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Circular E, Employers Tax Guide

Page no.Table of Contents

Sectionnumber

Internal Revenue ServiceBulk RateWADC9999

Rancho Cordova, CA 95743-9999 Postage and Fees Paid

Internal Revenue ServiceOfficial BusinessPermit No. G-48Penalty for Private Use $300

Carrier Route Presort

Publication 15

Deliver to Payroll Department

Cat. No. 10000W (Rev. January 1993)

(Keep this booklet for reference.)

Wage Bases for Social Security and Medicare Taxes; FUTA Rate

For 1993, the wage base for social security is $57,600. The wage basefor Medicare is $135,000. For social security, the tax rate is 6.2% eachfor employers and employees. For Medicare, the rate is 1.45% each foremployers and employees. Be sure to use the social security table thatbegins on page 49 AND the Medicare table on page 51.

1993 Form W-2

The 1993 Form W-2 has been revised extensively. Please see the 1993Form W-2 and its instructions for details.

Advance Earned Income Credit

Eligible employees may be able to receive a part of their Earned IncomeCredit in advance with their pay. This booklet contains the tables youneed to figure the advance earned income credit. See section 18 fordetails.

Additional Forms or Publications

If you need to order forms or publications, including additional copies ofthis booklet, you may use Form 7018-A, Employers Order Blank for1993 Forms, at the end of this booklet or you may call 1-800-TAX-FORM(1-800-829-3676).

New Deposit Rules

Calendar 2

Reminders 2

1. Purpose 3

2. Are You an Employer? 3

3. Employer Identification Number 3

4. Who Are Employees? 3

5. Employees Social Security Number (SSN) 4

6. Taxable Wages 4

7. Taxable Tips 68. Supplemental Wages 6

9. Payroll Period 7

10. Withholding From Employees 7

11. Figuring Withholding 8

12. Income Tax Withholding FromPensions and Annuities 8

13. Depositing Taxes 9

14. Filing the Quarterly Return of SocialSecurity, Medicare, and Withheld IncomeTaxes 11

15. Filing the Federal Unemployment(FUTA) Tax Return (Form 940 or 940-EZ) 13

16. Filing Forms W-2, 1099-R, and OtherInformation Returns 13

17. Reporting to Employees on Form W-2 1418. Advance Payment of the Earned

Income Credit 15

19. Sick Pay Reporting 17

20. Reconciling Forms W-2, W-3, and 941 17

21. Recordkeeping 17

Percentage Method 2627

Percentage Method 5253

Special Rules for VariousTypes of Services and Products 1823

Income Tax Withholding and AdvanceEarned Income Credit (EIC)Payment Methods 24

Income Tax Withholding Tables:

Wage Bracket 2847 Social Security Employee Tax Table 4950

Medicare Employee Tax Table 51

1992 Guide to Information Returns 5859

Wage Bracket Method 5457

Index 62 Form 7018-A (order blank) 63

Federal Tax Deposit (FTD) Checklist 6061

Advance EIC Payment Tables:

The Federal unemployment (FUTA) tax rate for 1993 is 6.2%.

Effective January 1, 1993, deposit rules have changed. See section 13.The 1993 Form 941 and Schedule B (Form 941) have been revised to

reflect the new rules.

Penalties 12

Department of the TreasuryInternal Revenue Service

Backup Withholding Rate Change

The backup withholding rate changed from 20% to 31% for amountspaid after 1992.

Withholding on Pensions and Annuities

New rules apply to an eligible rollover distribution from a qualified plan,including direct rollovers and mandatory 20% withholding. Seesection 12.

Postmaster: Deliver Immediately

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CalendarThe following is a list of important dates. Alsosee Pub. 509, Tax Calendars for 1993.

Note: For any due date, you will meet thefile or furnish requirement if the form isproperly addressed, mailed, and postmarkedon or before the due date. If any date shownfalls on a Saturday, Sunday, or legal holiday,use the next business day.

By January 31

Furnish each employee a completed FormW-2, Wage and Tax Statement. Furnish eachrecipient a completed Form 1099-R, Distri-butions From Pensions, Annuities, Retire-ment or Profit-Sharing Plans, IRAs,Insurance Contracts, etc. You may furnishForm W-2 or 1099-R by mail as explained inthe Note above. (See section 17.)

Federal Unemployment (FUTA) Tax.FileForm 940 or Form 940-EZ, EmployersAnnual Federal Unemployment (FUTA) TaxReturn. However, if you deposited all theFUTA tax when due, you may file Form 940or 940-EZ on or before February 10.

By February 15

Ask for a new Form W-4, Employees With-holding Allowance Certificate, from eachemployee who claimed total exemption fromwithholding during the prior year.

On February 16

Begin withholding for each employee whopreviously claimed exemption from with-holding but has not given you a new FormW-4 for the current year. If the employeedoes not give you a new Form W-4, withholdtax as if he or she is single, with zero with-holding allowances. The Form W-4 previous-ly given you claiming exemption is nowexpired. (See section 10(d).)

By February 28

Send Copy A of all Forms 1099-R with Form1096, Annual Summary and Transmittal ofU.S. Information Returns, to the Internal Rev-enue Service Center for your locality. (Seesection 16.)

By the Last Day of February

Send Copy A of all Forms W-2 with FormW-3, Transmittal of Income and Tax State-ments, to the Social Security Administration(SSA). (See section 16.)

Allocated Tip Reporting.File Form 8027,Employers Annual Information Return of TipIncome and Allocated Tips, with the InternalRevenue Service. (See section 7.)

By April 30, July 31, October 31, and

January 31Deposit Federal unemployment tax due if itis more than $100. File Form 941, Employ-ers Quarterly Federal Tax Return, or Form941E, Quarterly Return of Withheld FederalIncome Tax and Medicare Tax, and pay anyundeposited income, social security, andMedicare taxes. If you deposited all taxeswhen due, you have 10 additional days fromthe due dates above to file the return.

File Form 942, Employers Quarterly TaxReturn for Household Employees, and paythe tax due. (See section 14.)

Before December 1

Income Tax Withholding.Ask for a newForm W-4 from each employee whose with-holding allowances will change for the nextyear.

On December 31

Form W-5, Earned Income Credit AdvancePayment Certificate, expires. Employeeswho want to continue receiving advancepayments of the earned income credit for thenext year must give you a new Form W-5.

RemindersWhen Hiring New Employees

Eligibility for Employment.You mustverify that each new employee is legally eli-gible to work in the United States. This willinclude completing the Immigration and Nat-uralization Service (INS) Form I-9, Employ-ment Eligibility Verification Form. The formcan be obtained from INS offices. Contactthe INS for further information concerningyour responsibilities.

Income Tax Withholding.Ask each newemployee to complete the 1993 Form W-4.

Name and Social Security Number.

Record each new employees name andnumber from his or her social security card.Any employee without a social security cardshould apply for one. (See section 5.)

When Paying Wages or Annuities

Income Tax Withholding.Withhold taxfrom each wage payment or supplementalunemployment compensation plan benefitpayment according to the employees FormW-4 and the correct withholding rate. (Em-ployers who have nonresident alien employ-ees, see section 10.) Withhold from periodicpension and annuity payments as if the re-cipient is married claiming three withholdingallowances, unless he or she has filed FormW-4P either electing no withholding or giving

a different number of allowances, maritalstatus, or additional amount to be withheld.Do not withhold on direct rollovers from qual-ified plans. (See sections 6, 10, 11, and 12.)

Social Security and Medicare Taxes.Withhold 6.2% from each wage payment in1993 for social security. Stop when youreach $57,600 in taxable wages. Withhold1.45% from each wage payment in 1993 forMedicare. Stop when you reach $135,000 intaxable wages. (If the employee reportedtips, see section 7.)

Backup Withholding

Note: The backup withholding rate changedto 31% for payments made after 1992.

Payers must generally withhold 31% oftaxable interest, dividend, and certain otherpayments if payees fail to furnish payers withtheir correct taxpayer identification numbers.There are other circumstances when thepayer is also required to withhold. This with-holding is referred to as backup withholding.Please see Form W-9, Request for TaxpayerIdentification Number and Certification, andthe Instructions for Forms 1099, 1098,5498, and W-2G for details. Backup with-holding does not apply to wages or annui-ties.

Report backup withholding amounts onthe same Form 941 you use to report socialsecurity, Medicare, and income tax with-holding (or Form 941E if only reportingincome tax withholding and the Medicaretax). See section 13 for information on de-positing backup withholding.

Information Returns

You may have to file information returns toreport certain types of payments madeduring the year. For example, you must fileForm 1099-MISC, Miscellaneous Income, to

report payments of $600 or more to personsnot treated as employees (e.g., independentcontractors) for services performed for yourtrade or business. You can use the chart onpages 58 and 59 as a quick reference guideto 1992 information returns. For detailsabout filing Forms 1099 and for informationabout required magnetic media filing, see theInstructions for Forms 1099, 1098, 5498, andW-2G. Do not use Forms 1099 to reportwages and other compensation you paid toemployees; report these on Form W-2. Seethe separate Instructions for Form W-2 fordetails. Other compensation to be report-ed on Form W-2 is described in sections 6and 17.

Information Return PenaltiesA penalty may be imposed if you fail to file(on paper or on magnetic media) an informa-tion return (including Forms W-2 and 1099)or you file with incorrect information.

