[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2014 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 26
Internal Revenue
________________________
Parts 30 to 39
Revised as of April 1, 2014
Containing a codification of documents of general
applicability and future effect
As of April 1, 2014
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT OFFICIAL EDITION NOTICE
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 491
Alphabetical List of Agencies Appearing in the CFR...... 511
Table of OMB control numbers............................ 521
List of CFR Sections Affected........................... 539
[[Page iv]]
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 31.0-1 refers
to title 26, part 31,
section 0-1.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
The Code of Federal Regulations is kept up to date by the individual
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To determine whether a Code volume has been amended since its
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Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
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inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
amendments to existing regulations in the CFR. These OMB numbers are
placed as close as possible to the applicable recordkeeping or reporting
requirements.
PAST PROVISIONS OF THE CODE
Provisions of the Code that are no longer in force and effect as of
the revision date stated on the cover of each volume are not carried.
Code users may find the text of provisions in effect on any given date
in the past by using the appropriate List of CFR Sections Affected
(LSA). For the convenience of the reader, a ``List of CFR Sections
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the Code prior to the LSA listings at the end of the volume, consult
previous annual editions of the LSA. For changes to the Code prior to
2001, consult the List of CFR Sections Affected compilations, published
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.
``[RESERVED]'' TERMINOLOGY
The term ``[Reserved]'' is used as a place holder within the Code of
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``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used
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not accidentally dropped due to a printing or computer error.
INCORPORATION BY REFERENCE
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This material, like any other properly issued regulation, has the force
of law.
What is a proper incorporation by reference? The Director of the
Federal Register will approve an incorporation by reference only when
the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
material published in the Federal Register.
(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
process.
(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
What if the material incorporated by reference cannot be found? If
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CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Authorities
and Rules. A list of CFR titles, chapters, subchapters, and parts and an
alphabetical list of agencies publishing in the CFR are also included in
this volume.
[[Page vii]]
An index to the text of ``Title 3--The President'' is carried within
that volume.
The Federal Register Index is issued monthly in cumulative form.
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the daily Federal Register.
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the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
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INQUIRIES
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The e-CFR is a regularly updated, unofficial editorial compilation
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available at www.ecfr.gov.
Charles A. Barth,
Director,
Office of the Federal Register.
April 1, 2014.
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of twenty volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2014. The first thirteen volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Sec. Sec. 1.0-1.60;
Sec. Sec. 1.61-1.169; Sec. Sec. 1.170-1.300; Sec. Sec. 1.301-1.400;
Sec. Sec. 1.401-1.440; Sec. Sec. 1.441-1.500; Sec. Sec. 1.501-1.640;
Sec. Sec. 1.641-1.850; Sec. Sec. 1.851-1.907; Sec. Sec. 1.908-1.1000;
Sec. Sec. 1.1001-1.1400; Sec. Sec. 1.1401-1.1550; and Sec. 1.1551 to
end. The fourteenth volume containing parts 2-29, includes the remainder
of subchapter A and all of Subchapter B--Estate and Gift Taxes. The last
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and
Collection of Income Tax at Source); parts 40-49; parts 50-299
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).
The OMB control numbers for Title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Susannah C. Hurley was Chief Editor. The Code of
Federal Regulations publication program is under the direction of the
Managing Editor, assisted by Ann Worley.
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains parts 30 to 39)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury (Continued)...................................... 31
[[Page 3]]
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
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Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980,
deleting statutory sections from their regulations. In Chapter I, cross
references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy, the
cross reference has been deleted. For further explanation, see 45 FR
20795, Mar. 31, 1980.
SUBCHAPTER C--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Part Page
30
[Reserved]
31 Employment taxes and collection of income
tax at source........................... 5
32 Temporary employment tax regulations under
the Act of December 29, 1981 (Pub. L.
97-123)................................. 436
34
[Reserved]
35 Employment tax and collection of income tax
at source regulations under the Tax
Equity and Fiscal Responsibility Act of
1982.................................... 443
35a Temporary employment tax regulations under
the Interest and Dividend Tax Compliance
Act of 1983............................. 470
36 Contract coverage of employees of foreign
subsidiaries............................ 478
37-39
[Reserved]
[[Page 5]]
SUBCHAPTER C_EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
PART 30 [RESERVED]
PART 31_EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE--Table
of Contents
Subpart A_Introduction
Sec.
31.0-1 Introduction.
31.0-2 General definitions and use of terms.
31.0-3 Scope of regulations.
31.0-4 Extent to which the regulations in this part supersede prior
regulations.
Subpart B_Federal Insurance Contributions Act (Chapter 21, Internal
Revenue Code of 1954)
Tax on Employees
31.3101-1 Measure of employee tax.
31.3101-2 Rates and computation of employee tax.
31.3101-3 When employee tax attaches.
31.3102-1 Collection of, and liability for, employee tax; in general.
31.3102-2 Manner and time of payment of employee tax.
31.3102-3 Collection of, and liability for, employee tax on tips.
31.3102-4 Special rules regarding additional medicare tax.
Tax on Employers
31.3111-1 Measure of employer tax.
31.3111-2 Rates and computation of employer tax.
31.3111-3 When employer tax attaches.
31.3111-4 Liability for employer tax.
31.3111-5 Manner and time of payment of employer tax.
31.3112-1 Instrumentalities of the United States specifically exempted
from the employer tax.
General Provisions
31.3121(a)-1 Wages.
31.3121(a)-1T Question and answer relating to the definition of wages in
section 3121(a) (Temporary).
31.3121(a)-2 Wages; when paid and received.
31.3121(a)-3 Reimbursement and other expense allowance amounts.
31.3121(a)(1)-1 Annual wage limitation.
31.3121(a)(2)-1 Payments on account of sickness or accident disability,
medical or hospitalization expenses, or death.
31.3121(a)(3)-1 Retirement payments.
31.3121(a)(4)-1 Payments on account of sickness or accident disability,
or medical or hospitalization expenses.
31.3121(a)(5)-1 Payments from or to certain tax-exempt trusts, or under
or to certain annuity plans or bond purchase plans.
31.3121(a)(5)-2 Payments under or to an annuity contract described in
section 403(b).
31.3121(a)(6)-1 Payment by an employer of employee tax under section
3101 or employee contributions under a State law.
31.3121(a)(7)-1 Payments for services not in the course of employer's
trade or business or for domestic service.
31.3121(a)(8)-1 Payments for agricultural labor.
31.3121(a)(9)-1 Payments to employees for nonwork periods.
31.3121(a)(10)-1 Payments to certain home workers.
31.3121(a)(11)-1 Moving expenses.
31.3121(a)(12)-1 Tips.
31.3121(a)(13)-1 Payments under certain employers' plans after
retirement, disability, or death.
31.3121(a)(14)-1 Payments by employer to survivor or estate of former
employee.
31.3121(a)(15)-1 Payments by employer to disabled former employee.
31.3121(a)(18)-1 Payments or benefits under a qualified educational
assistance program.
31.3121(b)-1 Employment; services to which the regulations in this
subpart apply.
31.3121(b)-2 Employment; services performed before 1955.
31.3121(b)-3 Employment; services performed after 1954.
31.3121(b)-4 Employment; excepted services in general.
31.3121(b)(1)-1 Certain services performed by foreign agricultural
workers, or performed before 1959 in connection with
oleoresinous products.
31.3121(b)(2)-1 Domestic service performed by students for certain
college organizations.
31.3121(b)(3)-1 Family employment.
31.3121(b)(3)-1T Family employment (temporary).
31.3121(b)(4)-1 Services performed on or in connection with a non-
American vessel or aircraft.
31.3121(b)(5)-1 Services in employ of an instrumentality of the United
States specifically exempted from the employer tax.
31.3121(b)(6)-1 Services in employ of United States or instrumentality
thereof.
[[Page 6]]
31.3121(b)(7)-1 Services in employ of States or their political
subdivisions or instrumentalities.
31.3121(b)(7)-2 Service by employees who are not members of a public
retirement system.
31.3121(b)(8)-1 Services performed by a minister of a church or a member
of a religious order.
31.3121(b)(8)-2 Services in employ of religious, charitable,
educational, or certain other organizations exempt from income
tax.
31.3121(b)(9)-1 Railroad industry; services performed by an employee or
an employee representative as defined in section 3231.
31.3121(b)(10)-1 Services for remuneration of less than $50 for calendar
quarter in the employ of certain organizations exempt from
income tax.
31.3121(b)(10)-2 Services performed by certain students in the employ of
a school, college, or university, or of a nonprofit
organization auxiliary to a school, college, or university.
31.3121(b)(11)-1 Services in the employ of a foreign government.
31.3121(b)(12)-1 Services in employ of wholly owned instrumentality of
foreign government.
31.3121(b)(13)-1 Services of student nurse or hospital intern.
31.3121(b)(14)-1 Services in delivery or distribution of newspapers,
shopping news, or magazines.
31.3121(b)(15)-1 Services in employ of international organization.
31.3121(b)(16)-1 Services performed under share-farming arrangement.
31.3121(b)(17)-1 Services in employ of Communist organization.
31.3121(b)(18)-1 Services performed by a resident of the Republic of the
Philippines while temporarily in Guam.
31.3121(b)(19)-1 Services of certain nonresident aliens.
31.3121(b)(20)-1 Service performed on a boat engaged in catching fish.
31.3121(c)-1 Included and excluded services.
31.3121(d)-1 Who are employees.
31.3121(d)-2 Who are employers.
31.3121(e)-1 State, United States, and citizen.
31.3121(f)-1 American vessel and aircraft.
31.3121(g)-1 Agricultural labor.
31.3121(h)-1 American employer.
31.3121(i)-1 Computation to nearest dollar of cash remuneration for
domestic service.
31.3121(i)-2 Computation of remuneration for service performed by an
individual as a member of a uniformed service.
31.3121(i)-3 Computation of remuneration for service performed by an
individual as a volunteer or volunteer leader within the
meaning of the Peace Corps Act.
31.3121(i)-4 Computation of remuneration for service performed by
certain members of religious orders.
31.3121(j)-1 Covered transportation service.
31.3121(k)-1 Waiver of exemption from taxes.
31.3121(k)-2 Waivers of exemption; original effective date changed
retroactively.
31.3121(k)-3 Request for coverage of individual employed by exempt
organization before August 1, 1956.
31.3121(k)-4 Constructive filing of waivers of exemption from social
security taxes by certain tax-exempt organizations.
31.3121(l)-1 Agreements entered into by domestic corporations with
respect to foreign subsidiaries.
31.3121(o)-1 Crew leader.
31.3121(q)-1 Tips included for employee taxes.
31.3121(r)-1 Election of coverage by religious orders.
31.3121(s)-1 Concurrent employment by related corporations with common
paymaster.
31.3121(v)(2)-1 Treatment of amounts deferred under certain nonqualified
deferred compensation plans.
31.3121(v)(2)-2 Effective dates and transition rules.
31.3123-1 Deductions by an employer from remuneration of an employee.
31.3127-1T Exemption for employers and their employees where both are
members of religious faiths opposed to participation in Social
Security Act programs (temporary).
Subpart C_Railroad Retirement Tax Act (Chapter 22, Internal Revenue Code
of 1954)
Tax on Employees
31.3201-1 Measure of employee tax.
31.3201-2 Rates and computation of employee tax.
31.3202-1 Collection of, and liability for, employee tax.
Tax on Employee Representatives
31.3211-1 Measure of employee representative tax.
31.3211-2 Rates and computation of employee representative tax.
31.3211-3 Employee representative supplemental tax.
31.3212-1 Determination of compensation.
Tax on Employers
31.3221-1 Measure of employer tax.
31.3221-2 Rates and computation of employer tax.
31.3221-3 Supplemental tax.
31.3221-4 Exception from supplemental tax.
[[Page 7]]
General Provisions
31.3231(a)-1 Who are employers.
31.3231(b)-1 Who are employees.
31.3231(c)-1 Who are employee representatives.
31.3231(d)-1 Service.
31.3231(e)-1 Compensation.
31.3231(e)-2 Contribution base.
Subpart D_Federal Unemployment Tax Act (Chapter 23, Internal Revenue
Code of 1954)
31.3301-1 Persons liable for tax.
31.3301-2 Measure of tax.
31.3301-3 Rate and computation of tax.
31.3301-4 When wages are paid.
31.3302(a)-1 Credit against tax for contributions paid.
31.3302(a)-2 Refund of State contributions.
31.3302(a)-3 Proof of credit under section 3302(a).
31.3302(b)-1 Additional credit against tax.
31.3302(b)-2 Proof of additional credit under section 3302(b).
31.3302(c)-1 Limit on total credits.
31.3302(d)-1 Definitions and special rules relating to limit on total
credits.
31.3302(e)-1 Successor employer.
31.3306(a)-1 Who are employers.
31.3306(b)-1 Wages.
31.3306(b)-1T Question and answer relating to the definition of wages in
section 3306(b) (Temporary).
31.3306(b)-2 Reimbursement and other expense allowance amounts.
31.3306(b)(1)-1 $3,000 limitation.
31.3306(b)(2)-1 Payments under employers' plans on account of
retirement, sickness or accident disability, medical or
hospitalization expenses, or death.
31.3306(b)(3)-1 Retirement payments.
31.3306(b)(4)-1 Payments on account of sickness or accident disability,
or medical or hospitalization expenses.
31.3306(b)(5)-1 Payments from or to certain tax-exempt trusts, or under
or to certain annuity plans or bond purchase plans.
31.3306(b)(6)-1 Payment by an employer of employee tax under section
3101 or employee contributions under a State law.
31.3306(b)(7)-1 Payments other than in cash for service not in the
course of employer's trade or business.
31.3306(b)(8)-1 Payments to employees for non-work periods.
31.3306(b)(9)-1 Moving expenses.
31.3306(b)(10)-1 Payments under certain employers' plans after
retirement, disability, or death.
31.3306(b)(13)-1 Payments or benefits under a qualified educational
assistance program.
31.3306(c)-1 Employment; services performed before 1955.
31.3306(c)-2 Employment; services performed after 1954.
31.3306(c)-3 Employment; excepted services in general.
31.3306(c)(1)-1 Agricultural labor.
31.3306(c)(2)-1 Domestic service.
31.3306(c)(3)-1 Services not in the course of employer's trade or
business.
31.3306(c)(4)-1 Services on or in connection with a non-American vessel
or aircraft.
31.3306(c)(5)-1 Family employment.
31.3306(c)(5)-1T Family employment (temporary).
31.3306(c)(6)-1 Services in employ of United States or instrumentality
thereof.
31.3306(c)(7)-1 Services in employ of States or their political
subdivisions or instrumentalities.
31.3306(c)(8)-1 Services in employ of religious, charitable,
educational, or certain other organizations exempt from income
tax.
31.3306(c)(9)-1 Railroad industry; services performed by an employee or
an employee representative under the Railroad Unemployment
Insurance Act.
31.3306(c)(10)-1 Services in the employ of certain organizations exempt
from income tax.
31.3306(c)(10)-2 Services of student in employ of school, college, or
university.
31.3306(c)(10)-3 Services before 1962 in employ of certain employees'
beneficiary associations.
31.3306(c)(11)-1 Services in employ of foreign government.
31.3306(c)(12)-1 Services in employ of wholly owned instrumentality of
foreign government.
31.3306(c)(13)-1 Services of student nurse or hospital intern.
31.3306(c)(14)-1 Services of insurance agent or solicitor.
31.3306(c)(15)-1 Services in delivery or distribution of newspapers,
shopping news, or magazines.
31.3306(c)(16)-1 Services in employ of international organization.
31.3306(c)(17)-1 Fishing services.
31.3306(c)(18)-1 Services of certain nonresident aliens.
31.3306(d)-1 Included and excluded service.
31.3306(i)-1 Who are employees.
31.3306(j)-1 State, United States, and citizen.
31.3306(k)-1 Agricultural labor.
31.3306(m)-1 American vessel and aircraft.
31.3306(n)-1 Services on American vessel whose business is conducted by
general agent of Secretary of Commerce.
31.3306(p)-1 Employees or related corporations.
31.3306(r)(2)-1 Treatment of amounts deferred under certain nonqualified
deferred compensation plans.
31.3307-1 Deductions by an employer from remuneration of an employee.
[[Page 8]]
31.3308-1 Instrumentalities of the United States specifically exempted
from tax imposed by section 3301.
Subpart E_Collection of Income Tax at Source
31.3401(a)-1 Wages.
31.3401(a)-1T Question and answer relating to the definition of wages in
section 3401(a) (Temporary).
31.3401(a)-2 Exclusions from wages.
31.3401(a)-3 Amounts deemed wages under voluntary withholding
agreements.
31.3401(a)-4 Reimbursements and other expense allowance amounts.
31.3401(a)(1)-1 Remuneration of members of the Armed Forces of the
United States for active service in combat zone or while
hospitalized as a result of such service.
31.3401(a)(2)-1 Agricultural labor.
31.3401(a)(3)-1 Remuneration for domestic service.
31.3401(a)(4)-1 Cash remuneration for service not in the course of
employer's trade or business.
31.3401(a)(5)-1 Remuneration for services for foreign government or
international organization.
31.3401(a)(6)-1 Remuneration for services of nonresident alien
individuals.
31.3401(a)(6)-1A Remuneration for services of certain nonresident alien
individuals paid before January 1, 1967.
31.3401(a)(7)-1 Remuneration paid before January 1, 1967, for services
performed by nonresident alien individuals who are residents
of a contiguous country and who enter and leave the United
States at frequent intervals.
31.3401(a)(8)(A)-1 Remuneration for services performed outside the
United States by citizens of the United States.
31.3401(a)(8)(B)-1 Remuneration for services performed in possession of
the United States (other than Puerto Rico) by citizen of the
United States.
31.3401(a)(8)(C)-1 Remuneration for services performed in Puerto Rico by
citizen of the United States.
31.3401(a)(9)-1 Remuneration for services performed by a minister of a
church or a member of a religious order.
31.3401(a)(10)-1 Remuneration for services in delivery or distribution
of newspapers, shopping news, or magazines.
31.3401(a)(11)-1 Remuneration other than in cash for service not in the
course of employer's trade or business.
31.3401(a)(12)-1 Payments from or to certain tax-exempt trusts, or under
or to certain annuity plans or bond purchase plans, or to
individual retirement plans.
31.3401(a)(13)-1 Remuneration for services performed by Peace Corps
volunteers.
31.3401(a)(14)-1 Group-term life insurance.
31.3401(a)(15)-1 Moving expenses.
31.3401(a)(16)-1 Tips.
31.3401(a)(17)-1 Remuneration for services performed on a boat engaged
in catching fish.
31.3401(a)(18)-1 Payments or benefits under a qualified educational
assistance program.
31.3401(a)(19)-1 Reimbursements under a self-insured medical
reimbursement plan.
31.3401(b)-1 Payroll period.
31.3401(c)-1 Employee.
31.3401(d)-1 Employer.
31.3401(e)-1 Number of withholding exemptions claimed.
31.3401(f)-1 Tips.
31.3402(a)-1 Requirement of withholding.
31.3402(b)-1 Percentage method of withholding.
31.3402(c)-1 Wage bracket withholding.
31.3402(d)-1 Failure to withhold.
31.3402(e)-1 Included and excluded wages.
31.3402(f)(1)-1 Withholding exemptions.
31.3402(f)(2)-1 Withholding exemption certificates.
31.3402(f)(3)-1 When withholding exemption certificate takes effect.
31.3402(f)(4)-1 Period during which withholding exemption certificate
remains in effect.
31.3402(f)(4)-2 Effective period of withholding exemption certificate.
31.3402(f)(5)-1 Form and contents of withholding exemption certificates.
31.3402(f)(6)-1 Withholding exemptions for nonresident alien
individuals.
31.3402(g)-1 Supplemental wage payments.
31.3402(g)-2 Wages paid for payroll period of more than one year.
31.3402(g)-3 Wages paid through an agent, fiduciary, or other person on
behalf of two or more employers.
31.3402(h)(1)-1 Withholding on basis of average wages.
31.3402(h)(2)-1 Withholding on basis of annualized wages.
31.3402(h)(3)-1 Withholding on basis of cumulative wages.
31.3402(h)(4)-1 Other methods.
31.3402(i)-1 Additional withholding.
31.3402(i)-2 Increases or decreases in withholding.
31.3402(j)-1 Remuneration other than in cash for service performed by
retail commission salesman.
31.3402(k)-1 Special rule for tips.
31.3402(l)-1 Determination and disclosure of marital status.
31.3402(m)-1 Withholding allowances.
31.3402(n)-1 Employees incurring no income tax liability.
31.3402(o)-1 Extension of withholding to supplemental unemployment
compensation benefits.
31.3402(o)-2 Extension of withholding to annuity payments if requested
by payee.
[[Page 9]]
31.3402(o)-3 Extension of withholding to sick pay.
31.3402(p)-1 Voluntary withholding agreements.
31.3402(p)-1T Voluntary Withholding Agreements (temporary).
31.3402(q)-1 Extension of withholding to certain gambling winnings.
31.3402(r)-1 Withholding on distributions of Indian gaming profits to
tribal members.
31.3403-1 Liability for tax.
31.3404-1 Return and payment by governmental employer.
31.3405(c)-1 Withholding on eligible rollover distributions; questions
and answers.
31.3406-0 Outline of the backup withholding regulations.
31.3406a-1 Backup withholding requirement on reportable payments.
31.3406a-2 Definition of payors obligated to backup withhold.
31.3406a-3 Scope and extent of accounts subject to backup withholding.
31.3406a-4 Time when payments are considered to be paid and subject to
backup withholding.
31.3406(b((2)-1 Reportable interest payment.
31.3406(b)(2)-2 Original issue discount.
31.3406(b)(2)-3 Window transactions.
31.3406(b)(2)-4 Reportable dividend payment.
31.3406(b)(2)-5 Reportable patronage dividend payment.
31.3406(b)(3)-1 Reportable payments of rents, commissions, nonemployee
compensation, etc.
31.3406(b)(3)-2 Reportable barter exchanges and gross proceeds of sales
of securities or commodities by brokers.
31.3406(b)(3)-3 Reportable payments by certain fishing boat operators.
31.3406(b)(3)-4 Reportable payments of royalties.
31.3406(b)(3)-5 Reportable payments of payment card and third party
network transactions.
31.3406(b)(4)-1 Exemption for certain minimal payments.
31.3406(c)-1 Notified payee underreporting of reportable interest or
dividend payments.
31.3406(d)-1 Manner required for furnishing a taxpayer identification
number.
31.3406(d)-2 Payee certification failure.
31.3406(d)-3 Special 30-day rules for certain reportable payments.
31.3406(d)-4 Special rules for readily tradable instruments acquired
through a broker.
31.3406(d)-5 Backup withholding when the Service or a broker notifies
the payor to withhold because the payee's taxpayer
identification number is incorrect.
31.3406(e)-1 Period during which backup withholding is required.
31.3406(f)-1 Confidentiality of information.
31.3406(g)-1 Exception for payments to certain payees and certain other
payments.
31.3406(g)-1T Exception for payments to certain payees and certain other
payments (temporary).
31.3406(g)-2 Exception for reportable payments for which withholding is
otherwise required.
31.3406(g)-3 Exemption while payee is waiting for a taxpayer
identification number.
31.3406(h)-1 Definitions.
31.3406(h)-2 Special rules.
31.3406(h)-2T Special rules (temporary).
31.3406(h)-3 Certificates.
31.3406(i)-1 Effective date.
31.3406(j)-1 Taxpayer Identification Number (TIN) matching program.
Subpart F_General Provisions Relating to Employment Taxes (Chapter 25,
Internal Revenue Code of 1954)
31.3501(a)-1T Question and answer relating to the time employers must
collect and pay the taxes on noncash fringe benefits
(Temporary).
31.3502-1 Nondeductibility of taxes in computing taxable income.
31.3503-1 Tax under chapter 21 or 22 paid under wrong chapter.
31.3504-1 Designation of agent by application.
31.3504-2 Designation of payor to perform acts of an employer.
31.3505-1 Liability of third parties paying or providing for wages.
31.3506-1 Companion sitting placement services.
31.3507-1 Advance payments of earned income credit.
31.3507-2 Earned income credit advance payment certificates.
Subpart G_Administrative Provisions of Special Application to Employment
Taxes (Selected Provisions of Subtitle F, Internal Revenue Code of 1954)
31.6001-1 Records in general.
31.6001-2 Additional records under Federal Insurance Contributions Act.
31.6001-3 Additional records under Railroad Retirement Tax Act.
31.6001-4 Additional records under Federal Unemployment Tax Act.
31.6001-5 Additional records in connection with collection of income tax
at source on wages.
31.6001-6 Notice by district director requiring returns, statements, or
the keeping of records.
31.6011-4 Requirement of statement disclosing participation in certain
transactions by taxpayers.
31.6011(a)-1 Returns under Federal Insurance Contributions Act.
31.6011(a)-2 Returns under Railroad Retirement Tax Act.
[[Page 10]]
31.6011(a)-3 Returns under Federal Unemployment Tax Act.
31.6011(a)-3A Returns of the railroad unemployment repayment tax.
31.6011(a)-4 Returns of income tax withheld.
31.6011(a)-5 Monthly returns.
31.6011(a)-6 Final returns.
31.6011(a)-7 Execution of returns.
31.6011(a)-8 Composite return in lieu of specified form.
31.6011(a)-9 Instructions to forms control as to which form is to be
used.
31.6011(a)-10 Instructions to forms may waive filing requirement in case
of no liability tax returns.
31.6011(b)-1 Employers' identification numbers.
31.6011(b)-2 Employees' account numbers.
31.6051-1 Statements for employees.
31.6051-2 Information returns on Form W-3 and Internal Revenue Service
copies of Forms W-2.
31.6051-3 Statements required in case of sick pay paid by third parties.
31.6051-4 Statement required in case of backup withholding.
31.6053-1 Report of tips by employee to employer.
31.6053-2 Employer statement of uncollected employee tax.
31.6053-3 Reporting by certain large food or beverage establishments
with respect to tips.
31.6053-4 Substantiation requirements for tipped employees.
31.6060-1 Reporting requirements for tax return preparers.
31.6061-1 Signing of returns.
31.6065(a)-1 Verification of returns or other documents.
31.6071(a)-1 Time for filing returns and other documents.
31.6071(a)-1A Time for filing returns with respect to the railroad
unemployment repayment tax.
