Nebraska Tax Law Alert: Failure to Follow Nebraska’s New Withholding Rules Could Lead to Significant Penalties

by Matt Ottemann

Ottemann, Matthew
(402) 341-3070

Under LB 223, which became effective on January 1, 2008, the Nebraska Legislature imposed a new Nebraska withholding tax requirement for employers who employ “twenty-five or more employees at any one time during the year.”  Without substantiating documentation for a lower withholding percentage (discussed below), these employers must now withhold from their employees’ paychecks either: a) 3% of the employees’ gross wages, less tax qualified deductions; or b) at least 50% of the normal withholding amount for a single person with one withholding allowance or a married person with two allowances, as calculated on a table written by the Nebraska Department of Revenue.

To justify withholding at a lower rate, an employer must receive substantiating documentation which demonstrates the employee’s justification for lower withholding.  Adequate supporting documentation may include a year-end mortgage statement (to demonstrate a large mortgage interest deduction), a paid property tax statement on the employee’s home (to demonstrate a large real estate tax deduction), social security cards or school registration cards for the employee’s children (to demonstrate the number of the employee’s children or dependents), or receipts from the employee’s church or other charitable organizations (to demonstrate a large charitable contribution deduction).  The employer may also use benefits information or other records for the employee, such as medical insurance information, which demonstrates the number of the employee’s dependents.

Penalties for noncompliance with LB 223 can be significant.  An employer may be subject to a penalty of up to $1,000 for each employee whose pay was not properly withheld.  In addition, LB 223 establishes that an employee who is found to have intentionally evaded the state’s income tax by claiming an excessive number of allowances or in any other manner overstating the amount of withholding, shall be guilty of a Class II misdemeanor, punishable by up to six months imprisonment, a $1,000 fine, or both.

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