Income Tax Withholding From Wages
| Published date | 06 October 2020 |
| Citation | 85 FR 63019 |
| Record Number | 2020-22071 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 85 Issue 194 (Tuesday, October 6, 2020)
[Federal Register Volume 85, Number 194 (Tuesday, October 6, 2020)]
[Rules and Regulations]
[Pages 63019-63037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22071]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 9924]
RIN 1545-B032
Income Tax Withholding From Wages
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document sets forth final regulations that provide
guidance for employers concerning income tax withholding from
employees' wages. These final regulations concern the amount of Federal
income tax employers withhold from employees' wages, implement changes
in the Internal Revenue Code made by the Tax Cuts and Jobs Act, and
reflect the redesigned withholding allowance certificate (Form W-4) and
related IRS publications. These final regulations affect employers that
pay wages subject to Federal income tax withholding and employees who
receive wages subject to Federal income tax withholding.
DATES:
Effective date: These final regulations are effective on October 6,
2020.
Applicability dates:For dates of applicability see Sec. Sec.
31.3402(a)-1(h), 31.3402(b)-1(b), 31.3402(c)-1(f), 31.3402(f)(1)-1(c),
31.3402(f)(2)-1(h), 31.3402(f)(3)-1(d), 31.3402(f)(4)-1(e),
31.3402(f)(5)-1(d), 31.3402(f)(6)-1(c), 31.3402(g)-1(d), 31.3402(h)(4)-
1(c), 31.3402(i)-1(b), 31.3402(l)-1(e), 31.3402(m)-1(f), and
31.3402(n)-1(f).
FOR FURTHER INFORMATION CONTACT: Concerning these final regulations,
Mikhail Zhidkov of the Office of Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes), (202) 317-4774
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 3402(a)(1) provides that, except as otherwise provided in
section 3402, every employer making a payment of wages shall deduct and
withhold from such wages a tax determined in accordance with tables or
computational procedures prescribed by the Secretary of the Treasury.
Section 3402(a)(1) further provides that any tables or procedures
prescribed under section 3402(a)(1) shall be in such form, and provide
for such amounts to be deducted and withheld, as the Secretary
determines to be most appropriate to carry out the purposes of chapter
1 (imposition of individual income tax). Section 3402 sets forth
certain methods of withholding but also gives the Secretary broad
regulatory authority in providing for tables or computational
procedures for income tax withholding.
Generally, employers apply the withholding tables or computational
procedures based on the entries on the Form W-4 the employee furnishes
the employer. An employee who receives wages subject to withholding
under section 3402 is required to furnish his or her employer a Form W-
4 on commencement of employment or, generally, within 10 days after the
employee experiences a ``change of status'' that reduces the
``withholding allowance'' to which the employee is entitled. See
section 3402(f)(2).
An employee completes Form W-4 based on the employee's personal tax
situation by applying the factors listed in section 3402(f)(1). Section
3402(f)(1) describes the combination of these factors as the employee's
``withholding allowance.'' Once an employee completes a valid Form W-4,
the employee must furnish the Form W-4 to the employer. The employer
puts the Form W-4 into effect in accordance with the timing rules in
section
[[Page 63020]]
3402(f)(3). Once in effect, the employer generally applies the entries
on an employee's Form W-4 (the withholding allowance) to compute the
amount of income tax to withhold from the employee's regular wages
under either the percentage method of withholding or the wage bracket
method of withholding. See section 3402(b) and (c).\1\
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\1\ Special rules under Sec. 31.3402(g)-1 of the current
regulations apply to ``supplemental wages''. In the case of
supplemental wages in excess of $1,000,000, employers must disregard
the entries on the employee's Form W-4 and apply a mandatory flat
rate of withholding. In the case of supplemental wages of less than
$1,000,000, employers may either disregard the entries on the
employee's Form W-4 and withhold using the optional flat rate or may
use an aggregate procedure, taking into consideration the entries on
the Form W-4 furnished by the employee.
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In certain cases, the IRS may issue an employer a lock-in letter
that notifies the employer in writing that an employee is not entitled
to claim exemption from withholding or is not entitled to the
withholding allowance claimed on the employee's Form W-4 and prescribes
the withholding allowance the employer must use to figure withholding.
If the employer employs the employee at the time the employer receives
the lock-in letter, the employer must furnish the employee notice of
the lock-in letter within 10 days of receipt of the lock-in letter. In
this case, the employer must withhold in accordance with the lock-in
letter as of the date specified in the lock-in letter, which cannot be
any earlier than 45 calendar days after the date of issuance of the
lock-in letter.
After the lock-in letter becomes effective, the IRS may issue a
subsequent notice (modification notice) modifying the lock-in letter.
Generally, a modification notice is issued only after the employee
contacts the IRS to request an adjustment to the withholding prescribed
in the lock-in letter. In certain cases, if warranted, the IRS may
issue a notice releasing the employee from the lock-in program. If the
employee is subject to a lock-in letter or modification notice, the
employer may put in effect a Form W-4 only if doing so results in more
withholding than specified by the lock-in letter or modification
notice. Finally, an employee who was subject to a lock-in letter or
modification notice, who terminates employment and then resumes
employment with the same employer within 12 months of termination,
remains subject to the lock-in letter or the modification notice
withholding instructions upon resuming the employment.
TCJA Changes
Prior to the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat.
2054 (2017) (TCJA), one withholding exemption was equal to the amount
of one personal exemption provided in section 151(b), prorated to the
payroll period. See section 3402(a)(2) (2017). TCJA enacted section
151(d)(5), which reduced the personal exemption amount to zero for the
years 2018-2025. See TCJA section 11041(a). TCJA also increased the
standard deduction under section 63, increased the child tax credit
under section 24, and created a new credit under section 24 for other
dependents. See TCJA sections 11021 and 11022.
TCJA permanently modified the wage withholding rules in section
3402(a)(2) and, replaced ``withholding exemptions'' with a
``withholding allowance, prorated to the payroll period.'' See TCJA
section 11041(c)(1). TCJA also repealed section 3401(e), which, prior
to TCJA, provided, for purposes of chapter 24 (relating to collection
of income tax at source on wages), that the ``number of withholding
exemptions claimed'' meant the number of withholding exemptions claimed
in a withholding exemption certificate in effect under section 3402(f)
or in effect under the corresponding section of prior law, except that
if no such certificate was in effect, the number of withholding
exemptions claimed was considered zero. See TCJA section
11041(c)(2)(A).
TCJA modified section 3402(f), and defined a ``withholding
allowance,'' which is determined based on the factors listed in section
3402(f)(1). See TCJA section 11041(c)(2)(B). TCJA further changed the
list of factors on which the withholding allowance is based and added
that the withholding allowance is determined based on rules determined
by the Secretary. See TCJA section 11041(c)(2)(B). This change to
section 3402(f)(1) revised section 3402(f)(1)(C), entitling an employee
to take into account the number of individuals for which the employee
expects to take an income tax credit under section 24 instead of the
number of individuals with respect to whom the employee reasonably
expects to claim a deduction under section 151. Section 3402(f)(1)(D)
also changed an employee's entitlement to take into account the
standard deduction from an amount generally equal to one withholding
exemption to the standard deduction allowable to such employee (one-
half of the standard deduction in the case of an employee who is
married and whose spouse is an employee receiving wages subject to
withholding). Finally, TCJA added section 3402(f)(1)(F), which provides
that the employee's withholding allowance also takes into account
``whether the employee has withholding allowance certificates in effect
with respect to more than one employer.'' See TCJA section
11041(c)(2)(B).
TCJA also made conforming changes to the ``change of status'' rules
in section 3402(f)(2), changing ``withholding exemptions'' to
``withholding allowance'' and striking out ``exemption'' and inserting
``allowance'' in various subsections of section 3402. This resulted in
a conforming change to the statutory name of the withholding exemption
certificate in section 3402(f)(5) to the withholding allowance
certificate. See TCJA sections 11041(c)(2)(B) and (C).
TCJA amended section 3402(m) by changing the reference from
``withholding allowances'' to ``withholding allowance.'' See TCJA
sections 11041(c)(2)(D) and (E). TCJA added the section 199A deduction
to the list of deductions in section 3402(m)(1) that an employee may
take into account in determining the additional withholding allowance
that the employee is entitled to claim on Form W-4, and struck the
reference to section 62(a)(10) in section 3402(m)(1) with respect to
certain payments made under divorce or separation instruments
previously described in section 62(a)(10). See TCJA sections
11011(b)(4) and 11051(b)(2)(B).
The legislative history of TCJA states that ``the Secretary of the
Treasury is to develop rules to determine the amount of tax required to
be withheld by employers from a taxpayer's wages.'' H.R. Rep. No. 115-
466, at 203 (2017).
Guidance Addressing TCJA
TCJA allowed the Secretary of the Treasury to administer section
3402 before January 1, 2019, without regard to the changes described
above. See TCJA section 11041(f)(2). Nevertheless, on January 11, 2018,
the Treasury Department and the IRS released Notice 1036, ``Early
Release Copies of the 2018 Percentage Method Tables for Income Tax
Withholding,'' which implemented TCJA's tax rate changes, standard
deduction, and suspension of the deduction under section 151. The
Treasury Department and the IRS designed the 2018 withholding tables to
work with the Forms W-4 that employees had already furnished their
employers. On February 28, 2018, the Treasury Department and the IRS
updated Form W-4, ``Employee's Withholding Allowance Certificate,''
[[Page 63021]]
incorporating TCJA's changes in the 2018 Form W-4's worksheets and
updated the online withholding calculator (now called the Tax
Withholding Estimator) to reflect TCJA changes. Notice 2018-14, 2018-7
I.R.B. 353, published February 12, 2018, allowed continued use of the
2017 Form W-4 temporarily in 2018 and included a relief provision for
employees who experienced changes in their tax circumstances solely
attributable to TCJA.
Notice 2018-92, 2018-51 I.R.B. 1038, published December 17, 2018,
addressed some of TCJA's changes to section 3402 and provided interim
rules for the 2019 calendar year. Section 3 of Notice 2018-92 addressed
TCJA's use of ``withholding allowance'' (singular) and provided that
withholding allowances (plural) were to be used for wage withholding
computational procedures in 2019. Under section 3 of Notice 2018-92,
any reference to a withholding exemption in the regulations and other
guidance under section 3402 was to be applied as if it were a reference
to a withholding allowance. Section 4 of Notice 2018-92 extended the
relief provided in Notice 2018-14 for changes in tax circumstances
solely attributable to TCJA. Section 5 of Notice 2018-92 addressed the
repeal of section 3401(e) and provided rules for employees who fail to
furnish a valid Form W-4. Section 6 of Notice 2018-92 allowed employees
to include the employee's estimated deduction under section 199A in
determining the additional withholding allowance under section 3402(m)
that the employee is entitled to claim on Form W-4. Section 7 of Notice
2018-92 allowed taxpayers to use the online withholding calculator (now
called the Tax Withholding Estimator) or Publication 505, ``Tax
Withholding and Estimated Tax,'' in lieu of the Form W-4 worksheets.
Section 8 of Notice 2018-92 requested comments on alternative
withholding methods under section 3402(h) and announced that the IRS
and the Treasury Department intended to eliminate the combined income
tax withholding and employee Federal Insurance Contributions Act (FICA)
tax withholding tables under Sec. 31.3402(h)(4)-1(b). Section 9 of
Notice 2018-92 confirmed that an employer in receipt of a lock-in
letter should not send a response to the IRS when the employer no
longer employs the employee (within the meaning of Sec. 31.3402(f)(2)-
1(g)(2)(iii)).
2019 Form W-4
In June 2018, the Treasury Department and the IRS released a draft
2019 Form W-4 and draft instructions for public comment. The 2019 draft
Form W-4 and instructions incorporated significant changes intended to
improve the accuracy of income tax withholding and make the withholding
system more transparent for employees. Many comments were received on
the draft form and instructions. In response to comments received from
stakeholders, the Treasury Department and the IRS announced on
September 20, 2018, that implementation of the redesigned form would be
postponed until 2020, and that the Treasury Department and the IRS
would continue working closely with stakeholders as additional changes
were made to the form for 2020. For 2019, however, Notice 2018-92
announced that the 2019 Form W-4 would include minimal changes to the
2018 Form W-4 and would continue to apply section 3402 by using the
existing withholding system under which employees claimed a number of
withholding allowances on a valid Form W-4.
