US Internal Revenue Service: p15--1994

8/14/2019 US Internal Revenue Service: p15--1994

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Circular E, Employers Tax Guide

PageTable of Contents

Chapter I. Payroll Taxes

Internal Revenue ServiceBulk RateWADC9999

Rancho Cordova, CA 95743-9999 Postage and Fees Paid

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Publication 15

Deliver to Payroll Department

Cat. No. 10000W (Rev. January 1994)

Employment Tax Rates and Wage Base for 1994

Social Security Tax - 6.2% each for employers and employees

Calendar 2Reminders 2

1. Are You an Employer? 32. Employer Identification Number (EIN) 33. Who Are Employees? 34. Employees Social Security Number (SSN) 45. Taxable Wages 4

6. Taxable Tips 67. Supplemental Wages 6

8. Payroll Period 79. Withholding From Employees 710. Figuring Withholding 811. Depositing Taxes 812. Filing the Employers Quarterly Federal

Tax Return (Form 941) 11

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

15. Advance Payment of the EarnedIncome Credit 13

Special Rules for VariousTypes of Services and Products 1520

Income Tax Withholding and Advance EarnedIncome Credit (EIC) Payment Methods 27

Income Tax Withholding Tables:Percentage Method 2930

Wage Bracket 3150Social Security Employee Tax Table 5152

Medicare Employee Tax Table 53

Index 62

Form 7018-A (order blank) 6364

Federal Tax Deposit (FTD) Checklist 6061

Advance EIC Payment Tables:Percentage Method 5455Wage Bracket Method 5659

Department of the TreasuryInternal Revenue Service

Postmaster: Deliver Immediately

New Forms 945 and 945-A for 1994

All nonpayroll items have been removed from Form 941, EmployersQuarterly Federal Tax Return, beginning in the first quarter of 1994. Thenonpayroll items include backup withholding and withholding forpensions, annuities, IRAs, and gambling winnings. These nonpayrollitems will be reported on Form 945, Annual Return of Withheld FederalIncome Tax. Form 945 is an annual tax return and the return for 1994will be due January 31, 1995. Form 941 will continue to be filedquarterly. Form 945 filers who are required to deposit on a semiweeklydeposit schedule will attach the new Form 945-A, Annual Record ofFederal Tax Liability. See Chapter II, page 21, for details.

Separate Deposit Requirements for Form 945 Tax Liabilities

Separate deposits are required for nonpayroll (Form 945) income taxwithholding on payments made after December 31, 1993. Be sure tomark the checkbox for Form 945 on the revised Form 8109, Federal Tax

Deposit Coupon. DO NOT combine deposits for Form 941 and Form 945tax liabilities. See Chapter II, page 21, for details.

Form 941E, Quarterly Return of Withheld Federal Income Tax andMedicare Tax, will be eliminated. Previous filers of Form 941E will berequired to report any employment tax and withholding from wages onForm 941 beginning in the first quarter of 1994. Income tax withholdingon nonpayroll items must be reported on Form 945 and depositedseparately as discussed above. See Chapter II for details.

Chapter II. Nonpayroll Income Tax Withholding

1. Backup Withholding 21

3. Depositing and Reporting NonpayrollIncome Tax Withholding 21

Chapter III. Information Returns1. Filing Forms W-2, 1099-R, and Other

Information Returns 22

3. Reconciling Forms W-2, W-3, and 941 242. Reporting to Employees on Form W-2 22

4. Information Return Penalties 24 Guide to Information Returns 2526

13. Filing the Employers Quarterly Tax Returnfor Household Employees (Form 942) 12

2. Income Tax Withholding From Pensionsand Annuities 21

Sick Pay Reporting 6

Penalties 11Seasonal Employers 11

1994 Wage Base for Social Security Tax - $60,600

Effective January 1, 1994, the wage base limit for Medicare tax hasbeen eliminated. All 1994 wages are subject to Medicare tax.

Medicare Tax - 1.45% each for employers and employees

Federal Unemployment (FUTA) Tax - 6.2% (employers only)

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CalendarThe following is a list of important dates. Alsosee Pub. 509, Tax Calendars for 1994.

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 (e.g., Form1099-R, Distributions From Pensions, Annu-ities, Retirement or Profit-Sharing Plans,IRAs, Insurance Contracts, etc., and Form1099-MISC, Miscellaneous Income). Youmay furnish Form W-2 or 1099 by mail asexplained in the Note above. (See ChapterIII, section 1.)

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 by February 10.

By February 15

Ask for a new Form W-4, Employees With-holding Allowance Certificate, from eachemployee who claimed total exemption fromwithholding last 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 Chapter I, section 9d.)

By February 28

File Copy A of all Forms 1099 with Form1096, Annual Summary and Transmittal ofU.S. Information Returns, with the InternalRevenue Service Center for your locality.(See Chapter III, section 1.)

By the Last Day of February

File Copy A of all Forms W-2 with Form W-3,Transmittal of Wage and Tax Statements,with the Social Security Administration(SSA). (See Chapter III, section 1.)

