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FEDTAX * IRS * HOME * PUB_15-A
Publication 15-A
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Example of Figuring and Reporting Sick PayDave, an employee, was seriously injured in a car accident on January 1, 2002. Dave's last day of work was December 31, 2001. The accident was not job related. Key, an insurance company that was not an agent of the employer, paid Dave $2,000 each month for 10 months, beginning in January 2002. Dave submitted a Form W-4S to Key, requesting $210 be withheld from each payment for Federal income tax. Dave received no payments from Edgewood, his employer, from January 2002 through October 2002. Dave returned to work in November 2002. For the policy year in which the car accident occurred, Dave paid a part of the premiums for his coverage, and Edgewood paid the remaining part. The plan was, therefore, a contributory plan. During the 3 policy years before the calendar year of the accident, Edgewood paid 70% of the total of the net premiums for its employees' insurance coverage, and its employees paid 30%. Social security and Medicare taxes. For social security and Medicare tax purposes, taxable sick pay was $8,400 ($2,000 per month × 70% = $1,400 taxable portion per payment; $1,400 × 6 months = $8,400 total taxable sick pay). Only the six $2,000 checks received by Dave from January through June are included in the calculation. The check received by Dave in July (the seventh check) was received more than 6 months after the month in which Dave last worked. Of each $2,000 payment Dave received, 30% ($600) is not subject to social security and Medicare taxes because the plan is contributory and Dave's aftertax contribution is considered to be 30% of the premiums during the 3 policy years before the calendar year of the accident. FUTA tax. Of the $8,400 taxable sick pay (figured the same as for social security and Medicare taxes), only $7,000 is subject to the FUTA tax because the FUTA contribution base is $7,000. Income tax withholding. Of each $2,000 payment, $1,400 ($2,000 × 70%) is subject to voluntary income tax withholding. In accordance with Dave's Form W-4S, $210 was withheld from each payment ($2,100 for the 10 payments made during 2002). Liability transferred. For the first 6 months following the last month in which Dave worked, Key was liable for social security, Medicare, and FUTA taxes on any payments that constituted taxable wages. However, Key could have shifted the liability for the employer part of the social security and Medicare taxes (and for the FUTA tax) during the first 6 months by withholding Dave's part of the social security and Medicare taxes, timely depositing the taxes, and notifying Edgewood of the payments. If Key shifted liability for the employer part of the social security and Medicare taxes to Edgewood and provided Edgewood with a sick pay statement, Key would not prepare a Form W-2 for Dave. However, Key would prepare third-party sick pay recap Forms W-2 and W-3. Key and Edgewood must each prepare Form 941. Edgewood must also report the sick pay and withholding for Dave on Forms W-2, W-3, and 940. As an alternative, the parties could have followed the optional rule described under Optional rule for Form W-2 earlier. Under this rule, Key would prepare Form W-2 even though liability for the employer part of the social security and Medicare taxes had been shifted to Edgewood. Also, Key would not prepare a sick pay statement, and Edgewood, not Key, would prepare the recap Forms W-2 and W-3 reflecting the sick pay shown on Edgewood's Form 941. Liability not transferred. If Key did not shift liability for the employer part of the social security and Medicare taxes to Edgewood, Key would prepare Forms W-2 and W-3 as well as Forms 941 and 940. In this situation, Edgewood would not report the sick pay. Payments received after 6 months. The payments received by Dave in July through October are not subject to social security, Medicare, or FUTA taxes, because they were received more than 6 months after the last month in which Dave worked (December 2001). However, Key must continue to withhold income tax from each payment because Dave furnished Key a Form W-4S. Also, Key must prepare Forms W-2 and W-3, unless it has furnished Edgewood with a sick pay statement. If the sick pay statement was furnished, then Edgewood must prepare Forms W-2 and W-3. 7. Special Rules for Paying TaxesCommon PaymasterIf two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster, which is one of the corporations, the corporations are considered a single employer. They have to pay, in total, no more in social security and Medicare taxes than a single employer would. Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions will not be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information. Reporting AgentsYou must submit an application for authorization to act as an agent to the IRS service center where you will be filing returns. A Form 2678, Employer Appointment of Agent, properly completed by each employer, must be submitted with this application. See Rev. Proc. 70-6, 1970-1 C.B. 420, Rev. Proc. 84-33, 1984-1 C.B. 502, and the separate Instructions for Forms W-2 and W-3 for procedures and reporting requirements. Form 2678 does not apply to FUTA taxes reportable on Form 940. Magnetic tape filing of Forms 940 and 941. Reporting agents filing Forms 940 and 941 for a large number of employers may file them on magnetic tape. For authorization to file using this method, reporting agents must submit a Form 8655, Reporting Agent Authorization for Magnetic Tape/Electronic Filers, completed by each employer. See Rev. Proc. 96-18, 1996-1 C.B. 637, for the procedures for filing Forms 940 and 941 on magnetic tape. You can find Rev. Proc. 96-18 on page 73 of Internal Revenue Bulletin 1996-4 at www.irs.gov/pub/irs-irbs/irb96-04.pdf. Also, see Pub. 1314 (Form 940) and Pub. 1264 (Form 941) for the tape specifications. Electronic filing of Form 941. The 941e-file program
accepts and processes Form 941 electronically in the Electronic Data Interchange (EDI)
format. The program allows a reporting agent taxpayer to electronically file Form 941
using a personal computer, modem, and commercial tax preparation software. See Rev. Proc.
96-17, 1996-1 C.B. 633 and Rev. Proc. 99-39, 1999-43 IRB 532 for procedural information.
You can find Rev. Proc. 96-17 on page 69 of Internal Revenue Bulletin 1996-4 at Payment of Employment Taxes by Disregarded EntitiesEmployment taxes for employees of a qualified subchapter S subsidiary or other entity disregarded as an entity separate from its owner may be reported and paid under one of the following methods:
If the second method is chosen, the owner retains responsibility for the employment tax
obligations of the disregarded entity. For more information, see Notice 99-6, 1999-3 C.B.
321. You can find Notice 99-6 on page 12 of Internal Revenue Bulletin 1999-3 at Employee's Portion of Taxes Paid by EmployerIf you pay your employee's social security and Medicare taxes without deducting them from the employee's pay, you must include the amount of the payments in the employee's wages for income tax withholding and social security, Medicare, and FUTA taxes. This increase in the employee's wage payment for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. This again increases the amount of the additional taxes you must pay. Note: This discussion does not apply to household and agricultural employers. If you pay a household or agricultural employee's social security and Medicare taxes, these payments must be included in the employee's wages. However, this wage increase due to the tax payments made for the employee is not subject to social security or Medicare taxes as discussed in this section. To figure the employee's increased wages in this situation, divide the stated pay (the amount you pay without taking into account your payment of employee social security and Medicare taxes) by a factor for that year. This factor is determined by subtracting from 1 the combined employee social security and Medicare tax rate for the year the wages are paid. For 2003, the factor is .9235 (1 - .0765). If the stated pay is more than $80,344.50 (2003 wage base $87,000 × .9235), follow the procedure described under Stated pay of more than $80,344.50 in 2003 below. Stated pay of $80,344.50 or less in 2003. For an employee with stated pay of $80,344.50 or less in 2003, figure the correct wages (wages plus employer-paid employee taxes) and withholding to report by dividing the stated pay by .9235. This will give you the wages to report in box 1 and the social security and Medicare wages to report in boxes 3 and 5 of Form W-2. To figure the correct social security tax to enter in box 4 and Medicare tax to enter in box 6, multiply the amounts in boxes 3 and 5 by the withholding rates (6.2% and 1.45%) for those taxes, and enter the results in boxes 4 and 6. Example. Donald Devon hires Lydia Lone for only 1 week during 2003. He pays her $300 for that week. Donald agrees to pay Lydia's part of the social security and Medicare taxes. To figure her reportable wages, he divides $300 by .9235. The result, $324.85, is the amount he reports as wages in boxes 1, 3, and 5 of Form W-2. To figure the amount to report as social security tax, Donald multiplies $324.85 by the social security tax rate of 6.2% (.062). The