In addition, the amount of each withholding allowance for 2019,
like for the years before it, was set to what would have been the value
of a personal or dependency exemption under section 151(b) prior to
enactment of TCJA. See Rev. Proc. 2018-57, 2018-49 I.R.B. 827, sections
2.03 and 3.25. For calendar years 2018 through 2025, however, the
exemption amount is zero. See section 151(d)(5)(A). Moreover, the high
value of each withholding allowance ($4,050 for 2017, $4,150 for 2018,
and $4,200 for 2019) led to rounding errors that made it difficult for
some employees to have their withholding equal their tax liability for
the year. Accuracy was even more difficult to achieve for employees
claiming tax credits, as these amounts first had to be converted into
tax deductions and then expressed as a number of withholding
allowances. In addition to limiting accuracy, the use of withholding
allowances to compute withholding is not intuitive, given that wages,
deductions, credits, and taxes are all expressed as dollar amounts,
rather than as a number of withholding allowances. Although the 2019 or
earlier Forms W-4 allowed an employee to achieve a high degree of
accuracy if the employee requested an additional dollar amount to be
withheld and/or used the online withholding calculator (now called the
Tax Withholding Estimator) or Publication 505 in completing the Form W-
4, most employees did not use these options.
Redesigned Form W-4, Employee's Withholding Certificate
To address the limitations of the 2019 Form W-4, on May 31, 2019, a
draft of a redesigned 2020 Form W-4 was released for public comment.
The redesigned Form W-4 was intended to reduce the combined complexity
of the form, instructions, and worksheets and to increase the
transparency and accuracy of the withholding system. The redesigned
Form W-4 uses the same underlying information as the 2019 Form W-4 but
replaces complex worksheets with more straightforward questions. The
redesigned Form W-4 was released on December 4, 2019, and then was
rereleased on December 31, 2019, to reflect a change in the medical
expense deduction threshold under section 213 for 2020 made by the
Further Consolidated Appropriations Act, 2020, Public Law 116-94, 133
Stat. 2534, 3228 (2019).
The redesigned Form W-4 does not use withholding allowances. An
employee selects a filing status (single, married filing separately,
head of household, married filing jointly, or qualifying widow(er)) on
the Form W-4, and this entry generally results in the basic standard
deduction relating to the filing status being taken into account in
determining the amount of tax withheld from the employee's pay. In
addition, the redesigned Form W-4 streamlines the multiple jobs
procedures and gives employees three options to account for a working
spouse or multiple jobs held concurrently. Specifically, employees may
(1) use the Tax Withholding Estimator to achieve accurate withholding;
(2) complete the Multiple Jobs Worksheet and enter an additional amount
to withhold from pay for each pay period; or (3) check the box in Step
2(c) on the redesigned Form W-4 to request withholding using higher
withholding rate tables. For married taxpayers filing jointly with two
jobs held concurrently, the effect of checking the box in Step 2(c) is
similar to selecting ``Married, but withhold at higher Single rate'' on
a 2019 or earlier Form W-4. The redesigned Form W-4 also allows an
employee to enter dollar amounts for tax credits, other income, and
deductions the employee expects to claim on his or her income tax
return to reflect the permitted allowance under sections 3402(f)(1)(C)
and (f)(1)(D) and the increase in the amount of withholding under
section 3402(i).
Publication 15-T, Federal Income Tax Withholding Methods
On June 7, 2019, the IRS released for public comment a draft of
Publication
[[Page 63022]]
15-T, ``Federal Income Tax Withholding Methods,'' which provided
percentage method tables, wage bracket withholding tables, and other
computational procedures for employers to use to compute withholding
for employees for the 2020 calendar year, including for employees who
furnished a redesigned Form W-4 to be effective for 2020. After
stakeholder feedback, Publication 15-T was revised and rereleased on
August 13, 2019, and was rereleased on November 4, 2019. Publication
15-T was finalized and released on December 24, 2019.
Publication 15-T prescribes percentage method tables, wage bracket
withholding tables, discussion on alternative withholding methods, and
Tables for Withholding on Distributions of Indian Gaming Profits to
Tribal Members. These tables and discussions, which were formerly
published in Publication 15 (Circular E), ``Employer's Tax Guide,''
Publication 15-A, ``Employer's Supplemental Tax Guide,'' and
Publication 51, ``Agricultural Employer's Tax Guide,'' are now
published only in Publication 15-T, ``Federal Income Tax Withholding
Methods.'' However, in 2020, the IRS discontinued publishing Formula
Tables for Percentage Method Withholding (for Automated Payroll
Systems), Wage Bracket Percentage Method Tables (for Automated Payroll
Systems), and Combined Federal Income Tax, Employee Social Security
Tax, and Employee Medicare Tax Withholding Tables. In addition, the IRS
has discontinued publishing Notice 1036, ``Early Release Copies of the
Percentage Method Tables for Income Tax Withholding,'' effective
beginning with calendar year 2020, and instead will post information
previously included in Notice 1036 in early release drafts of
Publication 15 (www.irs.gov/Pub15) and Publication 15-T (www.irs.gov/Pub15T) for use by employers and the payroll community. For percentage
method and wage bracket withholding tables, Publication 15-T describes
different withholding computational procedures and different tables for
2019 or earlier Forms W-4 than for Forms W-4 from 2020 or later (the
redesigned Forms W-4).
Notice of Proposed Rulemaking
On February 13, 2020, a notice of proposed rulemaking (proposed
regulations) (REG-132741-17) was published in the Federal Register (85
FR 8344) to update the regulations under sections 3401 and 3402 for
legislative changes, including TCJA, and expand the rules in the
regulations to accommodate the changes necessary to fully implement the
redesigned Form W-4 and its related computational procedures, along
with most existing computational procedures applicable to 2019 or
earlier Forms W-4. These changes are explained in detail in the
preamble to the proposed regulations.
The IRS did not receive any requests for a public hearing on the
proposed regulations, and therefore no public hearing was held. Written
comments responding to the proposed regulations were received and are
available for public inspection and copying at http://www.regulations.gov or upon request. After full consideration of the
comments received on the proposed regulations, this Treasury decision
adopts the proposed regulations with revisions as described in the
Summary of Comments and Explanation of Revisions.
Summary of Comments and Explanation of Revisions
The Treasury Department and the IRS received seven written comments
in response to the proposed regulations. Some of the comments propose
changes to the Form W-4 or related instructions, publications, or other
guidance that would not require a change to the proposed regulations
themselves. One commenter made a general comment about the complexity
of income tax withholding from wages but did not offer any comments
specific to the proposed regulations. Except to the extent that the
comments raise issues related to the proposed regulations, the comments
are beyond the scope of the proposed regulations, and therefore are not
addressed in this Summary of Comments and Explanation of Revisions.
However, the comments will remain under consideration for future
revisions to forms, instructions, publications, and other guidance
relating to income tax withholding from wages, including revisions to
the Form W-4.
1. Requirement To Maintain Two Systems To Determine Withholding
Two commenters expressed concern that the proposed regulations and
the related forms, instructions, publications, and other guidance
require maintenance of two different systems for computing income tax
withholding from wages: One system for 2019 or earlier Forms W-4, and
another system for redesigned Forms W-4. According to these commenters,
these two systems complicate computer programming and exacerbate
inaccuracy of employees' withholding determined using 2019 or earlier
Forms W-4. These commenters requested that all employees should be
required to furnish a redesigned Form W-4. One commenter stated that
requiring all employees to furnish a redesigned Form W-4 would simplify
computer programming and make employees more aware of TCJA changes to
the wage withholding rules. The other commenter stated that not
requiring employees to furnish a redesigned Form W-4 would increase
burden on employers and would confuse employees who commence employment
with a second or third employer that pays wages subject to income tax
withholding for which the employee has to complete a redesigned Form W-
4 while the employee still has 2019 or earlier Form(s) W-4 in effect
with one or more employers.
The Treasury Department and the IRS note that section 3402(f)(4)
generally requires that a Form W-4 continue in effect with respect to
an employer until another Form W-4, furnished by the employee, takes
effect under the rules in section 3402. Thus, an employer must continue
withholding according to the Form W-4 submitted by an employee until
the employee furnishes the employer a new Form W-4. In addition,
section 11041 of TCJA does not require all employees to submit new
Forms W-4 to conform to changes to the wage withholding rules in TCJA.
In contrast, section 1581 of the Tax Reform Act of 1986, Public Law 99-
514, 100 Stat. 2085, 2101 (1987), explicitly required all employees to
furnish new Forms W-4 as a result of the changes made to the statute.
In other words, although TCJA and the Tax Reform Act of 1986 both
enacted significant changes to the income tax withholding rules in
chapter 1, only the Tax Reform Act of 1986 mandated that employees
furnish new Forms W-4. Therefore, the final regulations do not require
all employees with a 2019 or earlier Form W-4 in effect to furnish a
redesigned Form W-4.
Nevertheless, the Treasury Department and the IRS acknowledge the
commenters' concerns and address them in two ways: (1) Through
instructions to the redesigned Form W-4 for employees with multiple
jobs and (2) through optional computational ``bridge'' entries
permitted under these regulations and described in Publication 15-T.
First, in redesigning the Form W-4, the Treasury Department and the
IRS were aware of the challenges facing employees who have multiple
employers paying wages subject to withholding and who have 2019 or
earlier Form(s) W-4 in effect in completing the redesigned Form W-4.
The redesigned 2020 Form W-4 includes instructions advising
[[Page 63023]]
employees that, ``[t]o be accurate, submit a 2020 Form W-4 for all
other jobs.'' The IRS intends to continue providing an updated version
of this instruction on Forms W-4 for future years.
Second, to address commenters' concerns relating to employers
maintaining separate withholding systems, these regulations adopt
optional computational bridge entries that will allow employers to
continue in effect 2019 or earlier Forms W-4 as if the employees had
furnished redesigned Forms W-4. This will allow employers to use one
process for both 2019 and earlier Forms W-4 and 2020 and later Forms W-
4 and free employers from the need to use the number of allowances data
field from 2019 and earlier Forms W-4 once the employers apply the
appropriate computational bridge entries for their employees.
Accordingly, starting for calendar year 2021, the IRS intends to
include instructions in Publication 15-T for these optional
computational bridge entries. The computational bridge entries will
allow employers to use the computational procedures and data fields for
the redesigned Form W-4 to arrive at the equivalent withholding for an
employee that would have applied using the computational procedures and
data fields related to a 2019 or earlier Form W-4 furnished by the
employee.
Specifically, Publication 15-T will provide for four adjustments to
accurately implement the computational bridge entries. First,
Publication 15-T will provide for treating an employee as having made
an entry on line 1(c) (filing status) of the redesigned Form W-4 that
most accurately reflects the employee's entry on line 3 (marital
status) of a 2019 or earlier Form W-4. In this regard, an employee will
be treated as having selected ``single or married filing separately''
on the redesigned form if the employee selected either ``single'' or
``married, but withhold at higher single rate'' on a 2019 or prior Form
W-4. An employee will be treated as having selected ``married filing
jointly'' on the redesigned form if the employee selected ``married''
on a 2019 or prior Form W-4.
Second, Publication 15-T will provide for treating an employee as
also having made an entry in step 4(a) (other income (not from jobs))
on the redesigned Form W-4 based on the marital status on line 3 of a
2019 or earlier Form W-4 to help offset the full basic standard
deduction that has otherwise been incorporated in tables related to the
various filing statuses in step 1(c) of the redesigned Form W-4. In
particular, the employer would treat the employee as having entered the
value of two allowances corresponding to a single employee's filing
status and the value of three allowances corresponding to a married
employee's filing status in Step 4(a) of the redesigned Form W-4.
Third, Publication 15-T will provide for treating an employee as
having made an entry in step 4(b) (deductions) of the redesigned Form
W-4 to replicate the effect of allowances claimed on line 5 (number of
allowances) of a 2019 or earlier Form W-4. In particular, the employer
would multiply the number of allowances claimed on line 5 of a 2019 or
earlier Form W-4 by $4,300 and treat the employee as having entered the
product in Step 4(b) of the redesigned Form W-4.
Finally, fourth, Publication 15-T will provide for treating an
employee as having made an entry in step 4(c) (extra withholding) of
the redesigned Form W-4 to replicate the effect of any additional
amount that the employee requested to have withheld using line 6
(additional amount withheld from each paycheck) on a 2019 or earlier
Form W-4. In particular, the employer would treat the employee as
having entered any additional amount the employee requested to have
withheld from each paycheck on line 6 of a 2019 or earlier Form W-4 in
Step 4(c) of the redesigned Form W-4.\2\
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\2\ For employers that use the computational bridge entries for
nonresident alien employees with 2019 or earlier Forms W-4 in
effect, the procedures in Publication 15-T will provide for an
entries on the redesigned form to replicate the effect of allowances
claimed on a 2019 or earlier Form W-4, as well as an entry for any
additional amount the nonresident alien requested to be withheld on
a 2019 or earlier Form W-4. Publication 15-T will instruct employers
that choose to use the computational bridge entries for nonresident
alien employees with a 2019 or earlier Form W-4 in effect to apply
the general procedures applicable to nonresident alien employees who
furnish a redesigned Form W-4.
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To facilitate the use of the computational bridge entries, starting
in 2021, the IRS will no longer index the withholding allowance to
reflect cost-of-living adjustments to what would have been the value of
a personal or dependency exemption in section 151(b) prior to enactment
of TCJA. The withholding allowance will be fixed at $4,300 in 2021.