The amount of the penalty is based onwhen the correct information returns arefiled. The penalty is:

$15 for each information return if you cor-rectly file within 30 days after the due date(by March 30 if the due date is February 28)with a maximum penalty of $75,000 per year($25,000 for small businesses, definedbelow).

$30 for each information return if you cor-rectly file more than 30 days after the duedate but by August 1, with a maximum pen-alty of $150,000 per year ($50,000 for smallbusinesses).

$50 for each information return if you cor-rectly file after August 1 or you do not file atall, with a maximum penalty of $250,000 peryear ($100,000 for small businesses).

At least $100 for each information returnif your failure is due to intentional disregardof the filing requirements with no maximumpenalty.

Exceptions.In general, the penalty will notapply to any failure that was due to reason-able cause and not to willful neglect.

In addition, the penalty will not apply to a

de minimis number of failures. These failuresare information returns that were filed butwith incomplete or incorrect information andwere corrected by August 1. The penalty willnot apply to the greater of 10 informationreturns or 12 of 1% of the total number ofinformation returns you were required to filefor the year.

Definition of Small Business.A smallbusiness is a firm with average annual grossreceipts of $5 million or less for the 3 mostrecent tax years.

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Failure to Provide Payee Statement orProviding Incorrect Payee Statement.Apenalty may be imposed if you either fail tofurnish a payee statement by the due dateor fail to include all correct information on apayee statement. The penalty is $50 for eachfailure. The maximum penalty for such fail-ures is $100,000 per year.

Business Reporting

If you are a small business, self-employed,sole proprietor, independent contractor, or amember of a partnership, you may want to

get Pub. 937, Employment Taxes and Infor-mation Returns, for useful information onbusiness reporting.

Change of Address

To notify the IRS that you changed your busi-ness mailing address or business location,send Form 8822, Change of Address, to theIRS.

Unresolved Problems

If you have a tax problem you have beenunable to resolve with the IRS, write to yourlocal IRS district director or call your localIRS office and ask for Problem Resolutionassistance. This office will take responsibilityfor your problem and ensure that it receives

proper attention. Although this office cannotchange the tax law or technical decisions, itcan frequently clear up misunderstandingsthat resulted from previous contacts.

Hearing-impaired taxpayers with accessto TDD equipment may call 1-800-829-4059for Problem Resolution assistance.

General Information

1. PurposeThis guide explains your tax responsibilitiesas an employer. It explains the requirementsfor withholding, depositing, reporting, andpaying taxes. It explains the forms you must

give your employees, those your employeesmust give you, and those you must send tothe IRS and SSA. (Detailed filing require-ments and instructions for completing theforms, including instructions for correctingpreviously filed forms, are contained in theinstructions for each form.) This booklet alsohas tax tables you need to figure the taxesto withhold for each employee for 1993.

Most employers must withhold (exceptFUTA), deposit, report, and pay the followingemployment taxes

Income tax,

Social security and Medicare taxes,

Federal unemployment tax (FUTA).

There are exceptions to these require-ments. See pages 18 through 23. Railroadretirement and railroad unemployment re-payment taxes are explained in the Instruc-tions for Form CT-1.

2. Are You an Employer?Generally, an employer is a person or organ-ization for whom a worker performs a serviceas an employee. The employer usually givesthe worker the tools and place to work andhas the right to fire the worker. A person ororganization paying wages to a former em-

ployee after the work ends is also consideredan employer.

Specific definitions of employers apply forincome and FUTA tax purposes.

Income Tax Withholding.For income taxwithholding purposes, the term employer in-cludes organizations that are exempt fromincome, social security, Medicare, and FUTAtaxes.

FUTA Tax.For FUTA tax purposes, an em-ployer is:

Any person or organization (other than an

agricultural or household employer) thatduring this year or last year either:

1. Paid wages of $1,500 or more in anycalendar quarter, or

2. Had one or more employees at any timein each of any 20 different calendar weeks.

Any agricultural employer who during thisyear or last year either:

1. Paid cash wages of $20,000 or more tofarmworkers in any calendar quarter, or

2. Employed 10 or more farmworkersduring some part of a day for at least 1 dayduring any 20 different weeks.

Any household employer who during thisyear or last year paid cash wages of $1,000

or more during any calendar quarter forhousehold service in a private home, localcollege club, or local chapter of a collegefraternity or sorority.

Federal Government Employers.If youare a Federal agency, the information in thisguide applies, except deposit Federal taxesonly at Federal Reserve banks or through theFedTax option of the Government On-LineAccounting Link Systems (GOALS). See theTreasury Financial Manual (I TFM 3-4000)for more information.

State and Local GovernmentEmployers.Wages of your employees aregenerally subject to Federal income tax with-holding. In addition, wages of your employ-

ees hired after March 31, 1986, are subjectto the Medicare tax (1.45% of the first$135,000 paid to each employee for theyear), unless they are otherwise covered bya section 218 agreement between the stateand the SSA. Wages of any employees cov-ered by a section 218 agreement are subjectto social security and Medicare taxes.Wages for services performed after July 1,1991, by employees who are not membersof retirement systems of state and local gov-ernment employers, with certain exceptions,are subject to social security and Medicaretaxes. For rules for determining whether anemployee is a member of a retirementsystem, see Regulations section

31.3121(b)(7)-2.You can get information on reporting andsocial security coverage from your local IRSoffice. If you have any questions about cov-erage under a section 218 agreement, con-tact the appropriate state official.

3. Employer IdentificationNumberIf you are required to report employmenttaxes or give tax statements to employeesor annuitants, you need an employer identi-fication number (EIN).

The EIN is a nine-digit number the IRSissues. The digits are arranged as follows:00-0000000. It is used to identify the taxaccounts of employers and certain othersthat have no employees.

If you have not asked for a number, re-quest one on Form SS-4, Application forEmployer Identification Number. You can getthis form at IRS or SSA offices.

You should have only one number. If youhave more than one and are not sure whichone to use, please check with the InternalRevenue Service Center where you file yourreturn. Give the numbers you have, the nameand address to which each was assigned,and the address of your main place of busi-ness. The IRS will tell you which number touse. Use your EIN on all the items yousend to the IRS and SSA.

If you took over another employers busi-ness, do not use that employers number. Ifyou dont have your own number by the timea return is due, write Applied for and thedate you applied in the space shown for thenumber.

Please see Pub. 583, Taxpayers Startinga Business, for more information on how tomake deposits, file returns, etc., if due beforeyou have received your number.

4. Who Are Employees?Generally, employees can be defined eitherunder common law or under special statutesfor special purposes.

Employment Status Under CommonLaw. Anyone who performs services is anemployee if you, as an employer, can controlwhat will be done and how it will be done.This is so even when you give the employeefreedom of action. What matters is that youhave the legal right to control the methodand result of the services. Also see StatutoryEmployees on page 4.

Generally, people in business for them-

selves are not employees. For example, doc-tors, lawyers, veterinarians, constructioncontractors, and others in an independenttrade in which they offer their services to thepublic are usually not employees. Also seeStatutory Nonemployees on page 4.

If an employer-employee relationshipexists, it does not matter what it is called.The employee may be called a partner,agent, or independent contractor. It alsodoes not matter how payments are mea-sured or paid, what they are called, or wheth-er the employee works full- or part-time.

There is no employee class difference. Anemployee can be a superintendent, manag-er, or supervisor. Generally, an officer of a

corporation is an employee, but a director isnot. An officer who performs no services oronly minor ones, and who neither receivesnor is entitled to receive pay of any kind, isnot considered an employee.

Whether an employer-employee relation-ship exists under the usual common lawrules will be determined, when there is anydoubt, by the facts in each case.

If you have good reason for treating aworker other than as an employee, you willnot be liable for employment taxes on thepayments to that worker.

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To get this relief, you must file all requiredFederal tax returns, including information re-turns (Form 1099-MISC), on a basis consis-tent with your treatment of the worker. You(or your predecessor) must not have treatedany worker holding a substantially similar po-sition as an employee for any period after1977. See Rev. Proc. 85-18, 1985-1 C.B.518, for further details.

This relief is not available, however, to abusiness that furnishes technical servicespecialists (e.g., engineers, computer pro-grammers, and systems analysts) to clients.

In these cases, the employment relationshipbetween the business and the technical ser-vice specialist will be determined under thecommon law rules.

Note: If you, as the business that furnishestechnical service specialists to clients, cor-rectly treat a technical service specialist asan independent contractor under thecommon law rules, you will not be liable foremployment taxes on that individual. SeeRev. Rul. 87-41, 1987-1 C.B. 296, for guide-lines for determining the employment statusof a technical service specialist.

Statutory Employees.If someone whoworks for you is not an employee under thecommon law rules explained above, do not

withhold Federal income tax from his or herpay. Although the following persons may notbe common law employees, they are con-sidered employees for social security andMedicare purposes if tests 1 through 3 beloware met. Persons in a and d are employeesfor FUTA tax purposes if tests 1 through 3are met.

a. An agent (or commission) driver whodelivers food or beverages (other than milk)or laundry or dry cleaning for someone else.

b. A full-time life insurance salesperson.

c. A homeworker who works by theguidelines of the person for whom the workis done, with materials furnished by and re-turned to that person or to someone thatperson designates.

d. A traveling or city salesperson (otherthan an agent-driver or commission-driver)who works full time (except for sideline salesactivities) for one firm or person gettingorders from customers. The order must befor items for resale or use as supplies in thecustomers business. The customers mustbe retailers, wholesalers, contractors, or op-erators of hotels, restaurants, or other busi-nesses dealing with food or lodging.

