Publication 505 - Tax Withholding And Estimated Tax (Page 13 of 49) in pdf

How withholding is figured. Your employer

have enough income tax withheld, you may

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

can either add the value of a fringe benefit to

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

tificate, tax will be withheld as if you were

your regular pay and figure income tax withhold-

Form W – 4S remains in effect until you

married and claiming three withholding al-

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

change or cancel it, or stop receiving payments.

lowances. This means that tax will be with-

value.

You can change your withholding by giving a

held only if your pension or annuity is at

If the benefit’s actual value cannot be deter-

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

least $1,320 a month (or $15,840 a year).

mined when it is paid or treated as paid, your

of your sick pay.

employer can use a reasonable estimate. Your

2) You can choose not to have tax with-

employer must determine the actual value of the

held, regardless of how much tax you

benefit by January 31 of the next year. If the

owed last year or expect to owe this year.

Pensions and

actual value is more than the estimate, your

You do not have to qualify for exemption.

employer must pay the IRS any additional with-

See Choosing Not To Have Income Tax

Annuities

holding tax required. Your employer has until

Withheld, later.

April 1 of that next year to recover from you the

3) If you do not give the payer your social

additional tax paid to the IRS for you.

Income tax usually will be withheld from your

security number (in the required manner)

pension or annuity distributions unless you

How your employer reports your benefits.

or the IRS notifies the payer before any

choose not to have it withheld. This rule applies

Your employer must report on Form W – 2,

payment or distribution is made that you

to distributions from:

Wage and Tax Statement, the total of the taxa-

gave it an incorrect social security number,

•

ble fringe benefits paid or treated as paid to you

A traditional individual retirement arrange-

tax will be withheld as if you were single

during the year and the tax withheld for the

ment (IRA),

and were claiming no withholding al-

benefits. These amounts can be shown either

•

lowances. This means that tax will be with-

A life insurance company under an en-

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

held if your pension or annuity is at least

dowment, annuity, or life insurance con-

separate Form W – 2. If your employer provided

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

tract,

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

•

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

A pension, annuity, or profit-sharing plan,

value must be either separately shown on Form

Effective date of withholding certificate. If

•

A stock bonus plan, and

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

you give your withholding certificate (Form

•

ment.

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

Any other plan that defers the time you

your payments start, it will be put into effect by

receive compensation.

the first payment made more than 30 days after

you submit the certificate.

The amount withheld depends on whether

Sick Pay

you receive payments spread out over more

If you give the payer your certificate after

than one year (periodic payments), within one

your payments start, it will be put into effect with

Sick pay is a payment to you to replace your

year (nonperiodic payments), or as an eligible

the first payment made on or after January 1,

regular wages while you are temporarily absent

rollover distribution (ERD). You cannot choose

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

from work due to sickness or personal injury. To

not to have income tax withheld from an ERD.

30 days after you submit it. However, the payer

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

ERDs are discussed later.

can elect to put it into effect earlier.

to which your employer is a party.

If you receive sick pay from your employer or

Nontaxable part. The part of your pension or

Nonperiodic Payments

an agent of your employer, income tax must be

annuity that is a return of your investment in your

withheld. An agent who does not pay regular

retirement plan — the amount you paid into the

Tax will be withheld at a 10% rate on any

wages to you may choose to withhold income

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

nonperiodic payments you receive.

tax at a flat 27% rate.

tax will not be withheld from the part of your

Because withholding on nonperiodic pay-

However, if you receive sick pay from a third

pension or annuity that is not taxable. The tax

ments does not depend on withholding al-

party who is not acting as an agent of your

withheld will be figured on, and cannot be more

lowances or whether you are married or single,

employer, income tax will be withheld only if you

than, the taxable part.

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

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

For information about figuring the part of

how much to withhold. But you can use Form

later.

your pension or annuity that is not taxable, see

W – 4P to specify that an additional amount be

If you receive payments under a plan in

Publication 575, Pension and Annuity Income.

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

which your employer does not participate (such

choose not to have tax withheld or to revoke a

as an accident or health plan where you paid all

Periodic Payments

choice not to have tax withheld.

the premiums), the payments are not sick pay

You may need to use Form W – 4P to

and usually are not taxable.

Withholding from periodic payments of a pen-

ask for additional withholding. If you do

sion or annuity is figured in the same way as

Union agreements. If you receive sick pay

not have enough tax withheld, you may

CAUTION

withholding from salaries and wages. To tell the

under a collective bargaining agreement be-

need to make estimated tax payments, as ex-

payer of your pension or annuity how much you

tween your union and your employer, the agree-

plained in chapter 2.

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

ment may determine the amount of income tax

form provided by the payer. Follow the rules

withholding. See your union representative or

discussed under Salaries and Wages, earlier, to

Eligible Rollover

your employer for more information.

fill out your Form W – 4P.

Distributions

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

Note. Use Form W – 4, not Form W – 4P, if

tax withheld from sick pay paid by a third party,

A distribution you receive that is eligible to be

you receive any of the following.

such as an insurance company, you must fill out

rolled over tax free into a qualified retirement or

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

annuity plan is called an eligible rollover distri-

1) Military retirement pay.

sheet you can use to figure the amount you want

bution (ERD). This is the taxable part of any

withheld. They also explain restrictions that may

2) Payments from a nonqualified deferred

distribution from a qualified pension plan or

apply.

compensation plan.

tax-sheltered annuity that is not any of the fol-

Give the completed form to the payer of your

lowing.

3) Payments from state and local deferred

sick pay. The payer must withhold according to

compensation plan.

your directions on the form.

1) A minimum required distribution.

If you do not request withholding on Form

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

Withholding rules. The withholding rules for

2) One of a series of substantially equal peri-

held, you may have to make estimated tax pay-

pensions and annuities differ from those for sal-

odic pension or annuity payments made

ments. If you do not pay enough estimated tax or

aries and wages in the following ways.

over:

Chapter 1 Tax Withholding for 2003

Page 13

Publication 505 - Tax Withholding And Estimated Tax Page 13

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