result, $20.14, is entered in box 4 of Form W-2. To figure the amount to report as Medicare tax, Donald multiplies $324.85 by the Medicare tax rate of 1.45% (.0145). The result, $4.71, is entered in box 6 of Form W-2. Although he did not actually withhold these amounts from Lydia, he will report these amounts as taxes withheld on Form 941 and is responsible for matching these amounts with the employer share of these taxes. For FUTA tax and income tax withholding, Lydia's weekly wages are $324.85. Stated pay of more than $80,344.50 in 2003. For an employee with stated pay of more than $80,344.50 in 2003, the correct social security wage amount is $87,000 (the first $80,344.50 of wages ÷ .9235). The stated pay in excess of $80,344.50 is not subject to social security tax because the tax only applies to the first $87,000 of wages (stated pay plus employer-paid employee taxes). Enter $87,000 in box 3 of Form W-2. The social security tax to enter in box 4 is $5,394 (87,000 x .062). To figure the correct Medicare wages to enter in box 5 of Form W-2, subtract $80,344.50 from the stated pay. Divide this amount by .9855 (1- .0145) and add $87,000. For example, if stated pay is $100,000, the correct Medicare wages are figured as follows:
The Medicare wages are $106,944.70. Enter this amount in box 5 of Form W-2. The Medicare tax to enter in box 6 is $1,550.70 ($106,944.70 × .0145). Although these employment tax amounts are not actually withheld, report them as withheld on Form 941, and pay this amount as the employer's share of the social security and Medicare taxes. If the wages for income tax purposes in the preceding example are the same as for social security and Medicare purposes, the correct wage amount for income tax withholding is $106,944.70 ($100,000 + $5,394 + $1,550.70), which is included in box 1 of Form W-2. International Social Security AgreementsThe United States has social security agreements with many countries to eliminate dual taxation and coverage under two social security systems. Under these agreements, sometimes known as totalization agreements, you generally must pay social security taxes only to the country where you work. Employees and employers who are subject only to foreign social security taxes under these agreements are exempt from U.S. social security taxes, including the Medicare portion. The United States has social security agreements with the following countries: Australia, Austria, Belgium, Canada, Chile, Finland, France, Germany, Greece, Ireland, Italy, Korea, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Additional agreements are expected in the future. For more information, see Pub. 519, U.S. Tax Guide for Aliens, or contact:
If you have access to the Internet, you can get more information from the SSA at www.ssa.gov/international. 8. Pensions and AnnuitiesGenerally, pension and annuity payments are subject to Federal income tax withholding. The withholding rules apply to the taxable part of payments from an employer pension, annuity, profit-sharing, stock bonus, or other deferred compensation plan. The rules also apply to payments from an individual retirement arrangement (IRA), an annuity, endowment, or life insurance contract issued by a life insurance company. There is no withholding on any part of a distribution that is not expected to be includible in the recipient's gross income. Generally, recipients of payments described above can choose not to have withholding apply to their pensions or annuities (however, see Mandatory Withholding below). The election remains in effect until the recipient revokes it. The payer must notify the recipient that this election is available. WithholdingPeriodic PaymentsGenerally, periodic payments are pension or annuity payments made for more than 1 year that are not eligible rollover distributions (see discussion below). Periodic payments include substantially equal payments made at least once a year over the life of the employee and/or beneficiaries or for 10 years or more. For withholding purposes, these payments are treated as if they are wages. You can figure withholding by using the recipient's Form W-4P, Withholding Certificate for Pension or Annuity Payments, and the income tax withholding tables and methods in Circular E or the alternative tables and methods in this publication. Recipients of periodic payments can give you a Form W-4P to specify the number of withholding allowances and any additional amount they want withheld. They may also claim exemption from withholding on Form W-4P or revoke a previously claimed exemption. If they do not submit a Form W-4P, you must figure withholding by treating a recipient as married with three withholding allowances. See