Allocated Tip Reporting.File Form 8027,Employers Annual Information Return of TipIncome and Allocated Tips, with the Internal

Revenue Service. (See Chapter I, section 6.)By April 30, July 31, October 31, andJanuary 31

Deposit Federal unemployment tax due if itis more than $100. File Form 941, Employ-ers Quarterly Federal Tax Return, and payany undeposited income, social security,and Medicare taxes. If you deposited alltaxes when due, you have 10 additional daysfrom the due dates above to file the return.

File Form 942, Employers Quarterly TaxReturn for Household Employees, and paythe tax due. (See Chapter I, section 13.)

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. Eligible em-ployees who want to receive advance pay-ments of the earned income credit next yearmust give you a new Form W-5.

RemindersTax Law Changes for 1994

The Revenue Reconciliation Act of 1993 re-sulted in the following changes affecting1994 employment taxes.

Medicare Wage Base LimitEliminated.Effective January 1, 1994, thewage base limit for Medicare tax has beeneliminated. All 1994 taxable wages are sub-ject to Medicare tax.

Supplemental Wage WithholdingRate.The withholding rate for supplemen-tal wages has been increased to 28% forpayments made after December 31, 1993.

Moving Expense Reimbursement.Effective for expenses incurred after 1993,reimbursed and employer-paid moving ex-penses that are otherwise deductible by theemployee are not included in employeeincome. Reimbursed and employer-paidmoving expenses that are not deductible bythe employee are included in income andsubject to employment taxes and income taxwithholding. Deductions for certain movingexpenses have been eliminated. See page 4for details.

Educational Assistance.The exclusionof employer-provided educational assis-tance programs from employee income hasbeen extended retroactively to amounts paid

from June 30, 1992, through December 31,1994. See Pub. 508, Educational Expenses,for details. If you have been including qual-ified educational assistance in employeewages after June 30, 1992, follow the exist-ing rules for correcting prior employment taxreturns. (See Chapter I, section 12, for de-tails.)

Interest on Tax Refunds.Effective Jan-uary 1, 1994, no interest shall be allowed onrefunds of employment tax if refunded within45 days of the date the tax return was filed.Similarly, if a refund on a claim is paid within45 days of the date the claim is filed, nointerest will be paid for the period after theclaim was filed.

When Hiring New EmployeesEligibility 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 1994 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 Chapter I, section4.)

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 Chapter I, section 9.) Withhold fromperiodic pension and annuity payments as ifthe recipient is married claiming three with-holding allowances, unless he or she hasfiled Form W-4P either electing no withhold-ing or giving a different number of allow-ances, marital status, or additional amountto be withheld. Do not withhold on directrollovers from qualified plans. (See ChapterI, sections 5, 9, 10, and Chapter II, section2.)

Social Security and Medicare Taxes.Withhold 6.2% from each wage payment in1994 for social security. Stop when youreach $60,600 in taxable wages. Withhold1.45% from each wage payment in 1994 forMedicare. (If the employee reported tips, seeChapter I, section 6.)

Recordkeeping

Keep all records of employment taxes for atleast 4 years. These should be available forIRS review. Records should include:

Your employer identification number.

Amounts and dates of all wage, annuity,and pension payments.

Amounts of tips reported.

The fair market value of in-kind wagespaid.

Names, addresses, social security num-bers, and occupations of employees and re-

cipients. Any employee copies of Form W-2 thatwere returned to you as undeliverable.

Dates of employment.

Periods for which employees and recipi-ents were paid while absent due to sicknessor injury, and the amount and weekly rate ofpayments you or third-party payers made tothem.

Copies of employees and recipientsincome tax withholding allowance certifi-cates.

Dates and amounts of tax deposits youmade.

Copies of returns filed.

Records of allocated t ips.

Records of fringe benefits provided, in-cluding substantiation required under Codesection 274 and related regulations.

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.


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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 receivesproper attention. Although this office cannotchange the tax law or technical decisions, itcan frequently clear up problems that result-ed from previous contacts.

Hearing-impaired taxpayers with access

to TDD equipment may call 1-800-829-4059for Problem Resolution assistance.

Additional Forms or Publications

If you need to order forms or publications,including additional copies of this booklet,you may use Form 7018-A, EmployersOrder Blank for 1994 Forms, at the end ofthis booklet or you may call 1-800-TAX-FORM (1-800-829-3676).

Chapter I. Payroll TaxesThis chapter explains your tax responsibili-ties as an employer. It explains the require-ments for withholding, depositing, reporting,and paying taxes. It explains the forms you

must give your employees, those your em-ployees must give you, and those you mustsend to the IRS and SSA. (Detailed filing re-quirements and instructions for completingthe forms, including instructions for correct-ing previously filed forms, are contained inthe instructions for each form.) This bookletalso has tax tables you need to figure thetaxes to withhold for each employee for1994.

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 15 through 20. Railroadretirement and railroad unemployment re-payment taxes are explained in the Instruc-tions for Form CT-1.

See Chapter II, Nonpayroll Income TaxWithholding, for information on depositingand reporting Federal income tax withheldfrom nonpayroll items. These items includebackup withholding and withholding frompensions, annuities, IRAs, and gambling w in-nings. Effective January 1, 1994, nonpayrollincome tax withholding must be reported onthe new Form 945 and has separate depositrequirements.

1. 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 anagricultural 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 $1,000or 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, with certain exceptions, are subject tosocial security and Medicare taxes. Seepage 19 for more information on the excep-tions.

