Reference: Prior Taxables

The following is an overview explaining the logic of why and how prior taxables are handled. If you wish to simply know how to determine which figures to transfer, please scroll down. Please note that these instructions do not apply to companies using Multi-Jurisdiction file numbers (though some of the principles are the same). Contact ADP for specific instructions for your particular processing medium (software, internet, telephone, etc.).

The SCET function in the ADP software allows you to create the new file number ‘linked’ to the old one (within the same company code/control) so that the employee receives only one federal Form W-2. It also has an automated feature that allows one to easily bring over the prior taxables. The software will automatically prompt you when you try to create a new file for an existing employee. Otherwise, you will need to enter the prior taxable information manually. This function should only be used if the previous file number is correctly coded and contains good data.

When an automated processing system tracks employee year-to-date figures, it must not only track the gross dollars processed for the employee, but what kind of dollars. The system must track which dollars are taxable to which tax category and which tax jurisdiction. For example, how many dollars are taxable to Social Security, how many are exempt to Social Security, how many are taxable for state income taxes, etc. This is necessary, not only for proper taxation when a payroll processes, but also for the proper production of quarter and year end reports, including the Forms W-2.

In ADP, the system refers to the employee’s masterfile information stored under the employee’s file number. The masterfile information identifies the tax parameters of the employee, such as if the employee is exempt from Social Security, and to which state and local (if applicable) taxes to which the employee is subject. For example, if the employee’s file number is set up as not exempt for Social Security (the norm), and subject to Louisiana state income taxes and state unemployment taxes, all dollars paid under that file number will be stored as Lousiana dollars and subject to Social Security, up to the normal taxable limit.

Suppose an employee, coded to Louisiana, was paid $1000.00 in wages for the first quarter of the year and had a total of $50.00 in 401(k) deductions, and $25.00 in Cafe deductions. The system would record the following information:

If one changed the file number to be for, say, Connecticut SIT and SUI, the next payroll would begin to store the information as Connecticut dollars. Imagine what would happen if one then tried to reverse a check that was issued while the employee was coded to Louisiana. The system would treat the reversal as Connecticut dollars, causing serious balancing issues at the end of the quarter. Furthermore, at the end of the quarter, the system would treat all dollars in that file as if they were paid while the employee was in Connecticut. This is why a new file number must be created.

When an employee’s tax status changes, a new masterfile record (in ADP, file number) must be created that will identify the employee’s new tax status, usually a change of tax jurisdiction when an employees moves (new state or local), or if their exemption status changes (a filing status change, as from single to married, does not affect how dollars are tracked, and so, does not require a new file number). When this is done, The new file number will not reference the figures in the old file number during payroll processing, so the new record must reference valid taxable wages, taxes, and tax exempt contributions recorded under the previous record or file number for that employee in that year, in order to prevent an employee from exceeding limits, such as FICA, FUTA and SUI taxable wage and tax limits, or 401(k) contribution limits. So, prior taxables refer to employee figures processed under a different employee record or file, but referenced solely for the purpose of ensuring the employee does not exceed any annual taxable, tax and/or contribution limits in the new record or file.

In the example above, one would record (bring over) the following information to the new file number:

Note that prior tax and taxables should only be referenced (brought over to the new file number) if the previous employee record or file was with the same employer. An employer cannot generally take credit for wages and taxes paid by a different employer, except under special conditions [e.g. employer is a succesor employer (acquired or merged with the previous employer) and the terms of succession allow them to do so - check with your legal counsel]. On the other hand, deferred compensation contributions should generally be brought over, even if the employee’s previous record is with an unrelated employer, since it is a limit for the employee, not the company.

If the previous record or file contained bad or invalid data, or the new record/file number is being created because the original one was incorrectly set up for the employee, the new file number should have no prior taxables. Prior taxables imply valid data under a previous file number exists. If the data is being reversed out of a previous file number, it should not be entered as prior taxables under the new one. Instead, if it needs to be added to the new file number, it should be done as a manual check entry, not as prior taxables.

$10,025.00

$9,950.00

$10,000.00

$7,000.00

$9,950.00

$9,000.00

$50.00

$25.00

GRS

FIT Taxable Wages

SS/Med Taxable Wages

FUTA Taxable Wages

LA SIT Taxable Wages

LA SUI Taxable Wages

401(k) (FIT Exempt)

CAFE (FIT/SS/Med Exempt)

$10,000.00

$76.50

$7,000.00

$9,000.00

$50.00

SS/Med Taxable*

SS/Med Tax (this number must be 7.65% of the taxable wages)

FUTA Wages (remember that $7,000 is the limit)

SUI Wages (assuming LA had a $9,000 limit) **

401(k)