The IRS has issued guidance on how an employer determines the amount of income required to be withheld for tax purposes relative to payments of supplemental wages paid under nine differing circumstances. Employers determine withholding on payments of supplemental wages under either an aggregate method or an optional flat rate method. In order to use the optional flat rate withholding, three requirements must be met:
(1) supplemental wages payments to that employee from that employer may not have exceeded $1,000,000 during that tax year;
(2) the supplemental wages are either not paid concurrently with regular wages or kept separately stated on the employer's payroll records; and
(3) income tax must have been withheld by that employer from the regular wages paid to that employee during either that or the immediately-preceding calendar year.
The nine situations addressed by this guidance included when an employer pays:
(1) commissions at fixed intervals with no regular wages paid to the employee;
(2) commissions at fixed intervals in addition to regular wages which are paid at different intervals;
(3) commissions when an employee's accumulated commission credit reaches a specified numerical threshold;
(4) draws in connection with commissions;
(5) a signing bonus in advance of an employee actually starting employment;
(6) severance amounts after employment has been terminated;
(7) lump sum payments of accumulated annual leave;
(8) annual vacation and sick leave payouts; and
(9) sick pay when paid at a different rate from the regular wage rate.
The examples point out that the optional flat rate method is not available in situations where the employee has received no regular wages, and clarifies that draws represent prepayments of commissions rather than a payment of salary. Under such circumstances, the employer must use the aggregate procedure described in Reg. §31.3402(g)-1(a)(6). In addition, when commission payments are made at irregular intervals - such as when specified thresholds or benchmarks are achieved - the employer must determine the income tax to be withheld based on a table for miscellaneous payroll periods contained inReg. §31.2402(c)-1(c)(3) and Circular E (IRS Pub. 15, Employer's Tax Guide).
Rev. Rul. 66-294, 1966-2 CB 459, and Rev. Rul. 67-131, 1967-1 CB 291, are obsoleted.
Reprinted with permission from CCH