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 (Social SecurityAct) agreement, contact the appropriatestate official.

2. Employer IdentificationNumber (EIN)If you are required to report employmenttaxes or give tax statements to employeesor annuitants, you need an 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 to

use. 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, TaxpayersStarting a Business, for more information onhow to file returns, etc., if due before youhave received your number.

See Depositing Without an EIN on page9 if you must make a deposit and you havenot received your EIN.

3. 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 acorporation 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.

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-


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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 notwithhold 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 work

is 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 the

person.2. The person does not have a substantial

investment 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 sellers

and 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.

4. 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, Statement of Cor-rected Income and Tax Amounts, to showthe employees 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 recordsand show the new information on Form W-2.If you filed Form W-2 for the same employeein prior years under the old name and SSN,file Form W-2c to correct the name andnumber. Advise the employee to contact thelocal SSA office about 6 months after theForm W-2c is filed to ensure that his or herrecords have been updated.

5. 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 15 through 20 for exceptionsto wages. See section 6 for a discussion oftips. See Chapter III, section 2, for reportingother compensation not subject to withhold-ing.

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 17 and 18.

Travel and Business Expenses.Payments to your employee for travel andother necessary expenses of your businessgenerally are taxable if (1) your employee is

not required to or does not substantiatetimely 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 1993 FormW-2 in Chapter III, section 2, for more infor-mation.

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 pay

in that pay period is taxable. If the employeespends 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 or

closing 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.

Employee Stock Options.There are twoclasses of stock options, statutory (coveredby a specific Code provision) and nonstatu-tory. Generally, statutory stock options arenot taxable to the employee either when theoption is granted, or when it is exercised(unless the stock is disposed of in a disqual-ifying disposition). However, nonstatutorystock options normally are taxable to the em-ployee as wages when the option is exer-cised (see Regulation section 1.83-7). Thesewages are subject to social security and

Medicare taxes and income tax withholding.Moving Expenses.New moving expenserules apply to expenses incurred after 1993.Reimbursed and employer-paid qualifiedmoving expenses (those that would other-wise be deductible by the employee) are notincludible in employees income unless theemployer has knowledge that the employeededucted the expenses in a prior year. Re-imbursed and employer-paid non-qualifiedmoving expenses are includable in incomeand are subject to employment taxes andincome tax withholding.

Under the new rules, certain moving ex-penses are now considered to be non-qualified expenses and are no longer

deductible by the employee. These non-qualified expenses include costs related tothe sale of an old residence and the pur-chase of a new one, expenses related tohouse hunting trips and living in temporaryquarters near the new job. Meals are nolonger deductible moving expenses. Formore information on moving expenses for1994, get Pub. 553, Highlights of 1993 TaxChanges. See page 22 for how to reportmoving expenses on Form W-2 for 1993.

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. Such payments may be subject toreporting and withholding requirements.

The golden parachute provision does notapply to payments made by a corporationthat immediately before the change in own-ership or control was (1) an S corporation or(2) a corporation that had no readily tradablesecurities. If (2) applies, shareholders musthave consented to the payments. Excessparachute payments (defined in Code sec-tion 280G) are not deductible by the payer,and the recipient of the excess payments issubject to a 20% excise tax. If the excess


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parachute payment is made to an employee,you must withhold the 20% excise tax.

If you make the payments to an employee,see Chapter III, section 2, for instructions forreporting to the employee. If you make par-achute payments to a nonemployee, useForm 1099-MISC for reporting. The para-chute payments provision applies to pay-ments made under agreements entered intoor renewed 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. Thewages are subject to FUTA tax as well. How-ever, see the chart on page 15 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. The payments, unless exempt

from tax because of a Code or U.S. tax treatyprovision, are subject to withholding at a flat30% or lower treaty rate. You must reportthe payments and any withheld tax on Form1042-S, Foreign Persons U.S. SourceIncome 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 an agreement are exemptfrom both the social security (6.2%) portionand the Medicare (1.45%) portion. At thistime, we have agreements with Austria, Bel-gium, Canada, Finland, France, Germany,Ireland, Italy, Luxembourg, the Netherlands,

Norway, Portugal, Spain, Sweden, Switzer-land, and the United Kingdom. For more in-formation about social security totalizationagreements, contact the Social Security Ad-ministration, Office of International Policy,P.O. Box 17741, Baltimore, MD 21235. (SeeRev. Procs. 80-56, 1980-2 C.B. 851, and84-54, 1984-2 C.B. 489, for information onhow to prove 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 employees

pay, 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 theformula, 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 Medicare

taxes 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 to your employees at noadditional cost to you.

Qualified employee discounts.

Working condition fringes (including out-

placement services under certain condi-tions).

Minimal value fringes (including an occa-sional cab ride when an employee must workovertime, local transportation benefits pro-vided because of unsafe conditions and un-usual circumstances, and meals you provideat eating places you run for your employeesif the meals are not furnished at below cost).

Qualified transportation fringes subject tospecified conditions and dollar limitations(including transportation in a commuter high-way vehicle, any transit pass, and qualifiedparking).

The use of on-premises athletic facilities.