31.6081(a)-1 Extensions of time for filing returns and other documents.
31.6091-1 Place for filing returns.
31.6101-1 Period covered by returns.
31.6107-1 Tax return preparer must furnish copy of return to taxpayer
and must retain a copy or record.
31.6109-1 Supplying of identifying numbers.
31.6109-2 Tax return preparers furnishing identifying numbers for
returns or claims for refund.
31.6151-1 Time for paying tax.
31.6157-1 Cross reference.
31.6161(a)(1)-1 Extensions of time for paying tax.
31.6205-1 Adjustments of underpayments.
31.6205-2 Adjustments of underpayments of hospital insurance taxes that
accrue after March 31, 1986, and before January 1, 1987, with
respect to wages of State and local government employees.
31.6302-0 Table of Contents.
31.6302-1 Deposit rules for taxes under the Federal Insurance
Contributions Act (FICA) and withheld income taxes.
31.6302-2 Deposit rules for taxes under the Railroad Retirement Tax Act
(RRTA).
31.6302-3 Federal tax deposit rules for amounts withheld under the
backup withholding requirements of section 3406 for payments
made after December 31, 1992.
31.6302-4 Deposit rules for withheld income taxes attributable to
nonpayroll payments.
31.6302(b)-1 Method of collection.
31.6302(c)-1 Use of Government depositories in connection with taxes
under Federal Insurance Contributions Act and income tax
withheld for amounts attributable to payments made before
January 1, 1993.
31.6302(c)-2 Use of Government depositories in connection with employee
and employer taxes under Railroad Retirement Tax Act for
amounts attributable to payments made before January 1, 1993.
31.6302(c)-3 Deposit rules for taxes under the Federal Unemployment Tax
Act.
31.6302(c)-4 Cross references.
31.6361-1 Collection and administration of qualified State individual
income taxes.
31.6402(a)-1 Credits or refunds.
31.6402(a)-2 Credit or refund of tax under Federal Insurance
Contributions Act or Railroad Retirement Tax Act.
31.6402(a)-3 Refund of Federal unemployment tax.
31.6404(a)-1 Abatements.
31.6413(a)-1 Repayment or reimbursement by employer of tax erroneously
collected from employee.
31.6413(a)-2 Adjustments of overpayments.
31.6413(a)-3 Repayment by payor of tax erroneously collected from payee.
31.6413(b)-1 Overpayments of certain employment taxes.
31.6413(c)-1 Special refunds.
31.6414-1 Credit or refund of income tax withheld from wages.
31.6652(c)-1 Failure of employee to report tips for purposes of the
Federal Insurance Contributions Act.
31.6674-1 Penalties for fraudulent statement or failure to furnish
statement.
31.6682-1 False information with respect to withholding.
31.6694-1 Section 6694 penalties applicable to tax return preparer.
31.6694-2 Penalties for understatement due to an unreasonable position.
31.6694-3 Penalty for understatement due to willful, reckless, or
intentional conduct.
31.6694-4 Extension of period of collection when tax return preparer
pays 15 percent of a penalty for understatement of taxpayer's
liability and certain other procedural matters.
[[Page 11]]
31.6695-1 Other assessable penalties with respect to the preparation of
tax returns for other persons.
31.6696-1 Claims for credit or refund by tax return preparers.
31.7701-1 Tax return preparer.
31.7805-1 Promulgation of regulations.
Authority: 26 U.S.C. 7805.
Sections 31.3121(a)-1, 31.3121(a)-3, 31.3231(e)-1, 31.3231(e)-3,
31.3306(b)-1, 31.3306(b)-2, 31.3401(a)-1, and 31.3401(a)-4 also issued
under 26 U.S.C. 62.
Section 31.3121(b)(7)-2 also issued under 26 U.S.C. 3121(b)(7)(F).
Section 31.3121(b)(19)-1 also issued under 26 U.S.C. 7701(b)(11).
Section 31.3306(c)(18)-1 also issued under 26 U.S.C. 7701(b)(11).
Section 31.3401(a)(6)-1 also issued under 26 U.S.C. 1441(c)(4) and
26 U.S.C. 3401(a)(6).
Section 31.3402(f)(1)-1 also issued under 26 U.S.C. 3402(m).
Section 31.3402(f)(5)-1 also issued under 26 U.S.C. 3402 (i) and
(m).
Section 31.3402(f)(5)-1T also issued under 26 U.S.C. 3402 (i) and
(m).
Section 31.3402(n)-1 also issued under 26 U.S.C. 6001, 6011 and
6364.
Section 31.3402(r)-1 also issued under 26 U.S.C. 3402(p) and (r).
Sections 31.3406(a)-1 through 31.3406(i)-1 also issued under 26
U.S.C.3406(i).
Section 31.3406(j)-1 also issued under 26 U.S.C. 3406(i).
Section 31.6011(a)-3A is also issued under the authority of 26
U.S.C. 6011.
Section 31.6011(a)-4 also issued under 26 U.S.C. 6011.
Section 31.6051-1 also issued under 26 U.S.C. 6051.
Section 31.6051-2 also issued under 26 U.S.C. 6051.
Sections 31.6053-3 (b)(5), (h) and (j)(9) and 31.6053-4 are also
issued under sec. 1072 of Pub. L. 98-369, 98 Stat. 1052; and 26 U.S.C.
6001.
Sections 31.6053-3T and 31.6053-4T are also issued under sec. 1072
of Pub. L. 98-369, 98 Stat. 1052; and 26 U.S.C. 6001.
Section 31.6060-1 also issued under 26 U.S.C. 6060(a).
Section 31.6071(a)-1 also issued under 26 U.S.C.6071.
Section 31.6071(a)-1A is also issued under the authority of 26
U.S.C. 6071.
Section 31.6081-1 also issued under 26 U.S.C. 6081.
Section 31.6109-2 also issued under 26 U.S.C. 6109(a).
Section 31.6205-2 is also issued under 26 U.S.C. 6205(a)(1).
Section 31.6302-1 also issued under 26 U.S.C. 6302(a) and (h).
Section 31.6302-2, 31.6302-3, and 31.6302-4 also issued under 26
U.S.C. 6302(a) and (h).
Section 31.6302(c)-2A also issued under 26 U.S.C. 6157(d) and
6302(a) and (h).
Section 31.6302(c)-3 also issued under 26 U.S.C. 6302(a) and (h).
Section 31.6695-1 also issued under 26 U.S.C. 6695(b).
Source: T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31,
1960, unless otherwise noted.
Subpart A_Introduction
Sec. 31.0-1 Introduction.
(a) In general. The regulations in this part relate to the
employment taxes imposed by subtitle C (chapters 21 to 25, inclusive) of
the Internal Revenue Code of 1954, as amended. References in the
regulations to the ``Internal Revenue Code'' or the ``Code'' are
references to the Internal Revenue Code of 1954, as amended, unless
otherwise indicated. References to the Federal Insurance Contributions
Act, the Railroad Retirement Tax Act, and the Federal Unemployment Tax
Act are references to chapters 21, 22, and 23, respectively, of the
Code. References to sections of law are references to sections of the
Internal Revenue Code unless otherwise indicated. The regulations in
this part also provide rules relating to the deposit of other taxes by
electronic funds transfer.
(b) Division of regulations. The regulations in this part are
divided into 7 subparts. Subpart A contains provisions relating to
general definitions and use of terms, the division and scope of the
regulations in this part, and the extent to which the regulations in
this part supersede prior regulations relating to employment taxes.
Subpart B relates to the taxes under the Federal Insurance Contributions
Act. Subpart C relates to the taxes under the Railroad Retirement Tax
Act. Subpart D relates to the tax under the Federal Unemployment Tax
Act. Subpart E relates to the collection of income tax at source on
wages under chapter 24 of the Code. Subpart F relates to the provisions
of chapter 25 of the Code which are applicable in respect of the taxes
imposed by chapters 21 to 24, inclusive, of the Code. Subpart G relates
to selected provisions of subtitle F of the Code, relating to procedure
and administration, which have special application in respect of the
taxes imposed by subtitle C of the
[[Page 12]]
Code. Inasmuch as these regulations constitute Part 31 of title 26 of
the Code of Federal Regulations, each section of the regulations is
preceded by a section symbol and 31 followed by a decimal point (Sec.
31.). Sections of law or references thereto are preceded by ``Sec.'' or
the word ``section''.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 8723, 62 FR
37492, July 14, 1997]
Sec. 31.0-2 General definitions and use of terms.
(a) In general. As used in the regulations in this part, unless
otherwise expressly indicated--
(1) The terms defined in the provisions of law contained in the
regulations in this part shall have the meanings so assigned to them.
(2) The Internal Revenue Code of 1954 means the act approved August
16, 1954 (26 U.S.C.), entitled ``An act to revise the internal revenue
laws of the United States'', as amended.
(3) The Internal Revenue Code of 1939 means the act approved
February 10, 1939 (53 Stat., Part 1), as amended.
(4) The Social Security Act means the act approved August 14, 1935
(42 U.S.C. c. 7), as amended.
(5) (i) The Social Security Amendments of 1954 means the act
approved September 1, 1954 (68 Stat. 1052), as amended.
(ii) The Social Security Amendments of 1956 means the act approved
August 1, 1956 (70 Stat. 807), as amended.
(iii) The Social Security Amendments of 1958 means the act approved
August 28, 1958 (72 Stat. 1013), as amended.
(iv) The Social Security Amendments of 1960 means the act approved
September 13, 1960 (74 Stat. 924).
(v) The Social Security Amendments of 1961 means the act approved
June 30, 1961 (75 Stat. 131).
(vi) The Social Security Amendments of 1965 means the act approved
July 30, 1965 (79 Stat. 286).
(vii) The Social Security Amendments of 1967 means the act approved
January 2, 1968 (81 Stat. 821).
(viii) The Social Security Amendments of 1972 means the act approved
October 30, 1972 (86 Stat. 1329).
(6) The Social Security Administration means the Social Security
Administration of the Department of Health and Human Services. (See the
Statement of Organization and delegations of Authority of the Department
of Health and Human Services (20 CFR Part 1996).)
(7) District director means district director of internal revenue.
The term also includes the Director of International Operations in all
cases where the authority to perform the functions which may be
performed by a district director has been delegated to the Director of
International Operations.
(8) Person includes an individual, a corporation, a partnership, a
trust or estate, a joint-stock company, an association, or a syndicate,
group, pool, joint venture or other unincorporated organization or
group, through or by means of which any business, financial operation,
or venture is carried on. It includes a guardian, committee, trustee,
executor, administrator, trustee in bankruptcy, receiver, assignee for
the benefit of creditors, conservator, or any person acting in a
fiduciary capacity.
(9) Calendar quarter means a period of 3 calendar months ending on
March 31, June 30, September 30, or December 31.
(10) Account number means the identifying number of an employee
assigned, as the case may be, under the Internal Revenue Code of 1954,
under Subchapter A of Chapter 9 of the Internal Revenue Code of 1939, or
under title VIII of the Social Security Act. See also Sec. 301.7701-11
of this chapter (Regulations on Procedure and Administration).
(11) Identification number means the identifying number of an
employer assigned, as the case may be, under the Internal Revenue Code
of 1954, under Subchapter A or D of Chapter 9 of the Internal Revenue
Code of 1939, or under title VIII of the Social Security Act. See also
Sec. 301.7701-12 of this chapter (Regulations on Procedure and
Administration).
(12) Regulations 90 means the regulations approved February 17, 1936
(26 CFR (1939) Part 400), as amended, relating to the excise tax on
employers under title IX of the Social Security
[[Page 13]]
Act, and such regulations as made applicable to Subchapter C of Chapter
9 and other provisions of the Internal Revenue Code of 1939 by Treasury
Decision 4885, approved February 11, 1939 (26 CFR (1939) 1943 Cum.
Supp., p. 5876), together with any amendments to such regulations as so
made applicable to the Internal Revenue Code of 1939.
(13) Regulations 91 means the regulations approved November 9, 1936
(26 CFR (1939) Part 401), as amended, relating to the employees' tax and
the employers' tax under title VIII of the Social Security Act, and such
regulations as made applicable to Subchapter A of Chapter 9 and other
provisions of the Internal Revenue Code of 1939 by Treasury Decision
4885, approved February 11, 1939 (26 CFR (1939) 1943 Cum. Supp., p.
5876), together with any amendments to such regulations as so made
applicable to the Internal Revenue Code of 1939.
(14) Regulations 106 means the regulations approved February 24,
1940 (26 CFR (1939) Part 402), as amended, relating to the employees'
tax and the employers' tax under the Federal Insurance Contributions Act
(Subchapter A of Chapter 9 of the Internal Revenue Code of 1939) with
respect to the period after 1939 and before 1951.
(15) Regulations 107 means the regulations approved September 12,
1940 (26 CFR (1939) Part 403), as amended, relating to the excise tax on
employers under the Federal Unemployment Tax Act (Subchapter C of
Chapter 9 of the Internal Revenue Code of 1939) with respect to the
period after 1939 and before 1955.
(16) Regulations 114 means the regulations approved December 30,
1948 (26 CFR (1939) Part 411), as amended, relating to the employers'
tax, employees' tax, and employee representatives' tax under the
Railroad Retirement Tax Act (Subchapter B of Chapter 9 of the Internal
Revenue Code of 1939) with respect to compensation paid after 1948 for
services rendered after 1946 and before 1955.
(17) Regulations 120 means the regulations approved December 22,
1953 (26 CFR (1939) Part 406), as amended, relating to collection of
income tax at source on wages under Subchapter D of Chapter 9 of the
Internal Revenue Code of 1939 with respect to the period after 1953 and
before 1955.
(18) Regulations 128 means the regulations approved December 6, 1951
(26 CFR (1939) Part 408), as amended, relating to the employee tax and
the employer tax under the Federal Insurance Contributions Act
(Subchapter A of Chapter 9 of the Internal Revenue Code of 1939) with
respect to the period after 1950 and before 1955.
(19) The cross references in the regulations in this part to other
portions of the regulations, when the word ``see'' is used, are made
only for convenience and shall be given no legal effect.
(b) Subpart B. As used in Subpart B of this part, unless otherwise
expressly indicated--
(1) Act means the Federal Insurance Contributions Act.
(2) Taxes means the employee tax and the employer tax, as
respectively defined in this paragraph.
(3) Employee tax means the tax (with respect to wages received by an
employee after Dec. 31, 1965, the taxes) imposed by section 3101 of the
Code.
(4) Employer tax means the tax (with respect to wages paid by an
employer after Dec. 31, 1965, the taxes) imposed by section 3111 of the
Code.
(c) Subpart C. As used in Subpart C of this part, unless otherwise
expressly indicated--
(1) Act means the Railroad Retirement Tax Act.
(2) Railway Labor Act means the act approved May 20, 1926 (45 U.S.C.
c. 8), as amended.
(3) Railroad Retirement Act of 1937 means the act approved June 24,
1937 (45 U.S.C. 228a and following), as amended.
(4) Railroad Retirement Board means the board established pursuant
to section 10 of the Railroad Retirement Act of 1937 (45 U.S.C. 228j).
(5) Tax means the employee tax, the employee representative tax, or
the employer tax, as respectively defined in this paragraph.
(6) Employee tax means the tax imposed by section 3201 of the Code.
(7) Employee representative tax means the tax imposed by section
3211 of the Code.
(8) Employer tax means the tax imposed by section 3221 of the Code.
[[Page 14]]
(d) Subpart D. As used in Subpart D of this part, unless otherwise
expressly indicated:
(1) Act means the Federal Unemployment Tax Act.
(2) Railroad Unemployment Insurance Act means the act approved June
25, 1938 (45 U.S.C. c. 11), as amended.
(3) Tax means the tax imposed by section 3301 of the Code.
(e) Subpart E. As used in Subpart E of this part, unless otherwise
expressly indicated, tax means the tax required to be deducted and
withheld from wages under section 3402 of the Code.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6606, 27 FR
8516, Aug. 25, 1962; T.D. 6658, 28 FR 6631, June 27, 1963; T.D. 6983, 33
FR 18013, Dec. 4, 1968; T.D. 7280, 38 FR 18369, July 10, 1973]
Sec. 31.0-3 Scope of regulations.
(a) Subpart B. The regulations in Subpart B of this part relate to
the imposition of the employee tax and the employer tax under the
Federal Insurance Contributions Act with respect to wages paid and
received after 1954 for employment performed after 1936. In addition to
employment in the case of remuneration therefor paid and received after
1954, the regulations in Subpart B of this part relate also to
employment performed after 1954 in the case of remuneration therefor
paid and received before 1955. The regulations in Subpart B of this part
include provisions relating to the definition of terms applicable in the
determination of the taxes under the Federal Insurance Contributions
Act, such as ``employee'', ``wages'', and ``employment''. The provisions
of Subpart B of this part relating to ``employment'' are applicable
also, (1) to the extent provided in Sec. 31.3121(b)-2, to services
performed before 1955 the remuneration for which is paid after 1954, and
(2) to the extent provided in Sec. 31.3121(k)-3, to services performed
before 1955 the remuneration for which was paid before 1955. (For prior
regulations on similar subject matter, see 26 CFR (1939) Part 408
(Regulations 128).)
(b) Subpart C. The regulations in Subpart C of this part relate to
the imposition of the employee tax, the employee representative tax, and
the employer tax under the Railroad Retirement Tax Act with respect to
compensation paid after 1954, for services rendered after such date. The
regulations in Subpart C of this part include provisions relating to the
definition of terms applicable in the determination of the taxes under
the Railroad Retirement Tax Act, such as ``employee'', ``employee
representative'', ``employer'', and ``compensation''. (For prior
regulations on similar subject matter, see 26 CFR (1939) Part 411
(Regulations 114).)
(c) Subpart D. The regulations in Subpart D of this part relate to
the imposition on employers of the excise tax under the Federal
Unemployment Tax Act for the calendar year 1955 and subsequent calendar
years with respect to wages paid after 1954 for employment performed
after 1938. In addition to employment in the case of remuneration
therefor paid after 1954, the regulations in Subpart D of this part
relate also to employment performed after 1954 in the case of
remuneration therefor paid before 1955. The regulations in Subpart D of
this part include provisions relating to the definition of terms
applicable in the determination of the tax under the Federal
Unemployment Tax Act, such as ``employee'', ``employer'',
``employment'', and ``wages''. The regulations in Subpart D of this part
also include provisions relating to the credits against the Federal tax
for State contributions. (For prior regulations on similar subject
matter, see 26 CFR (1939) Part 403 (Regulations 107).)
(d) Subpart E. The regulations in Subpart E of this part relate to
the withholding under chapter 24 of the Code of income tax at source on
wages paid after 1954, regardless of when such wages were earned. The
regulations in Subpart E of this part include provisions relating to the
definition of terms applicable in the determination of the tax under
chapter 24 of the Code, such as ``employee'', ``employer'', and
``wages''. (For prior regulations on similar subject matter, see 26 CFR
(1939) Part 406 (Regulations 120).)
(e) Subpart F. The regulations in Subpart F of this part deal with
the general provisions contained in chapter 25 of the Code, which relate
to the employment taxes imposed by chapters 21 to 24, inclusive, of the
Code. (For prior regulations on the subject matter of
[[Page 15]]
section 3503, see 26 CFR (1939) 411.802 and 408.803 (Regulations 114 and
128, respectively). For prior regulations on the subject matter of
section 3504, see 26 CFR (1939) 406.807 and 408.906 (Regulations 120 and
128, respectively).)
(f) Subpart G. The regulations in Subpart G of this part, which are
prescribed under selected provisions of subtitle F of the Code, relate
to the procedural and administrative requirements in respect of records,
returns, deposits, payments, and related matters applicable to the
employment taxes imposed by subtitle C (chapters 21 to 25, inclusive) of
the Code. In addition, the provisions of Subpart G of this part relate
to adjustments and to claims for refund, credit, or abatement, made
after 1954, in connection with the employment taxes imposed by subtitle
C of the Internal Revenue Code of 1954, by chapter 9 of the Internal
Revenue Code of 1939, or by the corresponding provisions of prior law,
but not to any adjustment reported, or credit taken, in whole or in part
on any return or supplemental return filed on or before July 31, 1960.
The provisions of Subpart G of this part also relate to deposits of
taxes imposed by subchapter B of chapter 9 of the 1939 Code or by
corresponding provisions of prior law with respect to compensation paid
after 1954 for services rendered before 1955. For other administrative
provisions which have application to the employment taxes imposed by
subtitle C of the Code, see Part 301 of this chapter (Regulations on
Procedure and Administration). (The administrative and procedural
regulations applicable with respect to a particular employment tax for a
prior period were combined with the substantive regulations relating to
such tax for such period. For the regulations applicable to the
respective taxes for prior periods, see paragraphs (a), (b), (c), and
(d) of this section.) Subpart G of this part also provides rules
relating to the deposit of other taxes by electronic funds transfer.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8305, July 2, 1964; T.D. 8723, 62 FR 37493, July 14, 1997]
Sec. 31.0-4 Extent to which the regulations in this part supersede
prior regulations.
The regulations in this part, with respect to the subject matter
within the scope thereof, supersede 25 CFR (1939) Parts 403, 406, 408,
and 411 (Regulations 107, 120, 128, and 114, respectively). The
Regulation on Monthly Returns and Payment of Employment Taxes (23 FR
5006) are also superseded.
Subpart B_Federal Insurance Contributions Act (Chapter 21, Internal
Revenue Code of 1954)
Tax on Employees
Sec. 31.3101-1 Measure of employee tax.
The employee tax is measured by the amount of wages received after
1954 with respect to employment after 1936. See Sec. 31.3121(a)-1,
relating to wages; and Sec. Sec. 31.3121(b)-1 to 31.3121(b)-4,
inclusive, relating to employment. For provisions relating to the time
of receipt of wages, see Sec. 31.3121(a)-2.
[T.D. 6744, 29 FR 8305, July 2, 1964]
Sec. 31.3101-2 Rates and computation of employee tax.
(a) Old-Age, Survivors, and Disability Insurance. The rates of
employee tax for Old-Age, Survivors, and Disability Insurance (OASDI)
with respect to wages received in calendar years after 1983 are as
follows (these regulations do not reflect off-Code revisions to the
following rates):
------------------------------------------------------------------------
Calendar year Percent
------------------------------------------------------------------------
1984, 1985, 1986, or 1987............................... 5.7
1988 or 1989............................................ 6.06
1990 and subsequent years............................... 6.2
------------------------------------------------------------------------
(b)(1) Hospital Insurance. The rates of employee tax for Hospital
Insurance (HI) with respect to wages received in calendar years after
1973 are as follows:
------------------------------------------------------------------------
Calendar year Percent
------------------------------------------------------------------------
1974, 1975, 1976, or 1977............................... 0.90
1978.................................................... 1.00
1979 or 1980............................................ 1.05
1981, 1982, 1983, or 1984............................... 1.30
1985.................................................... 1.35
1986 and subsequent years............................... 1.45
------------------------------------------------------------------------
[[Page 16]]
(2) Additional Medicare Tax. (i) The rate of Additional Medicare Tax
with respect to wages received in taxable years beginning after December
31, 2012, is as follows:
------------------------------------------------------------------------
Taxable year Percent
------------------------------------------------------------------------
Beginning after December 31, 2012....................... 0.9
------------------------------------------------------------------------
(ii) Individuals are liable for Additional Medicare Tax with respect
to wages received in taxable years beginning after December 31, 2012,
which are in excess of:
------------------------------------------------------------------------
Filling status Threshold
------------------------------------------------------------------------
Married individual filing a joint return................ $250,000
Married individual filing a separate return............. 125,000
Any other case.......................................... 200,000
------------------------------------------------------------------------
(c) Computation of employee tax. The employee tax is computed by
applying to the wages received by the employee the rates in effect at
the time such wages are received.
Example. In 1989, A performed services for X which constituted
employment (see Sec. 31.3121(b)-2). In 1990 A receives from X $1,000 as
remuneration for such services. The tax is payable at the 6.2 percent
OASDI rate and the 1.45 percent HI rate in effect for the calendar year
1990 (the year in which the wages are received) and not at the 6.06
percent OASDI rate and the 1.45 percent HI rate which were in effect for
the calendar year 1989 (the year in which the services were performed).
(d) Effective/applicability date. Paragraphs (a), (b), and (c) of
this section apply to quarters beginning on or after November 29, 2013.
[T.D. 9645, 78 FR 71471, Nov. 29, 2013, as amended at 79 FR 4623, Jan.
29, 2014]
Sec. 31.3101-3 When employee tax attaches.
The employee tax attaches at the time that the wages are received by
the employee. For provisions relating to the time of such receipt, see
Sec. 31.3121(a)-2.
Sec. 31.3102-1 Collection of, and liability for, employee tax; in
general.
(a) The employer shall collect from each of his employees the
employee tax with respect to wages for employment performed for the
employer by the employee. The employer shall make the collection by
deducting or causing to be deducted the amount of the employee tax from
such wages as and when paid. (For provisions relating to the time of
such payment, see Sec. 31.3121(a)-2.) The employer is required to
collect the tax, notwithstanding the wages are paid in something other
than money, and to pay over the tax in moey. (As to the exclusion from
wages of remuneration paid in any medium other than cash for certain
types of services, see Sec. 31.3121(a)(7)-1, relating to such
remuneration paid for service not in the course of the employer's trade
or business or for domestic service in a private home of the employer;
and Sec. 31.3121(a)(8)-1, relating to such remuneration paid for
agricultural labor.) For provisions relating to the collection of, and
liability for, employee tax in respect of tips, see Sec. 31.3102-3. For
special rules relating to Additional Medicare Tax imposed under section
3101(b)(2), see Sec. 31.3102-4.
(b) The employer is permitted, but not required, to deduct amounts
equivalent to employee tax from payments to an employee of cash
remuneration to which the sections referred to in this paragraph (b) are
applicable prior to the time that the sum of such payments equals--
(1) $100 in the calendar year, for service not in the course of the
employer's trade or business, to which Sec. 31.3121(a)(7)-1 is
applicable;
(2) The applicable dollar threshold (as defined in section 3121(x))
in the calendar year, for domestic service in a private home of the
employer, to which Sec. 31.3121(a)(7)-1 is applicable;
(3) $150 in the calendar year, for agricultural labor, to which
Sec. 31.3121(a)(8)-1(c)(1)(i) is applicable; or
(4) $100 in the calendar year, for service performed as a home
worker, to which Sec. 31.3121(a)(10)-1 is applicable.
