May 24, 2000

Recently central payroll agencies have requested that the Office of the State Controller (OSC) investigate the possibility of shifting from the current mid-month supplemental pay cycles that are required to be taxed at maximum amounts to a monthly pay cycle that would include these supplemental pay amounts. Additionally, the Governor’s Office requested OSC to consider the same request as a result of a recent study of employee retention issues within the State’s mental health facilities. A common complaint from employees with overtime, shift premium, holiday premium and related supplemental pay types concerns the amount of required deductions from this pay.

The Internal Revenue Service (Publication 15) titled CIRCULAR E, EMPLOYER’S TAX GUIDE provides the guidelines to be used for SUPPLEMEMTAL WAGE PAYMENTS. These guidelines require the employer to withhold income tax from an employee’s regular wages at a flat 28% (no other percentage allowed). The above rules hold for NC Tax withholding except that the NC Tax flat rate is 6%, rather than 28%. Under the current flat tax withholding method an employee is faced with a combined withholding percentage of 47.65% on supplemental wages as including: FEDERAL TAX - 28.00, NC TAX - 6.00, SOCIAL SECURITY - 7.65, and RETIREMENT - 6.00.

OSC central payroll staff working with ITS application support staff have developed a project plan for conversion of certain mid-month pay cycles to the month-end cycles in order to accommodate calculation of required taxes against the employees current W4 (EMPLOYEE’S WITHHOLDING ALLOWANCE CERTIFICATE) instead of maximum withholding amounts. This will result in the employee’s federal and state tax rate being adjusted by his/her exemptions listed on the W4 and should result in an increase in net pay. An additional benefit of this procedure will be direct deposit of the supplemental amounts along with the employee’s monthly pay.

The project plan reflects two phases of activity to accomplish this procedure. Phase 1 will convert the mid-month cycles K (Student), C (Temporary), N (Contract) and O (Longevity) to the monthly cycle A. This is scheduled to be effective with the August payroll. Phase 2 will convert cycle M (Premium) to the monthly cycle A and will be effective with the October payroll. Approximately 760 application support hours are estimated to accommodate the conversion through changes to batch programs, on-line programs, job submission programs and system testing. Contrary to information currently being circulated, this process can not be accomplished by this July.

Additional information concerning this project will be forwarded to your agency in the next few weeks. A member of the project team will also contact your agency to discuss the project plan and particular issues for your agency. Thank you for your continued assistance.