Reduced tuition for education.However, services you provide at no addi-tional cost to you, qualified employee dis-counts, meals at eating places you run foryour employees, and reduced tuition provid-ed to officers, owners, or highly paid employ-ees are excluded from those individualsincome and the wage base only if the ben-efits are given to employees on a nondis-criminatory basis. For further information,including who is an officer, owner, or highlypaid employee, see Pub. 535 and the regu-lations under Code section 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 maychange 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 28% 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 allaffected employees will be aware of it. Forexample, you can include a notice with theemployees paycheck or display a notice.You may change methods at any time bynotifying affected employees in a similarway. You must give notice by the later ofJanuary 31 of the year to which you want adifferent method to apply, or within 30 daysafter you first give a vehicle to the employee.

Depositing Taxes on Fringe Benefits.Once you choose payment dates for fringe

benefits, you must deposit taxes in the samedeposit period you treat the fringe benefit aspaid. To avoid a penalty, deposit the taxesfollowing the general deposit rules for thatdeposit period. You may reasonably esti-mate the value of the fringe benefits providedon the date(s) you choose, for purposes ofmaking your 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 11 for details.


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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. SeeFringe Benefits on page 23 for additionalinformation on this option.

Special Accounting Rule for Fringe Bene-fits Provided During November and

December.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 Form

W-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 excludeonly 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 excessfringe 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. These

amounts 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 make the payments, withhold on thebasis of the employees Form W-4. Includepayments subject to social security andMedicare taxes on lines 6a and 7 of Form941. Report payments subject to RRTAtaxes on Form CT-1, Employers Annual

Railroad Retirement and Unemployment Re-payment Tax Return. Pay FUTA tax as younormally would for any other type of taxablewages. Include the amount of sick pay pay-ments on line 1, Part I, of Form 940 or940-EZ.

If a third party makes the payments, theemployee may request income tax withhold-ing by giving the third-party payer a FormW-4S, Request for Federal Income Tax With-holding From Sick Pay. Even though the thirdparty makes the payments, you may be re-sponsible for paying social security andMedicare taxes and reporting on Form W-2.See Pub. 952, Sick Pay Reporting, for de-tails.

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 the

employee worked.

6. Taxable TipsTips 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 collect

these taxes from the employees wages orfrom other funds he or she makes available.(See Tips Treated as Supplemental Wagesin section 7 for further information.) Stop col-lecting the employee social security taxwhen his or her wages and tips for the yearreach the limit; collect the employee Medi-care tax for the whole year on all wages andtips.

You are responsible for the employersocial security tax on wages and tips untilthe wages (including tips) reach the limit. Youmust withhold income tax for the whole year

on wages and tips.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 onForm W-2, on lines 6b and 7 of Form 941,and as an adjustment on line 9, Form 941.(See the instructions for Forms W-2 and941.)

If an employee reports to you in writing$20 or more of tips in a month, they aresubject to FUTA tax.

Allocated Tips.If you operate a large foodor beverage establishment, you must reportallocated tips under certain circumstances.A large food or beverage establishment isone that provides food or beverages for con-sumption on the premises, where tipping iscustomary, and where there are normallymore than 10 employees on a typical busi-ness day during the preceding 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.

7. Supplemental WagesSupplemental wages are compensation paidto 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, prizes, back pay and retroactive payincreases for current employees, and pay-ments for nondeductible moving expenses.Other payments subject to the supplemental


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wage 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 28%.

b. Add the supplemental and regularwages for the most recent payroll period thisyear. Then figure the income tax withholdingas if the total were a single payment. Sub-tract the tax already withheld from the reg-ular wages. Withhold the remaining tax fromthe supplemental wages.

If you did not withhold income tax fromthe employees regular wages, use methodb. (This would occur, for example, when the

value 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 regular

wages. Then withhold income tax on thetotal. If you withheld income tax from theregular wages, you can withhold on the tipsby method a or b above.

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 government

agency to enforce a workers protection law,special rules apply for filing Forms W-2 withthe SSA for these payments. Contact yourSSA office for details.

8. 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 a

daily 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 period

of 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.

9. Withholding FromEmployees

Form 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 youa 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 day

from the date you received the replacementForm W-4. For exceptions, see this page forexemption from income tax withholding andforms that must be sent to the IRS, and page8 for 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 1994?

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 is con-sidered single for 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 stepchild

for 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 ofhousehold is considered single for withhold-ing purposes.

c. Withholding allowances.The num-ber of withholding allowances claimed onForm W-4 may be different from the numberof exemptions claimed on the employees

tax return. The process of determining thecorrect number of withholding allowancesbegins with the number of personal exemp-tions the employee expects to claim on hisor her tax return. This number is then in-creased or decreased based on the employ-ees financial situation, as outlined on theForm W-4 worksheets.

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.

d. Exemption from income tax withhold-ing for eligible persons.An employee

may claim exemption from income tax with-holding because he or she had no incometax liability last year and expects none thisyear. However, the wages may still be subject to social security and Medicare taxes.

An employee must file a Form W-4 eachyear by February 15 to claim exemption fromwithholding. If the employee does not giveyou a new Form W-4, withhold tax as if theemployee is single with zero withholding al-lowances.