Tests.

1. It is understood from a service contractthat the services will be performed by theperson.

2. The person does not have a substantialinvestment in facilities (other than transpor-tation) used to perform the services.

3. The services involve a continuing rela-tionship with the person for whom they areperformed.

Pub. 937 gives examples of the employer-employee relationship.

If you want the IRS to determine whethera worker is an employee, file Form SS-8,Determination of Employee Work Status forPurposes of Federal Employment Taxes andIncome Tax Withholding.

Statutory Nonemployees.Direct sellersand qualified real estate agents are by lawconsidered nonemployees. They are insteadtreated as self-employed for income tax andemployment tax purposes. See Pub. 937 fordetails on these two groups.

Treating Employees as Nonemployees.You will be liable for income tax and employ-ee social security and Medicare taxes if youdont deduct and withhold these taxes be-cause you consider an employee as a non-employee. See Internal Revenue Codesection 3509 for details.

5. Employees Social SecurityNumber (SSN)You must obtain each employees name andSSN because you must enter them on FormW-2. If you do not provide the correct nameand SSN, you may owe a penalty. Any em-ployee without a social security card can getone by completing Form SS-5, Applicationfor a Social Security Card. You can get thisform at SSA offices or by calling1-800-772-1213. If your employee has ap-plied for an SSN but does not have one whenyou must file Form W-2, enter Applied Foron the form. When the employee receivesthe SSN, file Form W-2c to show the em-ployees SSN.

Record the name and number of each em-ployee exactly as they are shown on the em-ployees social security card. If theemployees name is not correct as shown onthe card, including if the employees namehas changed due to marriage or divorce, theemployee should request a new card fromthe SSA.

If your employee was given a new socialsecurity card to show his or her correct nameand number after an adjustment to his or heralien residence status, correct your recordsfor 1993 and show the new information onthe 1993 Form W-2. If you filed Form W-2for the same employee in prior years underthe old name and SSN, file Form W-2c,Statement of Corrected Income and TaxAmounts, to correct the name and number.Advise the employee to contact the localSSA office about 6 months after the FormW-2c is filed to ensure that his or her recordshave been updated.

6. Taxable WagesWages subject to Federal employment taxesinclude all pay you give an employee forservices performed. The pay may be in cashor in other forms. It includes salaries, vaca-tion allowances, bonuses, commissions, andfringe benefits. It does not matter how youmeasure or make the payments.

See pages 18 through 23 for exceptionsto wages. See section 7 for a discussion oftips. See section 17 for reporting other com-pensation not subject to withholding.

Value noncash pay (such as goods, lodg-ing, and meals) by its fair market value. Thiskind of pay may be subject to tax and with-holding. See pages 20 and 21.

Travel and Business Expenses.Payments to your employee for travel andother necessary expenses of your businessgenerally are taxable if (1) your employee isnot required to or does not substantiate

timely those expenses to you with receiptsor other documentation, or (2) you advancean amount to your employee for businessexpenses and your employee is not requiredto or does not return timely any amount heor she does not use for business expenses.See What To Include on the 1992 FormW-2 in section 17 for more information.

Partially Exempt Employment.If an em-ployee spends half or more of his or her timein a pay period performing services subjectto employment taxes, all the employees payin that pay period is taxable. If the employee

spends less than half the time performingservices subject to taxes, no pay in that payperiod is subject to employment taxes.

Supplemental Unemployment Compensa-tion Benefits.Treat these benefits aswages for income tax withholding to theextent they are includible in your employeesgross income. This applies if you pay bene-fits to your employee because of his or herinvoluntary separation from the job under aplan to which you are a party. Involuntaryseparation includes a reduction in force orclosing a plant or operation. It does not in-clude separation because of disciplinaryproblems or because of age. Also see Rev.Rul. 90-72, 1990-2 C.B. 211.

Moving Expenses.Although you mustreport all moving expense reimbursementsin the box for Wages, tips, other compen-sation on Form W-2, reimbursements toemployees for moving expenses are not sub- ject to Federal employment taxes to theextent that you reasonably believe the em-ployee is entitled to a deduction for suchexpenses. Such reimbursements for movingexpenses are subject to employment taxesto the extent that you believe the expensesare not deductible. However, even thoughthe employee is not entitled to a deductionfor 20% of meal expenses, such 20% is notsubject to employment taxes. For more in-formation, see Pub. 521, Moving Expenses.

Golden Parachutes.Parachute payments(also called golden parachutes) are certainpayments in the nature of compensation thatcorporations make to key individuals, oftenin excess of their usual compensation, whenownership or control of the corporationchanges. If you make parachute paymentsto certain disqualified individuals (personalservices corporations, or similar entities, aretreated as individuals for purposes of thisprovision), the payments are subject to re-porting and withholding requirements.

The golden parachute provision does notapply to payments made to or for a disqual-ified individual by a corporation that imme-diately before the change in ownership orcontrol was (1) an S corporation or (2) a cor-poration that had no readily tradable securi-ties. If (2) applies, shareholders must haveconsented to the payments. Excess para-chute payments are not deductible by thepayer, and the recipient of the excess pay-ments is subject to a 20% excise tax. If theexcess is wages, you must withhold the 20%excise tax.

If you make the payments to an employee,see section 17 for instructions for reportingto the employee. If you make parachute pay-ments to a nonemployee, use Form1099-MISC for reporting. The parachute

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payments provision applies to paymentsmade under agreements entered into or re-newed after June 14, 1984, in tax yearsending after that date. For further informa-tion, see Internal Revenue Code sections280G and 4999.

Payments to Nonresident Aliens.In gen-eral, if you pay wages to nonresident aliens,you must withhold income tax (unless ex-cepted by regulations), social security, andMedicare taxes as you would for a U.S. cit-izen. You must also give a Form W-2 to thenonresident alien and file it with the SSA. The

wages are subject to FUTA tax as well. How-ever, see the chart on page 18 for exceptionsto these general rules.

In some cases, a Code section or a U.S.treaty provision will exempt payments to anonresident alien from wages. These pay-ments are not subject to regular income taxwithholding. Form W-2 is not required inthese cases. These payments, unlessexempt from tax because of a Code or U.S.tax treaty provision, are subject to withhold-ing at a flat 30% or lower treaty rate. Youmust report the payments and any withheldtax on Form 1042-S, Foreign Persons U.S.Source Income Subject to Withholding. Form1042-S is sent to the IRS with Form 1042,

Annual Withholding Tax Return for U.S.Source Income of Foreign Persons. You mayhave to make deposits of the withheldincome tax, using Form 8109, Federal TaxDeposit Coupon. See Pub. 515, Withholdingof Tax on Nonresident Aliens and ForeignCorporations, for more information. For in-formation on the requirement to file Forms1042-S on magnetic media, see Pub. 1187.

Social Security Totalization Agree-ments. The United States has entered intototalization agreements with several coun-tries. Under the terms of these agreements,employees and employers who would other-wise have to pay social security taxes to bothcountries will only have to pay to one coun-try. Thus, items shown as taxable for socialsecurity and Medicare in this booklet may beexempt if covered by a totalization agree-ment. Employees and employers who areexempt under one of the agreements areexempt from both the social security (6.2%)portion and the Medicare (1.45%) portion. Atthis time, we have agreements in effect withAustria, Belgium, Canada, Finland, France,Germany, Italy, the Netherlands, Norway,Portugal, Spain, Sweden, Switzerland, andthe United Kingdom. For more informationabout social security totalization agree-ments, contact the Social Security Adminis-tration, Office of International Policy, P.O.Box 17741, Baltimore, MD 21235. (See Rev.Procs. 80-56, 1980-2 C.B. 851, and 84-54,

1984-2 C.B. 489 for information on how toprove the exemption.)

Employees Portion of Taxes Paid byEmployer.If you are not a household oragricultural employer and you pay your em-ployees social security and Medicare taxeswithout deducting them from the employeespay, you must include the amount of thepayments in the employees wages for socialsecurity, Medicare, and FUTA taxes, and forincome tax withholding. To properly calcu-late the wages and taxes in this situation,you must use the formula in Rev. Rul. 86-14,1986-1 C.B. 304. Generally, in applying the

formula, use the rates in effect in the yearthe wages are paid. See Pub. 937 for moreinformation.

However, if you are a household employerin a private home or an agricultural employer,any employee social security and Medicaretaxes you pay for an employee is additionalincome to the employee for income tax pur-poses. But it is not considered wages forsocial security, Medicare, and FUTA taxes.

Fringe Benefits

Unless the law says otherwise, you must in-

clude fringe benefits in an employees grossincome. The benefits are subject to incomeand employment taxes. Fringe benefits in-clude cars you provide, flights on aircraft youprovide, free or discounted commercialflights, vacations, discounts on property orservices, memberships in country clubs orother social clubs, and tickets to entertain-ment or sporting events. In general, theamount you must include is the amount bywhich the fair market value of the benefits ismore than the sum of what the employeepaid for it plus any amount the law excludes.There are other special rules you and youremployees may use to value certain fringebenefits. See Pub. 535, Business Expenses,and Regulations section 1.61-21 for moreinformation.

