WITHHOLDINGS

This section discusses income tax withholding on these types of income:

Salaries and wages,
Tips,
Taxable fringe benefits,
Sick pay,
Pensions and annuities,
Gambling winnings,
Unemployment compensation, and
Certain federal payments, such as social security.

SALARIES AND WAGES:

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding.

Military retirees. Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes.

Household workers. If you are a household worker, you can ask your employer to withhold income tax from your pay.

Tax is withheld only if you want it withheld and your employer agrees to withhold it. If you do not have enough income tax withheld, you may have to pay estimated tax.

Farmworkers. Income tax generally is withheld from your cash wages for work on a farm unless your employer both:

Pays you cash wages of less than $150 during the year, and
Has expenditures for agricultural labor totaling less than $2,500 during the year.

You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. If your employer does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax,

TIPS:

The tips you receive while working on your job are considered part of your pay. You must include your tips on your tax return on the same line as your regular pay. However, tax is not withheld directly from tip income, as it is from your regular pay. Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay.

See chapter 6 for information on reporting your tips to your employer. For more information on the withholding rules for tip income.

How employer figures amount to withhold. The tips you report to your employer are counted as part of your income for the month you report them. Your employer can figure your withholding in either of two ways.

By withholding at the regular rate on the sum of your pay plus your reported tips.
By withholding at the regular rate on your pay plus a percentage of your reported tips.

Not enough pay to cover taxes. If your regular pay is not enough for your employer to withhold all the tax (including income tax, social security tax, Medicare tax, or railroad retirement tax) due on your pay plus your tips, you can give your employer money to cover the shortage.

Allocated tips. Your employer should not withhold income tax, social security tax, Medicare tax, or railroad retirement tax on any allocated tips. Withholding is based only on your pay plus your reported tips. Your employer should refund to you any incorrectly withheld tax.

TAXABLE FRINGE BENEFITS:

The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. Your employer generally must withhold income tax on these benefits from your regular pay.

Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your employer can choose not to withhold income tax on that amount. Your employer must notify you if this choice is made.

SICK PAY:

Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. To qualify as sick pay, it must be paid under a plan to which your employer is a party.

If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. An agent who does not pay regular wages to you may choose to withhold income tax at a flat rate. However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld.

If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where you paid all the premiums), the payments are not sick pay and usually are not taxable.

Union agreements. If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement may determine the amount of income tax withholding. See your union representative or your employer for more information.

Form W-4S. If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must fill out Form W-4S. Its instructions contain a worksheet you can use to figure the amount you want withheld. They also explain restrictions that may apply. Give the completed form to the payer of your sick pay. The payer must withhold according to your directions on the form. Estimated tax. If you do not request withholding on Form W-4S, or if you do not have enough tax withheld, you may have to make estimated tax payments. If you do not pay enough estimated tax or have enough income tax withheld, you may have to pay a penalty.

PENSIONS AND ANNUITIES:

Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. This rule applies to distributions from:

A traditional individual retirement arrangement (IRA),
A life insurance company under an endowment, annuity, or life insurance contract,
A pension, annuity, or profit-sharing plan,
A stock bonus plan, and
Any other plan that defers the time you receive compensation.

The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1 year (nonperiodic payments), or as an Eligible Rollover Distribution (ERD). You cannot choose not to have income tax withheld from an ERD.

More information. For more information on taxation of annuities and distributions (including eligible rollover distributions) from qualified retirement plans

GAMBLING WINNINGS:

Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings.

Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.

Any sweepstakes; wagering pool, including payments made to winners of poker tournaments on or after March 4, 2008; or lottery.
Any other wager, if the proceeds are at least 300 times the amount of the bet.

It does not matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken into account at their fair market value.

Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. However, you may need to provide the payer with a social security number to avoid withholding.

UNEMPLOYMENT COMPENSATION:

You can choose to have income tax withheld from unemployment compensation. To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

Unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to pay estimated tax.

CERTAIN FEDERAL PAYMENTS, SUCH AS SOCIAL SECURITY :

You can choose to have income tax withheld from certain federal payments you receive. These payments are:

Social security benefits,
Tier 1 railroad retirement benefits,
Commodity credit loans you choose to include in your gross income, and
Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et. seq.), or title II of the Disaster Assistance Act of 1988, as amended, that are treated as insurance proceeds and that you receive because:
1. Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or
2. You were unable to plant crops because of a natural disaster described in (a).

To make this choice, you will have to fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

If you do not choose to have income tax withheld, you may have to pay estimated tax.

NOTE: If you do not pay enough tax, either through withholding or estimated tax, you may have to pay a penalty.