An employee cannot claim exemptionfrom withholding if (1) his or her income ex-ceeds $600 and includes unearned income(e.g., interest and dividends), and (2) anotherperson can claim the employee as a depen-

dent on their tax return.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. For more information,

see Pub. 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 withholdingallowances or (2) claims exemption fromwithholding and his or her wages would nor-mally be $200 or more per week. You arenot required to send any other Forms W-4unless the IRS notifies you in writing to doso.


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Send in Forms W-4 that meet either of theabove conditions each quarter with Form941. (However, if your Form 941 is filed onmagnetic media, you must send your paperForms W-4 to the appropriate service centerwith a cover letter.) Complete boxes 8 and10 on any Forms W-4 you send in. You mayuse box 9 to identify the office responsiblefor processing the employees payroll infor-mation. Also send copies of any writtenstatements from employees in support of theclaims made on Forms W-4. Send thesestatements even if the Forms W-4 are not in

effect at the end of the quarter. You can sendthem to your Internal Revenue ServiceCenter more often if you like. If you do so,include a cover letter giving your name, ad-dress, employer identification number, andthe number of forms included. In certaincases, the IRS may notify you in writing thatyou must submit specified Forms W-4 morefrequently to your district director separatefrom your Form 941.

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 withholding al-lowances 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 employee prepares a new Form W-4explaining any difference with the IRS notice,he or she may either submit it to the IRS orto you. If submitted to you, send the FormW-4 and explanation to the IRS office shownin the notice. Continue to withhold based onthe notice until the IRS tells you to follow the

new 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 WithholdingAllowance 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 to

the 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 FromLevy 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.

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

Percentage method (see pages 2930).

Wage bracket tables (see pages 3150).

Also see page 27 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 27).

If an employee wants additional tax with-held, have the employee show the extraamount on Form W-4, line 6.

Social Security and Medicare Taxes, Em-ployers and Employees Share.Forwages paid in 1994, 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 51 through 52. You can use theamounts in the boxes in the lower right cor-

ners of the tables on pages 52 and 53 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.

Employee wages are subject to social se-curity and Medicare taxes regardless of theemployees age, or whether he or she is re-ceiving social security benefits.

11. Depositing TaxesIn general, you must deposit income taxwithheld and both the employer and employ-ee social security and Medicare taxes (minusany advance EIC payments) by mailing ordelivering a check, money order, or cash toan authorized financial institution or FederalReserve bank.

You may make payments with your returninstead of depositing if:

Your net tax liability for the return period

(line 13 on Form 941) is less than $500, or You are making a payment in accordancewith the Accuracy of Deposits (98% Rule)provision in the deposit rules discussed onpage 11. This amount may exceed $500.Caution: Only monthly schedule depositorsare allowed to make this underpayment withthe return.

Separate Deposit Requirements for Non-payroll (Form 945) Tax Liabilities.Separate deposits are required fornonpayroll income tax withholding on pay-ments made after December 31, 1993. DONOT combine deposits for Form 941 andForm 945 tax liabilities. Generally, the de-posit rules for nonpayroll liabilities are the

same as discussed below. See Chapter II,section 3, for details.

Federal Tax Deposit (FTD) Coupon.UseForm 8109, Federal Tax Deposit Coupon, tomake the deposits. Do not use the depositcoupons to pay delinquent taxes assessedby the IRS. Send those payments directly toyour Internal Revenue Service Center with acopy of any related 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 need

them. 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. (Filing 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 the


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other persons account. See Penalties onpage 9 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., Form

941), 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 moneyorder 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, make the deposit withthe FRB serving your area. Deposits may besubject to the failure to deposit penalty if thepayment is not considered an immediatecredit item on the day it is received by theFRB. A personal check, including one drawnon a business account, is not an immediatecredit item. To avoid a penalty, depositsmade by personal checks drawn on otherfinancial institutions must be made in ad-vance of the deposit due date to allow timefor check clearance. To be consideredtimely, the funds must be available to the

FRB on the deposit due date before theFRBs daily cutoff deadline. Contact yourlocal FRB to obtain information concerningcheck clearance and cutoff schedules.

Depositing on Time.The IRS determinesif deposits are on time by the date they arereceived by an authorized depositary or FRB.However, a deposit received by the autho-rized depositary or FRB after the due datewill be considered timely if the taxpayer es-tablishes that it was mailed in the UnitedStates at least 2 days before the due date.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 may

use Form 8109-B to make deposits. Form8109-B is an over-the-counter FTD couponthat is not preprinted with your identifyinginformation. It is available only at your localIRS office. Be sure to have your EIN readywhen you contact the office. The phonenumber for your local IRS office is listed inyour telephone directory. You will not be ableto obtain this form by calling the general1-800-TAX-FORM number.

Use Form 8109-B to make deposits onlyif:

You are a new entity and you have beenassigned an EIN, but you have not receivedyour initial supply of Forms 8109. The Fed-eral Tax Deposit (FTD) Checklist near theend of this booklet shows how to completeForm 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 isyour receipt.

How To Claim Credit for Overpayments.If you deposited more than the right amount

of taxes for a quarter, you can request onForm 941 for that quarter to have the over-payment refunded or applied as a credit toyour next return. Do not ask the depositaryor FRB to request a refund from the IRS foryou.