Nontaxable Fringe Benefits.Some fringebenefits are not taxable if certain conditionsare met. Examples are services provided toyour employees at no additional cost to you,qualified employee discounts, working con-dition fringes (including parking providedbefore 1993 and outplacement servicesunder certain conditions), minimal valuefringes (including an occasional cab ridewhen an employee must work overtime, localtransportation benefits provided because ofunsafe conditions and unusual circum-stances, monthly public transit passes pro-vided before 1993 not exceeding $21 invalue, and meals you provide at eating

places you run for your employees if themeals are not furnished at below cost), qual-ified transportation fringes provided after1992 subject to specified limits (includingtransportation in a commuter highway vehi-cle, any transit pass, and qualified parking),the use of on-premises athletic facilities, andreduced tuition for education. However,services you provide at no additional cost toyou, qualified employee discounts, meals ateating places you run for your employees,and reduced tuition provided to officers,owners, or highly paid employees are ex-cluded from those individuals income andthe wage base only if the benefits are givento employees on a nondiscriminatory basis.For further information, including who is anofficer, owner, or highly paid employee, seePub. 535 and the regulations under Codesection 132.

When Fringe Benefits Are Treated asPaid.You may choose to treat certain non-cash fringe benefits as paid by the payperiod, or by the quarter, or on any otherbasis you choose as long as you treat thebenefits as paid at least as often as once ayear. You do not have to make a formalchoice of payment dates or notify the IRS ofthe dates you choose. You do not have tomake this choice for all employees. You may

change methods as often as you like, as longas you treat all benefits provided in a calen-dar year as paid by December 31 of the cal-endar year. (However, see SpecialAccounting Rule for Fringe Benefits Pro-vided During November and December onpage 6.) You may treat a single fringe benefitas paid on one or more dates in the samecalendar year, even if the employee gets theentire benefit at one time. However, onceyou choose the payment dates, you mustreport the taxes on your return in the sametax period in which you treated them as paid.

This election does not apply to a fringe ben-efit when real property or investment person-al property is transferred.

Withholding on Fringe Benefits.You mayadd the value of fringe benefits to regularwages for a payroll period and figure with-holding taxes on the total, or you may with-hold Federal income tax on the value of thefringe benefits at the flat 20% supplementalwage rate.

If you withhold less than the requiredamount of taxes from an employee in a cal-endar year but report the proper amount, youshould ask the employee for the social se-curity, Medicare, or railroad retirement andincome taxes you paid on his or her behalf.

You must recover income taxes before April1 of the next year.

Election Not To Withhold Income Tax onPersonal Use of a Highway MotorVehicle.You may choose not to withholdincome tax on the value of an employeespersonal use of a vehicle you provide. Youmust, however, withhold social security,Medicare, or railroad retirement taxes on theuse of the vehicle. You do not have to makethe choice for all employees. If you make thechoice, you must do it in such a way that allof your affected employees will be aware ofit. For example, you can do this by includinga notice with the employees paycheck or bydisplaying a notice. You may change meth-ods at any t ime by notifying affected employ-ees in a similar way. You must give noticeby the later of January 31 of the year to whichyou want a different method to apply, orwithin 30 days after you first give a vehicleto the employee.

Depositing Taxes on Fringe Benefits.Once you choose payment dates for fringebenefits, you must deposit taxes in the sametax period you treat the fringe benefit aspaid. To avoid a penalty, deposit the taxesfollowing the general deposit rules for thattax period. You may reasonably estimate thevalue of the fringe benefits provided on thedate(s) you choose, for purposes of makingyour deposits on time.

You may claim a refund for overpaymentsor have them applied to your next employ-ment tax return. If you deposit too little, youmay be subject to the failure to deposit pen-alty. See section 13 for details.

When To Report Fringe Benefits.In gen-eral, you must figure the value of fringe ben-efits no later than January 31 of the nextyear. If you provide a vehicle, you may eitherfigure the actual value of the benefit for per-sonal use for the whole calendar year or con-sider the employees use of the vehicleduring the year to be entirely personal andinclude 100% in the employees income. See

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Fringe Benefits on page 14 for additionalinformation on this option.

Special Accounting Rule for Fringe Bene-fits Provided During November andDecember.You may choose to treat thevalue of certain noncash fringe benefits pro-vided during November and December, orany shorter period, as paid in the next year.However, this applies only to those benefitsyou actually provided during November andDecember, not to those you merely treatedas paid during those months. You may notuse this rule to report moving expense reim-

bursement, expense allowances paid undernonaccountable plans, or taxable educationreimbursements.

If you use this rule, you must notify eachaffected employee between the time of theemployees last paycheck of the calendaryear and at or near the time you give FormW-2. If you use the special accounting rule,your employee must also use it for all pur-poses (e.g., for deductions related to thefringe benefit) and for the same period. Youcannot use this rule for a fringe benefit whenyou transfer real property or investment per-sonal property to your employee.

Employer Line of Business Requirementand Election.In general, you can exclude

only qualified employee discounts and serv-ices you provide to employees at no addi-tional cost to you from the income ofemployees who perform substantial servicesin the line of business in which the benefitsare offered for sale to your customers.

If you have more than one line of business,employees in your other lines of business arenot entitled to nontaxable treatment of qual-ified employee discounts and services youprovide at no additional cost to you. How-ever, you can choose to consider all youremployees to be in one line of business andto receive fringe benefits from that line ofbusiness. If you make this choice, you willbe charged a 30% excise tax on the excess

fringe benefits. This is the excess of the totalvalue of these two types of fringe benefitsprovided during the calendar year over 1%of the total taxable compensation paid to allemployees during the calendar year. Youmust report the tax on Form 5330, Returnof Excise Taxes Related to Employee BenefitPlans, and it is not deductible. In general,this provision applies only to employmentwithin the United States. For more informa-tion, see Code section 4977 and its regula-tions.

Note: If you include the value of a noncashfringe benefit in an employees gross income,you cannot deduct this amount as compen-sation for services. You can deduct only whatit cost you to provide the benefit.

Sick Pay

In general, sick pay is any amount you pay,under a plan you take part in, to an employeebecause of sickness or injury. Theseamounts are sometimes paid by a third party,such as an insurance company or employ-ees trust. In either case, these payments aresubject to social security, Medicare, or rail-road retirement (RRTA) taxes, and Federalunemployment (FUTA) taxes. The paymentsare also subject to income tax. If you makethe payments, withhold on the basis of theemployees Form W-4. If a third party makes

the payments, the employee may requestincome tax withholding by giving the third-party payer a Form W-4S, Request for Fed-eral Income Tax Withholding From Sick Pay.Even though the third party makes the pay-ments, you may be responsible for payingsocial security and Medicare taxes and re-porting on Form W-2. See section 19 andPub. 952, Sick Pay Reporting for details.

The following payments are not subject tosocial security, Medicare, RRTA, RURT, orFUTA taxes:

1. Payments received under a workmenscompensation law.

2. Payments, or portions of payments, at-tributable to the employees contributions toa sick pay plan.

3. Payments received under the RailroadRetirement Act.

4. Payments of benefits under the RailroadUnemployment Insurance Act for an on-the-job injury.

5. Payments made more than 6 monthsafter the last calendar month in which theemployee worked.

7. Taxable Tips

Tips your employee receives are generallysubject to withholding. Your employee mustreport cash tips to you by the 10th of themonth after the month the tips are received.The report should include tips you paid overto the employee for charge customers andtips the employee received directly from cus-tomers. No report is required for monthswhen tips are less than $20. Your employeereports the tips on Form 4070, EmployeesReport of Tips to Employer, or on a similarstatement. Both Forms 4070 and 4070-A,Employees Daily Record of Tips, are includ-ed in Pub. 1244, Employees Daily Recordof Tips and Report to Employer.

The statement must be signed by the em-ployee and must show the following:

The employees name, address, and socialsecurity number.

Your name and address.

The month or period the report covers.

The total tips.

You must collect income tax, employeesocial security tax, and employee Medicaretax on the employees tips. You can collectthese taxes from the employees wages orfrom other funds he or she makes available.(See Tips Treated as Supplemental Wagesin section 8 for further information.) Stop col-lecting the employee social security andMedicare taxes when his or her wages andtips for the year reach the limits.

You are responsible for the employersocial security and Medicare taxes on wagesand tips unt il the wages (including tips) reachthe limits. You must withhold income tax forthe whole year on wages and tips, evenwhen the limits are reached.

File Form 941 to report withholding on tips.If, by the 10th of the month after the monthyou received an employees report on tips,you dont have enough employee fundsavailable to deduct the employee tax, you nolonger have to collect it. Show any uncol-lected social security and Medicare taxes on

Form W-2 and as an adjustment on line 9,Form 941. (See the Form 941 and W-2 in-structions.)

The chart on page 23 shows how tips aretreated for FUTA tax purposes.

Allocated Tips.If you are an employer whooperates a large food or beverage establish-ment, you must report allocated tips undercertain circumstances. A large food or bev-erage establishment is one that providesfood or beverages for consumption on thepremises, where tipping is customary, andwhere there are normally more than 10 em-ployees on a typical business day during thepreceding year.

You must allocate tips among employeeswho receive them if the total tips reported toyou during any payroll period are less than8% (or an approved lower rate) of the estab-lishments gross receipts for that period. UseForm 8027 to report allocated tips.

Generally, you must allocate to tipped em-ployees an amount equal to the differencebetween the total tips reported by the em-ployees and 8% (or an approved lower rate)of gross receipts (less carryout sales andsales with at least a 10% service chargeadded). You or a majority of your employeesmay request a lower percentage rate, but notbelow 2%. See Rev. Proc. 86-21, 1986-1C.B. 560, for details.

