Questions About the New 3% Withholding Procedures
Effective January 1, 2008

Home | Frequently Asked Questions for Business

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Bullet How is the number of employees determined when there is employee turnover during the year in my business?
Bullet Do the LB 223 special withholding procedures include state withholding on my pension or annuity?
Bullet How do I know what amount to withhold on, and what are tax qualified deductions?
Bullet I don't have the extra time to interview so many of my employees. Without obtaining documentation from my employees, must I withhold at the 3% level indicated in your notice?
Bullet Must I keep the documentation provided by my employees (birth certificates, mortgage payments, etc.) in my payroll files?
Bullet If an employee cannot document the number of allowances on the Federal W-4 and the documentation supports a lesser number, which number of allowances should be used for Nebraska withholding purposes?
Bullet If any employee does not provide any documentation, may the employer withhold for Nebraska purposes at the single, zero allowance level, even though this may be greater than 3%?
Bullet Since the percentage method calculations do not show the non-shaded and shaded areas like the payroll period tables, how will I know the equivalent withholding values as shown in the payroll period tables if I use the percentage method?
Bullet Will I be subject to the $1,000 penalty if any of my employees have to pay in (have too little withheld) at the end of the year?
Bullet How is this new procedure handled for employees who earn tips?

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25 or More Employees

Question:

 Your 2008 withholding Circular EN notice says the special withholding procedures are to be used by employers with “25 or more employees”. How is the number of employees determined when there is employee turnover during the year in my business?

Answer:

 Based on similar federal standards, if you employ 25 or more employees at any one time during the year, you are subject to the special withholding procedures. It does not matter how many W-2s are actually issued during the tax year. We apologize for any contrary information you may have received on this matter.

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Pension and Annuity

Question:

Do the LB 223 special withholding procedures include state withholding on my pension or annuity?

Answer:

 No, the special withholding procedures do not apply to any pension or annuity payments.  While pension and annuity payments may be deemed “wages subject to withholding” under both federal and state law, the special 3% withholding procedures apply only to wages and salaries paid to active employees by their employer.

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Tax Qualified Deductions

Question:

 A portion of your Notice to Employers says that the special 3% withholding must be based on gross wages, less “tax qualified deductions”. How do I know what amount to withhold on, and what are tax qualified deductions?

Answer:

 Generally, the special 3% withholding will be applied to an employee’s taxable wages.  The term “tax qualified deductions” is not currently defined in either Federal or State law. Therefore, the Tax Commissioner has administratively defined tax qualified deductions to include tax-deferred compensation, and other tax-sheltered items (cafeteria plan benefits such as health insurance, retirement, medical and dependent care reimbursement, etc.)

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Withholding at 3% vs. 50% of Single and 1 Allowance (or 50% of Married and 2 Allowances)

Question:

A portion of your Notice to Employers reads as follows: “An employer may accept documentation from an employee whose withholding falls into the shaded area to justify the lower withholding percentage. Documentation may include verification of number of children/dependents, marital status, and level of itemized deductions. Without such documentation, the employee’s withholding must be set at 3% or at some other level within the non-shaded area of the withholding table.” [emphasis added]

I don’t have the extra time to interview so many of my employees. Without obtaining documentation from my employees, must I withhold at the 3% level indicated in the notice above?

Answer:

The law specifies a withholding rate of 3%. However, the Tax Commissioner has set a threshold of 50% of a single person with one withholding allowance, or a married person with two allowances, as a minimum level of acceptable withholding. If withholding is imposed at this level (or greater), there will be no imposition of any employer penalty. You can also withhold an amount within the non-shaded area of the withholding tables which may include: reducing the number of withholding allowances, or using the Percentage Method Tables to calculate at least 50% of the withholding for a single employee with one allowance or at least 50% of the withholding for a married employee with two allowances. This should result in a lower, but still adequate, withholding amount rather than calculating the withholding at the 3% level.

The law change included language indicating its purpose was to insure that an employee was not attempting to improperly or fraudulently avoid paying the proper amount of income tax. The department has determined that if the withholding is set at an amount which is at least 50% of the “Single filing, one allowance” column or the “Married with two allowances” column, then the employee is not attempting to “fraudulently evade or defeat” the income tax system. This also preserves the due process rights of employees in seeking to establish a lesser amount of acceptable withholding.

For instance, in the Married Biweekly withholding chart (a portion of which is reproduced below) assume an employee making $515 during the biweekly period has claimed 3 withholding allowances. The withholding from the withholding table for 3 allowances is $1.55.  This amount  falls within the shaded area of the table for the $500-520 bracket and requires use of the special withholding procedures. Calculating the withholding at 3% would result in a withholding amount of $15.45 ($515 X .03), almost 10 times the amount originally determined. Reducing the number of withholding allowances to 2 (for state purposes only) would set the withholding amount at $3.23, which falls within the non-shaded area of the table. Using the Percentage Method Table, withholding would be calculated at 50% of the withholding for two allowances.

