Question: What affect does processing payroll without the latest Federal or State tax updates have?
Answer: Sometimes it is necessary to process payroll without the latest tax updates. This could be because they are not available or have not been installed.
In all cases it is still ok to process payrolls using the previous periods tax rates. Taxes will calculate based on the previous periods rates and formulas and be withheld normally.
Federal and State Income Taxes
While this is not optimal it is not a problem. This is because Federal and State Income Taxes are an estimate only. Even with the proper tax updates amounts withheld may be different and change through the year based on many factors like amount of pay, filing status or additional withholdings. As such there is no one true figure that should be withheld from each paycheck, it is an estimate.
Regardless of what is withheld the employee will reconcile what they owe with the government at the end of the year. Withholding at prior periods rates will change the amount that they get refunded (or owe) in some way. In most cases annual changes in taxes are not significant and the difference is usually a few dollars per paycheck.
Question: After the Tax Update is installed will it catch up or correct the difference in the rates?
Answer: No. When the tax update is installed, any payrolls run after that will calculate at the new rate. The payroll system will not go back and play catch to correct the differences.
State Unemployment and Local Taxes
State Unemployment (SUTA) and Local Tax (Other Taxes) rates are not controlled by the tax update. They are updated by the user. They would not be affected by a tax update
Social Security Tax
The Social Security tax rate seldom changes, so SS withholding would be the correct amount even without the new tax update. However, each year the Social Security Maximum increases and that increase is delivered via the tax update.
Social Security Tax rates can be manually modified but it is not recommended unless truly necessary. Most employees do not reach the Social Security maximum until the latter half of the year. If there is a discrepancy due to rates or taxes in most cases the system will automatically correct this for Social Security taxes in the next payroll.
Medicare tax rates have not traditionally changed. So, Medicare withholding would be the correct amount even without the new tax update.