The tip allocation may be made using oneof three methodshours worked, gross re-ceipts, or good faith agreement. For infor-mation about these allocation methods andfurther information, including the require-ment to file Forms 8027 on magnetic mediaif 250 or more forms are filed, see the sep-arate Instructions for Form 8027.

Do not withhold income, social security, orMedicare taxes on allocated tips.

8. Supplemental WagesSupplemental wages are compensation paid

to an employee in addition to the employeesregular wages. They include, but are not lim-ited to, bonuses, commissions, overtimepay, accumulated sick leave, severance pay,awards, back pay and retroactive pay in-creases for current employees, and pay-ments for nondeductible moving expenses.Other payments subject to the supplementalwage rules include taxable fringe benefitsand expense allowances paid under a non-accountable plan.

If you pay supplemental wages with reg-ular wages but do not specify the amount ofeach, withhold income tax as if the total werea single payment for a regular payroll period.

If you pay supplemental wages separately

(or combine them in a single payment andspecify the amount of each), the income taxwithholding method depends partly onwhether you withhold income tax from youremployees regular wages:

If you withhold income tax from an em-ployees regular wages, you can use one ofthe following methods for the supplementalwages:

a. Withhold a flat 20%.

b. Add the supplemental and regularwages for the most recent payroll period thisyear. Then figure the income tax as if the

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total were a single payment. Subtract the taxalready withheld from the regular wages.Withhold the remaining tax from the supple-mental wages.

If you did not withhold income tax fromthe employees regular wages, use methodb. (This would occur, for example, when thevalue of the employees withholding allow-ances claimed on Form W-4 is more than thewages.)

Regardless of the method you use to with-hold income tax on supplemental wages, in-cluding bonuses, supplemental wages aresubject to social security and Medicaretaxes.

Tips Treated as Supplemental Wages.Withhold the income tax on tips from wagesor from other funds the employee makesavailable. If an employee receives regularwages and reports tips, figure income tax asif the tips were supplemental wages. If youhave not withheld income tax from the reg-ular wages, add the tips to the regularwages. Then withhold income tax on thetotal. If you withheld income tax from theregular wages, you can withhold on the tipsby method a or b on page 6.

Vacation Pay.Vacation pay is subject towithholding as if it were a regular wage pay-ment. When vacation pay is in addition toregular wages for the vacation period, treatit as a supplemental wage payment. If thevacation pay is for a time longer than yourusual payroll period, spread it over the payperiods for which you pay it.

Back Pay Under a Statute.Treat back payas wages and withhold and pay employmenttaxes as appropriate. However, if back paywas awarded by a court or governmentagency to enforce a workers protection law,special rules apply for filing Forms W-2 withthe SSA for these payments. Contact yourSSA office for details.

9. Payroll PeriodThe payroll period is that period of servicefor which you usually pay wages. When youhave a regular payroll period, withholdincome tax for that time period even if youremployee does not work the full period.

When you dont have a payroll period,withhold the tax as if you paid wages on adaily or miscellaneous payroll period. Figurethe number of days (including Sundays andholidays) in the period covered by the wagepayment. If the wages are unrelated to aspecific length of time (e.g., commissionspaid on completion of a sale), count back thenumber of days from the payment period tothe latest of:

a. The last wage payment made during thesame calendar year,

b. The date employment began, if duringthe same calendar year, or

c. January 1 of the same year.

When you pay an employee for a periodof less than 1 week, and the employee signsa statement under penalties of perjury thathe or she is not working for any other em-ployer during the same calendar week forwages subject to withholding, figure with-holding based on a weekly payroll period. Ifthe employee later begins to work for anoth-

er employer for wages subject to withhold-ing, the employee must notify you within 10days. You should then figure withholdingbased on the daily or miscellaneous period.

10. Withholding FromEmployeesForm W-4.To know how much income taxto withhold from employees wages, youshould have a Form W-4, Employees With-holding Allowance Certificate, on file for eachemployee. Ask all new employees to give you

a signed Form W-4 when they start work.Make the form effective with the first wagepayment. If a new employee does not giveyou a completed Form W-4, withhold tax asif he or she is single, with no withholdingallowances. A Form W-4 remains in effectuntil the employee gives you a new one. Ifan employee gives you a Form W-4 that re-places an existing Form W-4, begin with-holding no later than the start of the firstpayroll period ending on or after the 30th dayfrom the date you received the replacementForm W-4. For exceptions, see this page forexemption from income tax withholding, andpage 8 for forms that must be sent to theIRS and invalid Forms W-4.

Note: A Form W-4 that makes a change forthe next calendar year will not take effect inthe current calendar year.

Pub. 505, Tax Withholding and EstimatedTax, contains detailed instructions for com-pleting Form W-4. Along with Form W-4, youmay wish to order Pub. 505 and Pub. 919,Is My Withholding Correct for 1993?

Withholding.To determine income taxwithholding, take the following into account:

a. Wages paid, including tips reported.

b. Marital status.The withholding tablesare different for single and for married em-ployees. On Form W-4, a married employeemay choose to have withholding at thehigher single rate. A nonresident alien, or a

person married to one, is considered singlefor withholding tax purposes.

An employee whose spouse has diedduring the year can show status as Marriedfor the year on Form W-4. An employeewhose spouse died in either of the two pre-ceding tax years can claim Married status if:

1. The employees home is maintained asthe main household of a child or stepchildfor whom the employee can claim an exemp-tion; and

2. The employee could file a joint returnwith the decedent in the year of the spousesdeath.

An employee who qualifies as a head of

household is considered single for with-holding purposes.

c. Withholding allowances.Thenumber of withholding allowances claimedon Form W-4 may be different from thenumber of exemptions claimed on the em-ployees tax return. The process of determin-ing the correct number of withholdingallowances begins with the number of per-sonal exemptions the employee expects toclaim on his or her tax return. This numberis then increased or decreased based on theemployees financial situation, as outlined onthe Form W-4 worksheets.

Personal Allowances Worksheet.Most employees will need to complete onlythe Personal Allowances Worksheet on page1 of Form W-4. (See Pub. 501, Exemptions,Standard Deduction, and Filing Information,for information on who can be claimed as adependent.) On this worksheet, employeesmay add to the number of the exemptionsthey expect to claim on their tax returns:

1. A special allowance, for withholdingpurposes only, if the employee has only onejob and does not have a working spouse, orthe employees wages from a second job

and the spouses wages do not exceed$1,000.

2. An additional allowance if the employ-ee expects to file the tax return using thehead of household filing status. A descrip-tion of the requirements for this filing statusis provided in the Form W-4 instructions.

3. An additional allowance if the employ-ee expects to claim a tax credit for child ordependent care expenses of at least $1,500.

Employees may claim fewer withholdingallowances than they are entitled to claim.They may wish to claim fewer allowances togenerate a larger tax refund or to offset othersources of taxable income that are not sub-ject to adequate withholding.

Deductions and AdjustmentsWorksheet.Employees who intend toitemize their deductions or claim adjust-ments to income on their tax returns maycomplete the Deductions and AdjustmentsWorksheet on page 2 of Form W-4. Thisworksheet will help them determine if theyare entitled to additional withholding allow-ances. For information on figuring withhold-ing allowances for tax credits, see Pub. 505.

Two-Earner/Two-Job Worksheet.Single employees with more than one joband combined earnings over $30,000, andmarried employees with a working spouse ormore than one job and combined earningsover $50,000, may use the Two-Earner/Two-Job Worksheet on page 2 ofForm W-4. Such employees may have toolittle tax withheld based on the above work-sheets and could be subject to underpay-ment penalties. This worksheet will help suchemployees decide if they need to reduce thenumber of withholding allowances or haveadditional specific dollar amounts withheld.

d. Exemption from income tax withhold-ing for eligible persons.An employeemay claim to be exempt from income taxwithholding because he or she had noincome tax liability last year and expectsnone this year. However, the wages may stillbe subject to social security and Medicaretaxes.

An employee must file a Form W-4 eachyear by February 15 to claim exemption fromwithholding. Employers should begin with-holding for each employee who previouslyclaimed exemption from withholding butwho has not submitted a new Form W-4 forthe current year. Withhold tax as if the em-ployee is single with zero withholding allow-ances.

An employee who can be claimed as adependent on someone elses tax returnmay not be exempt. If that employee has anynonwage income, such as interest on sav-

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ings, and wages plus the nonwage incomeare expected to be more than $600 for 1993,he or she usually cannot claim exemptionfrom withholding.

Caution: Students are subject to withholdingthe same as any other employee. They arenot exempt because of student status.

Withholding on Nonresident Aliens. Em-ployers should remind nonresident alienswhen completing Form W-4 that to avoidunderwithholding of income taxes theyshould (1) not claim exemption from incometax withholding; (2) request withholding as ifthey are single, regardless of their actualmarital status; and (3) claim only one allow-ance. However, if the nonresident alien is aresident of Canada, Mexico, Japan, orKorea, he or she may claim one allowancefor each dependent. In addition, nonresidentaliens should request that their employerwithhold an extra $4 per week to avoid beingunderwithheld. For more information, seePub. 515.

Sending Certain Forms W-4 to the IRS.You must send to the IRS copies of certainForms W-4 received during the quarter fromemployees still employed by you at the endof the quarter. Send copies when the em-ployee (1) claims more than 10 withholding

allowances, or (2) claims exemption fromwithholding and his or her wages would nor-mally exceed $200 per week. You are notrequired to send any other Forms W-4 unlessthe IRS notifies you in writing to do so.