Form W-4P for more information. Nonperiodic PaymentsWithhold 10% of the taxable part of a nonperiodic payment that is not an eligible rollover distribution. The recipient may request additional withholding on Form W-4P or claim exemption from withholding. Mandatory WithholdingPayments delivered outside the United States. The election to be exempt from income tax withholding does not apply to any periodic or nonperiodic payment delivered outside the United States or its possessions to a U.S. citizen or resident alien. See Form W-4P for more information. A nonresident alien can elect exemption from withholding only if he or she certifies to the payer that he or she is not (1) a U.S. citizen or resident alien or (2) an individual to whom Internal Revenue Code section 877 applies (concerning expatriation to avoid tax). The certification must be made in a statement to the payer under penalties of perjury. However, nonresident aliens who choose such exemption will be subject to withholding under Code section 1441. See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and the Instructions for Form 1042-S. Eligible rollover distributions. Withhold 20% of an eligible rollover distribution unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. An eligible rollover distribution is the taxable part of any distribution from a qualified plan, governmental section 457(b) plan (for distributions after December 31, 2001), or tax-sheltered annuity (but not an IRA) except:
You are not required to withhold 20% of an eligible rollover distribution that, when added to other rollover distributions made to one person during the year, is less than $200. A recipient of an eligible rollover distribution cannot claim exemption from the 20% withholding. However, a recipient may elect to have more than 20% withheld using Form W-4P. Do not provide the recipient a Form W-4P for eligible rollover distributions unless he or she wishes to request additional withholding in excess of the mandatory 20%. Notice to recipient (section 402(f) notice). Generally, you must provide a written explanation to the recipient at least 30 but no more than 90 days before making an eligible rollover distribution. You must explain the rollover rules, special tax treatment for lump-sum distributions, direct rollover option, and the mandatory 20% withholding rule. Notice 2002-3, contains a model notice you can use to satisfy this requirement. You can find Notice 2002-3 on page 289 of Internal Revenue Bulletin 2002-2 at www.irs.gov/pub/irs-irbs/irb02-02.pdf. Similar rules apply to distributions from tax-sheltered annuities. The IRS has issued regulations on these requirements under sections 401(a)(31), 402, 403(b), and 3405. Depositing and Reporting WithholdingReport income tax withholding from pensions, annuities, and governmental section 457(b) plans on Form 945, Annual Return of Withheld Federal Income Tax. Do not report these liabilities on Form 941. You must furnish the recipients and the IRS with Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Deposit withholding from pensions and annuities combined with any other nonpayroll withholding reported on Form 945 (e.g., backup withholding). Do not combine the Form 945 deposits with deposits for payroll taxes. Circular E and the separate Instructions for Form 945 include information on the deposit rules. 9. Alternative Methods for Figuring WithholdingYou may use various methods of figuring income tax withholding. The methods described below may be used instead of the common payroll methods provided in Circular E. Use the method that best suits your payroll system and employees. Annualized wages. Using your employee's annual wages, figure the withholding using the Percentage Method, Table 7-Annual Payroll Period, in Circular E. Divide the amount from the table by the number of payroll periods, and the result will be the amount of withholding for each payroll period. Average estimated wages. You may withhold the tax for a payroll period based on estimated average wages, with necessary adjustments, for any quarter. For details, see Regulations section 31.3402(h)(1)-1. Cumulative wages. An employee may ask you, in writing, to withhold tax on cumulative wages. If you agree to do so, and you have paid the employee for the same kind of payroll period (weekly, biweekly, etc.) since the beginning of the year, you may figure the tax as follows: Add the wages you have paid the employee for the current calendar year to the current payroll period amount. Divide this amount by the number of payroll periods so far this year including the current period. Figure the withholding on this amount, and multiply the withholding by the number of payroll periods used above. Use the percentage method shown in Circular E. Subtract the total withholding calculated from the total tax withheld during the calendar year. The excess is the amount to withhold for the current payroll period. (See Rev. Proc. 78-8, 1978-1 C.B. 562, for an example of the cumulative method.) Part-year employment. A part-year employee who figures income tax on a calendar-year basis may ask you to withhold tax by the part-year employment method. The request must be in writing and must contain the following information:
Complete the following steps to figure withholding tax by the part-year method:
(See Regulations section 31.3402(h)(4)-1(c)(4) for examples of the part-year method.) Term of continuous employment. A term of continuous employment may be a single term or two or more following terms of employment with the same employer. A continuous term includes holidays, regular days off, and days off for illness or vacation. A continuous term begins on the first day an employee works for you and earns pay. It ends on the earlier of the employee's last day of work for you or, if the employee performs no services for you for more than 30 calendar days, the last workday before the 30-day period. If an employment relationship is ended, the term of continuous employment is ended, even if a new employment relationship is established with the same employer within 30 days. Other methods. You may use other methods and tables for withholding taxes, as long as the amount of tax withheld is consistently about the same as it would be under the percentage method shown in Circular E. If you develop an alternative method or table, you should test the full range of wage and allowance situations to be sure that they meet the tolerances contained in Regulations section 31.3402(h)(4)-1 as shown in the chart below. Formula Tables for Percentage Method Withholding (for Automated Payroll Systems)Two formula tables for percentage method withholding are on pages 23 and 24. The differences in the Alternative Percentage Method formulas and the steps for figuring withheld tax for different payroll systems are shown in this example.
When employers use the percentage method in Circular E or the formula tables for percentage method withholding in this publication, the tax for the pay period may be rounded to the nearest dollar. If rounding is used, it must be used consistently. Withheld tax amounts should be rounded to the nearest whole dollar by (1) dropping amounts under 50 cents and (2) increasing amounts from 50 to 99 cents to the next higher dollar. This rounding will be considered to meet the tolerances under section 3402(h)(4). Alternative 1. - Tables for Percentage Method Withholding Computatins Alternative 2. Tables for Percentage Method Withholding Computations Wage Bracket Percentage Method Tables (for Automated Payroll Systems)The Wage Bracket Percentage Method Tables show the gross wage brackets that apply to each withholding percentage rate for employees with up to nine withholding allowances. These tables also show the computation factors for each number of withholding allowances and the applicable wage bracket. The computation factors are used to figure the amount of withholding tax by a percentage method. Two kinds of Wage Bracket Percentage Method Tables are shown. Each has tables for married and single persons for weekly, biweekly, semimonthly, and monthly payroll periods. The difference between the two kinds of tables is the reduction factor subtracted from wages before multiplying by the applicable percentage withholding rate. In the tables for Computing Income Tax Withholding From Gross Wages on pages 26-29, the reduction factor includes both the amount for withholding allowances claimed and a rate adjustment factor as shown in the Alternative 2 - Tables for Percentage Method Withholding Computations on page 24. In the tables for Computing Income Tax Withholding From Wages Exceeding Allowance Amount on pages 30-33, the reduction factor does not include an amount for the number of allowances claimed. Use the kind of wage bracket table that best suits your payroll system. For example, some pay systems automatically subtract from wages the allowance amount for each employee before finding the amount of tax to withhold. The tables for Computing Income Tax Withholding From Wages Exceeding Allowance Amount can be used in these systems. The reduction factors in these tables do not include the allowance amount that was automatically subtracted before applying the table factors in the calculation. For other systems that do not separately subtract the allowance amount, use the tables for Computing Income Tax Withholding From Gross Wages. When employers use the