Thus, employers that choose to implement the computational bridge
entries starting in 2021 will not have to make any adjustments to
employees' withholding entries that the employee is treated as having
made on the redesigned Form W-4 within their system unless the employee
furnishes a new, redesigned Form W-4.
For example, for the year 2021 and its withholding allowance of
$4,300, an employer determining withholding from wages for an employee
with a 2019 Form W-4 in effect on which the employee reported a marital
status of single (or married, but withhold at a higher single rate) and
one withholding allowance would compute withholding for the employee as
if the employee had made the following entries on a 2021 Form W-4:
Single or married filing separately in Step 1(c) (filing status), an
entry of $8,600 in Step 4(a) (other income (not from jobs)) and an
entry of $4,300 in Step 4(b) (deductions) to determine withholding from
wages for this employee. In this case, the computational bridge entries
that the employee is treated as having made in Step 1(c), Step 4(a),
and Step 4(b) of the 2021 Form W-4 replicate the effect of selecting
single and one withholding allowance on the 2019 Form W-4.
Use of the computational bridge entries will be optional; the IRS
intends to continue publishing withholding tables and procedures for
employers that choose to continue computing withholding using the
computational procedures related to 2019 or earlier Forms W-4 furnished
by employees. The computational bridge entries apply only for Forms W-4
that were properly put in effect on or before December 31, 2019, and
that continue in effect under section 3402(f)(4). The computational
bridge entries are not intended to continue 2019 or earlier
computational procedures, including the use of a number of withholding
allowances, for redesigned Forms W-4. Furthermore, if an employee is
either required, or chooses, to furnish a new Form W-4, the use of the
computational bridge entries by an employer does not change the
requirement that the employee must use the current year's revision of
the Form W-4 when furnishing a new Form W-4 to his or her employer.\3\
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\3\ Near the end of a year, an employee may furnish the Form W-4
revision for the following calendar year to take effect for the
following calendar year.
---------------------------------------------------------------------------
Accordingly, these final regulations revise Sec. 31.3402(f)(4)-
1(a) to provide that an employer's use of the computational bridge
entries to adapt a 2019 or earlier Form W-4 to the redesigned
computational procedures as if using entries on a redesigned Form W-4
will continue in effect, within the meaning of section 3402(f)(4), a
2019 or earlier Form W-4 that was properly in effect on or before
December 31, 2019.
2. Lock-in Letters or Modification Notices
One commenter expressed concern about whether a lock-in letter
under which an employer is required to
[[Page 63024]]
withhold based on instructions using 2019 or earlier Form W-4
computational procedures ceases to be effective because of the redesign
of the Form W-4 until a new lock-in letter using redesigned Form W-4
computational procedures is issued to the employer. Under current
regulations, once an employer is required to furnish the employee a
copy of the lock-in letter, the lock-in letter becomes effective. It
remains effective until the IRS issues the employer a modification
notice, including a modification notice releasing the employee from a
lock-in letter or a prior modification notice, or until the employee
furnishes the employer a Form W-4 that requests more withholding than
required under the lock-in letter or modification notice. If the
employee is no longer employed by the employer, the lock-in letter
generally does not apply because the employer generally is not paying
wages subject to withholding. Under the proposed regulations and these
final regulations, employers are no longer required to notify the IRS
that they no longer employ an employee for whom a lock-in letter was
issued.
These final regulations follow the proposed regulations and do not
require the IRS to reissue lock-in letters or modification notices
solely because of the redesign of the Form W-4. Employers may not
assume that a lock-in letter or modification notice ceases to be
effective because of changes resulting from the redesigned Form W-4 and
related withholding procedures. Unless the employee furnishes the
employer a Form W-4 that results in more withholding than under the
lock-in letter or modification notice, the employer must continue
following any lock-in letter or modification notice until the IRS
releases the employee from the program.
For ease of administering the withholding instructions in lock-in
letters or modification notices that were based on 2019 or earlier
Forms W-4, employers may use the optional computational bridge entries
discussed in section 1 of this Summary of Comments and Explanation of
Revisions to comply with the requirement to withhold based on the
maximum withholding allowance and filing status permitted in a lock-in
letter or modification notice and to adapt to the redesigned Form W-4
and computational procedures. For example, for calendar year 2021,
based on a withholding allowance of $4,300, an employer that is
determining withholding from wages for an employee subject to a lock-in
letter that uses 2019 computational procedures and instructs the
employer use a filing status of single and a maximum withholding
allowance of zero allowances, may comply with the lock-in letter by
using the following computational bridge entries on a 2021 Form W-4: An
entry of single or married filing separately in Step 1(c), an entry of
$8,600 in Step 4(a) (other income (not from jobs)) to further account
for the effect of the withholding instructions directing an employer to
withhold from the employee using the single filing status, and an entry
of $0 in Step 4(b) (deductions) to replicate the effect of the
employee's maximum withholding allowance of zero withholding
allowances.
These final regulations revise the rules in Sec. 31.3402(f)(2)-
1(g)(2)(iv) (relating to lock-in letters) and (vii) (relating to
modification notices) to provide that an employer may comply with a
lock-in letter or modification notice that is based on a 2019 or
earlier Form W-4, as required by the regulations, if the employer
implements the maximum withholding allowance and filing status
permitted in a lock-in letter or modification notice by using the
computational bridge entries as set forth in forms, instructions,
publications, and other guidance prescribed by the Commissioner to
calculate withholding for a 2019 or earlier Form W-4.
Another commenter stated that lock-in letters and modification
notices should be revised in such a way that makes it easier for
employers to compare withholding based on a lock-in letter or
modification notice to withholding based on the redesigned Form W-4.
Specifically, this commenter notes that the new entries on the
redesigned Form W-4 make it more difficult for employers to determine
whether a newly furnished Form W-4 results in more withholding than a
lock-in letter or modification notice that the employer was required to
put in effect. The commenter's suggestions regarding the contents of
the lock-in letters or modifications notices do not require changes to
the proposed regulations because the language of the proposed
regulations is broad enough to accommodate the commenter's suggestions
to the letters and notices. Accordingly, the proposed regulations
regarding the contents of the lock-in letter or modification notice
will be adopted as final without change. However, these comments will
be considered in future revisions of the lock-in letter and
modification notice.
Furthermore, to ease the employer's burden in determining whether a
Form W-4 furnished by an employee for whom a lock-in letter or
modification notice is in effect results in more withholding (and thus
may be put into effect), the Treasury Department and the IRS note that
employers may use the Income Tax Withholding Assistant for employers
available on www.irs.gov. The Income Tax Withholding Assistant can aid
in estimating the amount of tax to be withheld from employee's wages
based on a Form W-4 furnished by the employee, which can be compared to
the withholding required pursuant to a lock-in letter or modification
notice. The Income Tax Withholding Assistant is a software tool that is
designed to help small employers with manual payroll systems compute
the amount of income tax to withhold from employees' wages. Employers
enter the employees' pay frequency, wages, and Form W-4 entries, and
the software tool computes the amount of income tax that is required to
be withheld from employees' wages. This software tool is compatible
with 2019 or earlier Forms W-4, as well as with the 2020 Form W-4, and
is designed to be used by employers that use the income tax withholding
tables in Publication 15-T.
The same commenter also suggested that employees who are subject to
a lock-in letter or modification notice be restricted from making
certain entries on a Form W-4 that they furnish to an employer that
must withhold pursuant to a lock-in letter or modification notice.
However, because each entry on Form W-4 is intended to foster accuracy
and simplicity in income tax withholding, an employee who is subject to
a lock-in letter or modification notice should be able to use all
entries on Form W-4 when appropriate. Due to the circumstances under
which a lock-in letter or modification notice is issued (i.e., the
employee's history of noncompliance with withholding requirements), and
that any decrease in withholding from a lock-in letter or modification
notice may only be accomplished by seeking a modification notice from
the IRS, the employee would be furnishing a redesigned Form W-4 only to
request an increase in withholding.
3. Effective Period of a Withholding Allowance Certificate
The proposed regulations provide that when an employee is released
from a lock-in letter or modification notice, the employee would
generally be required to furnish a new Form W-4, and if the employee
fails to do so, the employee would be treated as single but having the
withholding allowance provided in forms, instructions, publications,
and
[[Page 63025]]
other guidance prescribed by the Commissioner that applies to other
employees who fail to furnish a new Form W-4.\4\ Under the redesigned
computational procedures, this means that the employee would be treated
as single or married filing separately in Step 1(c) of the 2020 Form W-
4 with no entries in Step 2, Step 3, or Step 4.
---------------------------------------------------------------------------
\4\ If the employee's Form W-4 results in more withholding than
prescribed by the lock-in letter or modification notice, the
proposed regulations provide that the employer should continue
withholding according to the employee's Form W-4, even after the
employee is released from the lock-in letter or modification notice.
---------------------------------------------------------------------------
One commenter recommended that this rule be modified to require an
employee to furnish a new Form W-4, but, in the event the employee
fails to do so, the withholding according to the lock-in letter or
modification notice would continue. The commenter recommended this
approach to reduce the administrative burden on employers in
administering lock-in letters and modification notices, especially upon
the employee's release from a lock-in letter or modification notice.
After careful consideration of the comment, the Treasury Department and
the IRS do not agree that this approach is appropriate. To foster
accuracy, the Treasury Department and IRS are of the view that an
employee released from a lock-in letter should be subject to the normal
default rule until the employee furnishes a new Form W-4. Accordingly,
these final regulations adopt the rule in Sec. 31.3402(f)(4)-1 as set
forth in the proposed regulations.
4. Head of Household Filing Status
One commenter questioned whether employees who were eligible for
the head of household filing status but claimed single filing status on
a 2019 or earlier Form W-4 must be withheld as head of household using
tables applicable to redesigned Forms W-4. Under the proposed
regulations, the adoption of the head of household filing status and
the use of related tables is limited to redesigned Forms W-4. The head
of household filing status and related tables are not available for
2019 or earlier Forms W-4. These final regulations adopt the filing
status rules set forth in the proposed regulations.
5. Amount of Income Tax Withheld Using the Redesigned Form W-4
One commenter noted that in processing 2020 Forms W-4 for
employees, it appeared that no tax would be withheld from employees'
pay, in certain circumstances, such as when employees enter an amount
in Step 3 to reflect the child or other dependent credits. The
commenter further noted that it appeared that no tax would be withheld
in these circumstances despite the Tax Withholding Estimator showing
that the employee would have a tax liability. The Treasury Department
and the IRS cannot comment on specific factual situations; however, the
Treasury Department and the IRS note that the redesigned Form W-4 is
intended to result in more accurate withholding.
Prior to the redesign of the Form W-4, approximately 30% of income
tax returns that reported gross income from wages did not report any
income tax liability, yet approximately 93% of these taxpayers with no
income tax liability still had federal income tax withheld from wages.
Accordingly, the redesigned Form W-4 was designed to consider all the
deductions and credits an employee is entitled to, which often results
in no income tax withholding from the employee's wages. This is
consistent with the goal of increased accuracy in withholding, which
includes minimizing overwithholding from employees who owe little or no
income tax, especially after tax credits reduce the employees' income
tax liability.
6. Estimated Tax Payments
Under the proposed regulations, employees who are not subject to a
lock-in letter or modification notice may take into account estimated
tax payments already made, provided that they take into account nonwage
income and follow the instructions to the Tax Withholding Estimator.
Although no comments were received on this issue, the Treasury
Department and the IRS have determined that certain employees,
especially those employees with a higher amount of nonwage income
relative to wage income, should also be able to take into account
planned estimated tax payments not yet made provided that the employee
(1) takes into account all wage and nonwage income in determining
withholding, (2) follows the instructions to the Tax Withholding
Estimator, and (3) does not use planned estimated tax payments to
reduce income tax withholding from wages below the pro-rata share of
chapter 1 income tax attributable to the estimated annual wages. The
pro-rata share of chapter 1 tax attributable to estimated annual wages
will be determined under forms, instructions, publications, and other
guidance prescribed by the Commissioner. The Treasury Department and
the IRS have determined that this rule furthers accuracy in withholding
without encouraging inappropriate underwithholding on wages by shifting
withholding from wages to estimated tax payments.
In addition, the Treasury Department and the IRS have determined
that employees who do not use the Tax Withholding Estimator and instead
use IRS Publication 505 to determine their withholding should be able
to take into account estimated tax payments subject to the applicable
requirements, provided that the employees use Publication 505
instructions. Accordingly, these final regulations revise Sec.
31.3402(m)-1(d) to allow employees to take into account estimated tax
payments provided that the employee (1) follows the instructions to the
Tax Withholding Estimator or Publication 505, (2) is not subject to a
lock-in letter or modification notice, and (3) does not request
withholding from wages that falls below the pro rata share of chapter 1
taxes attributable to wages as determined under forms, instructions,
publications, and other guidance prescribed by the Commissioner. The
IRS intends to update the Tax Withholding Estimator and Publication 505
to reflect this rule.