Send in Forms W-4 that meet either of theabove conditions each quarter with Form941 or 941E. (However, if your Form 941 or941E is filed on magnetic media, you mustsend your paper Forms W-4 to the appropri-ate service center with a cover letter.) Com-plete boxes 8 and 10 on any Forms W-4 yousend in. You may use box 9 to identify theoffice responsible for processing the em-ployees payroll information. Also sendcopies of any written statements from em-

ployees in support of the claims made onForms W-4. Do this even if the Forms W-4are not in effect at the end of the quarter.You can send them to your Internal RevenueService Center more often if you like. If youdo so, include a cover letter giving yourname, address, employer identificationnumber, and the number of forms included.In certain cases, the IRS may notify you inwriting that you must submit specified FormsW-4 more frequently to your district directorseparate from your Form 941 or 941E.

Base withholding on the Forms W-4 thatyou send in unless the IRS notifies you inwriting that you should do otherwise. If theIRS notifies you about a particular employee,base withholding on the number of withhold-ing allowances shown in the IRS notice. Youwill get a copy of the notice to give to theemployee. Also, the employee will get a sim-ilar notice directly from the IRS. If the em-ployee later gives you a new Form W-4,follow it only if (1) exempt status is notclaimed, or (2) the number of withholdingallowances is equal to or fewer than thenumber in the IRS notice. Otherwise, disre-gard it and do not submit it to the IRS. Con-tinue to follow the IRS notice. If the employeeprepares a new Form W-4 explaining anydifference with the IRS notice, he or she mayeither submit it to the IRS or to you. If sub-

mitted to you, send the Form W-4 and ex-planation to the IRS office shown in thenotice. Continue to withhold based on thenotice until the IRS tells you to follow thenew Form W-4.

Filing Form W-4 on Magnetic Media.Form W-4 information may be filed with theIRS on magnetic media. If you wish to file onmagnetic media, you must submit Form4419, Application for Filing Information Re-turns Magnetically/ Electronically, to requestauthorization. See Pub. 1245, Specificationsfor Filing Form W-4, Employees Withholding

Allowance Certificate, on Magnetic Tape,and 514- and 312-Inch Magnetic Diskettes.To obtain additional information about mag-netic media filing, call the IRS MartinsburgComputing Center at (304) 263-8700.

Note: Any Forms W-4with employee sup-porting statementsthat you must submit tothe IRS must be submitted on paper. Theycannot be submitted on magnetic media.

Invalid Forms W-4.Any unauthorizedchange or addition to Form W-4 makes itinvalid. This includes taking out any lan-guage by which the employee certifies thatthe form is correct. A Form W-4 is also invalidif, by the date an employee gives it to you,he or she indicates in any way that it is false.

When you get an invalid Form W-4, do notuse it to figure withholding. Tell the employeeit is invalid and ask for another one. If theemployee does not give you a valid one,withhold taxes as if the employee were singleand claiming no withholding allowances.However, if you have an earlier Form W-4 forthis worker that is valid, withhold as you didbefore.

Amounts Exempt From Levy on Wages,Salary, and Other Income.If you receivea Notice of Levy on Wages, Salary, andOther Income (Forms 668W or 668W(c)), youmust withhold amounts as described in theinstructions for these forms. Pub. 1494,Table for Figuring Amount Exempt From

Levy on Wages, Salary, and Other Income(Forms 668W and 668W(c)), shows theexempt amount. If a levy issued in a prioryear is still in effect, use the current year Pub.1494 to compute the exempt amount.

11. Figuring WithholdingThere are several ways to figure income taxwithholding:

Percentage method (see pages 2627).

Wage bracket tables (see pages 2847).

Also see page 24 for directions on how touse the tables for employees claiming morethan 10 allowances.

Alternative formula tables for percentagewithholding (see Pub. 493, Alternative TaxWithholding Methods and Tables).

Wage bracket percentage method with-holding tables (see Pub. 493).

Employers with automated payroll sys-tems will find the two alternative formulatables and the two alternative wage bracketpercentage method tables useful.

Combined income, employee social secu-rity, and employee Medicare tax table (seePub. 493).

Annualized wages method (see Pub. 493).

Average estimated wages method (seePub. 493).

Cumulative wages and part-year employ-ment methods (see Pub. 493). These may beused if your employee requests that you usethem, and you agree to this.

Other alternative methods (see page 24).

If an employee wants additional tax with-held, have the employee show the extraamount on Form W-4.

Social Security and Medicare Taxes, Em-ployers and Employees Share.For

wages paid in 1993, the social security taxrate is 6.2% and the Medicare tax rate is1.45% for both the employer and the em-ployee. You can multiply each wage pay-ment by these percentages or use the tableson pages 49 through 51. You can use theamounts in the boxes in the lower right cor-ners of the tables on pages 50 and 51 if thewage payment is $100 or more. For example,the social security tax on a wage paymentof $355 would be $22.01 ($18.60 + $3.41)each. The Medicare tax would be $5.15($4.35 + $.80) each.

12. Income Tax WithholdingFrom Pensions and Annuities

Generally, payers or plan administratorsmust withhold Federal income tax at speci-fied rates on certain periodic, nonperiodic,and eligible rollover distributions (that are notdirect rollovers) from pension, annuity, de-ferred income and IRA payments. Recipientsmay also choose to have additional amountswithheld from periodic payments and non-periodic distributions, or may choose ex-emption from withholding (however, seePeriodic Payments and Nonperiodic Dis-tributions Delivered Outside the U.S.below). They do this by submitting to thepayer or administrator a Form W-4P, With-holding Certificate for Pension or AnnuityPayments. Payers and administrators may

substitute their own forms for this purpose.(See Regulations section 31.3402(f)(5)-1.)

Note: Since military retirement pay is gener-ally considered wages, and not a pension orannuity, military retirees should give you aForm W-4 to request income tax withholding,not Form W-4P.

Also, the deposit rules in section 13 applyto withholding on pensions and annuities.See section 14 for information on reportingwithheld income tax on Form 941.

Withholding on Periodic Payments.Generally, periodic payments are those pay-able for more than 1 year that are not eligiblerollover distributions. Periodic payments in-clude substantially equal payments made at

least once a year over the life of the employ-ee and/or beneficiaries or for 10 years ormore. Because these payments are treatedas if they are wages, you can figure with-holding by using the income tax withholdingtables and methods in this booklet or in Pub.493.

Recipients of periodic payments cansubmit to you a Form W-4P to specify thenumber of withholding allowances and anyadditional amount they want withheld. Theymay also claim an exemption from withhold-ing on Form W-4P or revoke a previouslyclaimed exemption. If they do not submit a

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Form W-4P, you must figure withholding bytreating a recipient as married with threewithholding allowances. See Form W-4P.

Withholding on Nonperiodic Payments.Withhold 10% of a nonperiodic payment thatis not an eligible rollover distribution. Therecipient may request additional withholdingon Form W-4P or claim exemption from with-holding.

Periodic Payments and Nonperiodic Dis-tributions Delivered Outside the U.S.The election to be exempt from income taxwithholding does not apply to any periodicpayment or nonperiodic distribution that isdelivered outside the United States or itspossessions to a U.S. citizen or residentalien. See Form W-4P for more information.Others can elect exemption from withholdingonly if an individual certifies to the payer thatthe individual is not (1) a U.S. citizen or res-ident alien, or (2) an individual to whom In-ternal Revenue Code section 877 applies(concerning expatriation to avoid tax). Thecertification can be made in a statement tothe payer under penalties of perjury.

Nonresident aliens who choose such ex-emption will be subject to withholding underCode section 1441. See Pub. 515.

Withholding on an Eligible RolloverDistribution.In 1993, withhold 20% of aneligible rollover distribution unless the recip-ient elected to have the distribution paid ina direct rollover to an eligible retirement plan,including an IRA. A recipient cannot claimexemption from the 20% withholding; how-ever, no withholding is required for a directrollover. An eligible rollover distribution is thetaxable part of any distribution from a qual-ified plan except (1) one of a series of sub-stantially equal periodic payments (at leastannually) made for the life or life expectancyof the employee and the employees bene-ficiary or for a specified period of 10 yearsor more, and (2) any part of a dist ribution thatis a minimum distribution required by Code

section 401(a)(9). Other exceptions mayapply. Although the same rules generallyapply to an eligible rollover distribution froma tax-sheltered annuity, a special effectivedate may apply.

Notice to Recipient.You must provide awritten explanation to the recipient within areasonable period of time before making aneligible rollover distribution. You must ex-plain the rollover rules, the special tax treat-ment for lump-sum distributions, the directrollover option, and the mandatory 20%withholding rule. Notice 92-48, 1992-45I.R.B. 25, contains a model notice you canuse to satisfy this requirement. Also, see At-tention Employers on page 17.

13. Depositing TaxesIn general, you must deposit backup with-holding, income tax withheld, and both theemployer and employee social security andMedicare taxes (minus any advance EIC pay-ments) that total $500 or more by mailing ordelivering a check, money order, or cash toan authorized financial institution or FederalReserve bank.

Federal Tax Deposit (FTD) Coupon.UseForm 8109, Federal Tax Deposit Coupon, tomake the deposits. Do not use the depositcoupons to pay delinquent taxes that have

been assessed by the IRS. These paymentsshould be sent directly to your Internal Rev-enue Service Center with a copy of any re-lated notice the IRS sent you.

