Proposed regulation addresses default withholding rate for certain periodic payments
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Thursday, June 4, 2020

Proposed regulation addresses default withholding rate for certain periodic payments

By Payroll and Entitlements Editorial Staff

The Treasury Department and the IRS have issued a proposed regulation with rules for federal income tax withholding on certain periodic retirement and annuity payments. The proposed regulation:

  • would provide that, if no withholding certificate is in effect, the default withholding rate on periodic payments is determined in the manner described in applicable IRS forms, instructions, publications, and other prescribed guidance; and
  • would remove certain provisions that reflect the rule prior to amendments made by the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).

Withholding on periodic payments. Under Code Sec. 3405, income tax withholding is required for taxable payments from an employer-sponsored pension, annuity, profit-sharing, stock bonus, or other deferred compensation plan, unless the payee elects not to have tax withheld. With certain exceptions, withholding on annuity and similar periodic payments is treated like withholding on wages paid to an employee.

Before the TCJA, if a withholding certificate (Form W-4P) was not in effect for a periodic payment, the default withholding rate on the payment was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended Code Sec. 3405(a)(4) so that the default withholding rate on a such periodic payment is determined under rules prescribed by the Treasury Secretary.

Current IRS guidance has continued to determine the default withholding rate on a periodic payment not covered by a withholding certificate by treating the payee as a married individual claiming three withholding allowances, and applying that status when referring to the applicable withholding tables and computational procedures in the 2020 IRS Pub. 15-T, Federal Income Tax Withholding Methods (Notice 2020-3, I.R.B. 2020-3, 330).

The proposed regulation is intended to provide a flexible and administrable rule, so that the IRS can quickly update applicable IRS forms, instructions, publications, and other guidance as needed, and provide payers and plan administrators adequate time to program their systems to withhold the proper amount of tax on periodic payments.

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