7. Applicability Date
Consistent with the applicability date provisions in the proposed
regulations, these final regulations generally apply on and after
October 6, 2020. However, as in the proposed regulations, Sec.
31.3402(f)(2)-1(g), relating to withholding compliance, applies as of
February 13, 2020, the date the notice of proposed rulemaking was
published in the Federal Register; Sec. 31.3402(f)(5)-1(a)(3),
regarding the requirement to use the current version of Form W-4,
applies as of March 16, 2020, 30 days after the date the notice of
proposed rulemaking was published in the Federal Register; and the
removal of Sec. 31.3402(h)(4)-1(b), relating to the combined income
tax withholding and employee FICA tax withholding tables, applies on
and after January 1, 2020. Except with regard to the removal of Sec.
31.3402(h)(4)-1(b), taxpayers may also choose to apply the final
regulations, on and after January 1, 2020 and before their
applicability date as set forth in the regulations. See section
7805(b)(7).
Special Analyses
I. Regulatory Planning and Review
These final regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and
[[Page 63026]]
Budget regarding review of tax regulations.
II. Regulatory Flexibility Act
Under the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it
is hereby certified that these final regulations do not have a
significant economic impact on a substantial number of small entities
that are directly affected by these final regulations. These final
regulations will apply to all employers that have an income tax
withholding obligation and, therefore, are likely to affect a
substantial number of small entities. Although these final regulations
are likely to affect a substantial number of small entities, the
economic impact of these final regulations will not be significant.
These final regulations do not independently impact employers or
employees because these final regulations support both the 2019 and
2020 Form W-4 and related withholding procedures, and employees are not
required to furnish a new Form W-4 solely because of the redesign of
the Form W-4. Employees who have a Form W-4 on file with their employer
from years prior to 2020 generally will continue to have their
withholding determined based on that form. These final regulations
incorporate the changes made by TCJA to sections 3401 and 3402 and
provide flexible and administrable rules for income tax withholding
from wages to implement the 2020 Form W-4 and its related tables and
computational procedures described in Publication 15-T and to work with
2019 or earlier Forms W-4. Any economic impact on small entities that
have an income tax withholding obligation is generally a result of the
change in underlying substantive tax rules which led to revisions in
the method of computing withholding, not these final regulations.
Because the final regulations preserve the option of continuing to use
old Forms W-4 for existing employees who have not had significantly
changed circumstances, and provide for optional computational bridge
entries for employers to facilitate continued use of Forms W-4 provided
in 2019 or earlier years that eliminates the need for employers to
maintain separate withholding systems, these final regulations minimize
impact of the statutory changes on employers, including small entities.
Accordingly, the Treasury Department and the IRS certify that these
final regulations will not have a significant economic impact on a
substantial number of small entities pursuant to the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding this regulation was submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small business, and no comments were
received.
III. Paperwork Reduction Act
Any collection of information associated with these final
regulations has been submitted to the Office of Management and Budget
for review under OMB control number 1545-0074 in accordance with the
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). In general, the
collection of information is required under section 3402 of the
Internal Revenue Code. The Treasury Department and the IRS request
comments on all aspects of information collection burdens related to
these final regulations, including estimates for how much time it would
take to comply with the paperwork burdens described in OMB control
number 1545-0074 and ways for the IRS to minimize the paperwork burden.
An agency may not conduct or sponsor and a person is not required to
respond to a collection of information unless it displays a valid OMB
control number.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by state, local, or tribal governments, or by
the private sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This final rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive order.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, and Notices cited in this
preamble are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Drafting Information
The principal author of these final regulations is Mikhail Zhidkov,
Office of the Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes). Other personnel from the Treasury
Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 31
Employment taxes, Fishing vessels, Gambling, Income taxes,
Penalties, Pensions, Railroad retirement, Reporting and recordkeeping
requirements, Social security, Unemployment compensation.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 31 is amended as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
0
Paragraph 1. The authority citation for part 31 is amended by adding an
entry for Sec. 31.3402 in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 31.3402 also issued under 26 U.S.C. 3402(i) and (m).
* * * * *
Sec. 31.3401(e)-1 [Removed]
0
Par. 2. Section 31.3401(e)-1 is removed.
0
Par. 3. Section 31.3402(a)-1 is amended by adding paragraphs (g) and
(h) to read as follows:
Sec. 31.3402(a)-1 Requirement of withholding.
* * * * *
(g) For purposes of chapter 24 of the Code and this subpart:
(1) References to ``withholding exemption certificate'' include
``withholding allowance certificate'' unless otherwise stated in this
subpart.
(2) [Reserved]
(h) The provisions of paragraph (g) of this section apply on and
after October 6, 2020. Taxpayers may choose to apply
[[Page 63027]]
paragraph (g) of this section on or after January 1, 2020 and before
October 6, 2020.
0
Par. 4. Section 31.3402(b)-1 is revised to read as follows:
Sec. 31.3402(b)-1 Percentage method of withholding.
(a) Percentage method of withholding. The amount of tax to be
deducted and withheld from an employee's wages under the percentage
method of withholding is determined based on the entry for the
employee's anticipated filing status or marital status and other
entries on the employee's withholding allowance certificate using the
applicable percentage method tables and computational procedures set
forth in the applicable forms, instructions, publications, and other
guidance prescribed by the Commissioner issued with respect to the
period in which wages are paid.
(b) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
0
Par. 5. Section 31.3402(c)-1 is amended:
0
1. By revising paragraph (a)(1).
0
2. By redesignating paragraph (a)(2) as paragraph (a)(3).
0
3. By adding a new paragraph (a)(2).
0
4. By revising paragraph (b).
0
5. In paragraph (c)(1), by revising the first sentence.
0
6. By adding paragraph (f).
0
7. By removing the parenthetical authority citation at the end of the
section.
The revisions and additions read as follows:
Sec. 31.3402(c)-1 Wage bracket withholding.
(a) * * *
(1) The employer may elect to use the wage bracket method provided
in section 3402(c) instead of the percentage method with respect to any
employee. The tax computed under the wage bracket method shall be in
lieu of the tax required to be deducted and withheld under section
3402(a).
(2) The amount of tax to be deducted and withheld from an
employee's wages under the wage bracket method of withholding is
determined based on the entry for the employee's anticipated filing
status or marital status and other entries on the employee's
withholding allowance certificate using the applicable wage bracket
method tables and computational procedures set forth in the applicable
forms, instructions, publications, and other guidance prescribed by the
Commissioner issued with respect to the period in which wages are paid.
* * * * *
(b) Established payroll periods, other than daily or miscellaneous,
covered by wage bracket withholding tables. The wage bracket
withholding tables applicable to the employee's filing status set forth
in forms, instructions, publications, and other guidance prescribed by
the Commissioner for established periods other than daily or
miscellaneous should be used in determining the tax to be deducted and
withheld for any such period without reference to the time the employee
is actually engaged in the performance of services during such payroll
period.
(c) * * *
(1) * * * The tables applicable to a daily or miscellaneous payroll
period show the tentative amount of tax to be deducted and withheld
from an employee's wages for the employee's filing status for one day.
* * *
* * * * *
(f) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
0
Par. 6. Section 31.3402(f)(1)-1 is revised to read as follows:
Sec. 31.3402(f)(1)-1 Withholding allowance.
(a) In general. (1) Except as otherwise provided in section
3402(f)(6) (see Sec. 31.3402(f)(6)-1), an employee receiving wages
will, on any day, be entitled to a withholding allowance as provided in
section 3402(f)(1) and paragraph (b) of this section. In order to
receive the benefit of the withholding allowance, the employee must
furnish to the employer a valid withholding allowance certificate in
effect for the calendar year as provided in section 3402(f)(2) and
Sec. 31.3402(f)(2)-1.
(2) The employer is not required to ascertain whether the
withholding allowance claimed is greater than the withholding allowance
to which the employee is entitled. For rules relating to invalid
withholding allowance certificates, see Sec. 31.3402(f)(2)-1(f)(3),
for rules relating to required submission of copies of certain
withholding allowance certificates to the Internal Revenue Service, see
Sec. 31.3402(f)(2)-1(g)(1), and for rules relating to the notice of
the maximum withholding allowance permitted, see Sec. 31.3402(f)(2)-
1(g)(2).
(b) Withholding allowance defined. (1) Generally, the withholding
allowance to which an employee is entitled is determined under the
computational procedures prescribed by the Commissioner in forms,
instructions, publications, and other guidance for the calendar year
for which the withholding allowance certificate is in effect.
(2) The withholding allowance is determined based on the
following--
(i) Whether the employee is an individual for whom a deduction is
allowable with respect to another taxpayer under section 151;
(ii) If the employee is married, whether the employee's spouse is
an individual for whom a deduction is allowable with respect to another
taxpayer under section 151 but only if such spouse does not have in
effect a withholding allowance certificate claiming such deduction;
(iii) If the employee is married, whether the employee's spouse is
entitled to additional deductions, credits, or other items the employee
elects to take into account under Sec. 31.3402(m)-1 or would be so
entitled if the employee's spouse were an employee receiving wages, but
only if such spouse does not have in effect a withholding allowance
certificate claiming such allowance;
(iv) Any credit under section 24(a) that the employee reasonably
expects to be able to claim on the employee's income tax return for the
calendar year for which the withholding allowance certificate is in
effect, except that the employee may not take into account any credit
under section 24(a) if this credit is claimed on another valid
withholding allowance certificate in effect with respect to another
employer of the employee or the employee's spouse. In addition, an
employee whose employer must withhold for that employee pursuant to a
notice under Sec. 31.3402(f)(2)-1(g)(2) must offset any tax benefit
resulting from a credit under section 24(a) with any anticipated income
tax attributable to items other than wages includible in the employee's
gross income in the manner prescribed by the Commissioner;
(v) Any additional deductions, credits, or other items the employee
elects to take into account under Sec. 31.3402(m)-1 for the calendar
year for which the withholding allowance certificate is in effect;
(vi) The basic standard deduction (as defined in section 63(c)(2))
relating to the filing status the employee reasonably expects to claim
on the
[[Page 63028]]
employee's income tax return for the calendar year for which the
withholding allowance certificate is in effect; and
(vii) Any adjustment resulting from multiple withholding allowance
certificates the employee, the employee's spouse, or both have or
reasonably expect to have in effect with respect to one or more
employers, determined based on the instructions to the withholding
allowance certificate and other guidance for the calendar year for
which the withholding allowance certificate is in effect.
(c) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
0
Par. 7. Section 31.3402(f)(2)-1 is revised to read as follows:
Sec. 31.3402(f)(2)-1 Furnishing of withholding allowance
certificates.
(a) On commencement of employment. (1) On or before the date on
which an individual commences employment with an employer, the
individual must furnish the employer with a signed withholding
allowance certificate (see Sec. 31.3402(f)(5)-1) relating to the
filing status the employee reasonably expects to claim under Sec.
31.3402(l)-1(b) for the calendar year for which the withholding
allowance certificate is in effect and the withholding allowance under
Sec. 31.3402(f)(1)-1(b) that the employee claims.
(2) In no event may the withholding allowance exceed the
withholding allowance that the employee is entitled to as determined
based on the employee's reasonable expectations and the instructions
set forth in forms, instructions, publications, and other guidance
prescribed by the Commissioner.
(3) The employee may claim exemption from withholding if the
certifications described in section 3402(n) and Sec. 31.3402(n)-
1(a)(1) and (2) are true with respect to the employee.
(4) If an employee has no valid withholding allowance certificate
in effect with the employer at the time of the payment of the wages,
and fails to furnish a valid withholding allowance certificate to the
employer, the employee will be treated as single but having the
withholding allowance provided in forms, instructions, publications,
and other guidance prescribed by the Commissioner.
(b) Change of status that affects calendar year--(1) General rule.
If, on any day during the calendar year, the employee experiences a
change of status that reduces the employee's withholding allowance or
withholding allowances, in the manner described in paragraph (b)(2) of
this section, the employee must, within 10 days after the change
occurs, furnish the employer with a new withholding allowance
certificate claiming the withholding allowance to which the employee is
entitled under Sec. 31.3402(f)(1)-1(b), unless paragraph (b)(3) of
this section applies to the employee.
(2) Changes of status. A change of status occurs if any of the
following changes occur on any day during the calendar year:
(i) The employee's filing status changes in the manner described in
Sec. 31.3402(l)-1(c).
(ii) The employee no longer has only one withholding allowance
certificate in effect for the employee, the employee's spouse, or both,
and the employee or the employee's spouse selects higher withholding
rate tables on the additional withholding allowance certificate, but
higher withholding rate tables are not selected on any previously
furnished withholding allowance certificate.
(iii) The employee has multiple withholding allowance certificates
in effect on which higher withholding rate tables are not selected, and
the employee or the employee's spouse reasonably expects an increase in
regular wages for the calendar year (as defined in Sec. 31.3402(g)-
1(a)(1)(ii)) in excess of $10,000.