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Documentation/Recordkeeping

Question:

 I have talked to several of my employees whose claimed withholding allowances puts their state withholding in the shaded area of the withholding tables. During our discussions, some of the employees provided marriage status information, children’s birth certificates, and/or a copy of the mortgage and property tax payments on their house to show that they were being withheld at an appropriate level (even though the withholding fell into the shaded portion of the withholding tables).  Must I keep this type of data in my file?

Answer:

No, it is not necessary to keep such detailed or private information in the payroll files.  Instead, you can develop a summary document that includes a statement signed by the employee that the employee’s Form W-4 allowances have been reviewed and have been determined to be reasonable.  A sample copy of this type of summary document is included in the link below.

Employer Letter to Employees Regarding Special Withholding Procedures and Documentation Worksheet
          (Employers Note: You may print this document and photocopy for your own use)

The following is a potential (but not complete) CHECKLIST for “adequate supporting documentation”:

    • Mortgage interest – bank/mortgage firm year-end statement
    • Property tax on home- property tax statement from county treasurer (may be available online as public information)
    • State income tax information – payroll statements or past Federal Forms W-2. 
    • Charitable Contributions - receipts from the employee's church or other charitable organizations 
    • # of Dependents - social security cards, school registration, baptismal records

In addition, if the employer has benefits information in personnel or other records for the employee such as medical insurance with the number of dependents noted, this information may also be used.

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Question:

 If an employee cannot document  the number of allowances on the Federal W-4 and the documentation supports a lesser number, which number of allowances should be used for Nebraska withholding purposes?

Answer:

The law specifies a withholding rate of 3%. However, the Tax Commissioner has set a threshold of 50% of a single person with one withholding allowance, or a married person with two allowances, as a minimum level of acceptable withholding. If withholding is imposed at this level (or greater), there will be no imposition of any employer penalty.

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Question:

If an employee does not provide any documentation, may the employer withhold for Nebraska purposes at the single, zero allowance level, even though this may be greater than 3%?

Answer:

The law specifies a withholding rate of 3%. However, the Tax Commissioner has set a threshold of 50% of a single person with one withholding allowance, or a married person with two allowances, as a minimum level of acceptable withholding. If withholding is imposed at this level (or greater), there will be no imposition of any employer penalty. Thus, the single, zero withholding level is not necessarily recommended, as it may result in a substantial over withholding amount. Rather, you can set the withholding rate to a higher allowance number that will put the withholding into the non-shaded area of the withholding tables. Also see the answers above.

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Differences Between Calculating the Percentage Method and the Payroll Period Tables

Question:

 Since the percentage method calculations do not show the non-shaded and shaded areas like the payroll period tables, how will I know the equivalent withholding values as shown in the payroll period tables if I use the percentage method?

Answer:

Employers using the percentage method must compare the percentage method results with the payroll period tables to see if the calculated withholding percentage falls within the non-shaded or shaded areas. The law specifies a withholding rate of 3%. However, if the percentage method results fall within the required minimum acceptable withholding amounts as determined by the Tax Commissioner (non-shaded area), you may use the percentage method withholding amount without fear of incurring any employer penalty.

If the percentage method results fall below the required minimum withholding amounts (shaded area), then the special withholding procedure must be used. You may accept documentation from the employee which justifies state withholding below the required minimum amount. If documentation is not received, then withholding must be calculated at some level within the non-shaded area of the payroll period tables — either 3% of gross wages, less tax-qualified deductions; or, if single, at 50% of the withholding for a Single employee with one allowance; or, if married, at 50% of the withholding for a Married employee with two allowances.

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Miscellaneous

Question:

 Will I be subject to the $1,000 penalty if any of my employees have to pay in (have too little withheld) at the end of the year?

Answer:

Because withholding is an estimate of tax liability, and changes in wages or other circumstances can affect the withholding amount, the department would not use the year-end withholding against gross wages less qualified deductions as a threshold.

The Tax Commissioner may impose a penalty upon an employer who fails to either (a) withhold at least 3% of the wages of any employee, or (b) obtain satisfactory evidence from the employee justifying a lower withholding amount as required by subdivision (1)(b) of Section 77-2753.

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Question:

 How is this new procedure handled for employees who earn tips?

Answer:

If the employer is considering tips as wages, the tips will be subject to the same withholding requirements as all other wages being paid.

According to Section 77-2753(5), "Wages and other payments subject to withholding shall mean payments that are subject to withholding under the Internal Revenue Code of 1986 and are (a) payments made by employers to employees, except such payments subject to 26 U.S.C. 3406, (b) payments of gambling winnings, or (c) pension or annuity payments when the recipient has requested the payor to withhold from such payments."

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