE IRA contributions/deductions are done pre-tax for the employee's check (right?).  We did one for one of our employees - paid her an amount of which most of it was for a SIMPLE IRA withholding. The amount calculated and withheld by QBO for taxes used the entire (wages + SIMPLE contrib) amount to calculate and withhold local taxes.  Thus, too much was withheld.  I thought QBO PR treated SIMPLE contributions as pre-tax so that the withholding tax for local (as well as fed and state) should only be on the wages part.  Can anyone explain....am I wrong? Or tell me how to fix it (for next year)  Thanks.

Best answer by DS127

@DS127  Not familiar with the tax you're referring to specifically, but I'd be surprised if it was meant to be a pre-tax deduction.

 

Pre-tax deductions would lower the gross pay, and thereby Box 1 of the W-2, for the employee in question.

 

Unlike retirement plans with pre-tax deductions for employee contributions, where they pay income tax on the income when they withdraw it from their retirement account later in life, a pre-tax deduction like that would just be taken out of the equation, something the IRS isn't generally fond of.

 

That's why other local taxes, like User Fee, tend to come off the net (after-tax) pay, not the gross (pre-tax) pay.

 

That's also why you normally see social security and medicare still calculating on the full gross pay on a variety of retirement plans.


Thanks for your reply, Fishing.

You are right. I was able to confirm that YES, the local service tax (LST) DOES come out AFTER the other payroll taxes.  Well I guess that's how it is.

 

For anyone else out there, Fishing is also right in saying that Federal Income Tax is the ONLY withholding that is done pre-tax on the SIMPLE plan - Medicare and FICA and state taxes (and local) are paid on the entire amount of the paycheck, including the amount for the SIMPLE withholding.

thanks - 

1 reply

K
KiazzymaeC
January 2, 2025

Hello there, @DS127. 


Yes, before other taxes and deductions are calculated, pre-tax insurance, such as SIMPLE IRA, is first deducted from gross pay. The funds are deducted from your paycheck before your income is subjected to tax, reducing your taxable income for the current year and potentially saving your money immediately. However, you will be required to pay taxes on the money when you withdraw it during retirement.  

 

Since the local withholding tax is withholding an amount from the retirement plan contribution, let's ensure the employee's deduction is correctly configured in QBO. We can verify this by following these steps:

 

  1. Go to the Payroll menu, then Employees.
  2. Open the appropriate employee profile.
  3. Scroll down and select the Deductions and Contributions.
  4. Double-check the deduction item, and make sure it's set to SIMPLE IRA.
  5. Hit Save, then Done.

 

If you've confirmed the accuracy and already processed a paycheck, I highly recommend you contact our Payroll Support for they're the ones who can securely review your account and can do a screen share when necessary for payroll correction.

 

Additionally, I've included these articles for your future reference regarding payroll:

 

 

Just post your questions here if you still have queries about your payroll service. I'll reply to you as soon as possible.

 

 

D
DS127Author
January 2, 2025

Thanks Kiazzymae.

I had done all of that before and yes, the Deductions and Contributions item is correct.   I suppose  will have to call QBO PR which I was trying to avoid. 

 

The other issue, in case someone else is reading this, is we have a Local Service Tax charged by the municipalities of a flat $52/year.  I'm unable to set that up in the employees' paychecks as a pre-tax deduction even though it is fully tax deductible.  

 

Thanks for your quick reply!

--Bonnie

F
FaithA
January 2, 2025

Hello @DS127,

 

Thank you for sharing more details about your situation. I completely understand the need to avoid the hassle of additional phone calls and ensure your payroll is set up correctly and efficiently. Let's dive into the solutions together.

 

Firstly, it's great to know you've already set up your SIMPLE IRA contributions correctly. Since they should indeed be pre-tax deductions, if the system isn't recognizing this setup, our QBO Payroll Support team can dive deeper into your payroll configuration. Reach out to them to fine-tune your setup and clarify any discrepancies.

 

About your Local Service Tax of $52/year, it’s essential this gets handled correctly on your employees' paychecks. Here’s a simple yet powerful step-by-step guide to ensure this tax deduction is set up properly in QuickBooks Online. To set up your employee's local tax:

 

  1.  Navigate to the Payroll tab on the left-hand side of your QuickBooks dashboard.
  2. Click on Employees.
  3. Click on the specific employee for whom you want to set up the local tax.
  4. Edit Tax Withholding: Under their profile, find and select Tax withholding, then click Edit.
  5. Scroll to the Local Taxes section. Here, you can select the applicable local taxes.
  6. Edit Location if Necessary:
  7. If you don’t see the expected local taxes, click Edit location.
  8. Enter the correct city and ZIP code combination for the local tax jurisdiction you need.
  9. Click Save to finalize your setup.
     

By following these simple steps, you'll ensure your payroll is precise and compliant with local tax regulations.

 

Additionally, please feel free to visit this handy article to help you manage pay schedules in QBO: Set up and manage payroll schedules.

 

Rest assured, these efforts will streamline your payroll process. If you need additional assistance or have more questions, just reach out through the thread. Your QuickBooks experience is our top priority.

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