(iv) The employee has included on a valid withholding allowance
certificate the child tax credit allowed under section 24(a) but
reasonably expects the number of individuals who satisfy the definition
of ``qualifying child'' as defined in section 24(c) who will be
reported on the employee's income tax return for the year for which tax
is being withheld to be less than the number taken into account in
completing the withholding allowance certificate.
(v) The employee has included on a valid withholding allowance
certificate a tax credit allowed under section 24(a) or other tax
credits allowed under Sec. 31.3402(m)-1 but reasonably expects the
employee's tax credits that will be reported on the employee's income
tax return for the year for which tax is being withheld to decrease by
more than $500 from the amount taken into account in completing the
withholding allowance certificate.
(vi) The employee has included on a valid withholding allowance
certificate deductions allowed under Sec. 31.3402(m)-1 but reasonably
expects the employee's included income tax deductions that will be
reported on the employee's income tax return for the year for which tax
is being withheld to decrease by more than $2,300 from the amount taken
into account in completing the withholding allowance certificate.
(vii) It is no longer reasonable for an employee who has furnished
the employer with a withholding allowance certificate which relies upon
the certifications described in Sec. 31.3402(n)-1(a) to anticipate
that the employee will incur no liability for income tax imposed under
subtitle A of the Code for the current or previous taxable year.
(3) Exception. If one or more of the changes described in paragraph
(b)(2) of this section occurs, but the total effect of the changes
together with any other changes affecting the employee's anticipated
tax liability under subtitle A is not anticipated to result in an
amount of tax to be deducted and withheld from the employee's wages
under section 3402 for the year that is less than the employee's
anticipated tax liability under subtitle A, the employee is not
required to furnish a new withholding allowance certificate.
(c) Increase in withholding allowance. If, on any day during the
calendar year, the employee experiences a change of status that
increases the employee's withholding allowance, the employee may
furnish the employer with a new withholding allowance certificate
claiming the withholding allowance the employee is entitled to under
Sec. 31.3402(f)(1)-1(b).
(d) Exemption from withholding. If, on any day during the calendar
year, the certifications described in section 3402(n) and Sec.
31.3402(n)-1(a)(1) and (2) are true with respect to an employee, the
employee may furnish the employer with a withholding allowance
certificate claiming exemption from withholding in the manner described
in forms, instructions, publications, and other guidance prescribed by
the Commissioner.
(e) Change of status which affects next calendar year--(1) General
rule. If, on any day during the calendar year, the withholding
allowance to which the employee will be, or may reasonably be expected
to be, entitled under Sec. 31.3402(f)(1)-1(b) for the next calendar
year, but not for the current calendar year, decreases in the manner
prescribed in paragraph (b)(2) of this section, the employee must
furnish a new withholding allowance certificate claiming the
withholding allowance the employee is entitled to under Sec.
31.3402(f)(1)-1(b) to take effect in the next calendar year by the
later of
[[Page 63029]]
December 1 of the calendar year of the year in which the change occurs
or within 10 days after the change occurs, unless paragraph (e)(2) of
this section applies to the employee.
(2) Exception. If one or more of the changes in paragraph (b)(2) of
this section occurs, but the total effect of the changes together with
any other changes affecting the employee's anticipated tax liability
under subtitle A is not anticipated to result in an amount of tax to be
deducted and withheld from the employee's wages under section 3402 for
the employee's next year that is less than the employee's anticipated
tax liability under subtitle A, the employee is not required to furnish
a new withholding allowance certificate.
(f) Special rules--(1) Employer requests. Before December 1 of each
year, every employer should request each employee to furnish a new
withholding allowance certificate for the next calendar year, in the
event of a change to the employee's withholding allowance.
(2) Social security account numbers. Every individual to whom a
social security number has been assigned must include such number on
any withholding allowance certificate furnished to an employer. An
employee may not use a truncated social security number (see Sec.
301.6109-4 of this chapter) in completing the withholding allowance
certificate. For provisions relating to the obtaining of an account
number from the Social Security Administration, see Sec. 31.6011(b)-2.
(3) Invalid withholding allowance certificates--(i) General rule.
Any alteration of or unauthorized addition to a withholding allowance
certificate causes such certificate to be invalid; see Sec.
31.3402(f)(5)-1(b) for the definitions of alteration and unauthorized
addition. Any withholding allowance certificate which the employee
clearly indicates to be false by an oral statement or by a written
statement (other than one made on the withholding allowance certificate
itself) made by the employee to the employer on or before the date on
which the employee furnishes such certificate is also invalid. For
purposes of the preceding sentence, the term ``employer'' includes any
individual authorized by the employer either to receive withholding
allowance certificates, to make withholding computations, or to make
payroll distributions.
(ii) Employer disregard of invalid withholding allowance
certificate. If an employer receives an invalid withholding allowance
certificate, the employer must disregard it for purposes of computing
withholding. The employer must inform the employee who furnished the
certificate that it is invalid and must request another withholding
allowance certificate from the employee. If the employee who furnished
the invalid certificate fails to comply with the employer's request,
the employer must treat the employee as single but having the
withholding allowance provided by the forms, instructions,
publications, and other guidance prescribed by the Commissioner. If,
however, a prior certificate is in effect with respect to the employee,
the employer must continue to withhold in accordance with the prior
certificate.
(g) Submission of certain withholding allowance certificates and
notice of maximum withholding allowance permitted--(1) Submission of
certain withholding allowance certificates--(i) In general. An employer
must submit to the Internal Revenue Service (IRS) a copy of any
currently effective withholding allowance certificate as directed in a
written notice to the employer from the IRS or as directed in published
guidance.
(A) Notice to submit withholding allowance certificates. A notice
to the employer to submit withholding allowance certificates may relate
either to one or more named employees, to one or more reasonably
segregable units of the employer, or to withholding allowance
certificates under certain specified criteria. The notice will
designate the IRS office to which the copies of the withholding
allowance certificates must be submitted. Alternatively, upon notice
from the IRS, the employer must make available for inspection by an IRS
employee withholding allowance certificates received from one or more
named employees, from one or more reasonably segregable units of the
employer, or from employees who have furnished withholding allowance
certificates under certain specified criteria.
(B) Published guidance. Employers may also be required to submit
copies of withholding allowance certificates under certain specified
criteria when directed to do so by the IRS in published guidance in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(ii) Withholding after submission of withholding allowance
certificate. After a copy of a withholding allowance certificate has
been submitted to the IRS under this paragraph (g)(1), the employer
must withhold tax on the basis of the withholding allowance
certificate, if the withholding allowance certificate meets the
requirements of Sec. 31.3402(f)(5)-1. However, the employer may not
withhold on the basis of the withholding allowance certificate if the
certificate must be disregarded based on a notice of the maximum
withholding allowance permitted under the provisions of paragraph
(g)(2) of this section.
(2) Notice of the maximum withholding allowance permitted--(i)
Notice to employer. The IRS may notify the employer in writing that the
employee is not entitled to claim a complete exemption from withholding
or more than the maximum withholding allowance specified by the IRS in
the written notice. The notice will also specify the applicable filing
status for purposes of calculating the required amount of withholding.
The notice will specify the IRS office to be contacted for further
information. The notice of maximum withholding allowance permitted may
be issued if--
(A) The IRS determines that a copy of a withholding allowance
certificate submitted under paragraph (g)(1) of this section or
otherwise provided to the IRS includes a materially incorrect statement
or determines, after a request to the employee for verification of the
statements on the certificate, that the IRS lacks sufficient
information to determine if the certificate is correct; or
(B) The IRS otherwise determines that the employee is not entitled
to claim a complete exemption from withholding and is not entitled to
claim more than a specified number of withholding exemptions,
withholding allowances, or a specified withholding allowance.
(ii) Notice to employee. If the IRS provides a notice to the
employer under this paragraph (g)(2), the IRS will also provide the
employer with a similar notice for the employee (employee notice) that
identifies the maximum withholding allowance permitted and specifies
the filing status to be used for calculating the required amount of
withholding for the employee. The employee notice will indicate the
process by which the employee can provide additional information to the
IRS for purposes of determining the appropriate withholding allowance
and/or modifying the specified filing status. The IRS will also mail a
similar notice to the employee's last known address. For further
guidance regarding the definition of last known address, see Sec.
301.6212-2 of this chapter. If the IRS is unable to determine a last
known address for the employee, the IRS will use other available
information as appropriate to mail the notice to the employee.
(iii) Requirement to furnish. If the employee is employed by the
employer as of the date of the notice, the employer
[[Page 63030]]
must furnish the employee notice to the employee within 10 business
days of receipt. The employer may follow any reasonable business
practice to furnish the copy of the notice to the employee. For
purposes of this paragraph (g)(2)(iii), the determination of whether an
employee is employed as of the date of the notice is based on all the
facts and circumstances, including whether the employer has treated the
employment relationship as terminated for other purposes. An employee
who is not performing services for the employer as of the date of the
notice is employed by the employer as of the date of the notice for
purposes of this paragraph (g)(2)(iii) if--
(A) The employer pays wages with respect to prior employment to the
employee subject to income tax withholding on or after the date
specified in the notice;
(B) The employer reasonably expects the employee to resume the
performance of services for the employer within twelve months of the
date of the notice; or
(C) The employee is on a bona fide leave of absence and either the
period of such leave does not exceed twelve months or the employee
retains a right to reemployment with the employer under an applicable
statute or by contract.
(iv) Requirement to withhold based on the notice. If the employer
is required to furnish the employee notice to the employee under
paragraph (g)(2)(iii) of this section, then the employer must withhold
tax on the basis of the maximum withholding allowance and the filing
status specified in the notice for any wages paid after the date
specified in the notice, except as provided in paragraphs (g)(2)(v)
through (ix) of this section. The employer must withhold tax in
accordance with the notice as of the date specified in the notice,
which shall be no earlier than 45 calendar days after the date of the
notice. If the notice was provided to the employer based on
computational procedures applicable to a withholding allowance
certificate that was in effect on December 31, 2019 or earlier, the
employer may comply with the requirement in this paragraph (g)(2)(iv)
to withhold on the basis of the notice by implementing the maximum
withholding allowance and filing status permitted by using the
computational bridge entries as set forth in forms, instructions,
publications, and other guidance prescribed by the Commissioner to
calculate withholding for a withholding allowance certificate that was
in effect on December 31, 2019 or earlier.
(v) Employment resumes after twelve months. If the employer is
required to furnish the employee notice to the employee only pursuant
to paragraph (g)(2)(iii)(B) of this section and the employee resumes
the performance of services for the employer more than 12 months after
the date of the notice, then the employer is not required to withhold
based on the notice.
(vi) Requirement to withhold based on an existing Form W-4. If a
withholding allowance certificate is in effect with respect to the
employee before the employer receives a notice of the maximum
withholding allowance permitted under this paragraph (g)(2), the
employer must continue to withhold tax in accordance with the existing
withholding allowance certificate, rather than on the basis of the
notice, if the existing withholding allowance certificate does not
claim complete exemption from withholding and claims a filing status, a
withholding allowance, and any additional amount under Sec.
31.3402(i)-1(a)(1) and (2) that results in more withholding than would
result from applying the filing status and withholding allowance
specified in the notice.
(vii) Modification notice. After issuing the notice specifying the
maximum withholding allowance permitted and the filing status, the IRS
may issue a subsequent notice to the employer and the employee that
modifies the original notice (modification notice). The modification
notice may change the filing status and/or the withholding allowance
permitted. The employer must withhold based on the modification notice
as of the date specified in the modification notice. If the
modification notice was provided to the employer based on computational
procedures applicable to a withholding allowance certificate that was
in effect on December 31, 2019 or earlier, the employer may comply with
the requirement in this paragraph (g)(2)(vii) to withhold on the basis
of the modification notice by implementing the maximum withholding
allowance and filing status permitted by using the optional
computational bridge entries as set forth in forms, instructions,
publications, and other guidance prescribed by the Commissioner to
calculate withholding for a withholding allowance certificate that was
in effect on December 31, 2019 or earlier.
(viii) Requirement to withhold after termination of employment. If
the employee is employed as of the date of the notice under paragraph
(g)(2)(iii) of this section but the employer or employee terminates the
employment relationship after the date of the notice, the employer must
continue to withhold based on the maximum withholding allowance and the
filing status specified in the notice or a modification notice if any
wages subject to income tax withholding are paid with respect to the
prior employment after such date. Furthermore, the employer must
withhold based on the notice or modification notice if the employee
resumes an employment relationship with the employer within 12 months
after the termination of the employment relationship. Whether the
employment relationship is terminated is based on all the facts and
circumstances.
(ix) Requirement to withhold based on new Form W-4. The employee
may furnish a new withholding allowance certificate after the employer
receives a notice or modification notice from the IRS of the maximum
withholding allowance permitted under this paragraph (g)(2).