(c) At such time as the sum of the cash payments in the calendar
year for a type of service referred to in paragraph (b)(1), (b)(2),
(b)(3) or (b)(4) of this section equals or exceeds the amount specified,
the employer is required to collect from the employee any amount of
employee tax not previously deducted. If an employer pays cash
remuneration to an employee for two or more of the types of service
referred to in paragraph (b)(1), (b)(2), (b)(3) or (b)(4)
[[Page 17]]
of this section, the provisions of paragraph (b) of this section and
this paragraph (c) are to be applied separately to the amount of
remuneration attributable to each type of service. For provisions
relating to the repayment to an employee, or other disposition, of
amounts deducted from an employee's remuneration in excess of the
correct amount of employee tax, see Sec. 31.6413(a)-1.
(d) In collecting employee tax, the employer shall disregard any
fractional part of a cent of such tax unless it amounts to one-half cent
or more, in which case it shall be increased to 1 cent. The employer is
liable for the employee tax with respect to all wages paid by him to
each of his employees whether or not it is collected from the employee.
If, for example, the employer deducts less than the correct amount of
tax, or if he fails to deduct any part of the tax, he is nevertheless
liable for the correct amount of the tax. Until collected from him the
employee also is liable for the employee tax with respect to all the
wages received by him. Any employee tax collected by or on behalf of an
employer is a special fund in trust for the United States. See section
7501. The employer is indemnified against the claims and demands of any
person for the amount of any payment of such tax made by the employer to
the district director.
(e)(1) The provisions of paragraphs (a) and (d) of this section
apply to any payment made on or after January 1, 1955.
(2) The provisions of paragraphs (b) and (c) of this section that
apply to any payment made for service not in the course of the
employer's trade or business or for service performed as a home worker
within the meaning of section 3121(d)(3)(C) apply to any such payment
made on or after January 1, 1978. The provisions of paragraphs (b) and
(c) of this section that apply to any payment made for domestic service
in a private home of the employer apply to any such payment made on or
after January 1, 1994. The provisions of paragraphs (b) and (c) of this
section that apply to any payment made for agricultural labor apply to
any such payment made on or after January 1, 1988. For rules applicable
to any payment for these services made prior to the dates set forth in
this paragraph (e)(2), see Sec. 31.3102-1 in effect at such time (see
26 CFR part 31 contained in the edition of 26 CFR Parts 30 to 39,
revised as of April 1, 2006).
(f) Effective/applicability date. Paragraph (a) of this section
applies to quarters beginning on or after November 29, 2013.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8305, July 2, 1964; T.D. 7001, 34 FR 998, Jan. 23, 1969; T.D. 9266, 71
FR 35154, June 19, 2006; T.D. 9645, 78 FR 71472, Nov. 29, 2013]
Sec. 31.3102-2 Manner and time of payment of employee tax.
The employee tax is payable to the district director in the manner
and at the time prescribed in Subpart G of the regulations in this part.
For provisions relating to the payment by an employee of employee tax in
respect of tips, see paragraph (d) of Sec. 31.3102-3.
[T.D. 7001, 34 FR 998, Jan. 23, 1969]
Sec. 31.3102-3 Collection of, and liability for, employee tax on tips.
(a) Collection of tax from employee--(1) In general. Subject to the
limitations set forth in subparagraph (2) of this paragraph, the
employer shall collect from each of his employees the employee tax on
those tips received by the employee which constitute wages for purposes
of the tax imposed by section 3101. (For provisions relating to the
treatment of tips as wages, see 3121(a)(12) and 3121(q).) The employer
shall make the collection by deducting or causing to be deducted the
amount of the employee tax from wages (exclusive of tips) which are
under the control of the employer or other funds turned over by the
employee to the employer (see subparagraph (3) of this paragraph). For
purposes of this section the term ``wages (exclusive of tips) which are
under the control of the employer'' means, with respect to a payment of
wages, an amount equal to wages as defined in section 3121(a) except
that tips and noncash remuneration which are wages are not included,
less the sum of--
(i) The tax under section 3101 required to be collected by the
employer
[[Page 18]]
in respect of wages as defined in section 3121(a) (exclusive of tips);
(ii) The tax under section 3402 required to be collected by the
employer in respect of wages as defined in section 3401(a) (exclusive of
tips); and
(iii) The amount of taxes imposed on the remuneration of an employee
withheld by the employer pursuant to State and local law (including
amounts withheld under an agreement between the employer and the
employee pursuant to such law) except that the amount of taxes taken
into account in this subdivision shall not include any amount
attributable to tips.
(2) Limitations. An employer is required to collect employee tax on
tips which constitute wages only in respect of those tips which are
reported by the employee to the employer in a written statement
furnished to the employer pursuant to section 6053(a). The employer is
responsible for the collection of employee tax on tips reported to him
only to the extent that the employer can--
(i) During the period beginning at the time the written statement is
submitted to him and ending at the close of the 10th day of the month
following the month in which the statement was submitted, or
(ii) In the case of an employer who elects to deduct the tax on an
estimated basis (see paragraph (c) of this section), during the period
beginning at the time the written statement is submitted to him and
ending at the close of the 30th day following the quarter in which the
statement was submitted,
collect the employee tax by deducting it or causing it to be deducted as
provided in subparagraph (1).
(3) Furnishing of funds to employer. If the amount of employee tax
in respect of tips reported by the employee to the employer in a written
statement (or statements) furnished pursuant to section 6053(a) exceeds
the wages (exclusive of tips) which are under the control of the
employer, the employee may furnish to the employer, within the period
specified in subparagraph (2) (i) or (ii) of this paragraph (whichever
is applicable), an amount of money equal to the amount of such excess.
(b) Less than $20 of tips. Notwithstanding the provisions of
paragraph (a) of this section, if an employee furnishes to his employer
a written statement--
(1) Covering a period of less than 1 month, and
(2) The statement is furnished to the employer prior to the close of
the 10th day of the month following the month in which the tips were
actually received by the employee, and
(3) The aggregate amount of tips reported in the statement and in
all other statements previously furnished by the employee covering
periods within the same month is less than $20, and the statements,
collectively, do not cover the entire month,
the employer may deduct amounts equivalent to employee tax on such tips
from wages (exclusive of tips) which are under the control of the
employer or other funds turned over by the employee to the employer. For
provisions relating to the repayment to an employee, or other
disposition, of amounts deducted from an employee's remuneration in
excess of the correct amount of employee tax, see Sec. 31.6413(a)-1.
(As to the exclusion from wages of tips of less than $20, see Sec.
31.3121(a)(12)-1.)
(c) Collection of employee tax on estimated basis--(1) In general.
Subject to certain limitations and conditions, an employer may, at his
discretion, make collection of the employee tax in respect of tips
reported by an employee to the employer on an estimated basis. An
employer who elects to make collection of the employee tax on an
estimated basis shall:
(i) In respect of each employee, make an estimate of the amount of
tips that will be reported, pursuant to section 6053(a), by the employee
to the employer in a calendar quarter.
(ii) Determine the amount which must be deducted upon each payment
of wages (exclusive of tips) which are under the control of the employer
to be made during the quarter by the employer to the employee in order
to collect from the employee during the quarter an amount equal to the
amount obtained by multiplying the estimated quarterly tips by the sum
of the rates of tax under subsections (a) and (b) of section 3101.
[[Page 19]]
(iii) Deduct from any payment of such employee's wages (exclusive of
tips) which are under the control of the employer, or from funds
referred to in paragraph (a)(3) of this section, such amount as may be
necessary to adjust the amount of tax withheld on the estimated basis to
conform to the amount of employee tax imposed upon, and required to be
deducted in respect of, tips reported by the employee to the employer
during the calendar quarter in written statements furnished to the
employer pursuant to section 6053(a). If an adjustment is required, the
additional employee tax required to be collected may be deducted upon
any payment of the employee's wages (exclusive of tips) which are under
the control of the employer during the quarter and within the first 30
days following the quarter or from funds turned over by the employee to
the employer for such purposes within such period. For provisions
relating to the repayment to an employee, or other disposition, of
amounts deducted from an employee's remuneration in excess of the
correct amount of employee tax, see Sec. 31.6413(a)-1.
(2) Estimating tips employee will report--(i) Initial estimate. The
initial estimate of the amount of tips that will be reported by a
particular employee in a calendar quarter shall be made on the basis of
the facts and circumstances surrounding the employment of that employee.
However, if a number of employees are employed under substantially the
same circumstances and working conditions, the initial estimate
established for one such employee may be used as the initial estimate
for other employees in that group.
(ii) Adjusting estimate. If the quarterly estimate of tips in
respect of a particular employee continues to differ substantially from
the amount of tips reported by the employee and there are no unusual
factors involved (for example, an extended absence from work due to
illness) the employer shall make an appropriate adjustment of his
estimate of the amount of tips that will be reported by the employee.
(iii) Reasonableness of estimate. The employer must be prepared,
upon request of the district director, to disclose the factors upon
which he relied in making the estimate, and his reasons for believing
that the estimate is reasonable.
(d) Employee tax not collected by employer. If--
(1) The amount of the employee tax imposed by section 3101 in
respect of those tips received by an employee which constitute wages
exceeds
(2) The amount of employee tax imposed by section 3101 (in respect
of tips reported by the employee to the employer) which can be collected
by the employer from such employee's wages (exclusive of tips) which are
under the control of the employer or from funds referred to in paragraph
(a)(3) of this section,
the employee shall be liable for the payment of tax in an amount equal
to such excess. For provisions relating to the manner and time of
payment of employee tax by an employee, see paragraph (d) of Sec.
31.6011(a)-1 and paragraph (a)(4) of Sec. 31.6071(a)-1. For provisions
relating to statements required to be furnished by employers to
employees in respect of uncollected employee tax on tips reported to the
employer, see Sec. 31.6053-2.
[T.D. 7001, 34 FR 998, Jan. 23, 1969; 34 FR 1554, Jan. 31, 1969]
Sec. 31.3102-4 Special rules regarding Additional Medicare Tax.
(a) Collection of tax from employee. An employer is required to
collect from each of its employees the tax imposed by section 3101(b)(2)
(Additional Medicare Tax) with respect to wages for employment performed
for the employer by the employee only to the extent the employer pays
wages to the employee in excess of $200,000 in a calendar year. This
rule applies regardless of the employee's filing status or other income.
Thus, the employer disregards any amount of wages or Railroad Retirement
Tax Act (RRTA) compensation paid to the employee's spouse. The employer
also disregards any RRTA compensation paid by the employer to the
employee or any wages or RRTA compensation paid to the employee by
another employer.
Example. H, who is married and files a joint return, receives
$100,000 in wages from his employer for the calendar year. I, H's
spouse,
[[Page 20]]
receives $300,000 in wages from her employer for the same calendar year.
H's wages are not in excess of $200,000, so H's employer does not
withhold Additional Medicare Tax. I's employer is required to collect
Additional Medicare Tax only with respect to wages it pays which are in
excess of the $200,000 threshold (that is, $100,000) for the calendar
year.
(b) Collection of amounts not withheld. To the extent the employer
does not collect Additional Medicare Tax imposed on the employee by
section 3101(b)(2), the employee is liable to pay the tax.
Example. J, who is married and files a joint return, receives
$190,000 in wages from his employer for the calendar year. K, J's
spouse, receives $150,000 in wages from her employer for the same
calendar year. Neither J's nor K's wages are in excess of $200,000, so
neither J's nor K's employers are required to withhold Additional
Medicare Tax. J and K are liable to pay Additional Medicare Tax on
$90,000 ($340,000 minus the $250,000 threshold for a joint return).
(c) Employer's liability for tax. If the employer deducts less than
the correct amount of Additional Medicare Tax, or if it fails to deduct
any part of Additional Medicare Tax, it is nevertheless liable for the
correct amount of tax that it was required to withhold, unless and until
the employee pays the tax. If an employee subsequently pays the tax that
the employer failed to deduct, the tax will not be collected from the
employer. The employer will not be relieved of its liability for payment
of the tax required to be withheld unless it can show that the tax under
section 3101(b)(2) has been paid. The employer, however, will remain
subject to any applicable penalties or additions to tax resulting from
the failure to withhold as required.
(d) Effective/applicability date. This section applies to quarters
beginning on or after November 29, 2013.
[T.D. 9645, 78 FR 71472, Nov. 29, 2013]
Tax on Employers
Sec. 31.3111-1 Measure of employer tax.
The employer tax is measured by the amount of wages paid after 1954
with respect to employment after 1936. See Sec. 31.3121(a)-1, relating
to wages, and Sec. Sec. 31.3121(b)-1 to 31.3121(b)-4, inclusive,
relating to employment. For provisions relating to time of payment of
wages, see Sec. 31.3121(a)-2.
[T.D. 6744, 29 FR 8306, July 2, 1964]
Sec. 31.3111-2 Rates and computation of employer tax.
(a) Old-age, survivors, and disability insurance. The rates of
employer tax for old-age, survivors, and disability insurance with
respect to wages paid in calendar years after 1954 are as follows:
Calendar year Percent
1955 and 1956................................................ 2
1957 and 1958................................................ 2.25
1959......................................................... 2.5
1960 and 1961................................................ 3
1962......................................................... 3.125
1963 to 1965, both inclusive................................. 3.625
1966......................................................... 3.85
1967......................................................... 3.9
1968......................................................... 3.8
1969 and 1970................................................ 4.2
1971 and 1972................................................ 4.6
1973......................................................... 4.85
1974 to 2010, both inclusive................................. 4.95
2011 and subsequent calendar years........................... 5.95
(b) Hospital insurance. The rates of employer tax for hospital
insurance with respect to wages paid in calendar years after 1965 are as
follows:
Calendar year Percent
1966......................................................... 0.35
1967......................................................... .50
1968 to 1972, both inclusive................................. .60
1973......................................................... 1.0
1974 to 1977, both inclusive................................. 0.90
1978 to 1980, both inclusive................................. 1.10
1981 to 1985, both inclusive................................. 1.35
1986 and subsequent calendar years........................... 1.50
(c) Computation of employer tax. The employer tax is computed by
applying to the wages paid by the employer the rate in effect at the
time such wages are paid.
[T.D. 6983, 33 FR 18014, Dec. 4, 1968, as amended by T.D. 7374, 40 FR
30948, July 24, 1975]
Sec. 31.3111-3 When employer tax attaches.
The employer tax attaches at the time that the wages are paid by the
employer. For provisions relating to the time of such payment, see Sec.
31.3121(a)-2.
Sec. 31.3111-4 Liability for employer tax.
The employer is liable for the employer tax with respect to the
wages paid to his employees for employment performed for him.
[[Page 21]]
Sec. 31.3111-5 Manner and time of payment of employer tax.
The employer tax is payable to the district director in the manner
and at the time prescribed in Subpart G of the regulations in this part.
Sec. 31.3112-1 Instrumentalities of the United States specifically
exempted from the employer tax.
Section 3112 makes ineffectual as to the employer tax imposed by
section 3111 those provisions of law which grant to an instrumentality
of the United States an exemption from taxation, unless such provisions
grant a specific exemption from the tax imposed by section 3111 by an
express reference to such section or the corresponding section of prior
law (section 1410 of the Internal Revenue Code of 1939). Thus, the
general exemptions from Federal taxation granted by various statutes to
certain instrumentalities of the United States without specific
reference to the tax imposed by section 3111 or by section 1410 of the
1939 Code are rendered inoperative insofar as such exemptions relate to
the tax imposed by section 3111. For provisions relating to the
exception from employment of services performed in the employ of an
instrumentality of the United States specifically exempted from the
employer tax, see Sec. 31.3121(b)(5)-1. For provisions relating to
services performed for an instrumentality exempt on December 31, 1950,
from the employer tax, see paragraph (c) of Sec. 31.3121 (b) (6)-1.
General Provisions
Sec. 31.3121(a)-1 Wages.
(a)(1) Whether remuneration paid after 1954 for employment performed
after 1936 constitutes wages is determined under section 3121(a). This
section and Sec. Sec. 31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive
(relating to the statutory exclusions from wages), apply with respect
only to remuneration paid after 1954 for employment performed after
1936. Whether remuneration paid after 1936 and before 1940 for
employment performed after 1936 constitutes wages shall be determined in
accordance with the applicable provisions of law and of 26 CFR (1939)
Part 401 (Regulations 91). Whether remuneration paid after 1939 and
before 1951 for employment performed after 1936 constitutes wages shall
be determined in accordance with the applicable provisions of law and of
26 CFR (1939) Part 402 (Regulations 106). Whether remuneration paid
after 1950 and before 1955 for employment performed after 1936
constitutes wages shall be determined in accordance with the applicable
provisions of law and of 26 CFR (1939) Part 408 (Regulations 128).
(2) The term compensation as used in section 3231(e) of the Internal
Revenue Code has the same meaning as the term wages as used in this
section, determined without regard to section 3121(b)(9), except as
specifically limited by the Railroad Retirement Tax Act (chapter 22 of
the Internal Revenue Code) or regulation. The Commissioner may provide
any additional guidance that may be necessary or appropriate in applying
the definitions of sections 3121(a) and 3231(e).
(b) The term ``wages'' means all remuneration for employment unless
specifically excepted under section 3121(a) (see Sec. Sec.
31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive) or paragraph (j) of this
section.
(c) The name by which the remuneration for employment is designated
is immaterial. Thus, salaries, fees, bonuses, and commissions on sales
or on insurance premiums, are wages if paid as compensation for
employment.
(d) Generally the basis upon which the remuneration is paid is
immaterial in determining whether the remuneration constitutes wages.
Thus, it may be paid on the basis of piecework, or a percentage of
profits; and it may be paid hourly, daily, weekly, monthly, or annually.
See, however, Sec. 31.3121(a)(8)-1 which relates to the treatment of
cash remuneration computed on a time basis for agricultural labor.
(e) Generally the medium in which the remuneration is paid is also
immaterial. It may be paid in cash or in something other than cash, as
for example, goods, lodging, food, or clothing. Remuneration paid in
items other than cash shall be computed on the basis of the fair value
of such items at the time of payment. See, however, Sec. Sec. 31.3121
(a)(7)-1, 31.3121(a)(8)-1,
[[Page 22]]
31.3121(a)(10)-1, and 31.3121(a)(12)-1, relating to the treatment of
remuneration paid in any medium other than cash for services not in the
course of the employer's trade or business and for domestic service in a
private home of the employer, for agricultural labor, for services
performed by certain homeworkers, and as tips, respectively.
(f) Ordinarily, facilities or privileges (such as entertainment,
medical services, or so-called ``courtesy'' discounts on purchases),
furnished or offered by an employer to his employees generally, are not
considered as remuneration for employment if such facilities or
privileges are of relatively small value and are offered or furnished by
the employer merely as a means of promoting the health, good will,
contentment, or efficiency of his employees. The term ``facilities or
privileges'', however, does not ordinarily include the value of meals or
lodging furnished, for example, to restaurant or hotel employees, or to
seamen or other employees aboard vessels, since generally these items
constitute an appreciable part of the total remuneration of such
employees.
(g) Amounts of so-called ``vacation allowances'' paid to an employee
constitute wages. Thus, the salary of an employee on vacation, paid
notwithstanding his absence from work, constitutes wages.
(h) Amounts paid specifically--either as advances or
reimbursements--for traveling or other bona fide ordinary and necessary
expenses incurred or reasonably expected to be incurred in the business
of the employer are not wages. Traveling and other reimbursed expenses
must be identified either by making a separate payment or by
specifically indicating the separate amounts where both wages and
expense allowances are combined in a single payment. For amounts that
are received by an employee on or after July 1, 1990, with respect to
expenses paid or incurred on or after July 1, 1990, see Sec.
31.3121(a)-3.
(i) Remuneration for employment, unless such remuneration is
specifically excepted under section 3121(a) or paragraph (j) of this
section, constitutes wages even though at the time paid the relationship
of employer and employee no longer exists between the person in whose
employ the services were performed and the individual who performed
them.
Example. A is employed by B during the month of January 1955 in
employment and is entitled to receive remuneration of $100 for the
services performed for B, the employer, during the month. A leaves the
employ of B at the close of business on January 31, 1955. On February
15, 1955 (when A is no longer an employee of B), B pays A the
remuneration of $100 which was earned for the services performed in
January. The $100 is wages and the taxes are payable with respect
thereto.
(j) In addition to the exclusions specified in Sec. Sec.
31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive, the following types of
payments are excluded from wages:
(1) Remuneration for services which do not constitute employment
under section 3121(b) and which are not deemed to be employment under
section 3121(c) (see Sec. 31.3121(c)-1).
(2) Remuneration for services which are deemed not to be employment
under section 3121(c) (see Sec. 31.3121(c)-1).
(3) Tips or gratuities paid, prior to January 1, 1966, directly to
an employee by a customer of an employer, and not accounted for by the
employee to the employer. For provisions relating to the treatment of
tips received by an employee after December 31, 1965, as wages, see
Sec. Sec. 31.3121(a)(12) and 31.3121(q).
(k) Split-dollar life insurance arrangements. Except as otherwise
provided under section 3121(v), see Sec. Sec. 1.61-22 and 1.7872-15 of
this chapter for rules relating to the treatment of split-dollar life
insurance arrangements.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7001, 34 FR
999, Jan. 23, 1969; T.D. 7374, 40 FR 30948, July 24, 1975; T.D. 8276, 54
FR 51027, Dec. 12, 1989; T.D. 8324, 55 FR 51696, Dec. 17, 1990; T.D.
8582, 59 FR 66189, Dec. 23, 1994; T.D. 9092, 68 FR 45361, Sept. 17,
2003]
Sec. 31.3121(a)-1T Question and answer relating to the definition of
wages in section 3121(a) (Temporary).
The following question and answer relates to the definition of wages
in section 3121(a) of the Internal Revenue Code of 1954, as amended by
section 531(d)(1)(A) of the Tax Reform Act of 1984 (98 Stat. 885):
[[Page 23]]
Q-1: Are fringe benefits included in the definition of ``wages''
under section 3121(a)?
A-1: Yes, unless specifically excluded from the definition of
``wages'' pursuant to section 3121(a)(1) through (20). For example, a
fringe benefit provided to or on behalf of an employee is excluded from
the definition of ``wages'' if at the time such benefit is provided it
is reasonable to believe that the employee will be able to exclude such
benefit from income under section 117 or 132.
[T.D. 8004, 50 FR 755, Jan. 7, 1985]
Sec. 31.3121(a)-2 Wages; when paid and received.
(a) In general, wages are received by an employee at the time that
they are paid by the employer to the employee. Wages are paid by an
employer at the time that they are actually or constructively paid
unless under paragraph (c) of this section they are deemed to be
subsequently paid. For provisions relating to the time when tips
received by an employee are deemed paid to the employee, see Sec.
31.3121(q)-1.
(b) Wages are constructively paid when they are credited to the
account of or set apart for an employee so that they may be drawn upon
by him at any time although not then actually reduced to possession. To
constitute payment in such a case the wages must be credited to or set
apart for the employee without any substantial limitation or restriction
as to the time or manner of payment or condition upon which payment is
to be made, and must be made available to him so that they may be drawn
upon at any time, and their payment brought within his own control and
disposition. For provisions relating to the treatment of deductions from
remuneration as payments of remuneration, see Sec. 31.3123-1.
(c)(1) The first $100 of cash remuneration paid, either actually or
constructively, by an employer in any calendar year to an employee for--
(i) Service not in the course of the employer's trade or business,
to which Sec. 31.3121(a)(7)-1 is applicable, shall be deemed to be paid
by the employer to the employee at the first moment of time in such
calendar year that the sum of such cash payments made within such year
is at least $100; or
(ii) Service performed as a home worker within the meaning of
section 3121(d)(3)(C), to which Sec. 31.3121(a)(10)-1 is applicable,
shall be deemed to be paid by the employer to the employee at the first
moment of time in such calendar year that the sum of such cash payments
made within such year is at least $100.
(2) Cash remuneration paid, either actually or constructively, by an
employer in any calendar year to an employee for domestic service in a
private home of the employer to which Sec. 31.3121(a)(7)-1 is
applicable, and before the sum of the payments of such cash remuneration
equals or exceeds the applicable dollar threshold (as defined in section
3121(x)) for such year, shall be deemed to be paid by the employer to
the employee at the first moment of time in such calendar year that the
sum of such cash payments made within such year equals or exceeds the
applicable dollar threshold (as defined in section 3121(x)) for such
year.
(3) Cash remuneration paid, either actually or constructively, by an
employer in any calendar year to an employee for agricultural labor to
which Sec. 31.3121(a)(8)-1 is applicable, and before either of the
events described in paragraphs (c)(3)(i) and (c)(3)(ii) of this section
has occurred, shall be deemed to be paid by the employer to the employee
at the first moment of time in such calendar year that--
(i) The sum of the payments of such remuneration is $150 or more; or
(ii) The employer's expenditures for agricultural labor in such
calendar year equals or exceeds $2,500, except that this paragraph
(c)(3)(ii) shall not apply in determining when such remuneration is
deemed to be paid under this paragraph if such employee--
(A) Is employed as a hand-harvest laborer and is paid on a piece
rate basis in an operation which has been, and is customarily and
generally recognized as having been, paid on a piece rate basis in the
region of employment;
(B) Commutes daily from his permanent residence to the farm on which
he is so employed; and
[[Page 24]]
(C) Has been employed in agriculture less than 13 weeks during the
preceding calendar year.
(4) If an employer pays cash remuneration to an employee for two or
more of the types of service referred to in this paragraph, the
provisions of this paragraph are to be applied separately to the amount
of remuneration attributable to each type of service.
(d)(1) The provisions of paragraphs (a) and (b) of this section
apply to any payment of wages made on or after January 1, 1955.
(2) The provisions of paragraph (c) of this section that apply to
any payment of wages made for service not in the course of the
employer's trade or business or for service performed as a home worker
within the meaning of section 3121(d)(3)(C) apply to any such payment
made on or after January 1, 1978. The provisions of paragraph (c) of
this section that apply to any payment of wages made for domestic
service in a private home of the employer apply to any such payment made
on or after January 1, 1994. The provisions of paragraph (c) of this
section that apply to any payment of wages made for agricultural labor
apply to any such payment made on or after January 1, 1988. For rules
applicable to any payment of wages for these services made prior to the
dates set forth in this paragraph (d)(2), see Sec. 31.3121(a)-2 in
effect at such time (see 26 CFR part 31 contained in the edition of 26
CFR Parts 30 to 39, revised as of April 1, 2006).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8306, July 2, 1964; T.D. 7001, 34 FR 999, Jan. 23, 1969; T.D. 9266, 71
FR 35154, June 19, 2006]
Sec. 31.3121(a)-3 Reimbursement and other expense allowance amounts.