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 bepaid 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 thedeposit 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 March

15 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 underde-posits 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 required

payments; 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 DepositThere are two deposit schedulesmonthlyor semiweeklyfor determining when youdeposit Federal employment and withhold-ing taxes (other than FUTA taxes). The IRSwill notify you each November whether youare a monthly or semiweekly depositor forthe coming calendar year. The rules apply tosocial security and Medicare tax and Federal

income tax withheld on wages, tips, and sickpay. Similar rules apply for Federal incometax withholding for nonpayroll items such asbackup withholding and withholding on pen-sions, annuities, and gambling winnings (seepage 21 for details). These rules do not app lyto tax required to be reported on Forms 940or 942.

Your deposit schedule for a calendar yearis determined from the total taxes reportedon your Form 941 in a four-quarter lookbackperiodJuly 1 through June 30as shownin the chart below. If you reported $50,000or less of employment taxes for the lookbackperiod, you are a monthly depositor; if youreported more than $50,000, you are a sem-

iweekly depositor. There are two exceptionrulesthe $500 rule and the $100,000 rule.The deposit rules and exceptions are dis-cussed in the following sections.

Lookback Period For Calendar Year 1994

Calendar Year 1994

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

Lookback Period

1992 1993

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

Transition Rule for 1993.You were al-lowed to continue using the old deposit rulesduring 1993 while you converted your de-

posit system to the new rules which wereeffective January 1, 1993. Your conversionto the new rules, however, must be complet-ed by January 1, 1994.

Monthly Deposit Schedule Rule

Under the monthly rule, employment andother taxes withheld on payments madeduring a calendar month must be depositedby the 15th day of the following month. Anemployer is a monthly depositor for a calen-dar year if the total employment taxes for thefour quarters in the lookback period were$50,000 or less.


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Monthly depositors should not file Form941 on a monthly basis. Do not file Form941-M, Employers Monthly Federal TaxReturn, unless you are instructed to do soby an IRS representative.

New Employers.During the first calendaryear of your business, your tax liability foreach quarter in the lookback period is con-sidered to be zero. Therefore, you are amonthly depositor for the first year of yourbusiness (but see the $100,000 One-DayRule exception below).

Semiweekly Deposit ScheduleRule

An employer is a semiweekly depositor for acalendar year if the total employment taxesduring its lookback period were more than$50,000. Under the semiweekly rule, em-ployment and other taxes withheld on pay-ments made on Wednesday, Thursday,and/or Friday must be deposited by the fol-lowing Wednesday. Amounts accumulatedon payments made on Saturday, Sunday,Monday, and/or Tuesday must be depositedby the following Friday.

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 quarterly return period ends on a dayother than Tuesday or Friday, employmenttaxes accumulated on the days covered bythe return period just ending are subject toone deposit obligation, and employmenttaxes accumulated on the days covered bythe new return period are subject to a sep-arate deposit obligation. For example, if onequarterly return period ends on Thursdayand a new quarter begins on Friday, employ-ment taxes accumulated on Wednesday andThursday are subject to one deposit obliga-tion and taxes accumulated on Friday are

subject to a separate obligation. SeparateForms 8109, Federal Tax Deposit Coupons,are required for each deposit because twodifferent quarters are affected. Be sure tomark the quarter for which the deposit ismade on each Form 8109.

Example of Monthly andSemiweekly Rules

Employer A reported employment tax liabilityon Form 941 as follows:

1994 Lookback Period

3rd Quarter 1992 - $12,0004th Quarter 1992 - $12,0001st Quarter 1993 - $12,000

2nd Quarter 1993 - $12,000

$48,000

1995 Lookback Period

3rd Quarter 1993 - $15,0004th Quarter 1993 - $15,0001st Quarter 1994 - $15,000

2nd Quarter 1994 - $15,000

$60,000

Employer A is a monthly depositor for 1994because its tax liability for the four quartersin its lookback period (3rd quarter 1992through 2nd quarter 1993) was not more

than $50,000. However, for 1995, EmployerA must follow the semiweekly rule describedabove because As liability exceeded$50,000 for the four quarters in its lookbackperiod (3rd quarter 1993 through 2nd quarter1994).

Application of Monthly andSemiweekly Rules

The terms monthly depositor and semiweek-ly depositor do not refer to how often yourbusiness pays its employees, or even howoften you are required to make deposits. The

terms identify which set of rules you mustfollow when a tax liability arises (e.g., whenyou have a payday). The deposit rules arebased on the dates wages are paid; not onwhen payroll liabilities are accrued.

Monthly Rule Example: Employer A is aseasonal employer who has a monthly de-posit schedule. It paid wages each of thefour Fridays during January but did not payany wages during February. Under themonthly rule, Employer A must deposit thecombined tax liabilities for the four Januarypaydays by February 15. Employer A doesnot have a deposit requirement for February(due by March 15) because no wages werepaid and, therefore, it did not have a tax

liability for the month.Semiweekly Rule Example: Employer B,who has a semiweekly deposit schedule,pays wages once each month on the last dayof the month. Although Employer B has asemiweekly deposit schedule, it will deposit just once a month because it pays wagesonly once a month. The deposit, however,will be made under the semiweekly depositrule as follows: Employer Bs tax liability forthe January 31, 1994 (Monday) payday mustbe deposited by February 4, 1994 (Friday).Under the semiweekly deposit rule, liabilitiesarising on Saturday through Tuesday mustbe deposited by the following Friday.