For new employers, the IRS will send youan FTD coupon book 5 to 6 weeks after youreceive an employer identification number(EIN). (Apply for an EIN on Form SS-4.) TheIRS will keep track of the number of FTDcoupons you use and automatically willsend you additional coupons when you needthem. If you do not receive your resupply ofFTD coupons, contact your local IRS office.

You can have the FTD coupon books sentto a branch office, tax preparer, or servicebureau that is making your deposits byshowing that address on Form 8109C, FTDAddress Change, which is in the FTD couponbook. (Using Form 8109C will not changeyour address of record; it will change onlythe address where the FTD coupons aremailed.) The FTD coupons will be preprintedwith your name, address, and EIN. They haveentry boxes for indicating the type of tax andthe tax period for which the deposit is made.

It is very important to clearly mark the cor-rect type of tax and tax period on each FTDcoupon. This information is used by the IRSto credit your account. The Federal Tax De-

posit (FTD) Checklist near the end of thisbooklet illustrates how to complete the FTDcoupon properly.

If you have branch offices depositingtaxes, give them FTD coupons and completeinstructions so they can deposit the taxeswhen due.

Please use only your FTD coupons. If youuse anyone elses FTD coupon, you may besubject to the failure to deposit penalty. Thisis because your account will be underpaidby the amount of the deposit credited to theother persons account. See Penaltiesbelow for details.

How To Make Deposits.Mail or delivereach FTD coupon and a single payment cov-

ering the taxes to be deposited to a qualifieddepositary for Federal taxes or to the FederalReserve bank or branch (FRB) serving yourarea. Follow the instructions in the FTDcoupon book. Make the check or moneyorder payable to the depositary or FRBwhere you make your deposit. To helpensure proper crediting of your account, in-clude your EIN, the type of tax (e.g., Form941), and tax period to which the paymentapplies on your check or money order.

Reporting agents.Reporting agentswho make deposits for their clients shouldsee Rev. Proc. 89-48, 1989-2 C.B. 599.

Deposits at Depositaries.Authorized de-positaries must accept cash, a postal money

order drawn to the order of the depositary,or a check or draft drawn on and to the orderof the depositary. You can deposit taxes witha check drawn on another financial institu-tion only if the depositary is willing to acceptthat form of payment.

Note: Be sure that the financial institutionwhere you make deposits is an authorizeddepositary. Deposits made at an unautho-rized institution may be subject to the failureto deposit penalty.

Deposits at FRBs.If you want to make adeposit at an FRB, you must make that de-

posit with the FRB serving your area. Depos-its may be subject to the failure to depositpenalty if the payment is not considered animmediate credit item on the day it is re-ceived by the FRB. A personal check, includ-ing one drawn on a business account, is notan immediate credit item. To avoid a penalty,deposits made by personal checks drawn onother financial institutions must be made inadvance of the deposit due date to allowtime for check clearance. To be consideredtimely, the funds must be available to theFRB on the deposit due date before the

FRBs daily cut-off deadline. Contact yourlocal FRB to obtain information concerningcheck clearance and cut-off schedules.

Depositing on Time.The IRS determineswhether deposits are on time by the datethey are received by an authorized deposi-tary or FRB. However, a deposit received bythe authorized depositary or FRB after thedue date will be considered timely if the tax-payer establishes that it was mailed in theUnited States at least 2 days before the duedate.

Note: If you are required to deposit any taxesmore than once a month, any deposit of$20,000 or more must be made by its duedate to be timely.

Depositing Without an EIN.If you haveapplied for an EIN but have not received it,and you must make a deposit, make the de-posit with your Internal Revenue ServiceCenter. Do not make the deposit at an au-thorized depositary or FRB. Make it payableto the Internal Revenue Service and show onit your name (as shown on Form SS-4), ad-dress, kind of tax, period covered, and dateyou applied for an EIN. Attach an explanationto the deposit. Do not use Form 8109-B inthis situation.

Depositing Without Form 8109.If you donot have the preprinted Form 8109, you mayuse Form 8109-B to make deposits. Form8109-B is an over-the-counter FTD coupon

that is not preprinted with your identifyinginformation. It is available at IRS offices. UseForm 8109-B to make deposits only if:

You are a new entity and you already havebeen assigned an EIN, but you have not re-ceived your initial supply of Forms 8109. TheFederal Tax Deposit (FTD) Checklist nearthe end of this booklet shows how to com-plete Form 8109-B; or

You have not received your resupply ofpreprinted Forms 8109.

Deposit Record.For your records, a stubis provided with each FTD coupon in thecoupon book. The FTD coupon itself will notbe returned. It is used to credit your account.Your check, bank receipt, or money order is

your receipt.How To Claim Credit for Overpayments.If you deposited more than the right amountof taxes for a quarter, on the tax return youfile, you can ask to have the overpaymentrefunded or applied as a credit to your nextreturn. Do not ask the depositary or FRB torequest a refund from the IRS for you.

Penalties.Penalties may apply if you donot make required deposits on time, youmake deposits at an unauthorized financialinstitution, you pay directly to the IRS, or youpay with your return (amounts that may be

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paid with a return are limited). The penaltiesdo not apply if any failure to make a properand timely deposit was due to reasonablecause and not to willful neglect. For amountsnot properly or timely deposited, the penaltyrates are:

2% - deposits made 1 to 5 days late

5% - deposits made 6 to 15 days late

10% - deposits made 16 or more days late.Also applies to amounts paid to the IRSwithin 10 days of the date of the first noticethe IRS sent you asking for the tax due

10% - deposits made at unauthorized finan-cial institutions or directly to the IRS (butsee Depositing Without an EIN earlier)

15% - amounts still unpaid more than 10days after the date of the first notice theIRS sent you asking for the tax due or theday on which you receive notice anddemand for immediate payment, whichev-er is earlier

Order in Which Deposits Are Applied.Tax deposits are applied first to satisfy anypast due underdeposits for the quarter, withthe oldest underdeposit satisfied first.

Example: Employer A is required to makea deposit of $1,000 on February 15 and$1,500 on March 15. A does not make the

deposit on February 15. On March 15, A de-posits $1,700 assuming that he has paid hisMarch deposit in full and applied $200 to thelate February deposit. However, because de-posits are applied first to past due underde-posits in due date order, $1,000 of the March15 deposit is applied to the late Februarydeposit. The remaining $700 is applied to theMarch 15 deposit. Therefore, in addition toan underdeposit of $1,000 for February 15,A has an underdeposit for March 15 of $800.Penalties will be applied to both underdepo-sits as explained above.

Separate Accounting When Deposits AreNot Made or Withheld Taxes Are NotPaid. Separate accounting may be re-

quired if you do not pay over withheld em-ployee social security, Medicare, or incometaxes; deposit required taxes; make requiredpayments; or file tax returns. In this case,you would receive written notice from thedistrict director requiring you to deposittaxes in a special trust account for the U.S.Government. You would also have to filemonthly tax returns on Form 941-M, Em-ployers Monthly Federal Tax Return.

When To DepositNew rules for determining when you mustdeposit Federal employment taxes (otherthan FUTA taxes) are effective January 1,1993. However, you may continue to use theold deposit rules for 1993 only; see Cir. E

(Rev. February 1992) and Pub. 937, Employ-ment Taxes and Information Returns, for theold deposit rules. You can get Pub. 937 fromIRS offices. The new deposit rules apply tobackup withholding; Federal income taxwithheld on wages, pensions and annuities,and gambling winnings; and social securityand Medicare taxes. Generally, these rulesdo not apply to taxes required to be reportedon Form 942.

New Deposit Rules

Under the new rules, you are either (1) amonthly depositor or (2) a semiweekly de-

positor. However, if you accumulate taxes of$100,000 or more at any time during theyear, you are subject to the $100,000 one-day deposit rule, discussed later. The IRSwill notify you each November whether youare a monthly or a semiweekly depositor forthe coming calendar year. If you do not re-ceive the notification, you must determineyour own deposit status. You determine yourstatus as a monthly or semiweekly depositorat the beginning of the calendar year basedon the total tax you reported on your originalForms 941 (or 941E) for the four quarters in

the lookback period (explained below).Lookback Period.The lookback periodconsists of four quarters beginning July 1 ofthe second preceding year and ending June30 of the prior year. These four quarters areyour lookback period even if you did notreport any taxes for any of the quarters. For1993, the lookback period is July 1, 1991,through June 30, 1992:

Lookback Period For Calendar Year 1993

Calendar Year 1993

Jan.Mar. Ap r.June JulySep t. Oc t.Dec .

Lookback Period

1991 1992

JulySep t. Oc t.Dec . Jan.Mar. Ap r.June

Adjustments to lookback periodtaxes.To determine your taxes for anyquarter in the lookback period use only thetax you reported on the original returns(Forms 941 or 941E). Do not include adjust-ments made on a supplemental return filedafter the due date of the return. However, ifyou make adjustments on Form 941 (or941E), the adjustments are included in thetotal tax for the quarter in which the adjust-ments are reported.

Example of adjustments.Employer Soriginally reported total taxes of $45,000 forthe four quarters in the lookback period

ending June 30, 1992. S discovered duringJanuary 1993 that the tax during one of thelookback period quarters was understatedby $10,000 and corrected this error with anadjustment on the 1993 first quarter Form941. The total taxes reported in the lookbackperiod is $45,000. The $10,000 adjustmentis treated as part of the 1993 first quartertaxes.

