SUBJECT:

Federal Withholding Tax on Supplemental Wages

The Internal Revenue Service Employer's Tax Guide (Circular E), defines
supplemental wages as follows: "Supplemental wages are compensation
paid to an employee in addition to the employee's regular wages. They
include, but are not limited to, bonuses, awards, prizes, back pay and
retroactive pay increases for current employees, and payments for
nondeductible moving expenses. Other payments subject to the
supplemental wage rules include taxable fringe benefits and expense
allowances paid under a non-accountable plan." The Internal Revenue
Service and the State of California Employment Development Department
outline two methods for withholding income tax from supplemental wages:

A. Withhold a flat 28% for federal income tax and a flat 6% for
state income tax if supplemental wages are paid separately or with
other types of supplemental wages. The absence of the "REG" DOS code
payment will cause supplemental wages to be flat taxed.

B. Withhold income taxes according to the employee's Form W-4
provided supplemental wages are paid in addition to regular salary.
The addition of the "REG" DOS code payment will allow the payroll
system to compute taxes according to regular graduated tax tables.

Clearly this is a major clarification of federal and state tax
guidelines that may affect many in the area of tax withholding. The
following is a listing of the DOS Codes that have been identified as
supplemental wages and have been updated accordingly:

      DOS Code     Description

        ADL       Additional Compensation
        BYZ       MSCCP-Z component
        CHS      Chair Stipend
        CNP      Charge Nurse Differential OT Premium
        CNS      Charge Nurse Differential OT Straight
        EAA       Executive Automobile Allowance
        ICP       Intercampus Payment
        LSF       Lump Sum Payment - Faculty
        MIA       Management Incentive Award
        OLA       ASC Ret. Benefit Allowance
        OLM       ASC Research-Amt
        OLN       ASC Research
        OLS       ASC Teaching
        OTH      Overtime Half
        OTP      Overtime Premium
        OTS      Overtime Straight
        PDA      Professional Development Award
        *PTT       Terminal Trip Bonus Pay
        RIP       Relocation Incentive Payment
        SOP      Shift Differential At Premium
        SOS      Shift Differential Overtime Straight
        SPA       Special Performance Award
        SPP       Sea Pay OT Premium
        SPS       Sea Pay OT Straight
        STP       Stipend
        SVE       Executive Severance Pay
        TOC       Time On Call
        *TRM       Terminal Vacation Pay
        WKP       Weekend Differential Overtime Premium
        WKS       Weekend Differential Overtime Straight

* PTT and TRM are hard coded in the Payroll Personnel System to
always be flat taxed.

When using these DOS codes to pay supplemental wages we encourage the
departments to schedule payments on an employee's regular paydate.
This will increase the likelihood of having regular salary included so
that the total payment is not flat taxed. The changes will be in
effect commencing with the June 26, 1996 biweekly payroll.

Please inform all your academic, staff, and student employees of
this development so that they may begin to plan for their income tax
withholding needs.

If you have any questions or comments please contact Paul Rodriguez of
the Payroll Division at extension 43241 or via E-mail at
prodriguez@ucsd.edu.

Donald A. Larson Assistant Vice Chancellor