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1.5% State Income Tax Withholding

 

The State of Nebraska has made a significant change to state income tax withholding as of January 1, 2008.  The change resulted from a new law (LB 1004 http://uniweb.legislature.ne.gov/FloorDocs/100/PDF/Final/LB1004.pdf ) that requires employers to ensure that all employees have state income tax withholding of at least 1.5% of “gross wages minus tax qualified deductions”. 

Qualified deductions include (but are not limited to):

  • Retirement
  • Health Insurance
  • Flex (Medical and Dependent Care)
  • Vision Insurance
  • Dental Insurance
  • Parking
  • Deferred Compensation
  • Exemptions claimed by employees on their current W-4

When a W-4 is received from an employee, it should be reviewed carefully to ensure compliance with §77-2753.  This review should include:

  • Careful review of the worksheet on the W-4 form (Does the exemption total that they’re claiming seem appropriate?)
  • Is this employee claiming exempt?

Claiming exempt means that zero tax was owed to the state for the entire year.  The only way that an individual can truly claim exempt status is if they had no tax liability for the previous year, and also expect to have none for the current year.  (NOTE:  This has nothing to do with whether or not a tax refund is expected.)  Exempt status usually occurs when an employee has a low annual salary, and/or has a lot of valid exemptions.  In order for the State of Nebraska to allow an employee to be able to claim an exempt status, employees will have to provide documentation that supports their claim (a copy of their most recent tax return).  They must also verify that their situation has not changed dramatically for the current year, and that they estimate that they will again owe no State Income tax. 

W-4’s claiming exempt status expires annually.  Proper documentation (most current tax return available) will always need to be provided by employees claiming exempt when submitting a new W-4.  If proper documentation cannot be provided to support a requested exemption status, reference should be given to the IRS Publication 15 (Page 17):

 “When you get an invalid W-4 form, do not use it to figure federal income tax withholding.  Tell the employee that it is invalid and ask for another one.  If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding allowances.  However, if you have an earlier W-4 form for this worker that is valid, withhold as you did before.”

State Accounting will continue to review employee state tax withholding totals on an ongoing basis.