Monthly Depositor Rule.If the total taxreported on Forms 941 (or 941E) for the fourquarters in the lookback period is $50,000or less, you are a monthly depositor for thecurrent year. You must deposit employmenttaxes and taxes withheld on payments madeduring a calendar month by the 15th day ofthe following month.

New employers.If you are a new em-ployer, your taxes for the lookback periodare considered to be zero. Therefore, you area monthly depositor for the year in which youfirst became an employer (but see the$100,000 One-Day Deposit Rule exceptionlater).

Semiweekly Depositor Rule.If the totaltax reported on Forms 941 (or 941E) for thefour quarters in the lookback period is morethan $50,000, you are a semiweekly depos-itor for the current year. If you are a semi-weekly depositor, you must deposit on

Wednesday and/or Friday depending onwhat day of the week you make paymentsas shown below:

Payment Days/Deposit Periods Deposit By

Wednesday, Thursday, and/or Fol lowing WednesdayFriday

Saturd ay, Sund ay, Mond ay, Follo wing Frid ayand/or Tuesday

If a quarter ends on a day other than Tues-day or Friday, taxes accumulated on thedays in the quarter just ending are subjectto one deposit obligation, and taxes accu-mulated on the days in the next quarter aresubject to a separate deposit obligation. Forexample, if one quarter ends on Thursdayand a new quarter begins on Friday, taxesaccumulated on Wednesday and Thursdayare subject to one deposit obligation andtaxes accumulated on Friday are subject toa separate obligation. Separate FTD cou-pons (Form 8109) are required for each de-posit because two different quarters areaffected. Be sure to clearly mark the quarterfor which the deposit is made on each Form8109.

Example of Monthly and SemiweeklyRules.Employer A accumulated taxes onForm 941 as follows:

1993 Lookback Period

3rd Quarter 1991 - $12,0004th Quarter 1991 - $12,0001st Quarter 1992 - $12,000

2nd Quarter 1992 - $12,000

$48,000

1994 Lookback Period

3rd Quarter 1992 - $15,0004th Quarter 1992 - $15,0001st Quarter 1993 - $15,000

2nd Quarter 1993 - $15,000

$60,000

Employer A is a monthly depositor for 1993because its taxes for the four quarters in itslookback period ($48,000 for the 3rd quarterof 1991 through the 2nd quarter of 1992) wasnot more than $50,000. However, for 1994,Employer A is a semiweekly depositor be-cause As total taxes for the four quarters inits lookback period ($60,000 for the 3rd quar-ter of 1992 through the 2nd quarter of 1993)exceeded $50,000.

Deposits on Banking Days Only.If a de-posit is required to be made on a day thatis not a banking day, the deposit is consid-ered to be made timely if it is made by theclose of the next banking day. For example,if a deposit is required to be made on Friday,

but Friday is not a banking day, the depositis considered timely if it is made by the fol-lowing Monday.

Semiweekly depositors will always have3 banking days after the end of a semiweek-ly period to make a deposit. That is, if anyof the 3 weekdays after the end of a semi-weekly period is a banking holiday, you willhave one additional banking day to deposit.For example, if a semiweekly depositor ac-cumulated taxes for payments made onFriday and the following Monday is not abanking day, the deposit normally due on

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Wednesday may be made on Thursday (al-lowing 3 banking days to make the deposit).

$100,000 One-Day Deposit Rule.If youaccumulate taxes of $100,000 or more onany day during a deposit period, you mustdeposit it by the close of the next bankingday, whether you are a monthly or a semi-weekly depositor. For monthly depositors,the deposit period is a calendar month. Forsemiweekly depositors, the deposit periodsare Wednesday through Friday and Saturdaythrough Tuesday.

For purposes of the $100,000 rule, do notcontinue accumulating taxes after the end ofa deposit period. For example, if a semi-weekly depositor has accumulated taxes of$95,000 on Tuesday and $10,000 onWednesday, the $100,000 one-day rule doesnot apply because the $10,000 is accumu-lated in the next deposit period. Thus,$95,000 must be deposited on Friday and$10,000 must be deposited on the followingWednesday.

In addition, once you accumulate at least$100,000 in a deposit period, stop accumu-lating at the end of that day and begin toaccumulate anew on the next day. For ex-ample, Employer C is a semiweekly deposi-tor. On Monday, C accumulates taxes of

$110,000 and must deposit on Tuesday, thenext banking day. On Tuesday, C accumu-lates additional taxes of $30,000. Becausethe $30,000 is not added to the previous$110,000 and is less than $100,000, C mustdeposit the $30,000 on Friday using thenormal semiweekly deposit rule.

If you are a monthly depositor and youaccumulate $100,000 on any day, you im-mediately become a semiweekly depositorfor at least the remainder of the calendar yearand for the following calendar year.

Example of $100,000 one-day depositrule.Employer B started business on Feb-ruary 1, 1993. Because B is a new employer,the taxes for its lookback period are consid-

ered to be zero; therefore, B is a monthlydepositor. On February 10, B paid wages forthe first time and accumulated taxes of$60,000. On February 11, B paid wages andaccumulated taxes of $50,000, for a total of$110,000. Because B accumulated$110,000 on February 11, it must deposit$110,000 by February 12, the next bankingday. B immediately is a semiweekly depos-itor for at least the remainder of 1993 andfor 1994 but may be subject to the $100,000one-day deposit rule if it accumulates$100,000 again in any semiweekly period.

Accuracy of Deposits (98% Rule).Youwill satisfy your deposit obligation if you de-posit timely 98% of the required deposit or

all but $100 of the required deposit. For thisrule to apply, you must deposit any under-payment as follows:

Monthly DepositorDeposit or remit bythe due date of the Form 941 (or 941E) forthe period in which the underpayment oc-curred.

Semiweekly and $100,000 One-DayDepositorDeposit by the earlier of the firstWednesday or Friday that comes on or afterthe 15th of the month following the monthin which the underpayment occurred.

You will not be subject to a penalty if yourunderdeposit was due to reasonable cause.

$500 Exception.If you accumulate lessthan a $500 tax liability during a current quar-ter, no deposits are required. You may paywith the tax return for the quarter. However,if you are unsure that you will accumulateless than $500 for the quarter, deposit underthe appropriate rules so that you will not besubject to failure to deposit penalties.

Depositing and Reporting Withholding onPensions and Annuities.The rules in sec-tion 13 apply to deposits of withholding onpensions and annuities. The payer or planadministrator can (1) combine the withhold-ing with all other amounts under its control,make combined deposits, and report it onthe same Form 941 filed to report withhold-ing on employees wages; (2) request a sep-arate EIN for deposit ing and reporting all plandistributions under its control; or (3) use theEIN of each plan to deposit and report sep-arately the withholding from each plan. FileForms 1099-R to report the distributionsusing the same name and EIN you used tomake deposits and to file Form 941.

Depositing Backup Withholding.For taxdeposit purposes, you can either combinebackup withholding with other taxes report-

ed on Form 941 (or 941E) and deposit thecombined total, or you can treat backupwithholding as a separate tax and deposit itseparately following the same deposit rulesused for social security, Medicare, and with-held income taxes. For example, in the baseperiod, Bank A reported $80,000 of taxes onwages and $10,000 of backup withholdingon interest. For deposit and reporting pur-poses, A treated the backup withholdingseparately. Therefore, for 1993, if A choosesto treat the amounts separately, A is a sem-iweekly depositor for taxes on wages butmay use the monthly depositor rule forbackup withholding. If A does not choose totreat backup withholding separately in 1993,A is a semiweekly depositor based on thecombined total of both taxes in the lookbackperiod.

If you treat backup withholding as a sep-arate tax, show the amounts for deposit pur-poses on Schedule A (Form 941), Recordof Federal Backup Withholding Tax Liability.When depositing this tax, darken the Sch.A entry box on the FTD coupon. ScheduleA (Form 941) must be filed with Form 941 (or941E).

Deposit Instructions for State and LocalGovernment Employers.If you are notcovered by a section 218 agreement, depos-it withheld income tax and (for employeeshired after March 31, 1986) the Medicare tax.If you are covered by a section 218 agree-ment, or, for services performed after July 1,1991, if you have employees who are notmembers of a state or local government re-tirement system, deposit income, social se-curity, and Medicare taxes.

Deposit with authorized depositaries andFRBs only; do not send the social securitytaxes to the state.

Depositing Federal Unemployment (FUTA)Taxes.For deposit purposes, figure FUTAtax quarterly. Deposit any amount due by thelast day of the first month after the quarterends.

Determine whether you must deposit taxfor any of the first three quarters in a year.Figure the total tax by multiplying by .008that part of the first $7,000 of each employ-ees annual wages that you paid during thequarter. If any part of the first $7,000 paid toemployees is exempt from state unemploy-ment taxes, you may deposit an amount inexcess of the .008 rate. If the amount deter-mined by using the .008 rate (plus anyamount not yet deposited for any earlierquarter of the year) is more than $100, de-posit it during the first month after the quar-

ter. But if it is $100 or less, you do not haveto deposit it. Just add it to the amount fordeposit for the next quarter.

If the tax reportable on Form 940-EZ or940 (including any credit reductions underCode section 3302(c)), minus amounts de-posited for the year, is more than $100, de-posit all the tax by January 31. If your tax forthe year (minus deposits) is $100 or less, youmay either deposit it or pay it with Form 940or 940-EZ by January 31.

14. Filing the Quarterly Returnof Social Security, Medicare,and Withheld Income Taxes

Form 941.Generally, all employers whoare subject to inc