Wage Bracket Percentage Method Tables, the tax for the period may be rounded to the nearest dollar. If rounding is used, it must be used consistently. Withheld tax amounts should be rounded to the nearest whole dollar by (1) dropping amounts under 50 cents and (2) increasing amounts from 50 to 99 cents to the next higher dollar. Such rounding will be deemed to meet the tolerances under section 3402(h)(4). Combined Income Tax, Employee Social Security Tax, and Employee Medicare Tax Withholding TablesIf you want to combine amounts to be withheld as income tax, employee social security tax, and employee Medicare tax, you may use the combined tables on pages 35-54. Combined withholding tables for single and married taxpayers are shown for weekly, biweekly, semimonthly, monthly, and daily or miscellaneous payroll periods. The payroll period and marital status of the employee determine the table to be used. If the wages are greater than the highest wage bracket in the applicable table, you will have to use one of the other methods for figuring income tax withholding described in this publication or in Circular E. For wages that do not exceed $87,000 the combined social security tax rate and Medicare tax rate is 7.65% each for both the employee and the employer for wages paid in 2003. You can figure the employee social security tax by multiplying the wages by 6.2%, and you can figure the employee Medicare tax by multiplying the wages by 1.45%. The combined tables give the correct total withholding only if wages for social security and Medicare taxes and income tax withholding are the same. When you have paid more than the maximum amount of wages subject to social security tax ($87,000 in 2003) in a calendar year, you may no longer use the combined tables. If you use the combined withholding tables, use the following steps to find the amounts
to report on your
You can figure the amounts to be shown on Form W-2, Wage and Tax Statement, in the same way. Single Persons - Weekly Payroll Period 10. Tables for Withholding on Distributions of Indian Gaming Profits to Tribal MembersIf you make certain payments to members of Indian tribes from gaming profits, you must withhold Federal income tax. You must withhold if (1) the total payment to a member for the year is over $7,800 and (2) the payment is from the net revenues of class II or class III gaming activities (classified by the Indian Gaming Regulatory Act) conducted or licensed by the tribes. A class I gaming activity is not subject to this withholding requirement. Class I activities are social games solely for prizes of minimal value or traditional forms of Indian gaming engaged in as part of tribal ceremonies or celebrations. Class II. Class II includes (1) bingo and similar games, such as pull tabs, punch boards, tip jars, lotto, and instant bingo, and (2) card games that are authorized by the state or that are not explicitly prohibited by the state and played at a location within the state. Class III. A class III gaming activity is any gaming that is not class I or class II. Class III includes horse racing, dog racing, jai alai, casino gaming, and slot machines. Withholding TablesTo figure the amount of tax to withhold each time you make a payment, use the table on page 56 for the period for which you make payments. For example, if you make payments weekly, use table 1; if you make payments monthly, use table 4. If the total payments to an individual for the year are $7,800 or less, no withholding is required. Example: A tribal member is paid monthly. The monthly payment is $5,000. Using Table 4, Monthly Distribution Period, figure the withholding as follows: Subtract $3,017 from the $5,000 payment for a remainder of $1,983. Multiply this amount by 27%, for a total of $535.41. Add $330.05, for total withholding of $865.46. Depositing and reporting withholding. Combine the Indian gaming withholding with all other nonpayroll withholding (e.g., backup withholding and withholding on gambling winnings). Generally, you must deposit the amounts withheld by electronic funds transfer (see page 2) or at an authorized financial institution using Form 8109, Federal Tax Deposit Coupon. See Circular E, Employer's Tax Guide, for a detailed discussion of the deposit requirements. Report Indian gaming withholding on Form 945, Annual Return of Withheld Federal Income Tax. For more information, see Form 945 and its instructions. Also, report the payments and withholding to tribal members and to the IRS on Form 1099-MISC, Miscellaneous Income (see the Instructions for Forms 1098-MISC.). Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members
Indian Gaming Profits
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