(A) Employee requests more withholding. If the employee furnishes a
new withholding allowance certificate after the employer receives the
notice or modification notice, the employer must withhold tax on the
basis of that new certificate only if the new certificate does not
claim complete exemption from withholding and claims a filing status, a
withholding allowance, and any additional amount under Sec.
31.3402(i)-1(a)(1) and (2) that results in more withholding than would
result under the notice or modification notice.
(B) Employee requests less withholding. If the employee furnishes a
new withholding allowance certificate after the employer receives the
notice or modification notice, the employer must disregard the new
certificate and withhold on the basis of the notice or modification
notice if the employee claims complete exemption from withholding or
claims a filing status, a withholding allowance, and any additional
amount under Sec. 31.3402(i)-1(a)(1) and (2) that results in less
withholding than would result under the notice or modification notice.
If the employee wants to put a new certificate into effect that results
in less withholding than that required under the notice or modification
notice, the employee must contact the IRS. The employer must withhold
on the basis of the notice or modification notice unless the IRS
subsequently notifies the employer to withhold based on the new
certificate.
(3) Definition of employer. For purposes of this paragraph (g), the
term ``employer'' includes any person authorized by the employer to
receive withholding allowance certificates, to
[[Page 63031]]
make withholding computations, or to make payroll distributions.
(4) Examples. The following examples illustrate the rules of this
section.
(i) Example 1. Employer U receives a notice from the IRS that
identifies the maximum withholding allowance permitted and specifies
the filing status for Employee A. Employee A is not currently
performing any services for Employer U. However, Employer U is
continuing to make certain wage payments to Employee A. Employer U
must furnish the employee notice to Employee A within 10 business
days of receipt and must withhold based on the notice on any wages
paid to Employee A on or after the date specified in the notice.
(ii) Example 2. Employer V receives a notice in October of Year
1 from the IRS that identifies the maximum withholding allowance
permitted and specifies the filing status for Employee B. Employee B
has not performed services for Employer V since August of Year 1.
However, since Employee B has performed services for Employer V for
several years on a seasonal basis, Employer V reasonably expects
Employee B to resume the performance of services for Employer V in
June of Year 2, a date that is within 12 months of the date of the
notice. Employer V is required to furnish the notice to Employee B
within 10 business days of receipt. Employee B does not resume the
performance of services with Employer V until June of Year 3.
Employer V is not required to withhold based on the notice.
(iii) Example 3. Employer W receives a notice from the IRS that
identifies the maximum withholding allowance permitted and specifies
the filing status for Employee C. Employee C began a 4-month unpaid
maternity leave of absence three weeks before Employer W received
the notice. Employer W must furnish the employee notice to Employee
C within 10 business days of receipt. When her maternity leave ends
and Employee C resumes performing services for Employer W, Employer
W must withhold based on the notice.
(iv) Example 4. Employer X receives a notice from the IRS in
Year 1 that identifies the maximum withholding allowance permitted
and specifies the filing status for Employee D. Employer X must
furnish the employee notice to Employee D within 10 business days of
receipt and withhold based on the notice. In Year 2, Employee D
terminates the employment relationship. Employee D applies for a
different position with Employer X and resumes employment 10 months
after having left her previous position with Employer X. Since
Employer X rehired Employee D within 12 months after the termination
of employment, Employer X must withhold based on the notice.
(v) Example 5. Employer Y receives a notice from the IRS that
identifies the maximum withholding allowance permitted and specifies
the filing status for Employee E. Employer Y must furnish the
employee notice to Employee E within 10 business days of receipt.
After receipt of this notice, Employee E contacts the IRS and
establishes that the employee is entitled to claim a modified filing
status and withholding allowance. Employer Y receives a modification
notice from the IRS that changes the maximum withholding allowance
permitted for Employee E. Employer Y must withhold tax based on the
modification notice as of the date specified in such notice.
(vi) Example 6. Employer Z pays remuneration to Employee F, a
United States citizen, for services performed in Country M. Employer
Z receives a notice from the IRS in Year 1 that identifies the
maximum withholding allowance permitted and specifies the filing
status for Employee F. Employer Z must furnish the employee notice
to Employee F within 10 business days of receipt. Employer Z
reasonably believes all the remuneration paid to Employee F in Year
1 is excluded from Employee F's gross income under section 911.
Since section 3401(a)(8)(B) excludes such remuneration from wages
for income tax withholding purposes, Employer X does not have to
withhold on such remuneration, notwithstanding the maximum
withholding allowance permitted and filing status specified in the
notice. In Year 2, Employee F returns to the United States to
perform services. Employer Z does not reasonably believe any part of
Employee F's remuneration paid in Year 2 is excluded from Employee
F's gross income under section 911. Rather, Employer Z reasonably
believes that remuneration paid to Employee F in Year 2 is subject
to income tax withholding. Employer Z must withhold on the
remuneration paid to Employee F in Year 2 based on the notice.
(h) Applicability date. The provisions of paragraph (g) of this
section apply on February 13, 2020. Taxpayers may choose to apply
paragraph (g) of this section on or after January 1, 2020 and before
February 13, 2020. For rules that apply under paragraph (g) of this
section before February 13, 2020, see 26 CFR part 31, revised as of
April 1, 2020. The provisions of paragraphs (a) through (f) of this
section apply on and after October 6, 2020. Taxpayers may choose to
apply the provisions of paragraph (a) through (f) of this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
0
Par. 8. Section 31.3402(f)(3)-1 is revised to read as follows:
Sec. 31.3402(f)(3)-1 When withholding allowance certificate takes
effect.
(a) No withholding allowance certificate on file. A withholding
allowance certificate furnished to the employer in any case in which no
previous withholding allowance certificate is in effect with such
employer, takes effect as of the beginning of the first payroll period
ending, or the first payment of wages made without regard to a payroll
period, on or after the date on which such certificate is so furnished.
(b) Withholding allowance certificate on file. Except as provided
in paragraph (c) of this section, a withholding allowance certificate
furnished to the employer in any case in which a previous withholding
allowance certificate is in effect with such employer takes effect as
of the beginning of the first payroll period ending (or the first
payment of wages made without regard to a payroll period) on or after
the 30th day after the day on which such certificate is so furnished.
However, the employer may elect to put a withholding allowance
certificate into effect earlier, beginning with any payment of wages on
or after the day on which the certificate is so furnished.
(c) Withholding allowance certificate furnished to take effect in
next calendar year. A withholding allowance certificate furnished to
the employer pursuant to section 3402(f)(2)(C) (see Sec.
31.3402(f)(2)-1(e) or Sec. 31.3402(l)-1(c)) which effects a change for
the next calendar year, does not take effect, and may not be made
effective, with respect to the calendar year in which the certificate
is furnished.
(d) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
Sec. 31.3402(f)(4)-1 [Removed]
0
Par. 9. Section 31.3402(f)(4)-1 is removed.
Sec. 31.3402(f)(4)-2 [Redesignated as Sec. 31.3402(f)(4)-1]
0
Par. 10. Section 31.3402(f)(4)-2 is redesignated as Sec.
31.3402(f)(4)-1.
0
Par. 11. Newly redesignated Sec. 31.3402(f)(4)-1 is revised to read as
follows:
Sec. 31.3402(f)(4)-1 Effective period of a withholding allowance
certificate.
(a) In general. Except as provided in paragraph (b) of this section
and Sec. 31.3402(f)(2)-1(g)(2), a withholding allowance certificate
that takes effect under section 3402(f) of the Internal Revenue Code of
1986 continues in effect with respect to the employee until another
withholding allowance certificate takes effect under section 3402(f).
An employer's use of computational bridge entries as set forth in
forms, instructions, publications, and other guidance prescribed by the
Commissioner to calculate withholding for a withholding allowance
certificate that was in effect on December 31, 2019 or earlier
continues in effect an
[[Page 63032]]
employee's withholding allowance certificate under this paragraph (a).
(b) Certifications under section 3402(n) eliminating requirement of
withholding. The certifications described in Sec. 31.3402(n)-1(a) made
by an employee with respect to the employee's preceding taxable year
and current taxable year are effective until either a new withholding
allowance certificate furnished by the employee takes effect or the
existing certificate that relies upon such certifications expires. If
an employee's certificate expires and the employee fails to furnish a
valid withholding allowance certificate, the employee will be treated
as single but having the withholding allowance provided in forms,
instructions, publications, and other guidance prescribed by the
Commissioner. In no case shall a withholding allowance certificate that
relies upon such certifications be effective with respect to any
payment of wages made to an employee:
(1) In the case of an employee whose liability for tax under
subtitle A of the Code is determined on a calendar year basis, after
February 15 of the calendar year following the estimation year; or
(2) In the case of an employee to whom paragraph (b)(1) of this
section does not apply, after the 15th day of the 2nd calendar month
following the last day of the estimation year.
(c) Estimation year. The estimation year is the taxable year
including the day on which the employee furnishes the withholding
allowance certificate to the employer, except that if the employee
furnishes the withholding allowance certificate to the employer and
specifies on the certificate that the certificate is not to take effect
until a specified future date, the estimation year will be the taxable
year including that specified future date.
(d) Applicability to notice of maximum withholding allowance. If a
withholding allowance certificate is no longer in effect because of the
application of Sec. 31.3402(f)(2)-1(g)(2), the employer is no longer
required to withhold pursuant to any notice under Sec. 31.3402(f)(2)-
1(g)(2), and the employee fails to furnish the employer a valid
withholding allowance certificate, then the employee will be treated as
single but having the withholding allowance provided in forms,
instructions, publications, and other guidance prescribed by the
Commissioner, in accordance with Sec. 31.3402(f)(2)-1(a)(4).
(e) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
0
Par. 12. Section 31.3402(f)(5)-1 is revised to read as follows:
Sec. 31.3402(f)(5)-1 Form and contents of withholding allowance
certificates.
(a) In general--(1) Form W-4. Form W-4, ``Employee's Withholding
Certificate,'' previously called ``Employee's Withholding Allowance
Certificate,'' is the form prescribed for the withholding allowance
certificate required to be furnished under section 3402(f)(2). A
withholding allowance certificate must be prepared in accordance with
the instructions applicable thereto and must set forth fully and
clearly the information that is called for therein. In lieu of the
prescribed form, an employer may prepare and provide to employees a
form the provisions of which are identical to those of the prescribed
form, but only if the employer also provides employees with all the
tables, instructions, and worksheets set forth in the Form W-4 in
effect at that time, and only if the employer complies with all revenue
procedures and other guidance prescribed by the Commissioner relating
to substitute forms in effect at that time.
(2) Employee substitute forms. Employers are prohibited from
accepting a substitute form developed by an employee, and an employee
furnishing such form will be treated as failing to furnish a
withholding allowance certificate. For further guidance regarding the
employer's obligations when an employee is treated as failing to
furnish a withholding allowance certificate, see Sec. 31.3402(f)(2)-1.
(3) Current year revision. Only the Form W-4 revision in effect for
a calendar year may be furnished by an employee in that calendar year
and given legal effect by the employer, unless provided otherwise in
forms, instructions, publications, or other guidance, except that an
employee may furnish the Form W-4 revision for the following calendar
year in the current calendar year to take effect for the following
calendar year.
(4) Examples. The following examples illustrate the rule in
paragraph (a)(3) of this section.
(i) Example 1. Employee A furnishes a 2019 Form W-4 to Employer
X in calendar year 2020. The 2019 Form W-4 furnished by Employee A
in 2020 has no legal effect. Employer X must disregard this 2019
Form W-4 furnished in 2020 and continue to withhold based on a
previously furnished Form W-4 that has been in effect for Employee
A, if any. If Employee A has no Form W-4 in effect, she is treated
as having no valid withholding allowance certificate in effect.
(ii) Example 2. Employee A furnishes a 2021 Form W-4 to Employer
X in calendar year 2020 to take effect in calendar year 2021. The
2021 Form W-4 is valid, and the employer must put this form into
effect in 2021 in accordance with the timing rules in Sec.
31.3402(f)(3)-1.
(b) Invalid Form W-4. A Form W-4 does not meet the requirements of
section 3402(f)(5) or this section and is invalid if it includes an
alteration or unauthorized addition. For purposes of Sec.
31.3402(f)(2)-1(f)(3) and this paragraph (b)--
(1) An alteration of a withholding allowance certificate is any
deletion of the language of the jurat or other similar provision of
such certificate by which the employee certifies or affirms the
correctness of the completed certificate, or any material defacing of
such certificate; and
(2) An unauthorized addition to a withholding allowance certificate
is any writing on such certificate other than the entries requested on
the Form W-4 (e.g., name, address, and filing status) or permitted by
instructions or other guidance. For purposes of this paragraph (b)(2),
an entry claiming exemption from withholding that is accompanied by
other entries on the Form W-4 (other than the employee's filing status)
that could potentially affect the amount of income tax deducted and
withheld from the employee's pay is an unauthorized addition;
consequently, the employer must treat the Form W-4 as an invalid Form
W-4.
(c) Electronic Form W-4--(1) In general. An employer may establish
a system for its employees to furnish withholding allowance
certificates electronically.