(a) When excluded from wages. If a reimbursement or other expense
allowance arrangement meets the requirements of section 62(c) of the
Code and Sec. 1.62-2 and the expenses are substantiated within a
reasonable period of time, payments made under the arrangement that do
not exceed the substantiated expenses are treated as paid under an
accountable plan and are not wages. In addition, if both wages and the
reimbursement or other expense allowance are combined in a single
payment, the reimbursement or other expense allowance must be identified
either by making a separate payment or by specifically identifying the
amount of the reimbursement or other expense allowance.
(b) When included in wages--(1) Accountable plans--(i) General rule.
Except as provided in paragraph (b)(1)(ii) of this section, if a
reimbursement or other expense allowance arrangement satisfies the
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not
substantiated within a reasonable period of time or amounts in excess of
the substantiated expenses are not returned within a reasonable period
of time, the amount paid under the arrangement in excess of the
substantiated expenses is treated as paid under a nonaccountable plan,
is included in wages, and is subject to withholding and payment of
employment taxes no later than the first payroll period following the
end of the reasonable period.
(ii) Per diem or mileage allowances. If a reimbursement or other
expense allowance arrangement providing a per diem or mileage allowance
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the
allowance is paid at a rate for each day or mile of travel that exceeds
the amount of the employee's expenses deemed substantiated for a day or
mile of travel, the excess portion is treated as paid under a
nonaccountable plan and is included in wages. In the case of a per diem
or mileage allowance paid as a reimbursement, the excess portion is
subject to withholding and payment of employment taxes when paid. In the
case of a per diem or mileage allowance paid as an advance, the excess
portion is subject to withholding and payment of employment taxes no
later than the first payroll period following the payroll period in
which the expenses with respect to which the advance was paid (i.e., the
days or miles of travel) are substantiated. The Commissioner may, in his
discretion, prescribe special rules in pronouncements of general
applicability regarding the timing of withholding and payment of
employment taxes on per diem and mileage allowances.
[[Page 25]]
(2) Nonaccountable plans. If a reimbursement or other expense
allowance arrangement does not satisfy the requirements of section 62(c)
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be
substantiated or require amounts in excess of the substantiated expenses
to be returned), all amounts paid under the arrangement are treated as
paid under a nonaccountable plan, are included in wages, and are subject
to withholding and payment of employment taxes when paid.
(c) Effective dates. This section generally applies to payments made
under reimbursement or other expense allowance arrangements received by
an employee on or after July 1, 1990, with respect to expenses paid or
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section
applies to payments made under reimbursement or other expense allowance
arrangements received by an employee on or after January 1, 1991, with
respect to expenses paid or incurred on or after January 1, 1991.
[T.D. 8324, 55 FR 51696, Dec. 17, 1990]
Sec. 31.3121(a)(1)-1 Annual wage limitation.
(a) In general. (1) The term ``wages'' does not include that part of
the remuneration paid by an employer to an employee within any calendar
year--
(i) After 1954 and before 1959 which exceeds the first $4,200 of
remuneration,
(ii) After 1958 and before 1966 which exceeds the first $4,800 of
remuneration,
(iii) After 1965 and before 1968 which exceeds the first $6,600 of
remuneration,
(iv) After 1967 and before 1972 which exceeds the first $7,800 of
remuneration,
(v) After 1971 and before 1973 which exceeds the first $9,000 of
remuneration,
(vi) After 1972 and before 1974 which exceeds the first $10,800 of
remuneration,
(vii) After 1973 and before 1975 which exceeds the first $13,200 of
remuneration, or
(viii) After 1974 which exceeds the amount equal to the contribution
and benefit base (as determined under section 230 of the Social Security
Act) which is effective for such calendar year
(exclusive of remuneration excepted from wages in accordance with
paragraph (j) of Sec. 31.3121(a)-1 or Sec. Sec. 31.3121(a)(2)-1 to
31.3121(a)(15)-1, inclusive) paid within the calendar year by an
employer to the employee for employment performed for him at any time
after 1936. For provisions relating to the treatment of tips for
purposes of the annual wage limitation see Sec. 31.3121(q)-1.
(2) The annual wage limitation applies only if the remuneration
received during any 1 calendar year by an employee from the same
employer for employment performed after 1936 exceeds the amount of such
limitation. The limitation in such case relates to the amount of
remuneration received during any 1 calendar year for employment after
1936 and not to the amount of remuneration for employment performed in
any 1 calendar year.
Example. Employee A, in 1967 receives $7,000 from employer B in part
payment of $8,000 due him from employment performed in 1967. In 1968 A
receives from employer B the balance of $1,000 due him for employment
performed in 1967, and thereafter in 1968 also receives $7,000 for
employment performed in 1968 for employer B. The first $6,600 of the
$7,000 received during 1967 is subject to the taxes in 1967. The
remaining $400 received in 1967 is not included as wages and is not
subject to the taxes. The balance of $1,000 received in 1968 for
employment during 1967 is subject to the taxes during 1968 as is also
the first $6,800 of the $7,000 thereafter received in 1968 ($1,000 plus
$6,800 totaling $7,800, which is the annual wage limitation applicable
to remuneration received in 1968 by an employee from any one employer).
The remaining $200 received in 1968 is not included as wages and is not
subject to the taxes.
(3) If during a calendar year the employee receives remuneration
from more than one employer, the annual wage limitation does not apply
to the aggregate remuneration received from all of such employers, but
instead applies to the remuneration received during such calendar year
from each employer with respect to employment after 1936. In such case
the first remuneration received in any calendar year after 1974 up to
the amount equal to the contribution and benefit base (as
[[Page 26]]
determined under section 230 of the Social Security Act) (the first
$13,200 received in 1974, the first $10,800 received in 1973, the first
$9,000 received in 1972, the first $7,800 received in any calendar year
after 1967 and before 1972, the first $6,600 received in any calendar
year after 1965 and before 1968, the first $4,800 received in any
calendar year after 1958 and before 1966, or the first $4,200 received
in any calendar year after 1954 and before 1959) from each employer
constitutes wages and is subject to the taxes, even though, under
section 6413(c), the employee may be entitled to a special credit or
refund of a portion of the employee tax deducted from his wages received
during the calendar year. In this connection and in connection with the
two examples immediately following, see Sec. 31.6413(c)-1, relating to
special credits or refunds of employee tax. In connection with the
annual wage limitation in the case of remuneration paid for services
performed in the employ of the United States or a wholly owned
instrumentality thereof, see Sec. 31.3122. In connection with the
annual wage limitation in the case of remuneration paid for services
performed in the employ of the Government of Guam, the Government of
American Samoa, the District of Columbia, a political subdivision of the
Government of Guam, or the Government of American Samoa, or any
instrumentality of any of the foregoing which is wholly owned thereby,
see Sec. 31.3125. In connection with the application of the annual wage
limitation, see also paragraph (b) of this section, relating to the
circumstances under which wages paid by a predecessor employer are
deemed to be paid by his successor. In connection with the annual wage
limitation in the case of remuneration paid after December 31, 1978,
from two or more related corporations that compensate an employee
through a common paymaster, see Sec. 31.3121(s)-1.
Example 1. During 1968 employee C receives from employer D a salary
of $1,300 a month for employment performed for D during the first 7
months of 1968, or total remuneration of $9,100. At the end of the 6th
month C has received $7,800 from employer D, and only that part of his
total remuneration from D constitutes wages subject to the taxes. The
$1,300 received by employee C from employer D in the 7th month is not
included as wages and is not subject to the taxes. At the end of the 7th
month C leaves the employ of D and enters the employ of E. C receives
remuneration of $1,560 a month from employer E in each of the remaining
5 months of 1968, or total remuneration of $7,800 from employer E. The
entire $7,800 received by C from employer E constitutes wages and is
subject to the taxes. Thus, the first $7,800 received from employer D
and the entire $7,800 received from employer E constitute wages.
Example 2. During the calendar year 1968 F is simultaneously an
officer (an employee) of the X Corporation, the Y Corporation, and the Z
Corporation and during such year receives a salary of $7,800 from each
corporation. Each $7,800 received by F from each of the Corporations X,
Y, and Z (whether or not such corporations are related) constitutes
wages and is subject to the taxes.
(b) Wages paid by predecessor attributed to successor. (1) If an
employer (hereinafter referred to as a successor) during any calendar
year acquires substantially all the property used in a trade or business
of another employer (hereinafter referred to as a predecessor), or used
in a separate unit of a trade or business of a predecessor, and if
immediately after the acquisition the successor employs in his trade or
business an individual who immediately prior to the acquisition was
employed in the trade or business of such predecessor, then, for
purposes of the application of the annual wage limitation set forth in
paragraph (a) of this section, any remuneration (exclusive of
remuneration excepted from wages in accordance with paragraph (j) of
Sec. 31.3121(a)-1 or Sec. Sec. 31.3121(a)(2)-1 to 31.3121(a)(15)-1,
inclusive) with respect to employment paid (or considered under this
paragraph as having been paid) to such individual by the predecessor
during such calendar year and prior to the acquisition shall be
considered as having been paid by the successor.
(2) The wages paid, or considered as having been paid, by a
predecessor to an employee shall, for purposes of the annual wage
limitation, be treated as having been paid to such employee by a
successor if:
(i) The successor during a calendar year acquired substantially all
the property used in a trade or business, or used in a separate unit of
a trade or business, of the predecessor;
[[Page 27]]
(ii) Such employee was employed in the trade or business of the
predecessor immediately prior to the acquisition and is employed by the
successor in his trade or business immediately after the acquisition;
and
(iii) Such wages were paid during the calendar year in which the
acquisition occurred and prior to such acquisition.
(3) The method of acquisition by an employer of the property of
another employer is immaterial. The acquisition may occur as a
consequence of the incorporation of a business by a sole proprietor or a
partnership, the continuance without interruption of the business of a
previously existing partnership by a new partnership or by a sole
proprietor, or a purchase or any other transaction whereby substantially
all the property used in a trade or business, or used in a separate unit
of a trade or business, of one employer is acquired by another employer.
(4) Substantially all the property used in a separate unit of a
trade or business may consist of substantially all the property used in
the performance of an essential operation of the trade or business, or
it may consist of substantially all the property used in a relatively
self-sustaining entity which forms a part of the trade or business.
Example 1. The M Corporation which is engaged in the manufacture of
automobiles, including the manufacture of automobile engines,
discontinues the manufacture of the engines and transfers all the
property used in such manufacturing operation to the N Company. The N
Company is considered to have acquired a separate unit of the trade or
business of the M Corporation, namely, its engine manufacturing unit.
Example 2. The R Corporation which is engaged in the operation of a
chain of grocery stores transfers one of such stores to the S Company.
The S Company is considered to have acquired a separate unit of the
trade or business of the R Corporation.
(5) A successor may receive credit for wages paid to an employee by
a predecessor only if immediately prior to the acquisition the employee
was employed by the predecessor in his trade or business which was
acquired by the successor and if immediately after the acquisition such
employee is employed by the successor in his trade or business (whether
or not in the same trade or business in which the acquired property is
used). If the acquisition involves only a separate unit of a trade or
business of the predecessor, the employee need not have been employed by
the predecessor in that unit provided he was employed in the trade or
business of which the acquired unit was a part.
Example. The Y Corporation in 1968 acquires by purchase all the
property of the X Company and immediately after the acquisition employs
in its trade or business employee A, who, immediately prior to the
acquisition, was employed by the X Company. The X Company has in 1968
(the calendar year in which the acquisition occurs) and prior to the
acquisition paid $5,000 of wages to A. The Y Corporation in 1968 pays to
A remuneration of $5,000 with respect to employment. Only $2,800 of the
remuneration paid by the Y Corporation is considered to be wages. For
purposes of the $7,800 limitation, the Y Corporation is credited with
the $5,000 paid to A by the X Company. If in the same calendar year, the
Z Company acquires the property by purchase from the Y Corporation and A
immediately after the acquistion is employed by the Z Company in its
trade or business, no part of the remuneration paid to A by the Z
Company in the year of the acquisition will be considered to be wages.
The Z Company will be credited with the remuneration paid to A by the Y
Corporation and also with the wages paid to A by the X Company
(considered for purposes of the application of the $7,800 limitation as
having also been paid by the Y Corporation).
(6) Where a corporation described in section 501(c)(3) which is
exempt from income tax under section 501(a) has in effect a certificate
filed pursuant to section 3121(k), or pursuant to section 1426(1) of the
Internal Revenue Code of 1939, waiving its exemption from the taxes
imposed by the Act, the activity in which such corporation is engaged is
considered to be its trade or business for the purpose of determining
whether the transferred property was used in the trade or business of
the predecessor and for the purpose of determining whether the
employment by the predecessor and the successor of an individual whose
services were retained by the successor constitute employment in a trade
or business. Thus, if a charitable or religious organization, subject to
the taxes by virtue of its certificate, acquires all the property of
another such organization likewise subject to the taxes and retains the
services of
[[Page 28]]
employees of the predecessor, wages paid to such employees by the
predecessor in the year of the acquisition (and prior to such
acquisition) will be attributed to the successor for purposes of the
annual wage limitation.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8307, July 2, 1964; T.D. 6983, 33 FR 18015, Dec. 4, 1968; T.D. 7374, 40
FR 30948, July 24, 1975; T.D. 7660, 44 FR 75139, Dec. 19, 1979]
Sec. 31.3121(a)(2)-1 Payments on account of sickness or accident
disability, medical or hospitalization expenses, or death.
(a) The term ``wages'' does not include the amount of any payment
(including any amount paid by an employer for insurance or annuities, or
into a fund, to provide for any such payment) made to, or on behalf of,
an employee or any of his dependents under a plan or system established
by an employer which makes provision for his employees generally (or for
his employees generally and their dependents) or for a class or classes
of his employees (or for a class or classes of his employees and their
dependents), on account of--
(1) Sickness or accident disability of an employee or any of his
dependents, only if payment is received under a workers' compensation
law;
(2) Medical or hospitalization expenses in connection with sickness
or accident disability of an employee or any of his dependents, or
(3) Death of an employee or any of his dependents.
(b) The plan or system established by an employer need not provide
for payments on account of all of the specified items, but such plan or
system may provide for any one or more of such items. Payments for any
one or more of such items under a plan or system established by an
employer solely for the dependents of his employees are not within this
exclusion from wages.
(c) Dependents of an employee include the employee's husband or
wife, children, and any other members of the employee's immediate
family.
(d) Workers' compensation law. (1) For purposes of paragraph (a)(1)
of this section, a payment made under a workers' compensation law
includes a payment made pursuant to a statute in the nature of a
workers' compensation act.
(2) For purposes of paragraph (a)(1) of this section, a payment made
under a workers' compensation law does not include a payment made
pursuant to a State temporary disability insurance law.
(3) If an employee receives a payment on account of sickness or
accident disability that is not made under a workers' compensation law
or a statute in the nature of a workers' compensation act, the payment
is not excluded from wages as defined by section 3121(a)(2)(A) even if
the payment must be repaid if the employee receives a workers'
compensation award or an award under a statute in the nature of a
workers' compensation act with respect to the same period of absence
from work.
(4) If an employee receives a payment on account of non-occupational
injury sickness or accident disability such payment is not excluded from
wages, as defined by section 3121(a)(2)(A).
(e) Examples. The following examples illustrate the principles of
paragraph (d) of this section:
Example 1. A local government employee is injured while performing
work-related activities. The employee is not covered by the State
workers' compensation law, but is covered by a local government
ordinance that requires the local government to pay the employee's full
salary when the employee is out of work as a result of an injury
incurred while performing services for the local government. The
ordinance does not limit or otherwise affect the local government's
liability to the employee for the work-related injury. The local
ordinance is not a workers' compensation law, but it is in the nature of
a workers' compensation act. Therefore, the salary the employee receives
while out of work as a result of the work-related injury is excluded
from wages under section 3121(a)(2)(A).
Example 2. The facts are the same as in Example 1 except that the
local ordinance requires the employer to continue to pay the employee's
full salary while the employee is unable to work due to an injury
whether or not the injury is work-related. Thus, the local ordinance
does not limit benefits to instances of work-related disability. A
benefit paid under an ordinance that does not limit benefits to
instances of work-related injuries is not a statute in the nature of a
workers' compensation act. Therefore, the salary the injured employee
receives from the employer
[[Page 29]]
while out of work is wages subject to FICA even though the employee's
injury is work-related.
Example 3. The facts are the same as in Example 1 except that the
local ordinance includes a rebuttable presumption that certain injuries,
including any heart attack incurred by a firefighter or other law
enforcement personnel is work-related. The presumption in the ordinance
does not eliminate the requirement that the injury be work-related in
order to entitle the injured worker to full salary. Therefore, the
ordinance is a statute in the nature of a workers' compensation act, and
the salary the injured employee receives pursuant to the ordinance is
excluded from wages under section 3121(a)(2)(A).
(f) It is immaterial for purposes of this exclusion whether the
amount or possibility of such benefit payments is taken into
consideration in fixing the amount of an employee's remuneration or
whether such payments are required, expressly or impliedly, by the
contract of service.
[ T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9233, 70 FR 74199, Dec. 15, 2005]
Sec. 31.3121(a)(3)-1 Retirement payments.
The term ``wages'' does not include any payment made by an employer
to an employee (including any amount paid by an employer for insurance
or annuities, or into a fund, to provide for any such payment) on
account of the employee's retirement. Thus, payments made to an employee
on account of his retirement are excluded from wages under this
exception even though not made under a plan or system.
Sec. 31.3121(a)(4)-1 Payments on account of sickness or accident
disability, or medical or hospitalization expenses.
The term ``wages'' does not include any payment made by an employer
to, or on behalf of, an employee on account of the employee's sickness
or accident disability or the medical or hospitalization expenses in
connection with the employee's sickness or accident disability, if such
payment is made after the expiration of 6 calendar months following the
last calendar month in which such employee worked for such employer.
Such payments are excluded from wages under this exception even though
not made under a plan or system. If the employee does not actually
perform services for the employer during the requisite period, the
existence of the employer- employee relationship during that period is
immaterial.
Sec. 31.3121(a)(5)-1 Payments from or to certain tax-exempt trusts,
or under or to certain annuity plans or bond purchase plans.
(a) Payments from or to certain tax- exempt trusts. The term
``wages'' does not include any payment made--
(1) By an employer, on behalf of an employee or his beneficiary,
into a trust, or
(2) To, or on behalf of, an employee or his beneficiary from a
trust.
If at the time of such payment the trust is exempt from tax under
section 501(a) as an organization described in section 401(a). A payment
made to an employee of such a trust for services rendered as an employee
of the trust and not as a beneficiary thereof is not within this
exclusion from wages.
(b) Payments under or to certain annuity plans. (1) The term
``wages'' does not include any payment made after December 31, 1962--
(i) By an employer, on behalf of an employee or his beneficiary,
into an annuity plan, or
(ii) To, or on behalf of, an employee or his beneficiary under an
annuity plan, if at the time of such payment the annuity plan is a plan
described in section 403(a).
(2) The term ``wages'' does not include any payment made before
January 1, 1963--
(i) By an employer, on behalf of an employee or his beneficiary,
into an annuity plan, or
(ii) To, or on behalf of, an employee or his beneficiary under an
annuity plan,
if at the time of such payment the annuity plan meets the requirements
of section 401(a)(3), (4), (5), and (6).
(c) Payments under or to certain bond purchase plans. The term
``wages'' does not include any payment made after December 31, 1962--
(1) By an employer, on behalf of an employee or his beneficiary,
into a bond purchase plan, or
[[Page 30]]
(2) To, or on behalf of, an employee or his beneficiary under a bond
purchase plan,
if at the time of such payment the plan is a qualified bond purchase
plan described in section 405(a).
[T.D. 6876, 31 FR 2596, Feb. 10, 1966]
Sec. 31.3121(a)(5)-2 Payments under or to an annuity contract
described in section 403(b).
(a) Salary reduction agreement defined. For purposes of section
3121(a)(5)(D), the term salary reduction agreement means a plan or
arrangement (whether evidenced by a written instrument or otherwise)
whereby payment will be made by an employer, on behalf of an employee or
his or her beneficiary, under or to an annuity contract described in
section 403(b)--
(1) If the employee elects to reduce his or her compensation
pursuant to a cash or deferred election as defined at Sec. 1.401(k)-
1(a)(3) of this chapter;
(2) If the employee elects to reduce his or her compensation
pursuant to a one-time irrevocable election made at or before the time
of initial eligibility to participate in such plan or arrangement (or
pursuant to a similar arrangement involving a one-time irrevocable
election); or
(3) If the employee agrees as a condition of employment (whether
such condition is set by statute, contract, or otherwise) to make a
contribution that reduces his or her compensation.
(b) Effective/applicability date. This section is applicable on
November 15, 2007.
[T.D. 9367, 72 FR 64942, Nov. 19, 2007]
Sec. 31.3121(a)(6)-1 Payment by an employer of employee tax under
section 3101 or employee contributions under a State law.
The term ``wages'' does not include any payment by an employer
(without deduction from the remuneration of, or other reimbursement
from, the employee) of either (a) the employee tax imposed by section
3101 or the corresponding section of prior law, or (b) any payment
required from an employee under a State unemployment compensation law.
Sec. 31.3121(a)(7)-1 Payments for services not in the course of
employer's trade or business or for domestic service.
(a) Meaning of terms--(1) Services not in the course of employer's
trade or business. The term ``services not in the course of the
employer's trade or business'' includes services that do not promote or
advance the trade or business of the employer. Such term does not
include services performed for a corporation. As used in this section,
the term does not include service not in the course of the employer's
trade or business performed on a farm operated for profit or domestic
service in a private home of the employer. See paragraph (f) of Sec.
31.3121(g)-1 for provisions relating to services not in the course of
the employer's trade or business performed on a farm operated for
profit.
(2) Domestic service in a private home of the employer. Services of
a household nature performed by an employee in or about a private home
of the person by whom he is employed constitute domestic service in a
private home of the employer. A private home is a fixed place of abode
of an individual or family. A separate and distinct dwelling unit
maintained by an individual in an apartment house, hotel, or other
similar establishment may constitute a private home. If a dwelling house
is used primarily as a boarding or lodging house for the purpose of
supplying board or lodging to the public as a business enterprise, it is
not a private home. In general, services of a household nature in or
about a private home include services performed by cooks, waiters,
butlers, housekeepers, governesses, maids, valets, baby sitters,
janitors, laundresses, furnacemen, caretakers, handymen, gardeners,
footmen, grooms, and chauffeurs of automobiles for family use. The term
``domestic service in a private home of the employer'' does not include
the services enumerated above unless such services are performed in or
about a private home of the employer. Services not of a household
nature, such as services performed as a private secretary, tutor, or
librarian, even though performed in the employer's home, are not
included within the term ``domestic service in a private home of the
employer''. As used
[[Page 31]]
in this section, the term does not include domestic service in a private
home of the employer performed on a farm operated for profit or service
not in the course of the employer's trade or business. See paragraph (f)
Sec. 31.3121(g)-1 for provisions relating to domestic service in a
private home of the employer performed on a farm operated for profit.
(b) Payments other than in cash. The term ``wages'' does not include
remuneration paid in any medium other than cash (1) for service not in
the course of the employer's trade or business, or (2) for domestic
service in a private home of the employer. Cash remuneration includes
checks and other monetary media of exchange. Remuneration paid in any
medium other than cash, such as lodging, food, clothing, car tokens,
transportation passes or tickets, or other goods or commodities, for
service not in the course of the employer's trade or business or for
domestic service in a private home of the employer does not constitute
wages.
(c) Cash payments. (1) The term wages does not include cash
remuneration paid by an employer in any calendar year to an employee
for--
(i) Domestic service in a private home of the employer, unless the
cash remuneration paid in such year by the employer to the employee for
such service equals or exceeds the applicable dollar threshold (as
defined in section 3121(x)) for such year; or
(ii) Service not in the course of the employer's trade or business,
unless the cash remuneration paid in such year by the employer to the
employee for such service equals or exceeds $100.
(2) The tests relating to cash remuneration are based on the
remuneration paid in a calendar year rather than on the remuneration
earned during a calendar year. The following example illustrates this
provision:
Example. On March 31, 2004, employer X pays employee A cash
remuneration of $100 for service not in the course of X's trade or
business. Such remuneration constitutes wages subject to the taxes even
though $10 thereof represents payment for such service performed by A
for X in December 2003.
(3) In determining whether wages have been paid either for domestic
service in a private home of the employer or for service not in the
course of the employer's trade or business, only cash remuneration for
such service shall be taken into account. Cash remuneration includes
checks and other monetary media of exchange. Remuneration paid in any
other medium, such as lodging, food, clothing, car tokens,
transportation passes or tickets, or other goods or commodities, is
disregarded in determining whether the cash-remuneration test is met. If
an employee receives cash remuneration from an employer in a calendar
year for both types of services the pertinent cash-remuneration test is
to be applied separately to each type of service. If an employee
receives cash remuneration from more than one employer in a calendar
year for domestic service in a private home of the employer or for
service not in the course of the employer's trade or business, the
pertinent cash-remuneration test is to be applied separately to the
remuneration received from each employer.
(d) Cross references. (1) For provisions relating to deduction of
employee tax or amounts equivalent to the tax from cash payments for the
services described in this section, see Sec. 31.3102-1;
(2) For provisions relating to time of payment of wages for such
services, see Sec. 31.3121(a)-2;
(3) For provisions relating to computations to the nearest dollar of
any payment of cash remuneration for domestic service in a private home
of the employer, see Sec. 31.3121(i)-1.
(e) Effective dates. (1) The provisions of this section apply to any
cash payment for service not in the course of the employer's trade or
business made on or after January 1, 1978 and for domestic service in a
private home of the employer made on or after January 1, 1994.
(2) For rules applicable to any cash payment made prior to the dates
set forth in paragraph (e)(1), see Sec. 31.3121(a)(7)-1 in effect at
such time (see 26 CFR part 31 contained in the edition of 26 CFR Parts
30 to 39, revised as of April 1, 2006).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 9266, 71 FR
35155, June 19, 2006]
[[Page 32]]
Sec. 31.3121(a)(8)-1 Payments for agricultural labor.
