In this article, we will be helping you to set up tax exempt employees in QuickBooks Desktop Payroll.

Things to know about employee payroll taxes

  • There are 2 different employee payroll taxes: company-paid and employee-paid.
  • All the tax calculated and tracked in QuickBooks Desktop is set up on employee record and included in employee’s paycheck, even if it doesn’t add in employee’s gross-to-net-pay calculation.
  • All company-paid taxes included in employee’s paycheck, but it has zero impact on net pay and don’t get printed on pay stubs. However, they are displayed in payroll reports.
  • The employee’s paycheck will calculate taxes that are set up on an employee’s records. These taxes are included to the balance for paying to company and employee-paid taxes both. If you haven’t set up tax on employee record, it won’t be included to the paycheck. In case the tax is included on the employee record later, it won’t be added to the paycheck that is already created.
  • How can I correct the numbers if I’ve done this?
  • If there are some mistakes made and you want to correct that, you need to run payroll checkup to resolve “wage base” for that particular tax (Medicare, SS, FUTA, SUI and SDI, but not FWH and SWH) and many straight-line percentage taxes will “catch up” on the upcoming payroll.
  • Removing a tax from employee, the employee will partially or completely be excluded from any applicable tax forms that includes 941, 940, and your state tax forms (if you’re an Enhanced Payroll service user).

When should an employee be marked as exempt from tax?

It is not advised removing a Federal or State tax from an employee’s record. There are some situations when you can exempt an employee from Federal or State tax or selection on their record. These possible situations as follow:

The employee lives or works outside of the US.

There are possibilities that the employee is subjected to withholding in employee’s home state, but because those employees work in another country, the SUI and/or SDI taxes are not due. Contact your state agencies to be ensure.

The employee has a special status.

For example, if the employee is not a US citizen or on a special visa. In such cases, your employee needs to pay some taxes and may be exempt from others. You need to read and understand the rules carefully or get consultation from a certified ProAdvisor to know about this special situation.

The employee is working in a U.S. protectorate such as Guam.

In this situation, any “state-level” taxes are not supported by QuickBooks for the employee directly. The “state worked” and “state lived” fields can be left blank, but you have to set up the local taxes as custom taxes, whether employee- or company-paid. Both custom taxes types are supported by QuickBooks.

The employer has a special tax-exempt status.

For example, some organizations or institutions may have some special status at the Federal or Dtate level. If you are sure that you file in this category, you may deselect some taxes as well. Some employees can make several mistakes in removing a tax from the employee record. If they do it incorrectly may cause some “downstream” issues that can impact reports, tax forms, tax calculations, and liabilities due.

Common reasons why employers mistakenly remove a tax from an employee’s record

The tax is company-paid.

QuickBooks understands which taxes are company-paid and which are employee-paid. All taxes are included on the employee record depending upon “state lived” and “state worked” but the amount will be deducted from gross pay for only those that the employee pays.

The tax rate is 0%.

Some employers may create confusion when the tax rate is 0% but without being subjected to tax. Basically, you have to pay tax even if the tax rate is 0%, and you need to report wages for the tax. In such cases, you need to add the tax on the employee’s record and then set the rate to 0% on the Payroll Item list.

The employee claims “exempt” status.

Basically, this reflects that the employee is claiming that they don’t owe Federal or State withholding at the end of the year because of the hardship, high deductions, or low-income status. This mean that they are not subjected to any tax. There are various differences between “Subject to” and “exempt from”. For example, if you live or work in the US, or you are simply subjected to Federal tax. However, you need to claim to be exempt from withholding. In such situations, you need to choose “Do Not Withhold” as the withholding status.

You need to follow the steps mentioned below to set up a tax exempt employee in QuickBooks Desktop Payroll.

Note: You need to individually set up each exempt employee. A company file can be set up as exempt from Federal and State taxes.

  • From the Employees menu, choose Employee Center.
  • From the Employee Center, double-click on the name of employee.
  • From the Payroll Info tab and choose Taxes….
  • Navigate to the Federal
  • Select Don’t Withhold option from the Filing Status drop-down options.
  • Navigate to the State tab and select appropriate option from the Filing Status drop-down options. (You may see different options as per state. You may see Don’t Withhold, Exempt, or a different choice. If you don’t find Filing Status drop-down, that state doesn’t fall into state withholding category.)
  • Click on OK to save your selections.
  • Perform the same state for all exempt employees.

Reach Us For Technical Support For QuickBooks

This article should be helpful for you in setting up tax exempt employees in QuickBooks Desktop. However, there are so many confusions and complexities in the process as well. In such situations, you need to connect with our QuickBooks Experts. For this, you just need to dial our toll-free QuickBooks Support Phone Number +1855-565-6250 and get instant solutions for your issues.

Set Up Tax Exempt Employees In QuickBooks Desktop

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