(2) Requirements--(i) In general. The electronic system must ensure
that the information received is the information sent and must document
all occasions of employee access that result in the furnishing of a
Form W-4. In addition, the design and operation of the electronic
system, including access procedures, must make it reasonably certain
that the person accessing the system and furnishing the Form W-4 is the
employee identified in the form.
(ii) Information to employer. The electronic furnishing must
provide the employer with exactly the same information as the current
version of the official Internal Revenue Service (IRS) Form W-4
available on irs.gov.
(iii) Information to employee. The electronic Form W-4 system must
[[Page 63033]]
provide the employee with the same information as the current version
of the official IRS Form W-4 available on irs.gov and must satisfy any
requirements specified by the IRS in forms, publications, and other
guidance. The electronic Form W-4 system must provide employees the
ability to claim exemption from withholding under section 3402(n) and
must include the two certifications described in Sec. 31.3402(n)-1(a).
(iv) Jurat and signature requirements. The electronic furnishing
must be signed by the employee under penalties of perjury.
(A) Jurat. The jurat (perjury statement) must contain the language
that appears on the paper Form W-4. The electronic program must inform
the employee that he or she must make the declaration set forth in the
jurat and that the declaration is made by signing the Form W-4. The
instructions and the language of the jurat must immediately follow the
employee's income tax withholding selections and immediately precede
the employee's electronic signature.
(B) Electronic signature. The electronic signature must identify
the employee furnishing the electronic Form W-4 and authenticate and
verify the furnishing. For purposes of this paragraph (c)(2)(iv)(B),
the terms ``authenticate'' and ``verify'' have the same meanings as
they do when applied to a written signature on a paper Form W-4. An
electronic signature can be in any form that satisfies the foregoing
requirements. The electronic signature must be the final entry in the
employee's Form W-4 furnished electronically.
(v) Copies of electronic Forms W-4. Upon request by the Internal
Revenue Service, the employer must supply a hard copy of the electronic
Form W-4 and a statement that, to the best of the employer's knowledge,
the electronic Form W-4 was furnished by the named employee. The
hardcopy of the electronic Form W-4 must provide exactly the same
information as, but need not be a facsimile of, the paper Form W-4.
(d) Applicability date. The provisions of paragraphs (a)(3) and (4)
of this section apply on and after March 16, 2020. Taxpayers may choose
to apply the provisions of paragraphs (a)(3) and (4) of this section on
or after January 1, 2020 and before March 16, 2020. For the provision
of paragraph (a)(3) of this section that applies before March 16, 2020,
see 26 CFR part 31, revised as of April 1, 2020. The provisions of
paragraphs (a)(1) and (2), (b), and (c) of this section apply on and
after October 6, 2020. Taxpayers may choose to apply paragraphs (a)(1)
and (2), (b), and (c) of this section on or after January 1, 2020 and
before October 6, 2020. For rules that apply before October 6, 2020,
see 26 CFR part 31, revised as of April 1, 2020.
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Par. 13. Section 31.3402(f)(6)-1 is revised to read as follows:
Sec. 31.3402(f)(6)-1 Withholding exemptions for nonresident alien
individuals.
(a) In general. (1) A nonresident alien individual (other than a
nonresident alien individual treated as a resident under section
6013(g) or (h)) subject to withholding under section 3402 is on any one
day entitled to the number of withholding exemptions corresponding to
the number of personal exemptions to which the nonresident alien is
entitled on such day by reason of the application of section 873(b)(3)
or section 876, whichever applies. Thus, a nonresident alien individual
who is not a resident of Canada or Mexico and who is not a resident of
Puerto Rico during the entire taxable year, is allowed only one
withholding exemption.
(2) The withholding exemption in paragraph (a) of this section and
section 3402(f)(6) is the deduction allowed to the nonresident alien
individual under section 151.
(b) Additional guidance. A nonresident alien individual (other than
a nonresident alien individual treated as a resident under section
6013(g) or (h)) subject to withholding must follow administrative
guidance such as forms, instructions, publications, or other guidance
prescribed by the Commissioner to determine the nonresident alien's
withholding allowance.
(c) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply this section on or
after January 1, 2020 and before October 6, 2020. For rules that apply
before October 6, 2020, see 26 CFR part 31, revised as of April 1,
2020.
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Par. 14. Section 31.3402(g)-1 is amended:
0
1. In paragraph (a)(2), by revising the second sentence.
0
2. In paragraph (a)(7)(ii), by revising the first sentence.
0
3. By adding paragraph (d).
The revisions and addition read as follows:
Sec. 31.3402(g)-1 Supplemental wage payments.
(a) * * *
(2) * * * This flat rate shall be applied without regard to whether
income tax has been withheld from the employee's regular wages, and
without regard to any entries on Form W-4, including whether the
employee has claimed exempt status on Form W-4 or whether the employee
has requested additional withholding on Form W-4, and without regard to
the withholding method used by the employer. * * *
* * * * *
(7) * * *
(ii) * * * The determination of the tax to be withheld under
paragraph (a)(7)(iii) of this section is made without reference to any
payment of regular wages and without regard to any entries on the Form
W-4 other than the entry claiming exempt status on Form W-4 (see Sec.
31.3402(n)-1(b)). * * *
* * * * *
(d) Applicability date. The provisions of paragraphs (a)(2) and
(a)(7)(ii) of this section apply on and after October 6, 2020.
Taxpayers may choose to apply paragraphs (a)(2) and (a)(7)(ii) of this
section on or after January 1, 2020 and before October 6, 2020. For the
provisions of paragraphs (a)(2) and (a)(7)(ii) of this section that
apply before October 6, 2020, see 26 CFR part 31, revised as of April
1, 2020.
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Par. 15. Section 31.3402(h)(4)-1 is amended by:
0
1. Removing paragraph (b).
0
2. Redesignating paragraph (c) as paragraph (b).
0
3. Adding a new paragraph (c).
0
4. Removing the parenthetical authority citation at the end of the
section.
The addition reads as follows:
Sec. 31.3402(h)(4)-1 Other methods.
* * * * *
(c) Applicability date. The removal of paragraph (b) from this
section as of October 6, 2020, which provided for combined FICA and
income tax withholding tables, applies on and after January 1, 2020.
For rules that apply before January 1, 2020, see 26 CFR part 31,
revised as of April 1, 2020.
Sec. 31.3402(i)-1 [Removed]
0
Par. 16. Section 31.3402(i)-1 is removed.
Sec. 31.3402(i)-2 [Redesignated as Sec. 31.3402(i)-1]
0
Par. 17. Section 31.3402(i)-2 is redesignated as Sec. 31.3402(i)-1.
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Par. 18. Newly redesignated Sec. 31.3402(i)-1 is amended by:
0
1. Revising the section heading and paragraph (a)(2).
0
2. Adding paragraph (a)(3).
0
3. Revising paragraph (b).
0
4. Removing the parenthetical authority citation at the end of the
section.
The revisions and addition read as follows:
[[Page 63034]]
Sec. 31.3402(i)-1 Increases in withholding.
(a) * * *
(2) Increases in withholding based on additional income. (i) The
employee may request that the employer add an additional amount to the
employee's wages and that the employer deduct and withhold an
additional amount of income tax resulting from this addition under the
computational procedures prescribed by the Commissioner in forms,
instructions, publications, and other guidance for the calendar year
for which the withholding allowance certificate claiming an additional
amount to add to the employee's wages is furnished;
(ii) The employee may request that the employer deduct and withhold
additional amounts of income tax resulting from the employee selecting
higher withholding rate tables on the withholding allowance
certificate;
(iii) The employer must comply with the employee's request under
paragraph (a)(1)(i) or (ii) of this section, except that the employer
shall comply with the employee's request only to the extent that the
amount that the employee requests to be deducted and withheld under
this section does not exceed the amount that remains after the employer
has deducted and withheld all amounts otherwise required to be deducted
and withheld by Federal law (other than by section 3402(i) and this
section), State law, and local law (other than by State or local law
that provides for voluntary withholding); and
(iv) The employer must comply with the employee's request in
accordance with the time limitations in Sec. 31.3402(f)(3)-1. The
employee must make the request on Form W-4 as provided in Sec.
31.3402(f)(5)-1 (relating to form and contents of withholding allowance
certificates), and this Form W-4 shall take effect and remain effective
in accordance with section 3402(f) and Sec. 31.3402(f)(4)-1.
(3) Amount deducted treated as tax. The amount deducted and
withheld pursuant to paragraphs (a)(1) and (2) of this section shall be
treated as tax required to be deducted and withheld under section 3402.
(b) Applicability date. The provisions of paragraphs (a)(2) and (3)
of this section apply on and after October 6, 2020. Taxpayers may
choose to apply paragraphs (a)(2) and (3) this section on or after
January 1, 2020 and before October 6, 2020.
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Par. 18. Section 31.3402(l)-1 is revised to read as follows:
Sec. 31.3402(l)-1 Determination and disclosure of marital or filing
status.
(a) In general. An employer shall apply the applicable percentage
method or wage bracket method withholding tables corresponding to the
marital status or filing status that the employee selects on a valid
withholding allowance certificate as set forth in forms, instructions,
publications, and other guidance prescribed by the Commissioner.
(b) Employee's filing status. An employee will be treated as single
unless the employee selects head of household or married filing jointly
filing status on a valid withholding allowance certificate. Employees
may select a filing status other than single, subject to the following
conditions:
(1) The employee may select head of household filing status on the
employee's withholding allowance certificate only if the employee
reasonably expects to be eligible to claim head of household filing
status under section 2(b) and Sec. 1.2-2(b) of this chapter on the
employee's income tax return.
(2) The employee may select married filing jointly filing status on
the employee's withholding allowance certificate only if paragraph (d)
of this section applies to the employee and the employee reasonably
expects to file jointly a single return of income under subtitle A of
the Code with the employee's spouse. If an employee is married and
expects to file a separate return from the employee's spouse, the
employee must select single or married filing separately filing status
on the employee's withholding allowance certificate.
(c) Change in filing status--(1) In general. Unless paragraph
(c)(2) of this section applies, the employee must within 10 days
furnish the employer with a new withholding allowance certificate if
the employee's filing status changes--
(i) From married filing jointly (or qualifying widow(er)) to head
of household, married filing separately, or single; or
(ii) From head of household to married filing separately or single.
(2) Exception. If the employee's filing status changes in the
manner described in paragraph (c)(1)(i) or (ii) of this section, but
the total effect of the changes together with other changes affecting
the employee's anticipated tax liability under subtitle A does not
result in an amount of tax to be deducted and withheld from the
employee's wages for the taxable year that is less than the employee's
anticipated tax liability under subtitle A, the employee is not
required to furnish a new withholding allowance certificate within 10
days. However, the employee must furnish a new withholding allowance
certificate to take effect the following calendar year by the later of
December 1 of the calendar year in which the employee's filing status
changes, or within 10 days of such change.
(d) Determination of marital status. For the purposes of section
3402(l)(2) and paragraph (b) of this section, paragraphs (d)(1) and (2)
of this section shall be applied in determining whether an employee is
a single person or a married person:
(1) An employee shall on any day be considered as a single person
and not married if--
(i) The employee is legally separated from the employee's spouse
under a decree of divorce or separate maintenance; or
(ii) Either the employee or the employee's spouse is, or on any
preceding day within the same calendar year was, a nonresident alien
unless the employee has made or reasonably expects to make an election
under section 6013(g) in the time and manner prescribed in Sec.
1.6013-6(a)(4) of this chapter.
(2) An employee shall on any day be considered as a married person
if paragraph (d)(1) of this section does not apply and--
(i) The employee is married within the meaning of Sec. 301.7701-
18(b) of this chapter on the day the withholding allowance certificate
is furnished;
(ii) The employee's spouse died during the employee's taxable year;
or
(iii) The employee's spouse died during one of the two taxable
years immediately preceding the current taxable year and, on the basis
of facts existing at the beginning of such day, the employee reasonably
expects, at the close of the taxable year, to be a surviving spouse as
defined in section 2 and Sec. 1.2-2(a) of this chapter. The employee
must reasonably expect to file an income tax return claiming qualifying
widow(er) status.
(e) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply paragraphs (a)(2)
and (3) this section on or after January 1, 2020 and before October 6,
2020. For rules that apply before October 6, 2020, see 26 CFR part 31,
revised as of April 1, 2020.
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Par. 20. Section 31.3402(m)-1 is revised to read as follows:
Sec. 31.3402(m)-1 Additional withholding allowance.
(a) In general. In determining the withholding allowance or
additional
[[Page 63035]]
reductions in withholding under section 3402(m) on employee withholding
allowance certificates furnished to the employer to be effective on or
after January 1, 2020, employees may take into account the estimated
tax deductions described in paragraph (b) of this section, the
estimated tax credits described in paragraph (c) of this section, and
estimated tax payments described in paragraph (d) of this section.