(a) Scope of this section. For purposes of the regulations in this
section, the term ``agricultural labor'' means only such agricultural
labor (see Sec. 31.3121(g)-1) as constitutes employment or is deemed to
constitute employment by reason of the rules relating to included and
excluded services contained in section 3121(c) (see Sec. 31.3121(c)-1)
or the corresponding section of prior law.
(b) Payments other than in cash. The term ``wages'' does not include
remuneration paid in any medium other than cash for agricultural labor.
For meaning of the term ``cash remuneration'', see paragraph (f) of the
regulations in this section.
(c) Cash payments. (1) The term wages does not include cash
remuneration paid by an employer in any calendar year to an employee for
agricultural labor unless--
(i) The cash remuneration paid in such year by the employer to the
employee for such labor is $150 or more; or
(ii) The employer's expenditures for agricultural labor in such year
equal or exceed $2,500, except that this paragraph (c)(1)(ii) shall not
apply in determining whether remuneration paid to an employee
constitutes wages for agricultural labor if such employee--
(A) Is employed as a hand-harvest laborer and is paid on a piece
rate basis in an operation which has been, and is customarily and
generally recognized as having been, paid on a piece rate basis in the
region of employment;
(B) Commutes daily from his permanent residence to the farm on which
he is so employed; and
(C) Has been employed in agriculture less than 13 weeks during the
preceding calendar year.
(2) The application of the provisions of paragraph (c)(1) of this
section may be illustrated by the following example:
Example. Employer X pays A $140 in cash for agricultural labor in
calendar year 2004. X makes no other payments to A during the year and
makes no other payment for agricultural labor to any other employee.
Employee A is not employed as a hand-harvest laborer. Neither the $150-
cash-remuneration test nor the $2,500-employer's-expenditures-for-
agricultural-labor test is met. Accordingly, the remuneration paid by X
to A is not subject to the taxes. If in 2004 X had paid A $140 in cash
for agricultural labor and had made expenditures of $2,360 or more to
other employees for agricultural labor, the $140 paid by X to A would
have been subject to tax because the $2,500-employer's-expenditures-for-
agricultural-labor test would have been met. Or, if X had paid A $150 in
cash in 2004 and made no other payments to any other employee for
agricultural labor, the $150 paid by X to A would have been subject to
tax because the $150-cash-remuneration test would have been met.
(d) Application of cash-remuneration test. (1) If an employee
receives cash remuneration from an employer both for services which
constitute agricultural labor and for services which do not constitute
agricultural labor, only the amount of such remuneration which is
attributable to agricultural labor shall be included in determining
whether cash remuneration of $150 or more has been paid in the calendar
year by the employer to the employee for agricultural labor. The
following example illustrates this paragraph (d)(1):
Example. Employer X operates a store and also is engaged in farming
operations. Employee A, who regularly performs services for X in
connection with the operation of the store, works on X's farm when
additional help is required for the farm activities. In the calendar
year 2004, X pays A $140 in cash for services performed in agricultural
labor, and $4,000 for services performed in connection with the
operation of the store. X has no additional expenditures for
agricultural labor in 2004. Since the cash remuneration paid by X to A
in the calendar year 2004 for agricultural labor is less than $150, the
$150-cash-remuneration test is not met. The $140 paid by X to A in 2004
for agricultural labor does not constitute wages and is not subject to
the taxes.
(2) The test relating to cash remuneration of $150 or more is based
on the cash remuneration paid in a calendar year rather than on the
remuneration earned during a calendar year. It is immaterial if such
cash remuneration is paid in a calendar year other than the year in
which the agricultural labor is performed. The following example
illustrates this paragraph (d)(2):
Example. Employer X pays cash remuneration of $150 in the calendar
year 2004 to employee A for agricultural labor. Such remuneration
constitutes wages even though $10
[[Page 33]]
of such amount represents payment for agricultural labor performed by A
for X in December 2003.
(3) In determining whether $150 or more has been paid to an employee
for agricultural labor, only cash remuneration for such labor shall be
taken into account. If an employee receives cash remuneration in any one
calendar year from more than one employer for agricultural labor, the
cash-remuneration test is to be applied with respect to the remuneration
received by the employee from each employer in such calendar year for
such labor.
(e) Application of employer's-expenditures-for-agricultural-labor
test. (1) If an employer has expenditures in a calendar year for
agricultural labor and for non-agricultural labor, only the amount of
such expenditures for agricultural labor shall be included in
determining whether the employer's expenditures for agricultural labor
in such year equal or exceed $2,500. The following example illustrates
this paragraph (e)(1):
Example. Employer X operates a store and also is engaged in farming
operations. Employee A, who regularly performs services for X in
connection with the operation of the store, works on X's farm when
additional help is required for the farm activities. In calendar year
2004, X pays A $140 in cash for services performed in agricultural
labor, and $4,000 for services performed in connection with the
operation of the store. X has no additional expenditures for
agricultural labor in 2004. Since X's expenditures for agricultural
labor in 2004 are less than $2,500, the employer's-expenditures-for-
agricultural-labor test is not met. The $140 paid by X to A in 2004 for
agricultural labor does not constitute wages and is not subject to the
taxes.
(2) The test relating to an employer's expenditures of $2,500 or
more for agricultural labor is based on the expenditures paid by the
employer in a calendar year rather than on the expenses incurred by the
employer during a calendar year. It is immaterial if the expenditures
are paid in a calendar year other than the year in which the
agricultural labor is performed. The following example illustrates this
paragraph (e)(2):
Example. Employer X employs A to construct fences on a farm owned by
X. The work constitutes agricultural labor and is performed over the
course of November and December 2003. A is not employed by X at any
other time, however X does have other employees to whom X pays
remuneration of $2,000 for agricultural labor in 2003. X pays A $140 in
cash in November 2003 and $140 in cash in January 2004, in full payment
for the work. The $140 payment to A made in November is not wages for
calendar year 2003 because the $150-cash-remuneration test is not met
and X's total expenditures for agricultural labor for such year are not
equal to or in excess of $2,500. The $140 payment to A made in January
is not wages for 2004 because the $150 cash-remuneration test is not
met. However, if X pays additional remuneration to employees for
agricultural labor in 2004 that equals or exceeds $2,360, the
employer's-expenditures-for-agricultural-labor test will be met and the
$140 paid by X to A in 2004 will be considered wages. It is immaterial
that the work was performed in 2003.
(f) Meaning of ``cash remuneration.'' Cash remuneration includes
checks and other monetary media of exchange. Cash remuneration does not
include payments made in any other medium, such as lodging, food,
clothing, car tokens, transportation passes or tickets, farm products,
or other goods or commodities.
(g) Cross references. (1) For provisions relating to deductions of
employee tax or amounts equivalent to the tax from cash payments for
agricultural labor, see Sec. 31.3102-1.
(2) For provisions relating to the time of payment of wages for
agricultural labor, see Sec. 31.3121(a)-2.
(3) For provisions relating to records to be kept with respect to
agricultural labor, see paragraph (b) of Sec. 31.6001-2.
(h) Effective dates. The provisions of this section apply to any
payment for agricultural labor made on or after January 1, 1988. For
rules applicable to any payment for agricultural labor made prior to
January 1, 1988, see Sec. 31.3121(a)(8)-1 in effect at such time (see
26 CFR part 31 contained in the edition of 26 CFR parts 30 to 39,
revised as of April 1, 2006).
[T.D. 6744, 29 FR 8308, July 2, 1964, as amended by T.D. 9266, 71 FR
35155, June 19, 2006]
Sec. 31.3121(a)(9)-1 Payments to employees for nonwork periods.
(a) The term ``wages'' does not include any payment (other than
vacation or sick pay) made by an employer to an employee for a period
throughout
[[Page 34]]
which the employment relationship exists between the employer and the
employee, but in which the employee does not work (other than being
subject to call for the performance of work) for the employer, if such
payment is made after the calendar month in which--
(1) The employee attains age 65, if the employee is a man to whom
the payment is made before January 1975, or if the employee is a woman
to whom the payment is made before November 1956, or
(2) The employee attains age 62, if the employee is a man to whom
the payment is made after December 1974, or if the employee is a woman
to whom the payment is made after October 1956.
(b) Vacation or sick pay is not within this exclusion from wages. If
the employee does any work for the employer in the period for which the
payment is made, no remuneration paid by such employer to such employee
with respect to such period is within this exclusion from wages.
Example. Mrs. A, an employee of X, attained the age of 62 on
September 15, 1956, and discontinued the performance of regular work for
X on September 30, 1956. Their employment relationship continued for
several years until Mrs. A's death, and X paid Mrs. A $50 per month as
consideration for Mrs. A's agreement to work when asked by X. The
payment for each month was made on the first day of each succeeding
month. After September 30, 1956, the only work performed by Mrs. A for X
was performed on one day in October 1956. The payment made by X to Mrs.
A on November 1 (for October 1956) is not excluded from wages under this
exception, but the payments made thereafter are excluded from wages. The
payment on November 1 was not excluded because Mrs. A worked for X on
one day in October 1956. (Inasmuch as Mrs. A had attained age 62 in
September 1956, the November 1 payment would have been excluded if Mrs.
A had not performed any work for X in October 1956.)
[T.D. 6744, 29 FR 8309, July 2, 1964, as amended by T.D. 7373, 40 FR
30957, July 24, 1975; 40 FR 32831, Aug. 5, 1975]
Sec. 31.3121(a)(10)-1 Payments to certain home workers.
(a) The term wages does not include remuneration paid by an employer
in any calendar year to an employee for service performed as a home
worker who is an employee by reason of the provisions of section
3121(d)(3)(C) (see Sec. 31.3121(d)-1(d)), unless the cash remuneration
paid in such calendar year by the employer to the employee for such
services is $100 or more. The test relating to cash remuneration of $100
or more is based on remuneration paid in a calendar year rather than on
remuneration earned during a calendar year. If cash remuneration of $100
or more is paid in a particular calendar year, it is immaterial whether
such remuneration is in payment for services performed during the year
of payment or during any other year.
(b) The application of paragraph (a) of this section may be
illustrated by the following example:
Example. A, a home worker, performs services for X, a manufacturer,
in 2003 and 2004. In the performance of the home work A is an employee
by reason of section 3121(d)(3)(C). In March 2004, A returns to X
articles made by A at home from materials received by A from X in 2003.
X pays A cash remuneration of $100 for such work when the finished
articles are delivered. The $100 includes $10 which represents
remuneration for home work performed by A in 2003. The entire $100 is
subject to the taxes. Any additional cash remuneration paid by X to A in
2004 for such services is also subject to the taxes.
(c) In the event an employee receives remuneration in any one
calendar year from more than one employer for services performed as a
home worker of the character described in paragraph (a) of this section,
the regulations in this section are to be applied with respect to the
remuneration received by the employee from each employer in such
calendar year for such services. This exclusion from wages has no
application to remuneration paid for services performed as a home worker
who is an employee under section 3121(d)(2) (see Sec. 31.3121(d)-1(c))
relating to common law employees.
(d) Cash remuneration includes checks and other monetary media of
exchange. Remuneration paid in any other medium, such as clothing, car
tokens, transportation passes or tickets, or other goods or commodities,
is disregarded in determining whether the $100 cash-remuneration test is
met. If the cash remuneration paid in any calendar year by an employer
to an employee for services performed as a home worker of the character
described
[[Page 35]]
in paragraph (a) of this section is $100 or more, then no remuneration,
whether in cash or in any medium other than cash, paid by the employer
to the employee in such calendar year for such services is excluded from
wages under this exception.
(e)(1) For provisions relating to deductions of employee tax or
amounts equivalent to the tax from cash payments for services performed
as a home worker within the meaning of section 3121(d)(3)(C), see Sec.
31.3102-1.
(2) For provisions relating to the time of payment of wages for
services performed as a home worker within the meaning of section
3121(d)(3)(C), see Sec. 31.3121(a)-2.
(3) For provisions relating to records to be kept with respect to
payment of wages for services performed as a home worker within the
meaning of section 3121(d)(3)(C), see Sec. 31.6001-2.
(f) The provisions of this section apply to any payment for services
performed as a home worker within the meaning of section 3121(d)(3)(C)
made on or after January 1, 1978. For rules applicable to any payment
for services performed as a home worker within the meaning of section
3121(d)(3)(C) made prior to January 1, 1978, see Sec. 31.3121(a)(10)-1
in effect at such time (see 26 CFR part 31 contained in the edition of
26 CFR parts 30 to 39, revised as of April 1, 2006).
[T.D. 9266, 71 FR 35156, June 19, 2006]
Sec. 31.3121(a)(11)-1 Moving expenses.
(a) The term ``wages'' does not include remuneration paid on or
after November 1, 1964, to or on behalf of an employee, either as an
advance or a reimbursement, specifically for moving expenses incurred or
expected to be incurred, if (and to the extent that) at the time of
payment it is reasonable to believe that a corresponding deduction is or
will be allowable to the employee under section 217. The reasonable
belief contemplated by the statute may be based upon any evidence
reasonably sufficient to induce such belief, even though such evidence
may be insufficient upon closer examination by the district director or
the courts finally to establish that a deduction is allowable under
section 217. The reasonable belief shall be based upon the application
of section 217 and the regulations thereunder in Part 1 of this chapter
(Income Tax Regulations). When used in this section, the term ``moving
expenses'' has the same meaning as when used in section 217 and the
regulations thereunder.
(b) Except as otherwise provided in paragraph (a) of this section,
or in a numbered paragraph of section 3121(a), amounts paid to or on
behalf of an employee for moving expenses are wages for purposes of
section 3121(a).
[T.D. 7375, 40 FR 42350, Sept. 12, 1975]
Sec. 31.3121(a)(12)-1 Tips.
The term ``wages'' does not include remuneration received by an
employee after December 1965 in the form of tips if--
(a) The tips are paid in any medium other than cash, or
(b) The cash tips received by an employee in any calendar month in
the course of his employment by an employer are less than $20.
If the cash tips received by an employee in a calendar month after
December 1965 in the course of his employment by an employer amount to
$20 or more, none of the cash tips received by the employee in such
calendar month are excluded from the term ``wages'' under this section.
The cash tips to which this section applies include checks and other
monetary media of exchange. Tips received by an employee in any medium
other than cash, such as passes, tickets, or other goods or commodities
do not constitute wages. If an employee in any calendar month performs
services for two or more employers and receives tips in the course of
his employment by each employer, the $20 test is to be applied
separately with respect to the cash tips received by the employee in
respect of his services for each employer and not to the total cash tips
received by the employee during the month. As to the time tips are
deemed paid, see Sec. 31.3121(q)-1. For provisions relating to the
treatment of tips received by an employee prior to 1966, see paragraph
(j)(3) of Sec. 31.3121 (a)-1.
[T.D. 7001, 34 FR 999, Jan. 23, 1969]
[[Page 36]]
Sec. 31.3121(a)(13)-1 Payments under certain employers' plans after
retirement, disability, or death.
(a) In general. The term ``wages'' does not include the amount of
any payment or series of payments made after January 2, 1968, by an
employer to, or on behalf of, an employee or any of his dependents under
a plan established by the employer which makes provisions for his
employees generally (or for his employees generally and their
dependents) or for a class or classes of his employees (or for a class
or classes of his employees and their dependents), which is paid or
commences to be paid upon or within a reasonable time after the
termination of an employee's employment relationship because of the
employee's--
(1) Death,
(2) Retirement for disability, or
(3) Retirement after attaining an age specified in the plan
established by the employer or in a pension plan of the employer at the
age at which a person in the employee's circumstances is eligible for
retirement.
A payment or series of payments made under the circumstances described
in the preceding sentence is excluded from ``wages'' even if made
pursuant to an incentive compensation plan which also provides for the
making of other types of payments. However, any payment or series of
payments which would have been paid if the employee's relationship had
not been terminated is not excluded from ``wages'' under this section
and section 3121(a)(13). For example, lump-sum payments for unused
vacation time or a final paycheck received after retirement are payments
which the employee would have received whether or not he retired and
therefore are not excluded from ``wages'' under this section. Further,
if any payment is made upon or after termination of employment for any
reason other than those set out in subparagraphs (1), (2), and (3) of
this paragraph such payment is not excludable from ``wages'' by this
section. For example, if a pension plan provides for retirement upon
disability, completion of 30 years of service, or attainment of age 65,
and if an employee who is not disabled retires at age 61 after 30 years
of service, none of the retirement payments made to the employee under
the pension plan (including any made after he is 65) is excludable from
``wages'' under this section. However, if the pension plan had
conditioned retirement after 30 years of service upon attainment of age
60, all of the retirement payments would have been excludable.
(b) Plan. The plan or system established by an employer need not
provide for payments because of termination of employment for all the
reasons set out in paragraphs (a)(1), (2), and (3) of this section, but
such plan or system may provide for payments because of termination for
any one or more of such reasons. Payments because of termination of
employment for any one or more of such reasons under a plan or system
established by an employer solely for the dependents of his employees
are not within this exclusion from wages.
(c) Dependents. Dependents of an employee include the employee's
husband or wife, children, and any other members of the employee's
immediate family.
(d) Benefit payment. It is immaterial for purposes of this exclusion
whether the amount or possibility of benefit payments is paid on account
of services rendered or taken into consideration in fixing the amount of
an employee's remuneration or whether such payments are required,
expressly or impliedly, by the contract of service.
(e) Example. The application of this section may be illustrated by
the following example:
Example. A, an employee, receives a salary of $1,500 a month,
payable on the 5th day of the month following the month for which the
salary is earned. A's employer has established an incentive compensation
plan for a class of his employees, including A, providing for the
payment of deferred compensation on termination of employment, including
termination upon an employee's death, retirement at age 65 (the
retirement age specified in the plan), or retirement for disability. On
March 1, 1973, A attains the age of 65 and retires. On March 5, 1973, A
receives $5,500 from his employer of which $1,500 represents A's salary
for services he performed in February 1973, and $4,000 represents
incentive compensation paid under the employer's plan. The amount of
$4,000 is excluded from ``wages'' under this section. The amount of
$1,500 is not excluded from ``wages'' under this section.
[T.D. 7374, 40 FR 30949, July 24, 1975]
[[Page 37]]
Sec. 31.3121(a)(14)-1 Payments by employer to survivor or estate of
former employee.
The term ``wages'' does not include any payment by an employer to a
survivor or the estate of a former employee made after 1972 and after
the calendar year in which such employee died.
[T.D. 7374, 40 FR 30950, July 24, 1975, as amended by T.D. 7373, 40 FR
30957, July 24, 1975]
Sec. 31.3121(a)(15)-1 Payments by employer to disabled former employee.
The term ``wages'' does not include any payment made after 1972 by
an employer to an employee, if at the time such payment is made such
employee is entitled to disability insurance benefits under section
223(a) of the Social Security Act and such entitlement commenced prior
to the calendar year in which such payment is made, and if such employee
did not perform any service for such employer during the period for
which such payment is made.
[T.D. 7374, 40 FR 30950, July 24, 1975, as amended by T.D. 7373, 40 FR
30957, July 24, 1975]
Sec. 31.3121(a)(18)-1 Payments or benefits under a qualified
educational assistance program.
The term ``wages'' does not include any payment made, or benefit
furnished, to or for the benefit of an employee in a taxable year
beginning after December 31, 1978, if at the time of such payment or
furnishing it is reasonable to believe that the employee will be able to
exclude such payment or benefit from income under section 127.
[T.D. 7898, 48 FR 31019, July 6, 1983]
Sec. 31.3121(b)-1 Employment; services to which the regulations in
this subpart apply.
(a) The provisions of the regulations in this subpart relating to
the term ``employment'' apply with respect to services performed after
1954. Certain provisions also apply with respect to services performed
before 1955 for which the remuneration is paid after 1954 (see paragraph
(b) of Sec. 31.3121(b)-2. For provisions relating generally to services
performed before 1955, see paragraph (a) of Sec. 31.3121 (b)-2. For
provisions relating to the circumstances under which services which do
not constitute employment are nevertheless deemed to be employment, and
relating to the circumstances under which services which constitute
employment are nevertheless deemed not to be employment, see Sec.
31.3121 (c)-1. For provisions relating to who are employees and who are
employers see Sec. Sec. 31.3121 (d)-1 and 31.3121 (d)-2, respectively.
(b) The taxes apply with respect to remuneration paid after 1954 for
services performed before 1955, as well as for services performed after
1954, to the extent that the remuneration and services constitute wages
and employment. See Sec. Sec. 31.3121(a)-1 to 31.3121(a)(13)-1 relating
to wages.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR
18015, Dec. 4, 1968]
Sec. 31.3121(b)-2 Employment; services performed before 1955.
(a) General rule. (1) Subject to the provisions of paragraph (b) of
this section:
(i) Services performed after 1936 and before 1955 which were
employment under the applicable law in effect before 1955 constitute
employment under section 3121(b).
(ii) Services performed after 1936 and before 1955 which were not
employment under the applicable law in effect before 1955 do not
constitute employment under section 3121(b).
(2) Except as provided in paragraph (b) of this section,
determination of whether services performed before 1955 constitute
employment shall be made in accordance with the applicable provisions of
law in effect before 1955 and of the regulations thereunder. The
regulations applicable in determining whether service performed after
1936 and before 1955 constitute employment are as follows:
(i) Services performed after 1936 and before 1940--26 CFR (1939)
Part 401 (Regulations 91).
(ii) Services performed after 1939 and before 1951--26 CFR (1939)
Part 402 (Regulations 106).
(iii) Services performed after 1950 and before 1955--26 CFR (1939)
Part 408 (Regulations 128).
[[Page 38]]
(b) Certain services performed before 1955 the remuneration for
which is paid after 1954. (1) Services of the following character
performed before 1955, for which remuneration is paid after 1954,
constitute employment under section 3121(b):
(i) Agricultural labor, as defined in section 3121(g) (see Sec.
31.3121(g)-1), other than services of the character described in section
3121(b)(1) (relating to services performed in connection with the
production or harvesting of certain oleoresinous products and services
performed by certain foreign agricultural workers), which, at the time
performed, constituted employment under section 1426(b) of the 1939
Code, or would have constituted employment except for the provisions of
section 1426(b)(1) of such Code, as in effect at the time the services
were performed.
(ii) Services not in the course of the employers' trade or business
(see paragraph (a)(1) of Sec. 31.3121(a)(7)-1) which, at the time
performed, constituted employment under section 1426(b) of the 1939
Code, or would have constituted employment except for the provisions of
section 1426(b)(3) of such Code, as in effect at the time the services
were performed.
(2) Services of the character described in paragraphs (a) and (b) of
Sec. 31.3121(b)(1)-1, which were performed by certain foreign
agricultural workers before 1955 and the remuneration for which is paid
after 1954, do not constitute employment under section 3121(b),
irrespective of whether they constituted employment under section
1426(b) of the 1939 Code, as in effect at the time the services were
performed.
(3) This paragraph has no application to services performed before
1955 and the remuneration for which was paid before 1955.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8309, July 2, 1964]
Sec. 31.3121(b)-3 Employment; services performed after 1954.
(a) In general. Whether services performed after 1954 constitute
employment is determined in accordance with the provisions of section
3121(b).
(b) Services performed within the United States. Services performed
after 1954 within the United States (see Sec. 31.3121(e)-1) by an
employee for his employer, unless specifically excepted by section
3121(b), constitute employment. With respect to services performed
within the United States, the place where the contract of service is
entered into is immaterial. The citizenship or residence of the employee
or of the employer also is immaterial except to the extent provided in
any specific exception from employment. Thus, the employee and the
employer may be citizens and residents of a foreign country and the
contract of service may be entered into in a foreign country, and yet,
if the employee under such contract performs services within the United
States, there may be to that extent employment.
(c) Services performed outside the United States--(1) In general.
Except as provided in paragraphs (c)(2) and (3) of this section,
services performed outside the United States (see Sec. 31.3121(e)-1) do
not constitute employment.
(2) On or in connection with an American vessel or American
aircraft. (i) Services performed after 1954 by an employee for an
employer ``on or in connection with'' an American vessel or American
aircraft outside the United States (see Sec. 31.3121(e)-1) constitute
employment if:
(a) The employee is also employed ``on and in connection with'' such
vessel or aircraft when outside the United States; and
(b) The services are performed under a contract of service, between
the employee and the employer, which is entered into within the United
States, or during the performance of the contract under which the
services are performed and while the employee is employed on the vessel
or aircraft it touches at a port within the United States; and
(c) The services are not excepted under section 3121(b).
(ii) An employee performs services on and in connection with the
vessel or aircraft if he performs services on such vessel or aircraft
which are also in connection with the vessel or aircraft. Services
performed on the vessel by employees as officers or members of the crew,
or as employees of concessionaires, of the vessel, for example,
[[Page 39]]
are performed under such circumstances, since such services are also
connected with the vessel. Similarly, services performed on the aircraft
by employees as officers or members of the crew of the aircraft are
performed on and in connection with such aircraft. Services may be
performed on the vessel or aircraft, however, which have no connection
with it, as in the case of services performed by an employee while on
the vessel or aircraft merely as a passenger in the general sense. For
example, the services of a buyer in the employ of a department store
while he is a passenger on a vessel are not in connection with the
vessel.
(iii) If services are performed by an employee ``on and in
connection with'' an American vessel or American aircraft when outside
the United States and the conditions listed in paragraph (c)(2)(i) (b)
and (c) of this section are met, then the services of that employee
performed on or in connection with the vessel or aircraft constitute
employment. The expression ``on or in connection with'' refers not only
to services performed on the vessel or aircraft but also to services
connected with the vessel or aircraft which are not actually performed
on it (for example, shore services performed as officers or members of
the crew, or as employees of concessionaires, of the vessel).
(iv) Services performed by a member of the crew or other employee
whose contract of service is not entered into within the United States,
and during the performance of which and while the employee is employed
on the vessel or aircraft it does not touch at a port within the United
States, do not constitute employment under this subparagraph,
notwithstanding services performed by other members of the crew or other
employees on or in connection with the vessel or aircraft may constitute
employment.
(v) A vessel includes every description of watercraft, or other
contrivance, used as a means of transportation on water. An aircraft
includes every description of craft, or other contrivance, used as a
means of transportation through the air. In the case of an aircraft, the
term ``port'' means an airport. An airport means an area on land or
water used regularly by aircraft for receiving or discharging passengers
or cargo. For definitions of ``American vessel'' and ``American
aircraft'', see Sec. 31.3121(f)-1.
