Publication 505 - Tax Withholding And Estimated Tax (Page 14 of 49) in pdf

Exceptions. Your employer cannot choose

Give the completed form to the payer of your

3) Payments from state and local deferred

when to withhold tax on certain benefits. These

sick pay. The payer must withhold according to

compensation plan.

benefits are transfers of either real property or

your directions on the form.

personal property of a kind normally held for

If you do not request withholding on Form

Withholding rules. The withholding rules for

investment (such as stock). Your employer must

W – 4S, or if you do not have enough tax with-

pensions and annuities differ from those for sal-

withhold tax on these benefits at the time of the

held, you may have to make estimated tax pay-

aries and wages in the following ways.

transfer.

ments. If you do not pay enough estimated tax or

have enough income tax withheld, you may

1) If you do not fill out a withholding cer-

How withholding is figured. Your employer

have to pay a penalty. See chapters 2 and 4.

tificate, tax will be withheld as if you were

can either add the value of a fringe benefit to

Form W – 4S remains in effect until you

married and claiming three withholding al-

your regular pay and figure income tax withhold-

change or cancel it, or stop receiving payments.

lowances. This means that tax will be with-

ing on the total or withhold 27% of the benefit’s

You can change your withholding by giving a

held only if your pension or annuity is at

value.

new Form W – 4S or a written notice to the payer

least $1,280 a month (or $15,360 a year).

If the benefit’s actual value cannot be deter-

of your sick pay.

mined when it is paid or treated as paid, your

2) You can choose not to have tax with-

employer can use a reasonable estimate. Your

held, regardless of how much tax you

employer must determine the actual value of the

owed last year or expect to owe this year.

benefit by January 31 of the next year. If the

You do not have to qualify for exemption.

Pensions and

actual value is more than the estimate, your

See Choosing Not To Have Income Tax

employer must pay the IRS any additional with-

Withheld, later.

Annuities

holding tax required. Your employer has until

3) If you do not give the payer your social

April 1 of that next year to recover from you the

security number (in the required manner)

Income tax usually will be withheld from your

additional tax paid to the IRS for you.

or the IRS notifies the payer before any

pension or annuity distributions unless you

How your employer reports your benefits.

payment or distribution is made that you

choose not to have it withheld. This rule applies

Your employer must report on Form W – 2,

gave it an incorrect social security number,

to distributions from:

Wage and Tax Statement, the total of the taxa-

tax will be withheld as if you were single

•

A traditional individual retirement arrange-

ble fringe benefits paid or treated as paid to you

and were claiming no withholding al-

ment (IRA),

during the year and the tax withheld for the

lowances. This means that tax will be with-

•

benefits. These amounts can be shown either

held if your pension or annuity is at least

A life insurance company under an en-

on the Form W – 2 for your regular pay or on a

$230 a month (or $2,760 a year).

dowment, annuity, or life insurance con-

separate Form W – 2. If your employer provided

tract,

you with a car, truck, or other motor vehicle and

•

Effective date of withholding certificate. If

A pension, annuity, or profit-sharing plan,

chose to treat all of your use of it as personal, its

you give your withholding certificate (Form

•

value must be either separately shown on Form

A stock bonus plan, and

W – 4P or a similar form) to the payer by the time

W – 2 or reported to you on a separate state-

•

your payments start, it will be put into effect by

Any other plan that defers the time you

ment.

the first payment made more than 30 days after

receive compensation.

you submit the certificate.

If you give the payer your certificate after

The amount withheld depends on whether

Sick Pay

your payments start, it will be put into effect with

you receive payments spread out over more

the first payment made on or after January 1,

than one year (periodic payments), within one

May 1, July 1, or October 1, whichever is at least

year (nonperiodic payments), or as an eligible

Sick pay is a payment to you to replace your

30 days after you submit it. However, the payer

rollover distribution (ERD). You cannot choose

regular wages while you are temporarily absent

can elect to put it into effect earlier.

not to have income tax withheld from an ERD.

from work due to sickness or personal injury. To

ERDs are discussed later.

qualify as sick pay, it must be paid under a plan

Nonperiodic Payments

to which your employer is a party.

Nontaxable part. The part of your pension or

If you receive sick pay from your employer or

annuity that is a return of your investment in your

Tax will be withheld at a 10% rate on any

an agent of your employer, income tax must be

nonperiodic payments you receive.

retirement plan — the amount you paid into the

withheld. An agent who does not pay regular

plan or its cost to you — is not taxable. Income

Because withholding on nonperiodic pay-

wages to you may choose to withhold income

tax will not be withheld from the part of your

ments does not depend on withholding al-

tax at a flat 27% rate.

pension or annuity that is not taxable. The tax

lowances or whether you are married or single,

However, if you receive sick pay from a third

withheld will be figured on, and cannot be more

you cannot use Form W – 4P to tell the payer

party who is not acting as an agent of your

than, the taxable part.

how much to withhold. But you can use Form

employer, income tax will be withheld only if you

W – 4P to specify that an additional amount be

For information about figuring the part of

choose to have it withheld. See Form W – 4S,

withheld. You can also use Form W – 4P to

your pension or annuity that is not taxable, see

later.

choose not to have tax withheld or to revoke a

Publication 575, Pension and Annuity Income.

If you receive payments under a plan in

choice not to have tax withheld.

which your employer does not participate (such

Periodic Payments

as an accident or health plan where you paid all

You may need to use Form W – 4P to

the premiums), the payments are not sick pay

ask for additional withholding. If you do

Withholding from periodic payments of a pen-

and usually are not taxable.

not have enough tax withheld, you may

CAUTION

sion or annuity is figured in the same way as

need to make estimated tax payments, as ex-

Union agreements. If you receive sick pay

withholding from salaries and wages. To tell the

plained in chapter 2.

under a collective bargaining agreement be-

payer of your pension or annuity how much you

tween your union and your employer, the agree-

want withheld, fill out Form W – 4P or a similar

ment may determine the amount of income tax

Eligible Rollover

form provided by the payer. Follow the rules

withholding. See your union representative or

discussed under Salaries and Wages, earlier, to

Distributions

your employer for more information.

fill out your Form W – 4P.

Form W – 4S. If you choose to have income

Distributions you receive that are eligible to be

Note. Use Form W-4, not Form W-4P, if you

tax withheld from sick pay paid by a third party,

rolled over tax free into a qualified retirement or

receive any of the following.

such as an insurance company, you must fill out

annuity plans are subject to a 20% withholding

Form W – 4S. Its instructions contain a work-

tax.

1) Military retirement pay.

sheet you can use to figure the amount you want

This type of distribution is called an eligible

withheld. They also explain restrictions that may

2) Payments from a nonqualified deferred

rollover distribution (ERD). This is the taxable

apply.

compensation plan.

part of any distribution from a qualified pension

Page 14

Chapter 1 Tax Withholding for 2002

Publication 505 - Tax Withholding And Estimated Tax Page 14

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