Employees may only claim items in paragraphs (b), (c), and (d) of this
section to the extent provided in paragraph (e) of this section.
(b) Estimated tax deductions. Employees may take into account the
following income tax deductions in chapter 1 of the Code:
(1) Estimated itemized deductions (as defined in section 63(d))
allowable under chapter 1;
(2) Estimated deductions described in section 62(a), except for--
(i) Any deduction described in section 62(a)(1);
(ii) Any deduction described in section 62(a)(2) if the
reimbursement or payment for the amount allowable as such deduction is
excludable from wages subject to income tax withholding;
(iii) Any deduction described in section 62(a)(3);
(iv) Any deduction described in section 62(a)(4); and
(v) Any deduction described in section 62(a)(5);
(3) Estimated deductions for net operating loss carryovers under
section 172;
(4) The estimated aggregate net losses from schedules C (Profit or
Loss from Business), D (Capital Gains and Losses), E (Supplemental
Income and Loss), and F (Profit or Loss from Farming) of Form 1040 and
from the last line of Part II of Form 4797 (Sale of Business Property);
(5) Estimated additional standard deduction for the aged and blind
provided under section 63(c)(3) and section 63(f);
(6) Estimated deduction allowed under section 199A; and
(7) Estimated deduction or deductions allowed under section 151.
(c) Estimated tax credits. Employees may take into account the
estimated income tax credits allowable under chapter 1, except for--
(1) The credit under section 31(a) for taxes withheld under chapter
24 of the Code (which includes taxes withheld on wages and amounts
treated as wages for chapter 24 purposes, such as pension withholding
under section 3405 and backup withholding under section 3406) unless,
on the day the employee estimates this amount, the amount has been
actually withheld from the employee's wages (or another payment treated
as wages for this purpose), the employee enters this amount of tax
withheld pursuant to the instructions in the Tax Withholding Estimator
(or successor) or Publication 505 (or successor), and the employee is
not an employee whose employer must withhold for that employee pursuant
to a notice under Sec. 31.3402(f)(2)-1(g)(2);
(2) The credit for tax withheld at source for nonresident aliens
and foreign corporations under section 33; and
(3) Any credit to the extent that the employee has filed or expects
to file any IRS form claiming such credit other than the employee's
United States Individual Income Tax Return (Form 1040).
(d) Estimated tax payments. Employees may take into account
estimated tax payments only if--
(1) The employee's employer is not obligated to withhold on the
employee's wages pursuant to a notice under Sec. 31.3402(f)(2)-
1(g)(2);
(2) The amount claimed has been paid with the payment voucher from
Form 1040-ES (or was otherwise designated by the taxpayer as a payment
of estimated tax) or is planned to be made with respect to nonwage
items but only if the planned amount does not decrease withholding
below the pro-rata share of chapter 1 tax attributable to wages as
determined under forms, instructions, publications, and other guidance
prescribed by the Commissioner;
(3) The employee uses the Tax Withholding Estimator (or successor)
or Publication 505 (or successor) and enters the amount claimed
pursuant to the instructions in the Tax Withholding Estimator (or
successor) or Publication 505 (or successor); and
(4) In using the Tax Withholding Estimator (or successor) or
Publication 505 (or successor), the employee includes all items of
nonwage income the Tax Withholding Estimator (or successor) or
Publication 505 (or successor) prompts or instructs the employee to
enter or include.
(e) Definitions and special rules--(1) Estimated. The term
``estimated'' as used in this section to modify the terms
``deduction,'' ``deductions,'' ``credits,'' ``losses,'' and ``amount of
decrease'' means with respect to an employee the aggregate dollar
amount of a particular item that the employee reasonably expects will
be allowable to the employee on the employee's income tax return for
the estimation year under the section of the Code specified for each
item. In no event shall that amount exceed the sum of:
(i) The amount shown for that particular item on the income tax
return that the employee has filed for the taxable year preceding the
estimation year (or, if such return has not yet been filed, then the
income tax return that the employee filed for the taxable year
preceding such year), which amount the employee also reasonably expects
to show on the income tax return for the estimation year; plus
(ii) The determinable additional amounts (as defined in paragraph
(e)(1)(iii) of this section) for each item for the estimation year.
(iii) The determinable additional amounts are amounts that are not
included in paragraph (e)(1)(i) of this section and that are
demonstrably attributable to identifiable events during the estimation
year or the preceding year. Amounts are demonstrably attributable to
identifiable events if they relate to payments already made during the
estimation year, to binding obligations to make payments (including the
payment of taxes) during the year, and to other transactions or
occurrences, the implementation of which has begun and is verifiable at
the time the employee furnishes a withholding allowance certificate.
The estimation year is the taxable year including the day on which the
employee furnishes the withholding allowance certificate to the
employer, except that if the employee furnishes the withholding
allowance certificate to the employer and specifies on the certificate
that the certificate is not to take effect until a specified future
date, the estimation year shall be the taxable year including that
specified future date. It is not reasonable for an employee to include
in his or her withholding computation for the estimation year any
amount that is shown for a particular item on the income tax return
that the employee has filed for the taxable year preceding the
estimation year (or, if such return has not yet been filed, then the
income tax return that the employee filed for the taxable year
preceding such year) and that has been disallowed by the Service as
part of an adjustment described in Sec. 601.103(b) of this chapter
(relating to examination and determination of tax liability) and Sec.
601.105(b) through (d) of this chapter (relating to examination of
returns), without regard to any pending request for reconsideration,
protest, request for consideration by an Appeals office, or civil
action in which such proposed adjustment is at issue.
(2) Restriction for employees with nonwage income. The employee
must offset any deduction described in paragraph (b) of this section
with items
[[Page 63036]]
includible in the employee's gross income for which no Federal income
tax is withheld in accordance with forms, instructions, publications,
and other guidance prescribed by the Commissioner. In addition, an
employee whose employer must withhold for that employee pursuant to a
notice under Sec. 31.3402(f)(2)-1(g)(2) must offset any tax benefit
resulting from any deduction or credit described in paragraph (b) or
(c) of this section with the anticipated income tax attributable to
items other than wages includible in the employee's gross income in the
manner determined by the Commissioner.
(3) Multiple withholding allowance certificates--(i) In general.
The employee may not take into account deductions, credits, or
estimated tax payments described in paragraph (b), (c), or (d) of this
section if these deductions, credits, or estimated tax payments are
claimed on another valid withholding allowance certificate in effect
with respect to another employer of the employee or any employer of the
employee's spouse.
(ii) Married taxpayers filing jointly. Married taxpayers who
reasonably expect to file as married filing jointly on their Federal
income tax return for the estimation year determine the withholding
allowance to which they are entitled under section 3402(m) on the basis
of their combined wages, allowable credits or deductions, and estimated
tax payments permitted to be taken into account. The deductions,
credits, or estimated tax payments described in paragraphs (b), (c),
and (d) of this section to which either spouse is entitled may be
claimed by either spouse or may be allocated between both spouses.
However, one spouse may not claim deductions, credits, or estimated tax
payments described in paragraphs (b), (c), and (d) of this section
claimed on the other spouse's withholding allowance certificate.
(iii) Married taxpayers filing separately. A married taxpayer who
reasonably expects to file a separate income tax return from the
employee's spouse for the estimation year determines the withholding
allowance deductions, credits, or estimated tax payments described in
paragraphs (b), (c), and (d) of this section on the basis of the
employee's individual wages, deductions, credits, and estimated tax
payments.
(4) IRS instructions. An employee must follow the instructions to
the Form W-4, and other IRS forms, instructions, publications, and
related guidance in determining the employee's withholding allowance or
other reductions in withholding permitted under section 3402(m) for
deductions, credits, or estimated tax payments described in paragraphs
(b), (c), and (d) of this section.
(f) Applicability date. The provisions of this section apply on or
after October 6, 2020. Taxpayers may choose to apply paragraphs (a)(2)
and (3) this section on or after January 1, 2020 and before October 6,
2020. For rules that apply before October 6, 2020, see 26 CFR part 31,
revised as of April 1, 2020.
0
Par. 21. Section 31.3402(n)-1 is revised to read as follows:
Sec. 31.3402(n)-1 Employees incurring no income tax liability.
(a) In general. Notwithstanding any other provision of this subpart
(except to the extent a payment of wages is subject to withholding
under Sec. 31.3402(g)-1(a)(2)), an employer shall not deduct and
withhold any tax under chapter 24 of the Code upon a payment of wages
made to an employee, if there is in effect with respect to the payment
a withholding allowance certificate furnished to the employer by the
employee which certifies that--
(1) The employee incurred no liability for income tax imposed under
subtitle A of the Internal Revenue Code for the employee's preceding
taxable year; and
(2) The employee anticipates that the employee will incur no
liability for income tax imposed under subtitle A for the employee's
current taxable year.
(b) Mandatory flat rate withholding. To the extent wages are
subject to income tax withholding under Sec. 31.3402(g)-1(a)(2), such
wages are subject to such income tax withholding regardless of whether
a withholding allowance certificate under section 3402(n) and this
section has been furnished to the employer.
(c) Liability for income tax. For purposes of section 3402(n) and
this section, an employee is not considered to incur liability for
income tax imposed under subtitle A if the amount of such tax imposed
is equal to or less than the total amount of credits against such tax
which are allowable under chapter 1 of the Internal Revenue Code, other
than those credits allowable under section 31 or 34. For purposes of
this section, an employee who files a joint return under section 6013
is considered to incur liability for any tax shown on such return. An
employee who is entitled to file a joint return under section 6013
shall not certify that the employee anticipates that he or she will
incur no liability for income tax imposed by subtitle A for the
employee's current taxable year if such statement would not be true in
the event that the employee files a joint return for such year, unless
the employee filed a separate return for the preceding taxable year and
anticipates that the employee will file a separate return for the
current taxable year.
(d) Rules about withholding allowance certificates. For rules
relating to invalid withholding allowance certificates, see Sec.
31.3402(f)(2)-1(h), and for rules relating to disregarding certain
withholding allowance certificates on which an employee claims a
complete exemption from withholding, see Sec. 31.3402(f)(2)-1(i).
(e) Examples. The following examples illustrate this section:
(1) Example 1. A, an unmarried, calendar-year basis taxpayer,
files an income tax return for 2020 on April 10, 2021, showing that
A had adjusted gross income of $5,000 and is not liable for any
income tax for 2020. A had $180 of income tax withheld during 2020.
A anticipates that A's gross income for 2021 will be approximately
the same amount, and that A will not incur income tax liability for
that year. On April 20, 2021, A commences employment and furnishes
the employer a withholding allowance certificate certifying that A
incurred no liability for income tax imposed under subtitle A for
2020, and that A anticipates that A will incur no liability for
income tax imposed under subtitle A for 2021. A's employer shall not
deduct and withhold on payments of wages made to A on or after April
20, 2021. Under Sec. 31.3402(f)(4)-1(b), unless A furnishes a new
withholding allowance certificate including the certifications
described in paragraph (a) of this section to the employer, the
employer is required to deduct and withhold upon payments of wages
to A made after February 15, 2022.
(2) Example 2. Assume the facts are the same as in paragraph
(e)(1) of this section (Example 1) except that A had been employed
by the employer prior to April 20, 2021, and had furnished the
employer a withholding allowance certificate prior to furnishing the
withholding allowance certificate including the certifications
described in paragraph (a) of this section on April 20, 2021. Under
Sec. 31.3402(f)(3)-1(b), the employer would be required to give
effect to the new withholding allowance certificate no later than
the beginning of the first payroll period ending (or the first
payment of wages made without regard to a payroll period) on or
after May 20, 2021. However, under Sec. 31.3402(f)(3)-1(b), the
employer could, if it chose, make the new withholding allowance
certificate effective with respect to any payment of wages made on
or after April 20, 2021, and before the effective date mandated by
section 3402(f)(3)(B)(i) and Sec. 31.3402(f)(3)-1(b). Under Sec.
31.3402(f)(4)-1(b), unless A furnishes a new withholding allowance
certificate including the certifications described in Sec.
31.3402(n)-1(a) to A's employer, the employer is required to deduct
and withhold upon payments of wages to A made after February 15,
2022.
(3) Example 3. Assume the facts are the same as in paragraph
(e)(1) of this section (Example 1) except that for 2020 A has
[[Page 63037]]
taxable income of $8,000, income tax liability of $839, and income
tax withheld of $1,195. Although A received a refund of $356 due to
income tax withholding of $1,195, A may not certify on A's
withholding allowance certificate that A incurred no liability for
income tax imposed by subtitle A for 2020.
(f) Applicability date. The provisions of this section apply on and
after October 6, 2020. Taxpayers may choose to apply paragraphs (a)(2)
and (3) this section on or after January 1, 2020 and before October 6,
2020. For rules that apply before October 6, 2020, see 26 CFR part 31,
revised as of April 1, 2020.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: September 29, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-22071 Filed 10-5-20; 8:45 am]
BILLING CODE 4830-01-P