(vi) With respect to services performed outside the United States on
or in connection with an American vessel or American aircraft, the
citizenship or residence of the employee is immaterial, and the
citizenship or residence of the employer is material only in case it has
a bearing in determining whether a vessel is an American vessel.
(3) By a citizen of the United States as an employee for an American
employer. Services performed after 1954 outside the United States by a
citizen of the United States as an employee for an American employer
constitute employment provided the services are not specifically
excepted under section 3121(b). For definitions of ``citizen of the
United States'' and ``American employer'', see Sec. Sec. 31.3121(e)-1
and 3121 (h)-1, respectively.
(4) By a citizen of the United States as an employee for a foreign
subsidiary corporation. For provisions relating to the extension of the
Federal old-age, survivors, and disability insurance system established
by title II of the Social Security Act to certain services not
constituting employment which are performed outside the United States by
citizens of the United States in the employ of a foreign subsidiary of a
domestic corporation, see section 3121(1) and Part 36 of this chapter
(Regulations Relating to Contract Coverage of Employees of Foreign
Subsidiaries).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8309, July 2, 1964]
Sec. 31.3121(b)-4 Employment; excepted services in general.
(a) Services performed by an employee for an employer do not
constitute employment for purposes of the taxes if they are specifically
excepted from employment under any of the numbered paragraphs of section
3121(b). Services so excepted do not constitute employment for purposes
of the taxes even though they are performed within the United States, or
are performed outside the United States on or in connection with an
American vessel or
[[Page 40]]
American aircraft, or are performed outside the United States by a
citizen of the United States for an American employer. If not otherwise
provided in the regulations relating to the numbered paragraphs of
section 3121(b), such regulations apply to services performed after
1954.
(b) The exception attaches to the services performed by the employee
and not to the employee as an individual; that is, the exception applies
only to the services in an excepted class rendered by the employee.
Example. A is an individual who is employed part time by B to
perform services which are specifically excepted from employment under
one of the numbered paragraphs of section 312(b). A is also employed by
C part time to perform services which constitute employment. While no
tax liability is incurred with respect to A's remuneration for services
performed in the employ of B (the services being excepted from
employment), the exception does not embrace the services performed by A
in the employ of C (which constitute employment) and the taxes attached
with respect to the wages (see Sec. 31.3121(a)-1) for such services.
(c) For provisions relating to the circumstances under which
services which are excepted are nevertheless deemed to be employment,
and relating to the circumstances under which services which are not
excepted are nevertheless deemed not to be employment, see Sec.
31.3121(c)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8310, July 2, 1964]
Sec. 31.3121(b)(1)-1 Certain services performed by foreign
agricultural workers, or performed before 1959 in connection with
oleoresinous products.
(a) Services of workers from Mexico. Services performed before 1965
by foreign agricultural workers from the Republic of Mexico under
contracts entered into in accordance with title V of the Agricultural
Act of 1949, as amended, are excepted from employment. Contracts entered
into pursuant to the provisions of such title V may provide for the
performance only of services which constitute ``agricultural
employment''. The term ``agricultural employment'' includes certain
services which do not constitute ``agricultural labor'' as that term is
defined in section 3121(g) (see Sec. 31.3121(g)-1. For purposes of
title V of the Agricultural Act of 1949, as amended, the term
``agricultural employment'' includes services or activities included
within the provisions of section 3(f) of the Fair Labor Standards Act of
1938, as amended, or section 3121(g) of the Internal Revenue Code. Under
section 507 of the Agricultural Act of 1949, as amended, and as in
effect before October 3, 1961, the term ``agricultural employment''
included also horticultural employment, cotton ginning, compressing and
storing, crushing of oil seeds, and the packing, canning, freezing,
drying, or other processing of perishable or seasonable agricultural
products.
(b) Services of workers from British West Indies. Services performed
by a foreign agricultural worker lawfully admitted to the United States
from the Bahamas, Jamaica, or the other British West Indies, on a
temporary basis to perform form agricultural labor are excepted from
employment.
(c) Services performed after 1956 by foreign workers. Services
performed after 1956 by a foreign agricultural worker lawfully admitted
to the United States from any foreign country or possession thereof,
including the Republic of Mexico, on a temporary basis to perform
agricultural labor are excepted from employment.
(d) Services performed before 1959 in connection with the production
or harvesting of certain oleoresinous products. Services performed
before 1959 in connection with the production or harvesting of crude gum
(oleoresin) from a living tree or the processing of such crude gum into
gum spirits of turpentine and gum rosin, provided the processing is
carried on by the original producer of the crude gum, are expected from
employment. However, the services to which this paragraph relates
constitute agricultural labor as defined in section 3121(g) (see
paragraph (d) of Sec. 31.3121(g)-1). Thus, any cash remuneration paid
for such services, to the extent that the services are deemed to
constitute employment by reason of the rules relating to included and
excluded services continued in section 3121(c) (see Sec. 31.3121(c)-1),
is taken into account in applying the test prescribed
[[Page 41]]
in section 3121(a)(8)(B) for determining whether cash remuneration paid
for agricultural labor constitutes wages (see paragraph (c) of Sec.
31.3121(a)(8)-1).
(e) Cross-reference. See paragraph (b) of Sec. 31.3121(b)-2 for
provisions relating to the status of services of the character to which
paragraphs (a) and (b) of this section apply which were performed before
1955 and the remuneration for which is paid after 1954.
[T.D. 6744, 29 FR 8310, July 2, 1964]
Sec. 31.3121(b)(2)-1 Domestic service performed by students for
certain college organizations.
(a) Services of a household nature performed in or about the club
rooms or house of a local college club, or in or about the club rooms or
house of a local chapter of a college fraternity or sorority, by a
student who is enrolled and regularly attending classes at a school,
college, or university are excepted from employment. For purposes of
this exception, the statutory tests are the type of services performed
by the employee, the character of the place where the services are
performed, and the status of the employee as a student enrolled and
regularly attending classes at a school, college, or university.
(b) In general, services of a household nature in or about the club
rooms or house of a local college club or local chapter of a college
fraternity or sorority include services rendered by cooks, waiters,
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners,
housekeepers, and housemothers.
(c) A local college club or local chapter of a college fraternity or
sorority does not include an alumni club or chapter. If the club rooms
or house of a local college club or local chapter of a college
fraternity or sorority is used primarily for the purpose of supplying
board or lodging to students or the public as a business enterprise, the
services performed therein are not within the exception.
(d) An organization is a school, college, or university within the
meaning of section 3121(b)(2) if its primary function is the
presentation of formal instruction, it normally maintains a regular
faculty and curriculum, and it normally has a regularly enrolled body of
students in attendance at the place where its educational activities are
regularly carried on. See section 170(b)(1)(A)(ii) and the regulations
thereunder.
(e) Services of a household nature are not within the exception if
performed in or about rooming or lodging houses, boarding houses, clubs
(except local college clubs) hotels, hospitals, eleemosynary
institutions, or commercial offices or establishments.
(f) For provisions relating to domestic service in a private home of
the employer, see Sec. 31.3121(a)(7)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9167, 69 FR 76405, Dec. 21, 2004]
Sec. 31.3121(b)(3)-1 Family employment.
(a) Certain services are excepted from employment because of the
existence of a family relationship between the employee and the
individual employing him. The exceptions are as follows:
(1) Services performed by an individual in the employ of his or her
spouse;
(2) (i) Services performed before 1961 by a father or mother in the
employ of his or her son or daughter;
(ii) Services not in the course of the employer's trade or business,
or domestic service in a private home of the employer, performed after
1960 but prior to 1968 by a father or mother in the employ of his or her
son or daughter;
(iii) Services not in the course of the employer's trade or
business, or domestic service in a private home of the employer,
performed after 1967 by a father or mother in the employ of his or her
son or daughter unless (a) the employer has a child (including an
adopted child or stepchild) living in his or her home who is under age
18 or who has a mental or physical condition which requires the personal
care and supervision of an adult for at least 4 continuous weeks in the
calendar quarter in which the services are rendered; and (b) the
employer is during the calendar quarter in which the services are
rendered:
(1) A widow or widower;
(2) A divorced person who has not remarried; or
[[Page 42]]
(3) A married person who has a spouse living in the home who has a
mental or physical condition which results in such spouse's being
incapable of caring for such child for at least 4 continuous weeks in
the calendar quarter in which the services are rendered; and
(3) Services performed by a son or daughter under the age of 21 in
the employ of his or her father or mother.
(b) Under paragraph (a) (1) and (2) (i) of this section, the
exception is conditioned solely upon the family relationship between the
employee and the individual employing him. Under paragraph (a)(2) (ii)
and (iii) of this section, in addition to the family relationship, there
is a further requirement that the services performed after 1960 and
before 1968 for purposes of paragraph (a)(2)(ii) and after 1967 for
purposes of paragraph (a)(2)(iii) shall be services not in the course of
the employer's trade or business or shall be domestic service in a
private home of the employer. The terms ``services not in the course of
the employer's trade or business'' and ``domestic service in a private
home of the employer'' have the same meaning as when used in Sec.
31.3121(a) (7)-1, except that it is immaterial under paragraphs (a)(2)
(ii) and (iii) of this section whether or not such services are
performed on a farm operated for profit. The mere fact that a mental or
physical disability, whether temporary or permanent, renders a child or
spouse incapable of self-support does not necessarily mean that the
child requires the personal care and supervision of an adult or that the
spouse is incapable of caring for a child within the meaning of
paragraph (a)(2)(iii) of this section. A written statement by a doctor
of the existence of the mental or physical condition of the child or
spouse which states that the child requires the personal care and
supervision of an adult or that the spouse is incapable of caring for a
child and which sets forth the period of time during which the condition
has existed and is likely to exist will usually be sufficient evidence
to establish the existence and duration of the condition at the time of
the statement. Under paragraph (a)(3) of this section, in addition to
the family relationship, there is a further requirement that the son or
daughter shall be under the age of 21, and the exception continues only
during the time that the son or daughter is under the age of 21.
(c) [Reserved] For further guidance, see Sec. 31.3121(b)(3)-1T(c).
(d) [Reserved] For further guidance, see Sec. 31.3121(b)(3)-1T(d).
(e) [Reserved] For further guidance, see Sec. 31.3121(b)(3)-1T(e).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8311, July 2, 1964; T.D. 7374, 40 FR 30950, July 24, 1975; T.D. 9554, 76
FR 67365, Nov. 1, 2011]
Sec. 31.3121(b)(3)-1T Family employment (temporary).
(a) [Reserved] For further guidance, see Sec. 31.3121(b)(3)-1(a).
(b) [Reserved] For further guidance, see Sec. 31.3121(b)(3)-1(b).
(c) Services performed in the employ of a corporation are not within
the exceptions, except as provided in paragraph (d). Services performed
in the employ of a partnership are not within the exception unless the
requisite family relationship exists between the employee and each of
the partners comprising the partnership.
(d) A disregarded entity that is treated as a corporation under
Sec. 301.7701-2(c)(2)(iv)(B) of this chapter (Procedure and
Administration Regulations) shall not be treated as a corporation for
purposes of applying section 3121(b)(3). For purposes of applying
section 3121(b)(3), the owner of the disregarded entity will be treated
as the employer.
(e) Paragraphs (c) and (d) of this section apply with respect to
wages paid on or after November 1, 2011. However, taxpayers may apply
paragraphs (c) and (d) of this section to wages paid on or after January
1, 2009.
(f) Expiration date. The applicability of paragraphs (c) and (d) of
this section expires on or before October 31, 2014.
[T.D. 9554, 76 FR 67365, Nov. 1, 2011]
Sec. 31.3121(b)(4)-1 Services performed on or in connection with a
non-American vessel or aircraft.
(a) Services performed within the United States by an employee for
an employer ``on or in connection with'' a vessel not an American
vessel, or ``on or in connection with'' an aircraft not
[[Page 43]]
an American aircraft, are excepted from employment if--
(1) The employee is employed by such employer ``on and in connection
with'' such vessel or aircraft when outside the United States, and
(2) (i) The employee is not a citizen of the United States, or (ii)
the employer is not an American employer.
(b) An employee performs services on and in connection with the
vessel or aircraft if he performs services on the vessel or aircraft
when outside the United States which are also in connection with the
vessel or aircraft. Services performed on the vessel outside the United
States by employees as officers or members of the crew, or by employees
of concessionaires, of the vessel, for example, are performed under such
circumstances, since such services are also connected with the vessel.
Similarly, services performed on the aircraft outside the United States
by employees as officers or members of the crew of the aircraft are
performed on and in connection with such aircraft. Services may be
performed on the vessel or aircraft, however, which have no connection
with it, as in the case of services performed by an employee while on
the vessel or aircraft merely as a passenger in the general sense. For
example, the services of a buyer in the employ of a department store
while he is a passenger on a vessel are not in connection with the
vessel.
(c) The expression ``on or in connection with'' refers not only to
services performed on the vessel or aircraft but also to services
connected with the vessel or aircraft which are not actually performed
on it (for example, shore services performed as officers or members of
the crew, or as employees of concessionaires, of the vessel).
(d) Services performed within the United States on or in connection
with a non-American vessel or aircraft for an employer by an employee
who is not a citizen of the United States are excepted from employment,
irrespective of whether the employer is or is not an American employer,
provided the employee also is employed by such employer on and in
connection with the vessel or aircraft when outside the United States.
Services performed within the United States on or in connection with a
non-American vessel or aircraft by an employee for an employer who is
not an American employer also are excepted from employment, irrespective
of whether the employee is or is not a citizen of the United States,
provided the employee also is employed by such employer on and in
connection with the vessel or aircraft when outside the United States.
Services performed within the United States on or in connection with a
non-American vessel or aircraft for an American employer by an employee
who is a citizen of the United States are not excepted from employment
under section 3121(b)(4), irrespective of whether the employee is
employed by such employer on and in connection with the vessel or
aircraft when outside the United States. Further, section 3121(b)(4)
does not except from employment services performed within the United
States for an employer, whether or not an American employer, on or in
connection with a non-American vessel or aircraft by an employee,
whether or not a citizen of the United States, who is not also employed
by such employer on and in connection with the vessel or aircraft when
outside the United States.
(e) Services performed outside the United States on or in connection
with a vessel not an American vessel, or on or in connection with an
aircraft not an American aircraft, by a citizen of the United States as
an employee for an American employer are not excepted from employment
under section 3121(b)(4), irrespective of whether the employee is
employed on and in connection with such vessel or aircraft when outside
the United States. Services performed outside the United States on or in
connection with a vessel not an American vessel or on or in connection
with an aircraft not an American aircraft, either by an employee who is
not a citizen of the United States or for an employer who is not an
American employer, do not, in any event, constitute employment. See
paragraph (c) of Sec. 31.3121(b)-3, relating to services performed
outside the United States which constitute employment.
[[Page 44]]
(f) See paragraph (c)(2)(v) of Sec. 31.3121(b)-3 for definitions of
``vessel'' and ``aircraft'', Sec. 31.3121(f)-1, for definitions of
``American vessel'' and ``American aircraft'', Sec. 31.3121(e)-1, for
definition of ``citizen of the United States'', and Sec. 31.3121(h)-1,
for definition of ``American employer''.
Sec. 31.3121(b)(5)-1 Services in employ of an instrumentality of the
United States specifically exempted from the employer tax.
Services performed in the employ of an instrumentality of the United
States are excepted from employment if such instrumentality is exempt
from the employer tax imposed by section 3111 by virtue of any other
provision of law which specifically refers to such section 3111 or the
corresponding section of prior law (section 1410 of the Internal Revenue
Code of 1939) in granting exemption from the employer tax. This
exception does not operate to exclude from employment services performed
in the employ of an instrumentality of the United States unless the
Congress has granted to such instrumentality a specific exemption from
the tax imposed by section 3111 or the corresponding section of prior
law. For provisions which make general exemptions from Federal taxation
ineffectual as to the employer tax imposed by section 3111, see Sec.
31.3112-1. For other exceptions from employment applicable with respect
to services performed in the employ of an instrumentality of the United
States, see Sec. 31.3121(b)(6)-1.
Sec. 31.3121(b)(6)-1 Services in employ of United States or
instrumentality thereof.
(a) In general. This section relates to services performed in the
employ of the United States Government or in the employ of an
instrumentality of the United States. Particular services which are not
excepted from employment under one rule set forth in this section may
nevertheless be excepted under another rule set forth in this section or
under Sec. 31.3121(b)(5)-1, relating to services in the employ of an
instrumentality of the United States specifically exempted from the
employer tax. Moreover, services performed in the employ of the United
States or of any instrumentality thereof which are not excepted from
employment under paragraph (5) or (6) of section 3121(b) may
nevertheless be excepted under some other paragraph of such section. For
provisions relating generally to the application of the taxes in the
case of services performed in the employ of the United States or a
wholly owned instrumentality thereof, see 3122. For provisions relating
to the computation of remuneration for service performed by an
individual as a member of a uniformed service or for service performed
by an individual as a volunteer or volunteer leader within the meaning
of the Peace Corps Act, see Sec. 31.3121(i)-2 and Sec. 31.3121(i)-3,
respectively.
(b) Services covered under a retirement system established by a law
of the United States. Services performed in the employ of the United
States or in the employ of any instrumentality thereof are excepted from
employment under section 3121(b)(6)(A) if such services are covered
under a law enacted by the Congress of the United States which
specifically provides for the establishment of a retirement system for
employees of the United States or of such instrumentality.
Determinations as to whether services are covered by a retirement system
of the requisite character are to be made as of the time such services
are performed. Services of an employee who has an option to have his
services covered under a retirement system are not covered under such
retirement system unless and until he exercises such option. The test is
whether particular services performed by an employee are covered by a
retirement system of the requisite character rather than whether the
position in which such services are performed is covered by such
retirement system.
(c) Services performed for an instrumentality not subject to
employer tax on December 31, 1950, and covered under a retirement system
established by such instrumentality. (1) Subject to the provisions of
subparagraph (4) of this paragraph, services performed in the employ of
an instrumentality of the United States are excepted from employment
under section 3121(b)(6)(B) if--
(i) The particular instrumentality was not subject on December 31,
1950,
[[Page 45]]
to the employer tax imposed by section 1410 of the Internal Revenue Code
of 1939, and
(ii) The services are covered by a retirement system established by
such instrumentality.
(2) If the particular instrumentality was not in existence on
December 31, 1950, but is created thereafter under a law which was in
effect on December 31, 1950, services performed in the employ of such
instrumentality are excepted from employment (unless otherwise provided
in paragraph (c)(4) of this section) if--
(i) The instrumentality had it been in existence on December 31,
1950, would not have been subject on that date to the employer tax
imposed by section 1410 of the Internal Revenue Code of 1939, and
(ii) The services are covered by a retirement system established by
such instrumentality.
It is immaterial, for purposes of this exception, whether the exemption
from the employer tax on December 31, 1950, resulted, or would have
resulted, from a tax exemption as such in effect on December 31, 1950,
or from the provisions of section 1426(b) (6) of the Internal Revenue
Code of 1939 in effect on that date, relating to the exception from
employment of services performed in the employ of certain
instrumentalities of the United States.
(3) Determinations as to whether services performed in the employ of
an instrumentality referred to in paragraph (c)(1) or (2) of this
section are covered by a retirement system established by such
instrumentality are to be made as of the time such services are
performed. Services of an employee who has an option to have his
services covered under a retirement system established by the
instrumentality are not covered under such retirement system unless and
until he exercises such option. The test is whether particular services
performed by an employee are covered by a retirement system established
by the instrumentality rather than whether the position in which such
services are performed is covered by such retirement system.
(4) The exception from employment provided in section 3121(b)(6)(B)
has no application with respect to any of the following classes of
services:
(i) Services performed in the employ of a corporation which is
wholly owned by the United States;
(ii) Services performed in the employ of a production credit
association, a Federal Reserve Bank, or a Federal Credit Union; services
performed before December 31, 1959, in the employ of a national farm
loan association; services performed after December 30, 1959, in the
employ of a Federal land bank association; services performed after
December 31, 1959, in the employ of a Federal land bank, a Federal
intermediate credit bank, or a bank for cooperatives; services performed
after December 31, 1972, in the employ of a Federal home loan bank; and
services performed after December 31, 1966, and before January 1, 1973,
in the employ of a Federal home loan bank, in the case of individuals
who are in such employ on the latter date, provided that an amount equal
to the taxes imposed by sections 3101 and 3111 with respect to all such
services performed by all such individuals are paid under the provisions
of section 3122 by July 1, 1973;
(iii) Services performed in the employ of a State, county, or
community committee under the Commodity Stabilization Service;
(iv) Services performed by a civilian employee, not compensated from
funds appropriated by the Congress, in the Army and Air Force Exchange
Service, Army and Air Force Motion Picture Service, Navy Exchanges,
Marine Corps Exchanges, or other activities, conducted by an
instrumentality of the United States subject to the jurisdiction of the
Secretary of Defense, at installations of the Department of Defense for
the comfort, pleasure, contentment, and mental and physical improvement
of personnel of such Department; or
(v) Services performed by a civilian employee, not compensated from
funds appropriated by the Congress, in the Coast Guard Exchanges or
other activities, conducted by an instrumentality of the United States
subject to the jurisdiction of the Secretary of the Treasury, at
installations of the Coast
[[Page 46]]
Guard for the comfort, pleasure, contentment, and mental and physical
improvement of personnel of the Coast Guard.
(d) Special classes of services. The following classes of services
performed either in the employ of the United States or in the employ of
any instrumentality thereof are excepted from employment under section
3121(b)(6)(C):
(1) Services performed as the President or Vice President of the
United States or a Member, Delegate, or Resident Commissioner, of or to
the Congress of the United States;
(2) Services performed in the legislative branch of the United
States Government;
(3) Services performed in a penal institution of the United States
by an inmate thereof;
(4) (i) Except as provided in paragraph (d)(4)(ii) of this section,
services performed by student nurses, medical or dental interns,
residents in training, student dietitians, student physical therapists,
or student occupational therapists, assigned or attached to a hospital,
clinic, or medical or dental laboratory operated by any department,
agency, or instrumentality of the U.S. Government, or by certain other
student employees described in section 5351(2) of title 5, United States
Code.
(ii) The provisions of paragraph (d)(4)(i) of this section have no
application to services performed after 1965 by medical or dental
interns or by medical or dental residents in training.
(5) Services performed by an individual as an employee serving on a
temporary basis in case of fire, storm, earthquake, flood, or other
similar emergency; and
(6) (i) Except as provided in paragraph (d)(6)(ii) of this section,
services performed by an individual to whom subchapter III of chapter 83
of title 5, United States Code (civil service retirement) does not apply
because he is, with respect to such services, subject to another
retirement system, established either by a law of the United States or
by the agency or instrumentality of the United States for which such
services are performed.
(ii) The provisions of paragraph (d)(6)(i) of this section have no
application to service performed by an individual to whom subchapter III
of chapter 83 of title 5, United States Code (civil service retirement)
does not apply because such individual is subject to the retirement
system of the Tennessee Valley Authority, if such service is subject to
the plan approved by the Secretary of Health and Human Services on
December 28, 1956, pursuant to section 104 (i)(2) of the Social Security
Amendments of 1956 (70 Stat. 827). See section 201(m)(4) of such
amendments for provisions relating to the timeliness of payment of tax
with respect to remuneration paid before 1957 for such services, and
barring the imposition of interest on the amount of any such tax due for
any period before December 28, 1956.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8311, July 2, 1964; T.D. 6983, 33 FR 18016, Dec. 4, 1968; T.D. 7373, 40
FR 30957, July 24, 1975]
Sec. 31.3121(b)(7)-1 Services in employ of States or their political
subdivisions or instrumentalities.
(a) In general. Except as provided in other paragraphs of this
section, services performed in the employ of any State, any political
subdivision of a State, or any instrumentality of one or more States or
political subdivisions thereof which is wholly owned by one or more
States or political subdivisions are excepted from employment. For the
definition of the term ``State'', as used in this section, see Sec.
31.3121(e)-1.
(b) Covered transportation service. The exception from employment
under section 3121(b)(7) does not apply to covered transportation
service as defined in section 3121(j). See that section and 31.3121(j)-
1.
(c) Government of American Samoa. The exception from employment
under section 3121(b)(7) does not apply to services performed after 1960
in the employ of the Government of American Samoa, any political
subdivision thereof, or any instrumentality of such Government or
political subdivision, or combination thereof, which is wholly owned
thereby, performed by an officer or employee thereof (including a member
of the legislature of such Government or political subdivision).
[[Page 47]]
(d) District of Columbia. The exception from employment under
section 3121(b)(7) does not apply to services performed after September
30, 1965, in the employ of the District of Columbia or any
instrumentality which is wholly owned thereby, if such service is not
covered by a retirement system established by a law of the United
States. Notwithstanding the preceding sentence the following classes of
services performed either in the employ of the District of Columbia or
in the employ of any instrumentality which is wholly owned thereby are
excepted from employment:
(1) Services performed in a hospital or penal institution by a
patient or inmate thereof.
(2) Services performed by student nurses, student dietitians,
student physical therapists, or student occupational therapists assigned
or attached to a hospital, clinic, or medical or dental laboratory
operated by the District of Columbia or by any wholly owned
instrumentality thereof, or by certain other student employees described
in section 5351(2) of title 5, United States Code. This subparagraph
does not apply to services performed by medical or dental interns or by
medical or dental residents in training described in such section
5351(2).
(3) Services performed by an individual as an employee serving on a
temporary basis in case of fire, storm, snow, earthquake, flood, or
other similar emergency.
(4) Services performed by a member of a board, committee, or council
of the District of Columbia, paid on a per diem, meeting, or other fee
basis.
(e) Government of Guam. The exception from employment under section
3121(b)(7) does not apply to services performed after 1972 in the employ
of the Government of Guam or any instrumentality which is wholly owned
thereby, by an employee properly classified as a temporary or
intermittent employee, if such service is not covered by a retirement
system established by a law of Guam. The preceding sentence shall not
apply to the services performed by an elected official or a member of
the legislature or in a hospital or penal institution by a patient or
inmate thereof. For purposes of this paragraph--
(1) Any person whose services as an officer or employee of such
Government or instrumentality is not covered by a retirement system
established by a law of the United States shall not, with respect to
such service, be regarded as an employee of the United States or any
agency or instrumentality thereof, and
(2) The remuneration for service described in subparagraph (1)
(including fees paid to a public official) shall be deemed to have been
paid by such Government or instrumentality.