Deposits on Banking Days Only

If a deposit is required to be made on a daythat is not a banking day, the deposit is con-sidered timely if it is made by the close ofthe next banking day. For example, if a de-posit is required to be made on a Friday andFriday is not a banking day, the deposit willbe considered timely if it is made by thefollowing Monday.

A special rule is provided for semiweeklydepositors that allows these depositors atleast 3 banking days to make a deposit. Thatis, if any of the 3 weekdays after the end ofa semiweekly period is a banking holiday,they will have one additional banking day todeposit. For example, if a semiweekly de-positor accumulated taxes for payments

made on Friday and the following Monday isnot a banking day, the deposit normally dueon Wednesday may be made on Thursday(allowing 3 banking days to make the depos-it).

$500 Rule

If an employer accumulates less than a $500tax liability during a quarter, no deposits arerequired and this liability may be paid withthe tax return for the quarter. However, if youare unsure that you will accumulate less than$500, deposit under the appropriate rules so

that you will not be subject to failure to de-posit penalties.

$100,000 One-Day Rule

If the total accumulated tax reaches$100,000 or more on any day during a de-posit period, it must be deposited by the nextbanking day, whether an employer is amonthly or semiweekly depositor. Formonthly depositors, the deposit period is acalendar month. The deposit periods for asemiweekly depositor are Wednesdaythrough Friday and Saturday through Tues-

day.For purposes of the $100,000 rule, do not

continue accumulating employment tax lia-bility after the end of a deposit period. Forexample, if a semiweekly depositor has ac-cumulated a liability of $95,000 on a Tuesday(of a Saturday-through-Tuesday depositperiod) and accumulated a $10,000 liabilityon Wednesday, the $100,000 one-day ruledoes not apply. Thus, $95,000 must be de-posited by Friday and $10,000 must be de-posited by the following Wednesday.

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 this amount onTuesday, the next banking day. On Tuesday,C accumulates additional taxes of $30,000.Because the $30,000 is not added to theprevious $110,000 and is less than$100,000, C must deposit the $30,000 byFriday following the semiweekly deposit rule.

If a monthly depositor accumulates a$100,000 employment tax liability on anyday, it becomes a semiweekly depositor onthe next day and remains so for at least theremainder of the calendar year and for thefollowing calendar year.

Example of $100,000 One-Day Rule.

Employer B started its business on February1, 1994. On February 9, it paid wages for thefirst time and accumulated a tax liability of$60,000. On February 10, Employer B paidwages and accumulated a liability of$40,000, bringing its accumulated employ-ment tax liability to $100,000. Because thiswas the first year of its business, the taxliability for its lookback period is consideredto be zero, and it would be a monthly de-positor based on the lookback rules. How-ever, since Employer B accumulated$100,000 on February 10, it became a sem-iweekly depositor on February 11. It will bea semiweekly depositor for the remainder of1994 and for 1995. Employer B is requiredto deposit the $100,000 by February 11, the

next banking day.

Adjustments and the LookbackRule

Determine your tax liability for the quartersin the lookback period based on the tax lia-bility as originally reported. If you made ad-justments to correct errors on previously filedemployment tax returns, these adjustmentsdo not affect the amount of tax liability forpurposes of the lookback rule. If you reportadjustments on your current employment taxreturn to correct errors on prior period re-turns, include these adjustments as part of


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your tax liability for the current quarter. If youfiled Form 843 to claim a refund for a priorperiod overpayment, your tax liability doesnot change for either the prior period or thecurrent period quarter for purposes of thelookback rule.

Example: An employer originally reporteda tax liability of $45,000 for the four quartersin the lookback period ending June 30, 1993.The employer discovered during January1994 that the tax during one of the lookbackperiod quarters was understated by $10,000and corrected this error with an adjustment

on the 1994 first quarter return. This employ-er would be a monthly depositor for 1994since the lookback period tax liabilities arebased on the amounts originally reportedand they were less than $50,000. The$10,000 adjustment would be treated as partof the 1994 first quarter tax liability.

Accuracy of Deposits (98% Rule)

You will be considered to have satisfied thedeposit requirements if you deposit timely atleast 98% of your tax liability or if any depositshortfall does not exceed $100. No depositpenalties will be applied if the shortfall isdeposited by the shortfall makeup date asfollows:

Monthly DepositorDeposit or pay theshortfall with your return by the due date ofthe Form 941 for the period in which theshortfall occurred. You may pay the shortfallwith Form 941 even if the amount exceeds$500.

Semiweekly DepositorDeposit by thefirst Wednesday or Friday, whichever is ear-lier, falling on or after the 15th day of themonth following the month in which theshortfall occurred. For example, if a semi-weekly depositor has a shortfall during Jan-uary 1994, the shortfall makeup date isFebruary 16, 1994 (Wednesday).