[T.D. 6744, 29 FR 8312, July 2, 1964, as amended by T.D. 6983, 33 FR
18016, Dec. 4, 1968; T.D. 7373, 40 FR 30958, July 24, 1975]
Sec. 31.3121(b)(7)-2 Service by employees who are not members of a
public retirement system.
(a) Table of contents. This paragraph contains a listing of the
major headings of this Sec. 31.3121(b)(7)-2.
Sec. 31.3121(b)(7)-2 Service by employees who are not members of a
public retirement system.
(a) Table of contents.
(b) Introduction.
(c) General rule.
(1) Inclusion in employment of service by employees who are not
members of a retirement system.
(2) Treatment of individuals employed in more than one position.
(d) Definition of qualified participant.
(1) General rule.
(2) Special rule for part time, seasonal and temporary employees.
(3) Alternative lookback rule.
(4) Treatment of former participants.
(e) Definition of retirement system.
(1) Requirement that system provide retirement-type benefits.
(2) Requirement that system provide minimum level of benefits.
(f) Transition rules.
(1) Application of qualified participant rules during 1991.
(2) Additional transition rules for plans in existence on November
5, 1990.
(b) Introduction. Under section 3121(b)(7)(F), wages of an employee
of a State or local government are generally subject to tax under FlCA
after July 1, 1991, unless the employee is a
[[Page 48]]
member of a retirement system maintained by the State or local
government entity. This section 31.3121(b)(7)-2 provides rules for
determining whether an employee is a ``member of a retirement system''.
These rules generally treat an employee as a member of a retirement
system if he or she participates in a system that provides retirement
benefits, and has an accrued benefit or receives an allocation under the
system that is comparable to the benefits he or she would have or
receive under Social Security. In the case of part-time, seasonal and
temporary employees, this minimum retirement benefit is required to be
nonforfeitable.
(c) General rule--(1) Inclusion in employment of service by
employees who are not members of a retirement system. Except in the case
of service described in sections 3121(b)(7)(F) (i) through (v), the
exception from employment under section 3121(b)(7) does not apply to
service in the employ of a State or any political subdivision thereof,
or of any instrumentality of one or more of the foregoing that is wholly
owned thereby, after July 1, 1991, unless the employee is a member of a
retirement system of such State, political subdivision or
instrumentality at the time the service is performed. An employee is not
a member of a retirement system at the time service is performed unless
at that time he or she is a qualified participant (as defined in
paragraph (d) of this section) in a retirement system that meets the
requirements of paragraph (e) of this section with respect to that
employee.
(2) Treatment of individuals employed in more than one position.
Under section 3121(b)(7)(F), whether an employee is a member of a
retirement system is determined on an entity-by-entity rather than a
position-by-position basis. Thus, if an employee is a member of a
retirement system with respect to service he or she performs in one
position in the employ of a State, political subdivision or
instrumentality thereof, the employee is generally treated as a member
of a retirement system with respect to all service performed for the
same State, political subdivision or instrumentality in any other
positions. A State is a separate entity from its political subdivisions,
and an instrumentality is a separate entity from the State or political
subdivision by which it is owned for purposes of this rule. See
paragraph (e)(2) of this section, however, for rules relating to service
and compensation required to be taken into account in determining
whether an employee is a member of a retirement system for purposes of
this section. This rule is illustrated by the following examples:
Example 1. An individual is employed full-time by a county and is a
qualified participant (as defined in paragraph (d) of this section) in
its retirement plan with regard to such employment. In addition to this
full-time employment, the individual is employed part-time in another
position with the same county. The part-time position is not covered by
the county retirement plan, however, and neither the service nor the
compensation in the part-time position is considered in determining the
employee's retirement benefit under the county retirement plan.
Nevertheless, if the retirement plan meets the requirements of paragraph
(e) of this section with respect to the individual, the exclusion from
employment under section 3121(b)(7) applies to both the employee's full-
time and part-time service with the county.
Example 2. An individual is employed full-time by a State and is a
member of its retirement plan. The individual is also employed part-time
by a city located in the State, but does not participate in the city's
retirement plan. The services of the individual for the city are not
excluded from employment under section 3121(b)(7), because the
determination of whether services constitute employment for such
purposes is made separately with respect to each political subdivision
for which services are performed.
(d) Definition of qualified participant--(1) General rule--(i)
Defined benefit retirement systems. Whether an employee is a qualified
participant in a defined benefit retirement system is determined as
services are performed. An employee is a qualified participant in a
defined benefit retirement system (within the meaning of paragraph
(e)(1) of this section) with respect to services performed on a given
day if, on that day, he or she is or ever has been an actual participant
in the retirement system and, on that day, he or she actually has a
total accrued benefit under the retirement system that meets the
[[Page 49]]
minimum retirement benefit requirement of paragraph (e)(2) of this
section. An employee may not be treated as an actual participant or as
actually having an accrued benefit for this purpose to the extent that
such participation or benefit is subject to any conditions (other than
vesting), such as a requirement that the employee attain a minimum age,
perform a minimum period of service, make an election in order to
participate, or be present at the end of the plan year in order to be
credited with an accrual, that have not been satisfied. The rules of
this paragraph (d)(1)(i) are illustrated by the following examples:
Example 1. A State maintains a defined benefit plan that is a
retirement system within the meaning of paragraph (e)(1) of this
section. Under the terms of the plan, employees in positions covered by
the plan must complete 6 months of service before becoming participants.
The exception from employment in section 3121(b)(7) does not apply to
services of an employee during the employee's 6 months of service prior
to his or her initial entry into the plan. The same result occurs even
if, upon the satisfaction of this service requirement, the employee is
given credit under the plan for all service with the employer (i.e., if
service is credited for the 6-month waiting period). This is true even
if the employee makes a required contribution in order to gain the
retroactive credit. The same result also occurs if the employee can
elect to participate in the plan before the end of the 6-month waiting
period, but does not elect to do so.
Example 2. A political subdivision maintains a defined benefit plan
that is a retirement system within the meaning of paragraph (e)(1) of
this section. Under the terms of the plan, service during a plan year is
not credited for accrual purposes unless a participant has at least
1,000 hours of service during the year. Benefits that accrue only upon
satisfaction of this 1,000-hour requirement may not be taken into
account in determining whether an employee is a qualified participant in
the plan before the 1,000-hour requirement is satisfied.
(ii) Defined contribution retirement systems. Whether an employee is
a qualified participant in a defined contribution retirement system is
determined as services are performed. An employee is a qualified
participant in a defined contribution or other individual account
retirement system (within the meaning of paragraph (e)(1) of this
section) with respect to services performed on a given day if, on that
day, he or she has satisfied all conditions (other than vesting) for
receiving an allocation to his or her account (exclusive of earnings)
that meets the minimum retirement benefit requirement of paragraph
(e)(2) of this section with respect to compensation during any period
ending on that day and beginning on or after the beginning of the plan
year of the retirement system. This is the case regardless of whether
the allocations were made or accrued before the effective date of
section 3121(b)(7)(F). This rule is illustrated by the following
examples:
Example 1. A State-owned hospital maintains a nonelective defined
contribution plan that is a retirement system within the meaning of
paragraph (e)(1) of this section. Under the terms of the plan, employees
must be employed on the last day of a plan year in order to receive any
allocation for the year. Employees may not be treated as qualified
participants in the plan before the last day of the year.
Example 2. Assume the same facts as in Example 1 except that, under
the terms of the plan, an employee who terminates service before the end
of a plan year receives a pro rata portion of the allocation he or she
would have received at the end of the year, e.g., based on compensation
earned since the beginning of the plan year. If the pro rata allocation
available on a given day would meet the minimum retirement benefit
requirement of paragraph (e)(2) of this section with respect to
compensation from the beginning of the plan year through that day (or
some later day), employees are treated as qualified participants in the
plan on that day.
Example 3. A political subdivision maintalns an elective defined
contribution plan that is a retirement system within the meaning of
paragraph (e)(1) of this section. The plan has a calendar year plan year
and two open seasons--in December and June--when employees can change
their contribution elections. In December, an employee elects not to
contribute to the plan. In June, the employee elects (beginning July 1)
to contribute a uniform percentage of compensation for each pay period
to the plan for the remainder of the plan year. The employee is not a
qualified participant in the plan during the period January-June,
because no allocations are made to the employee's account with respect
to compensation during that time, and it is not certain at that time
that any allocations will be made. If the level of contributions during
the period July-December meets the minimum retirement benefit
requirement of paragraph
[[Page 50]]
(e)(2) of this section with respect to compensation during that period,
however, the employee is treated as a qualified participant during that
period.
Example 4. Assume the same facts as in Example 3, except that the
plan allows participants to cancel their elections in cases of economic
hardship. In October, the employee suffers an economic hardship and
cancels the election (effective November 1). If the contributions during
the period July-October are high enough to meet the minimum retirement
benefit requirement of paragraph (e)(2) of this section with respect to
compensation during that period, the employee is treated as a qualified
participant during that period. In addition, if the contributions during
the period July-October are high enough to meet the requirements for the
entire period July-December, the employee is treated as a qualified
participant in the plan throughout the period July-December, even though
no allocations are made to the employee's account in the last two months
of the year. There is no requirement that the period used to determine
whether an employee is a qualified participant on a given day remain the
same from day to day, as long as the period begins on or after the
beginning of the plan year and ends on the date the determination is
being made.
(2) Special rule for part-time, seasonal and temporary employees--
(i) In general. A part-time, seasonal or temporary employee is generally
not a qualified participant on a given day unless any benefit relied
upon to meet the requirements of paragraph (d)(1) of this section is
100-percent nonforfeitable on that day. This requirement may be applied
solely to the portion of an employee's benefit under the retirement
system attributable to compensation and service while an employee is a
part-time, seasonal or temporary employee, provided that such service is
taken into account with respect to the remaining portion of the benefit
for vesting purposes. Rules similar to the rules in section 411(a)(11)
are applicable in determining whether a benefit is nonforfeitable. Thus,
a benefit does not fail to be nonforfeitable solely because it can be
immediately distributed upon separation of service without the consent
of the employee, provided that the present value of the benefit does not
exceed the cash-out limit in effect under Sec. 1.411(a)-11(c)(3)(ii) of
this chapter.
(ii) Treatment of employees entitled to certain distributions upon
death or separation from service. A part-time, seasonal or temporary
employee's benefit under a retirement system is considered
nonforfeitable within the meaning of paragraph (d)(2)(i) of this section
on a given day if on that day the employee is unconditionally entitled
under the retirement system to a single-sum distribution on account of
death or separation from service of an amount that is at least equal to
7.5 percent of the participant's compensation (within the meaning of
paragraph (e)(2)(iii)(B) of this section) for all periods of credited
service taken into account in determining whether the employee's benefit
under the retirement system meets the minimum retirement benefit
requirement of paragraph (e)(2) of this section. An employee will be
considered to be unconditionally entitled to a single-sum distribution
notwithstanding the fact that the distribution may be forfeitable (in
whole or in part) upon a finding of such employee's criminal misconduct.
The participant must be entitled to interest on the distributable amount
through the date of distribution, at a rate meeting the requirements of
paragraph (e)(2)(iii)(C) of this section, as part of the single sum. See
paragraph (f)(2)(i)(C) for a transition rule relating to this
nonforfeitable benefit safe harbor. The rule of this paragraph
(d)(2)(ii) is illustrated by the following example:
Example. An employee is required to contribute 7.5 percent of his or
her compensation to a State's defined benefit plan each year. The
contribution is ``picked up'' by the employer in accordance with section
414(h). Under the plan, these amounts plus interest accrued since the
date each amount was contributed are refundable to the employee in all
cases upon the employee's death or separation from service with the
employer. If the interest rate meets the requirements of paragraph
(e)(2)(iii)(C) of this section, then the employee's benefits under the
plan are considered nonforfeitable and thus meet the requirement of
paragraph (d)(2)(i) of this section. Of course, the benefit under the
plan must still meet the minimum retirement benefit requirement for
defined benefit plans of paragraph (e)(2)(ii) of this section.
(iii) Definitions of part-time, seasonal and temporary employee--(A)
Definition of part-time employee. For purposes of this section, a part-
time employee is any employee who normally works 20
[[Page 51]]
hours or less per week. A teacher employed by a post-secondary
educational institution (e.g., a community or junior college, post-
secondary vocational school, college, university or graduate school) is
not considered a part-time employee for purposes of this section if he
or she normally has classroom hours of one-half or more of the number of
classroom hours designated by the educational institution as
constituting full-time employment, provided that such designation is
reasonable under all the facts and circumstances. In addition, elected
officials and election workers (otherwise described in section
3121(b)(7)(F)(iv) but paid in excess of $100 annually) are not
considered part-time, seasonal or temporary employees for purposes of
this section. The rules of this paragraph (d)(2)(iii) are illustrated by
the following example:
Example. A community college treats a teacher as a full-time
employee if the teacher is assigned to work 15 classroom hours per week.
A new teacher is assigned to work 8 classroom hours per week. Because
the assigned classroom hours of the teacher are at least one-half of the
school's definition of full-time teacher, the teacher is not a part-time
employee.
(B) Definition of seasonal employee. For purposes of this section, a
seasonal employee is any employee who normally works on a full-time
basis less than 5 months in a year. Thus, for example, individuals who
are hired by a political subdivision during the tax return season in
order to process incoming returns and work full-time over a 3-month
period are seasonal employees.
(C) Definition of temporary employee. For purposes of this section,
a temporary employee is any employee performing services under a
contractual arrangement with the employer of 2 years or less duration.
Possible contract extensions may be considered in determining the
duration of a contractual arrangement, but only if, under the facts and
circumstances, there is a significant likelihood that the employee's
contract will be extended. Future contract extensions are considered
significantly likely to occur for purposes of this rule if on average 80
percent of similarly situated employees (i.e., those in the same or a
similar job classification with expiring employment contracts) have had
bona fide offers to renew their contracts in the immediately preceding 2
academic or calendar years. In addition, future contract extensions are
considered significantly likely to occur if the employee with respect to
whom the determination is being made has a history of contract
extensions with respect to his or her current position. An employee is
not considered a temporary employee for purposes of this rule solely
because he or she is included in a unit of employees covered by a
collective bargaining agreement of 2 years or less duration.
(D) Treatment of employees participating in certain systems. Whether
an employee is a part-time, seasonal or temporary employee with respect
to allocations or benefits under a retirement system is generally
determined based on service in the position in which the allocations or
benefits were earned, and does not take into account service in other
positions with the same or different States, political subdivisions or
instrumentalities thereof. All of an employee's service in other
positions with the same or different States, political subdivisions or
instrumentalities thereof may be taken into account for purposes of
determining whether an employee is a part-time, seasonal or temporary
employee with respect to benefits under the retirement system, however,
Provided that: The employee's service in the other positions is or was
covered by the retirement system; all service aggregated for purposes of
determining whether an employee is a part-time, seasonal or temporary
employee (and related compensation) is aggregated under the system for
all purposes in determining benefits (including vesting); and the
employee is treated at least as favorably as a full-time employee under
the retirement system for benefit accrual purposes. The rule of this
paragraph (d)(2)(iii)(D) is illustrated by the following example:
Example. Assume that an employee works 15 hours per week for a
county and 10 hours per week for a municipality, and that both of these
political subdivisions contribute to the same state-wide public employee
retirement system. Assume further that the employee's service in both
positions is aggregated under the system for all purposes in determining
[[Page 52]]
benefits (including vesting). If the employee is covered under the
retirement system with respect to both positions and is treated for
benefit accrual purposes at least as favorably as full-time employees
under the retirement system, then the employee is not considered a part-
time employee of either the county or the municipality for purposes of
the nonforfeitable benefit requirement of paragraph (d)(2)(i) of this
section.
(3) Alternative lookback rule--(i) In general. An employee may be
treated as a qualified participant in a retirement system throughout a
calendar year if he or she was a qualified participant in such system
(within the meaning of paragraphs (d) (1) and (2) of this section) at
the end of the plan year of the system ending in the previous calendar
year. This rule is illustrated by the following examples:
Example 1. A political subdivision maintains a plan that is a
retirement system within the meaning of paragraph (e)(1) of this
section. An employee is a qualified participant within the meaning of
paragraph (d)(1) of this section in the plan on the last day of the plan
year ending on May 31, 1995. If the alternative lookback rule is used to
determine FICA liability, no such liability exists with respect to the
employee or employer for calendar year 1996 by reason of section
3121(b)(7)(F). The same result would apply if the determination is being
made with respect to calendar year 1992 and the lookback year was the
plan year ending May 31, 1991, even though that plan year ended before
the effective date of section 3121(b)(7)(F).
Example 2. A political subdivision maintains an elective defined
contribution plan described in section 457(b) of the Code. An employee
is eligible to participate in the plan but does not elect to contribute
for a plan year. Under the general rule of paragraph (d)(1) of this
section, the employee is not a qualified participant in the plan during
the plan year because contributions sufficient to meet the minimum
retirement benefit requirement of paragraph (e)(2) of this section are
not being made. However, if an employee's status as a qualified
participant is being determined under the alternative lookback rule,
then the employee is a qualified participant for the calendar year in
which the determination is being made if he of she was a qualified
participant as of the end of the plan year that ended in the previous
calendar year.
(ii) Application in first year of participation. If the alternative
lookback rule is used, an employee who participates in the retirement
system may be treated as a qualified participant on any given day during
his or her first plan year of participation in a retirement system
(within the meaning of paragraph (e)(1) of this section) if and only if
it is reasonable on such day to believe that the employee will be a
qualified participant (within the meaning of paragraphs (d)(1) and (2)
of this section) on the last day of such plan year. In the case of a
defined contribution retirement system, the determination of whether the
employee is actually (or is expected to be) a qualified participant at
the end of the plan year must take into account all compensation since
the commencement of participation. See paragraph (d)(3)(iv) of this
section. If this reasonable belief is correct, and the employee is a
qualified participant on the last day of his or her first plan year of
participation, then the exception from employment in section 3121(b)(7)
will apply without regard to section 3121(b)(7)(F) to services of the
employee for the balance of the calendar year in which the plan year
ends. For purposes of this paragraph (d)(3)(ii), it is not reasonable to
assume the establishment of a new plan until such establishment actually
occurs. In addition, the rule in this paragraph (d)(3)(ii) may not be
used to treat an employee as a qualified participant until the employee
actually becomes a participant in the retirement system. In the case of
a retirement system that does not permit a new employee to participate
until the first day of the first month beginning after the employee's
commencement of service, or some earlier date, a new employee who is not
a part-time, seasonal or temporary employee may be treated as a
qualified participant until such date. This 1-month rule of
administrative convenience applies without regard to whether the
employer has a reasonable belief that the employee will be a qualified
participant. The rules of this paragraph (d)(3)(ii) are illustrated by
the following examples:
Example 1. A political subdivision maintains a plan that is a
retirement system within the meaning of paragraph (e)(1) of this section
and uses the alternative lookback rule of this paragraph (d)(3). Under
the terms of the plan, service during a plan year is not credited for
accrual purposes unless a participant has at least 1,000 hours of
[[Page 53]]
service during the year. Assume that an employee becomes a participant.
If it is reasonable to believe that the employee will be credited with
1,000 hours of service by the last day of his or her first year of
participation and thereby become a qualified participant by reason of
accruing a benefit that meets the minimum retirement benefit requirement
of paragraph (e)(2) of this section, the services of the employee are
not subject to FICA tax from the date of initial participation until the
end of that plan year. If the employee is a qualified participant on the
last day of his or her first plan year of participation, then the
exception from employment for purposes of FICA will apply to services of
the employee for the balance of the calendar year in which the plan year
ended.
Example 2. Assume the same facts as Example 1, except that the
employee is a newly hired employee and the plan provides that an
employee may not participate until the first day of his or her first
full month of employment. Under the 1-month rule of convenience, the
employee may be treated as a qualified participant until the first date
on which he or she could participate in the plan.
(iii) Application in last year of participation. If the alternative
lookback rule is used, an employee may be treated as a qualified
participant on any given day during his or her last year of
participation in a retirement system (within the meaning of paragraph
(e)(1) of this section) if and only if it is reasonable to believe on
such day that the employee, will be a qualified participant (within the
meaning of paragraphs (d)(1) and (2) of this section) on his or her last
day of participation. For purposes of this paragraph (d)(3)(iii), an
employee's last year of participation means the plan year that the
employer reasonably ascertains is the final year of such employee's
participation (e.g., where the employee has a scheduled retirement date
or where the employer intends to terminate the plan).
(iv) Special rule for defined contribution retirement systems. An
employee may not be treated as a qualified participant in a defined
contribution retirement system under this paragraph (d)(3) if
compensation for less than a full plan year or other 12-month period is
regularly taken into account in determining allocations to the
employee's account for the plan year unless, under all of the facts and
circumstances, such arrangement is not a device to avoid the imposition
of FICA taxes. For example, an arrangement under which compensation
taken into account is limited to the contribution base described in
section 3121(x)(1) is not considered a device to avoid FICA taxes by
reason of such limitation. See paragraph (e)(2)(iii)(B) of this section
for a rule permitting the use of such limitation. This rule is
illustrated by the following example:
Example. A political subdivision maintains a defined contribution
plan that covers all of its full-time employees and is a retirement
system within the meaning of paragraph (e)(1) of this section. Under the
plan, a portion of each participant's compensation in the final month of
every plan year is allocated to the participant's account. Employees
covered under the plan generally may not be treated as qualified
participants under the alternative lookback rule for any portion of the
calendar year following the year in which such allocation is made.
(v) Consistency requirement. Beginning with calendar year 1992, if
the alternative lookback rule is used to determine whether an employee
is a qualified participant, it must be used consistently from year to
year and with respect to all employees of the State, political
subdivision or instrumentality thereof making the determination. If a
retirement system is sponsored by more than one State, political
subdivision or instrumentality, this consistency requirement applies
separately to each plan sponsor.
(4) Treatment of former participants--(i) In general. In general,
the rules of this paragraph (d) apply equally to former participants who
continue to perform service for the same State, political subdivision or
instrumentality thereof or who return after a break in service. Thus,
for example, a former employee of a political subdivision with a
deferred benefit under a defined benefit retirement system maintained by
the political subdivision who is reemployed by the political subdivision
but does not resume participation in the retirement system, may continue
to be a qualified participant in the system after becoming reemployed if
his or her total accrued benefit under the system meets the minimum
retirement benefit requirement of paragraph (e)(2) of this section
(taking into account all periods of service (including current service)
required to be taken into account under that paragraph). See also
[[Page 54]]
paragraph (e)(2)(v) of this section for situations in which benefits
under a retirement system may be taken into account even though they
relate to service for another employer.
(ii) Treatment of re-hired annuitants. An employee who is a former
participant in a retirement system maintained by a State, political
subdivision or instrumentality thereof, who has previously retired from
service with the State, political subdivision or instrumentality, and
who is either in pay status (i.e., is currently receiving retirement
benefits) under the retirement system or has reached nomal retirement
age under the retirement system, is deemed to be a qualified participant
in the retirement system without regard to whether he or she continues
to accrue a benefit or whether the distribution of benefits under the
retirement system has been suspended pending cessation of services. This
rule also applies in the case of an employee who has retired from
service with another State, political subdivision or instrumentality
thereof that maintains the same retirement system as the current
employer, provided the employee is a former participant in the system by
reason of the employee's former employment. Thus, for example, if a
teacher retires from service with a school district that participates in
a state-wide teachers' retirement system, begins to receive benefits
from the system, and later becomes a substitute teacher in another
school district that participates in the same state-wide system, the
employee is treated as a re-hired annuitant under this paragraph
(d)(4)(ii).
(e) Definition of retirement system--(1) Requirement that system
provide retirement-type benefits. For purposes of section 3121(b)(7)(F),
a retirement system includes any pension, annuity, retirement or similar
fund or system within the meaning of section 218 of the Social Security
Act that is maintained by a State, political subdivision or
instrumentality thereof to provide retirement benefits to its employees
who are participants. Whether a plan is maintained to provide retirement
benefits with respect to an employee is determined under the facts and
circumstances of each case. For example, a plan providing only retiree
health insurance or other deferred welfare benefits is not considered a
retirement system for this purpose. The legal form of the system is
generally not relevant. Thus, for example, a retirement system may
include a plan described in section 401(a), an annuity plan or contract
under section 403 or a plan described in section 457(b) or (f) of the
Internal Revenue Code. In addition, the Social Security system is not a
retirement system for purposes of section 3121(b)(7)(F) and this
section. These rules are illustrated by the following examples:
Example 1. Under an employment arrangement, a portion of an
employee's compensation is regularly deferred for 5 years. Because a
plan that defers the receipt of compensation for a short span of time
rather than until retirement is not a plan that provides retirement
benefits, this arrangement is not a retirement system for purposes of
section 3121(b)(7)(F).
Example 2. An individual holds two positions with the same political
subdivision. The wages earned in one position are subject to FICA tax
pursuant to an agreement (under section 218 of the Social Security Act)
between the Secretary of Health and Human Services and the State in
which the political subdivision is located. Because the Social Security
system is not a retirement system for purposes of section 3121(b)(7)(F),
the exception from employment in section 3121(b)(7) does not apply to
service in the other position unless the employee is otherwise a member
of a retirement system of such political subdivision.
(2) Requirement that system provide minimum level of benefits--(i)
In general. A pension, annuity, retirement or similar fund or system is
not a retirement system with respect to an employee unless it provides a
retirement benefit to the employee that is comparable to the benefit
provided under the Old-Age portion of the Old-Age, Survivor and
Disability Insurance program of Social Security. Whether a retirement
system meets this requirement is generally determined on an individual-
by-individual basis. Thus, for example, a pension plan that is not a
retirement system with respect to an employee may nevertheless be a
retirement system with respect to other employees covered by the system.