Depositing Federal Unemployment(FUTA) Taxes

FUTA Amount To Deposit.For depositpurposes, figure FUTA tax quarterly. Deter-mine your FUTA tax by multiplying by .008that part of the first $7,000 paid to eachemployee during the quarter. The $7,000amount is the Federal wage base. Your statewage base may be different. If any part ofthe amount paid is exempt from state unem-ployment taxes, you may deposit an amountmore than the .008 rate. For example, in cer-tain states, wages paid to corporate officers,certain payments of sick pay by unions, andcertain fringe benefits, are exempt from un-employment tax. Refer to section 14 of thischapter for more information.

Employers Not Required To Deposit.If

your total FUTA tax for the year is $100 orless, you do not have to deposit the tax. Payyour FUTA tax with your Form 940 or Form940-EZ.

Employers Required To Deposit.If yourliability for any of the calendar year quartersof 1994 is over $100 (including any undepo-sited amount from any earlier quarter), youmust make deposits in an authorized depos-itary using Form 8109, Federal Tax DepositCoupon (see page 8 for details).

If the undeposited amount is $100 or less,you may carry it to the next quarter. If your

liability for the 4th quarter (plus any undepo-sited amount from any earlier quarter) is over$100, deposit the entire amount by the duedate of Form 940 or Form 940-EZ (January31). If it is $100 or less, you can either makea deposit or pay it with your Form 940 orForm 940-EZ by its due date.

When To Deposit.Deposit the FUTA taxby the last day of the first month after thequarter ends.

Quarter Ending Due Date

Jan.-Feb.-Mar. Mar. 31 Apr. 30

Apr.-May-June June 30 July 31

July-Aug.-Sept. Sept. 30 Oct. 31

Oct.-Nov.-Dec. Dec. 31 Jan. 31

Note: Enter the total amount of all depositsin Part II, line 7 of Form 940 or Part I, line 7of Form 940-EZ.

12. Filing the EmployersQuarterly Federal Tax Return(Form 941)Each quarter, all employers who are subjectto income tax withholding (including with-holding on sick pay and supplemental un-employment benefits) or social security andMedicare taxes must file Form 941, Employ-ers Quarterly Federal Tax Return. However,the following exceptions apply:

1. Seasonal employers who no longerfile for quarters when they regularly haveno tax liability because they have paid nowages.To alert the IRS that you will nothave to file a return for one or more quartersduring the year, mark the Seasonal employerbox above line 1 on Form 941. The IRS willmail two Forms 941 to the seasonal filer oncea year after March 1. The preprinted labelwill not include the date the quarter ended.You must enter the date the quarter endedwhen you file the return. The IRS will gener-

ally not inquire about unfiled returns if at leastone taxable return is filed each year. How-ever, you must mark the Seasonal employerbox on every quarterly return you file. Oth-erwise, the IRS will expect a return to be filedfor each quarter.

2. Household employers reportingsocial security and Medicare taxes and/orwithheld income tax.Report these onForm 942, Employers Quarterly Tax Returnfor Household Employees.

3. Employers reporting wages for em-ployees in American Samoa, Guam, theCommonwealth of the Northern MarianaIslands, or the Virgin Islands.If the em-ployees are not subject to U.S. income tax

withholding, use Form 941-SS. Employers inPuerto Rico use Form 941-PR.

4. Agricultural employers reportingsocial security and Medicare taxes andwithheld income tax.Report these onForm 943, Employers Annual Tax Return forAgricultural Employees.

5. Form 941E, Quarterly Return of With-held Federal Income Tax and Medicare Tax,will be eliminated after the fourth quarter of1993. Previous filers of Form 941E will berequired to report any employment tax andwithholding from wages on Form 941 begin-

ning in the first quarter of 1994. Income taxwithholding on nonpayroll items and backupwithholding must be reported on the newForm 945 and deposited separately. SeeChapter II for details.

When To File.Due dates for returns are:

Due Dates

Quarter Ending Due Date

Jan.-Feb.-Mar. Mar. 31 Apr. 30

Apr.-May-June June 30 July 31

July-Aug.-Sept. Sept. 30 Oct. 31

Oct.-Nov.-Dec. Dec. 31 Jan. 31

If you deposited all taxes when due for thequarter, you may file the return by the 10thday of the month following the due date.

Where To File.The addresses are listed inthe Form 941 instructions. Please note thatthere may be different addresses for filingreturns, depending on whether you file withor without a remittance.

Magnetic Tape Filing of Form 941.Reporting agents filing Forms 941 for groupsof taxpayers can file them on magnetic tape.For more information, see Pub. 1264, Mag-netic Tape Reporting of Form 941, Employ-ers Quarterly Federal Tax Return.

Penalties.For each whole or part month areturn is not filed when required (disregard-ing any extensions of the filing deadline),there is a penalty of 5% of the unpaid taxdue with that return. The maximum penaltyis 25%. Also, for each whole or part monththe tax is paid late (disregarding any exten-sions of the payment deadline), a penalty of0.5% of the amount of tax generally applies.The maximum for this penalty is also 25%.The penalties will not be charged if there isan acceptable reason for failing to file or pay.

Trust Fund Recovery Penalty.Ifincome, social security, and Medicare taxesthat must be withheld are not withheld or arenot paid to the IRS, the trust fund recovery

penalty may apply. The penalty is the fullamount of the unpaid trust fund tax. Thispenalty may apply to you if these unpaidtaxes cannot be immediately collected fromthe employer or business.

The trust fund recovery penalty m

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