(ii) Defined benefit retirement systems. A defined benefit
retirement system
[[Page 55]]
maintained by a State, political subdivision or instrumentality thereof
meets the requirements of this paragraph (e)(2) with respect to an
employee on a given day if and only if, on that day, the employee has an
accrued benefit under the system that entitles the employee to an annual
benefit commencing on or before his or her Social Security retirement
age that is at least equal to the annual Primary Insurance Amount the
employee would have under Social Security. For this purpose, the Primary
Insurance Amount an individual would have under Social Security is
determined as it would be under the Social Security Act if the employee
had been covered under Social Security for all periods of service with
the State, political subdivision or instrumentality, had never performed
service for any other employer, and had been fully insured within the
meaning of section 214(a) of the Social Security Act, except that all
periods of service with the State, political subdivision or
instrumentality must be taken into account (i.e., without reduction for
low-earning years).
(iii) Defined contribution retirement systems--(A) In general. A
defined contribution retirement system maintained by a State, political
subdivision or instrumentality thereof meets the requirements of
paragraph (e)(2)(i) of this section with respect to an employee if and
only if allocations to the employee's account (not including earnings)
for a period are at least 7.5 percent of the employee's compensation for
service for the State, political subdivision or instrumentality during
the period. Matching contributions by the employer may be taken into
account for this purpose.
(B) Definition of compensation. The definition of compensation used
in determining whether a defined contribution retirement system meets
the minimum retirement benefit requirement must generally be no less
inclusive than the definition of the employee's base pay as designated
by the employer or the retirement system, provided such designation is
reasonable under all the facts and circumstances. Thus, for example, a
defined contribution retirement system will not fail to meet this
requirement merely because it disregards for all purposes one or more of
the following: overtime pay, bonuses, or single-sum amounts received on
account of death or separation from service under a bona fide vacation,
compensatory time or sick pay plan, or under severance pay plans.
Furthermore, any compensation remaining after such amounts are
disregarded that is in excess of the contribution base described in
section 3121(x)(1) at the beginning of the plan year may also be
disregarded. The rules of this paragraph are illustrated by the
following example:
Example. A political subdivision maintains an elective defined
contribution plan that is a retirement system within the meaning of
paragraph (e)(1) of this section. The plan has a calendar year plan
year. In 1995, an employee contributes to the plan at a rate of 7.5
percent of base pay. Assume that the employee will reach the maximum
contribution base described in section 3121(x)(1) in October of 1995.
The employee is a qualified participant in the plan for all of the 1995
plan year without regard to whether the employee ceases to participate
at any time after reaching the maximum contribution base.
(C) Reasonable interest rate requirement. A defined contribution
retirement system does not satisfy this paragraph (e)(2) with respect to
an employee unless the employee's account is credited with earnings at a
rate that is reasonable under all the facts and circumstances, or
employees' accounts are held in a separate trust that is subject to
general fiduciary standards and are credited with actual earnings on the
trust fund. Whether the interest rate with which an employee's account
is credited is reasonable is determined after reducing the rate to
adjust for the payment of any administrative expenses. The rule of this
paragraph (e)(2)(iii)(C) is illustrated by the following example:
Example. A political subdivision maintains a defined contribution
plan described in section 457(b). Under the plan, the accounts of
participants are credited annually on the basis of a variable interest
rate formula determined as of the beginning of the plan year. The
formula requires an interest rate (after adjustment for administrative
expense payments) equal to 100 percent of the Applicable Federal Rate
for long-term debt instruments. This interest rate constitutes a
reasonable rate of interest.
[[Page 56]]
(iv) Treatment of emloyees employed in more than one position with
the same entity. All service and compensation of an employee with
respect to his or her employment with a State, political subdivision or
instrumentality thereof must generally be considered in determining
whether a benefit meets the requirement of this paragraph (e)(2).
However, for individuals employed simultaneously in multiple positions
with the same entity, this determination may (but is not required to) be
made solely by reference to the service and compensation related to a
single position of the employee with the State, political subdivision or
instrumentality thereof making the determination, provided that the
position is not a part-time, seasonal or temporary position.
(v) Treatment of employees participating in certain systems. In
general, only compensation from and service for the State, political
subdivision or instrumentality thereof that employs the employee (and
the allocations or benefits related to such compensation or service) on
a given day are considered in determining whether the employee's benefit
under the retirement system on that day meets the requirements of this
paragraph (e)(2), even if the employee has other allocations or benefits
under the same retirement system from service with another State,
political subdivision or instrumentality thereof. However, an employee's
total allocations or benefits under a retirement system maintained by
multiple States, political subdivisions or instrumentalities thereof
(including the current employer) may be taken into account if:
(A) The compensation and service on which the additional allocations
or benefits are based are also taken into account in determining whether
the employee's allocations or benefits satisfy the minimum retirement
benefit requirement;
(B) The retirement system takes all service and compensation of the
employee in all positions covered by the system into account for all
benefit determination purposes; and
(C) If the employee is a part-time, seasonal or temporary employee,
he or she is treated under the plan for benefit accrual purposes in as
favorable a manner as a full-time employee participating in the system.
(vi) Additional testing methods. Additional testing methods may be
designated by the Commissioner in revenue procedures, revenue rulings,
notices or other documents of general applicability.
(f) Transition rules--(1) Application of qualified participant rules
during 1991--(i) In general. An employee may be treated as a qualified
participant in a retirement system (within the meaning of paragraph
(e)(1) of this section) on a given day during the period July 1 through
December 31, 1991, if it is reasonable on that day to believe that he or
she will be a qualified participant under the general rule in paragraphs
(d) (1) and (2) of this section by January 1, 1992 (taking into account
only service and compensation on or after such date). For purposes of
this paragraph (f)(1)(i), given the facts and circumstances of a
particular case, it may be reasonable to assume that the terms of a plan
will be changed or that a new retirement system will be established by
the end of calendar year 1991, as long as affirmative steps have been
taken to accomplish this result.
(ii) Extension of reliance period if legislative action required. If
a plan amendment or other action is necessary in order to treat an
employee as a member of a retirement system for purposes of this
section, such amendment or other action may only be taken by a
legislative body that does not convene during the period July 1, 1991,
through December 31, 1991, and the other requirements of paragraph
(f)(1)(i) of this section are met, the end of the reasonable reliance
period (including the rule that service and compensation prior to that
date may be disregarded) provided under paragraph (f)(1)(i) of this
section is extended from December 31, 1991, to the date that is the last
day of the first legislative session commencing after December 31, 1991.
These rules are illustrated by the following examples:
Example 1. A State maintains a defined benefit plan that meets the
requirements of paragraph (e) of this section. The plan does not cover a
particular class of full-time employees as of July 1, 1991. However, in
light of the enactment of section 3121(b)(7)(F),
[[Page 57]]
State officials administering the plan for the State intend to request
that the legislature amend the State statute to include that class of
employees in the existing plan and otherwise to modify the terms of the
plan to meet the requirements of section 3121(b)(7)(F) and this section.
The State legislature meets from January through March each year, and
legislative action is required to expand coverage under the plan. State
officials administering the plan have publicized the proposed amendment
providing for the addition of these employees to the plan. Under the
transition rule for 1991, if it is reasonable to believe that the
legislature will pass this bill in the 1992 session, service by the
employees who will be covered under the plan by reason of the amendment
is not treated as employment by reason of section 3121(b)(7)(F) during
the period prior to April 1, 1992. This is true regardless of whether
the plan provides retroactive coverage for the period July 1, 1991
through March 31, 1992.
Example 2. Assume the same facts as in Example 1, except that
legislative action is not required in order to expand coverage under the
plan, and that publication of the proposed change to the plan occurs in
1991. Assume further that coverage is expanded under the plan to include
the new class of full-time employees as of April 1, 1992. Despite this
action, in this situation the service by those employees during the
period January 1, 1992 through March 31, 1992 is not excluded from
``employment'' under section 3121(b)(7)(F), and wages for that period
are generally subject to FICA taxes even if the plan provides
retroactive coverage for any portion of the period July 1, 1991 to March
31, 1992.
(2) Additional transition rules for plans in existence on November
5, 1990--(i) Application of minimum retirement benefit requirement to
defined benefit retirement systems in plan years beginning before 1993--
(A) In general. A defined benefit retirement system maintained by a
State, political subdivision or instrumentality thereof on November 5,
1990, is not subject to the minimum retirement benefit requirement of
paragraph (e)(2) of this section for any plan year beginning before
January 1, 1993, with respect to individuals who were actually covered
under the system on November 5, 1990. Such a retirement system is also
not subject to the minimum retirement benefit requirement of paragraph
(e)(2) of this section with respect to an employee who becomes a
participant after November 5, 1990, if he or she is employed in a
position that was covered under the retirement system on November 5,
1990, without regard to whether such coverage was mandatory or elective.
A retirement system is not described in this paragraph (f)(2)(i)(A) if
there has been a material decrease in the level of retirement benefits
under the retirement system pursuant to an amendment adopted subsequent
to November 5, 1990. Whether such a material decrease in benefits has
occurred is determined under the facts and circumstances of each case. A
decrease in benefits is not material to the extent that it does not
decrease the benefit payable at normal retirement age. These rules are
illustrated by the following examples:
Example 1. The retirement formula under a retirement plan that was
in existence on November 5, 1990, is amended to use career average
compensation instead of a high 3-year average, without any increase in
the benefit formula. This amendment constitutes a material decrease in
the level of benefit under the retirement plan. Therefore, the
retirement plan is subject to the minimum retirement benefit requirement
for the plan year for which the amendment is effective and for all
succeeding plan years.
Example 2. A defined benefit retirement plan that was in existence
on November 5, 1990, is subsequently amended to include part-time
employees. Previously, this class of employees was not covered under the
plan either on a mandatory or on an elective basis. The plan is subject
to the minimum retirement benefit requirement with respect to the part-
time employees because this class of employees was previously excluded
from coverage under the retirement plan. Of course, the nonforfeitable
benefit rule applies to the benefit relied upon to meet the minimum
retirement benefit requirement with respect to any part-time, seasonal
or temporary employee covered during this period.
(B) Treatment in plan years beginning after 1992 of benefits accrued
during previous plan years. The general rule that a defined benefit
retirement system meets the minimum retirement benefit requirement on
the basis of total benefits and service accrued to date is modified for
plans in existence on November 5, 1990. If a defined benefit retirement
system in existence on November 5, 1990, does not meet the minimum
retirement benefit requirement solely because the benefits accrued for
an employee (with respect to whom the
[[Page 58]]
system is entitled to relief under paragraph (f)(2)(i)(A) of this
section) as of the last day of the last plan year beginning before
January 1, 1993, do not meet the minimum retirement benefit requirement
of paragraph (e)(2) of this section with respect to service and
compensation before that time, then the retirement system will be deemed
to comply with the requirements of paragraph (e)(2) of this section if
the future service accruals would comply with the requirement of
paragraph (e)(2) of this section. If retirement benefits under a
retirement system in existence on November 5, 1990 are materially
decreased within the meaning of paragraph (f)(2)(i)(A) of this section,
then the date the decrease is effective is substituted for January 1,
1993 for purposes of this paragraph. The rule of this paragraph
(f)(2)(i)(B) is illustrated by the following example:
Example. A defined benefit plan maintained by a State was in
existence on November 5, 1990. It provides a retirement benefit on the
last day of the 1992 plan year that is insufficient to meet the
requirements of paragraph (e)(2) of this section based on employees'
total service and compensation with the State at that time. The plan
will nevertheless meet the requirements of paragraph (e)(2) of this
section if it is amended to provide benefits sufficient to meet the
requirements of paragraph (e)(2) of this section based on employees'
service and compensation in plan years beginning after December 31,
1992.
(C) Treatment of part-time, seasonal or temporary employees. A
defined benefit retirement system is not exempt from the minimum
retirement benefit requirement with respect to a part-time, seasonal or
temporary employee during the transition period provided in paragraph
(f)(2)(i)(A) of this section unless any retirement benefit provided to
the employee is 100-percent nonforfeitable within the meaning of
paragraph (d)(2) of this section. In determining whether the benefit is
nonforfeitable, the special rule in paragraph (d)(2)(ii) of this section
is modified in two respects during the transition period: first, the
percentage of compensation required to be available for distribution is
reduced from 7.5 percent to 6 percent; and second, the period of service
with respect to which compensation must be determined is modified to
include all periods of participation by the employee in the system since
July 1, 1991.
(ii) Application of minimum retirement benefit requirement to
defined contribution retirement systems in plan years beginning before
1993. A defined contribution retirement system maintained by a State,
political subdivision or instrumentality thereof on November 5, 1990,
meets the minimum retirement benefit requirement of paragraph (e) (2) of
this section with respect to an employee for any plan year beginning
before January 1, 1993, if mandatory allocations to the employee's
account (not including earnings) for a period are at least 6 percent
(rather than 7.5 percent) of the employee's compensation for service to
the State, political subdivision or instrumentality during the period,
and the plan otherwise meets the requirements of paragraph (e)(2)(iii)
of this section. This transition rule is only available with respect to
an employee who is actually covered under the system on November 5,
1990, and to an employee who becomes a participant after November 5,
1990, if he or she is employed in a position that was covered under the
retirement system on November 5, 1990, without regard to whether such
coverage was mandatory or elective. In addition, this transition rule is
not available with respect to a part-time, seasonal or temporary
employee unless the mandatory allocation required under this paragraph
(f)(2)(ii) is 100-percent nonforfeitable within the meaning of paragraph
(d)(2) of this section. A retirement system is not described in this
paragraph (f)(2)(ii) if there has been a material decrease in the level
of retirement benefits under the retirement system pursuant to an
amendment adopted subsequent to November 5, 1990. Whether such a
material decrease in benefits has occurred is determined under all the
facts and circumstances.
(iii) Application of qualified participant rules. A participant with
respect to whom relief is granted under paragraph (f)(2)(i)(A) of this
section may be treated as a qualified participant in the defined benefit
retirement system on a given day if, on that day, he or she is actually
a participant in the retirement system, and, on that day, it is
[[Page 59]]
reasonable to believe that the participant will actually accrue a
benefit before the end of the plan year of such retirement system in
which the determination is made. A participant is not treated as
accruing a benefit for purposes of this rule if his or her accrued
benefits increase solely as a result of an increase in compensation.
However, an employee is treated as a qualified participant for a plan
year if the employee meets all of the applicable conditions for accruing
the maximum current benefit for such year but fails to accrue a benefit
solely because of a uniformly applicable benefit limit under the plan.
In addition, an employee may be treated as a qualified participant in
the system on a given day if the employee is a re-hired annuitant within
the meaning of paragraph (d)(4)(ii) of this section. This rule is
illustrated by the following example:
Example. A political subdivision maintains a defined benefit plan
that is a retirement system within the meaning of paragraph (e)(1) of
this section but does not meet the requirements of paragraph (e)(2) of
this section. If the plan is not subject to the minimum retirement
benefit requirement, an employee who is a participant in the retirement
plan as of the end of a plan year beginning before January 1, 1993, and
may reasonably be expected to accrue a benefit under the plan by the end
of such plan year may be treated as a qualified participant in the plan
throughout the plan year regardless of the actual amount of the accrual.
[T.D. 8354, 56 FR 29570, June 28, 1991; 56 FR 40246, Aug. 14, 1991, as
amended by T.D. 8794, 63 FR 70338, Dec. 21, 1998; T.D. 8891, 65 FR
44682, July 19, 2000]
Sec. 31.3121(b)(8)-1 Services performed by a minister of a church or
a member of a religious order.
(a) In general. Services performed by a duly ordained, commissioned,
or licensed minister of a church in the exercise of his ministry, or by
a member of a religious order in the exercise of his duties required by
such order, are excluded from employment, except that services performed
by a member of such an order in the exercise of such duties (whether
performed for the order or for another employer) are included in
employment if an election of coverage under section 3121(r) and Sec.
31.3121(r)-1 is in effect with respect to such order or with respect to
the autonomous subdivision thereof to which such member belongs. For
provisions relating to the election available to certain ministers and
members of religious orders with respect to the extension of the Federal
old-age, survivors, and disability insurance system established by title
II of the Social Security Act to certain services performed by them, see
Part 1 of this chapter (Income Tax Regulations).
(b) Service by a minister in the exercise of his ministry. Except as
provided in paragraph (c)(3) of this section, service performed by a
minister in the exercise of his ministry includes the ministration of
sacerdotal functions and the conduct of religious worship, and the
control, conduct, and maintenance of religious organizations (including
the religious boards, societies, and other integral agencies of such
organizations), under the authority of a religious body constituting a
church or church denomination. The following rules are applicable in
determining whether services performed by a minister are performed in
the exercise of his ministry:
(1) Whether service performed by a minister constitutes the conduct
of religious worship or the ministration of sacerdotal functions depends
on the tenets and practices of the particular religious body
constituting his church or church denomination.
(2) Service performed by a minister in the control, conduct, and
maintenance of a religious organization relates to directing, managing,
or promoting the activities of such organization. Any religious
organization is deemed to be under the authority of a religious body
constituting a church or church denomination if it is organized and
dedicated to carrying out the tenets and principles of a faith in
accordance with either the requirements or sanctions governing the
creation of institutions of the faith. The term ``religious
organization'' has the same meaning and application as is given to the
term for income tax purposes.
(3) (i) If a minister is performing service in the conduct of
religious worship or the ministration of sacerdotal
[[Page 60]]
functions, such service is in the exercise of his ministry whether or
not it is performed for a religious organization.
(ii) The rule in paragraph (b)(3)(i) of this section may be
illustrated by the following example:
Example. M, a duly ordained minister, is engaged to perform service
as chaplain at N University. M devotes his entire time to performing his
duties as chaplain which include the conduct of religious worship,
offering spiritual counsel to the university students, and teaching a
class in religion. M is performing service in the exercise of his
ministry.
(4) (i) If a minister is performing service for an organization
which is operated as an integral agency, of a religious organization
under the authority of a religious body constituting a church or church
denomination, all service performed by the minister in the conduct of
religious worship, in the ministration of sacerdotal functions, or in
the control conduct, and maintenance of such organization (see paragraph
(b)(2) of this section) is in the exercise of his ministry.
(ii) The rule in paragraph (b)(4)(i) of this section may be
illustrated by the following example:
Example. M, a duly ordained minister, is engaged by the N Religious
Board to serve as director of one of its departments. He performs no
other service. The N Religious Board is an integral agency of O, a
religious organization operating under the authority of a religious body
constituting a church denomination. M is performing service in the
exercise of his ministry.
(5) (i) If a minister, pursuant to an assignment or designation by a
religious body constituting his church, performs service for an
organization which is neither a religious organization nor operated as
an integral agency of a religious organization, all service performed by
him, even though such service may not involve the conduct of religious
worship or the ministration of sacerdotal functions, is in the exercise
of his ministry.
(ii) The rule in paragraph (b)(5)(i) of this section may be
illustrated by the following example:
Example. M, a duly ordained minister, is assigned by X, the
religious body constituting his church, to perform advisory service to Y
Company in connection with the publication of a book dealing with the
history of M's church denomination. Y is neither a religious
organization nor operated as an integral agency of a religious
organization. M performs no other service for X or Y. M is performing
service in the exercise of his ministry.
(c) Service by a minister not in the exercise of his ministry. (1)
Section 3121(b)(8)(A) does not except from employment service performed
by a duly ordained, commissioned, or licensed minister of a church which
is not in the exercise of his ministry.
(2) (i) If a minister is performing service for an organization
which is neither a religious organization nor operated as an integral
agency of a religious organization and the service is not performed
pursuant to an assignment or designation by his ecclesiastical
superiors, then only the service performed by him in the conduct of
religious worship or the ministration of sacerdotal functions is in the
exercise of his ministry. See, however, paragraph (c)(3) of this
section.
(ii) The rule in paragraph (c)(2)(i) of this section may be
illustrated by the following example:
Example. M, a duly ordained minister, is engaged by N University to
teach history and mathematics. He performs no other service for N
although from time to time he performs marriages and conducts funerals
for relatives and friends. N University is neither a religious
organization nor operated as an integral agency of a religious
organization. M is not performing the service for N pursuant to an
assignment or designation by his ecclesiastical superiors. The service
performed by M for N University is not in the exercise of his ministry.
However, service performed by M in performing marriages and conducting
funerals is in the exercise of his ministry.
(3) Service performed by a duly ordained, commissioned, or licensed
minister of a church as an employee of the United States, or a State,
Territory, or possession of the United States, or the District of
Columbia, or a foreign government, or a political subdivision of any of
the foregoing, is not considered to be in the exercise of his ministry
for purposes of the taxes, even though such service may involve the
ministration of sacerdotal function or the conduct of religious worship.
Thus, for example, service performed by an individual as a
[[Page 61]]
chaplain in the Armed Forces of the United States is considered to be
performed by a commissioned officer in his capacity as such, and not by
a minister in the exercise of his ministry. Similarly, service performed
by an employee of a State as a chaplain in a State prison is considered
to be performed by a civil servant of the State and not by a minister in
the exercise of his ministry.
(d) Service in the exercise of duties required by a religious order.
Service performed by a member of a religious order in the exercise of
duties required by such order includes all duties required of the member
by the order. The nature or extent of such service is immaterial so long
as it is a service which he is directed or required to perform by his
ecclesiastical superiors.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7280, 38 FR 18369, July 10, 1973]
Sec. 31.3121(b)(8)-2 Services in employ of religious, charitable,
educational, or certain other organizations exempt from income tax.
(a) Services performed by an employee in the employ of a religious,
charitable, educational, or other organization described in section
501(c)(3) which is exempt from income tax under section 501(a) are
excepted from employment. However, this exception does not apply to
services with respect to which a certificate, filed pursuant to section
3121 (k) or (r), or section 1426(l) of the Internal Revenue Code of
1939, is in effect. For provisions relating to the services with respect
to which such a certificate is in effect, see Sec. Sec. 31.3121(k)-1
and 31.3121(r)-1.
(b) For provisions relating to exemption from income tax of an
organization described in section 501(c)(3), see Part 1 of this chapter
(Income Tax Regulations). For provisions relating to waiver by an
organization of its exemption from the taxes imposed by sections 3101
and 3111, see Sec. 31.3121(k)-1. See also Sec. 31.3121(b)(8)-1,
relating to services performed by a minister of a church in the exercise
of his ministry or by a member of a religious order in the exercise of
duties required by such order; Sec. 31.3121(b)(10)-1, relating to
services for remuneration of less than $50 for calendar quarter in the
employ of certain organizations exempt from income tax; Sec.
31.3121(b)(10)-2, relating to services performed in the employ of a
school, college, or university by certain students; and Sec.
31.3121(b)(13)-1, relating to services performed by certain student
nurses and hospital interns.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7280, 38 FR 18369, July 10, 1973]
Sec. 31.3121(b)(9)-1 Railroad industry; services performed by an
employee or an employee representative as defined in section 3231.
Services performed by an individual as an ``employee'' or as an
``employee representative'', as those terms are defined in section 3231,
are excepted from employment. For definitions of employee and employee
representatives, see Sec. Sec. 31.3231(b)-1 and 31.3231(c)-1.
Sec. 31.3121(b)(10)-1 Services for remuneration of less than $50 for
calendar quarter in the employ of certain organizations exempt from
income tax.
(a) Services performed by an employee in a calendar quarter in the
employ of an organization exempt from income tax under section 501(a)
(other than an organization described in section 401(a)) or under
section 521 are excepted from employment if the remuneration for the
services is less than $50. The test relating to remuneration of $50 is
based on the remuneration earned during a calendar quarter rather than
on the remuneration paid in a calendar quarter. The exception applies
separately with respect to each organization for which the employee
renders services in a calendar quarter. The type of services performed
by the employee and the place where the services are performed are
immaterial; the statutory tests are the character of the organization in
the employ of which the services are performed and the amount of the
remuneration for services performed by the employee in the calendar
quarter. For provisions relating to exemption from income tax under
section 501(a) or 521, see Part 1 of this chapter (Income Tax
Regulations).
Example 1. X is a local lodge of a fraternal organization and is
exempt from income tax
[[Page 62]]
under section 501(a) as an organization of the character described in
section 501(c)(8). X has two paid employees, A, who serves exclusively
as recording secretary for the lodge, and B, who performs services for
the lodge as janitor of its clubhouse. For services performed during the
first calendar quarter of 1955 (that is, January 1, 1955, through March
31, 1955, both dates inclusive) A earns a total of $30. For services
performed by certain student quarter B earns $180. Since the
remuneration for the services performed by A during such quarter is less
than $50, all of such services are expected, and the taxes do not attach
with respect to any of the remuneration for such services. Since the
remuneration for the services performed by B during such quarter,
however, is not less than $50, none of such services are excepted, and
the taxes attached with respect to all of the remuneration for such
services (that is, $180) as and when paid.
Example 2. The facts are the same as in example 1, above, except
that on April 1, 1955, A's salary is increased and, for services
performed during the calendar quarter beginning on that date (that is,
April 1, 1955, through June 30, 1955, both dates inclusive), A earns a
total of $60. Although all of the services performed by A during the
first quarter were excepted, none of A's services performed during the
second quarter are excepted since the remuneration for such services is
not less than $50. The taxes attach with respect to all of the
remuneration for services performed during the second quarter (that is,
$60) as and when paid.
Example 3. The facts are the same as in example 1, above, except
that A earns $120 for services performed during the year 1955, and such
amount is paid to him in a lump sum at the end of the year. The services
performed by A in any calendar quarter during the year are excepted if
the portion of the $120 attributable to services performed in that
quarter is less than $50. If, however, the portion of the $120
attributable to services performed in any calendar quarter during the
year is not less than $50, the services during that quarter are not
excepted, and the taxes attach with respect to that portion of the
remuneration attributable to his services in that quarter.
(b) See Sec. 31.3121(b)(8)-2, relating to services performed in the
employ of religious, charitable, educational, and certain other
organizations exempt from income tax; Sec. 31.3121(b)(8)-1, relating to
services performed by a minister of a church in the exercise of his
ministry or by a member of a religious order in the exercise of duties
required by such order; Sec. 31.3121(b)(10)-2, relating to services
performed by certain students in the employ of a school, college, or
university or of a nonprofit organization auxiliary to a school,
college, or university; and Sec. 31.3121(b)(13)-1, relating to services
performed by certain student nurses and hospital interns.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7373, 40 FR 30958, July 24, 1975]
Sec. 31.3121(b)(10)-2 Services performed by certain students in the
employ of a school, college, or university, or of a nonprofit
organization auxiliary to a school, college, or university.
(a) General rule. (1) Services performed in the employ of a school,
college, or university within the meaning of paragraph (c) of this
section (whether or not the organization is exempt from income tax) are
excepted from employment, if the services are performed by a student
within the meaning of paragraph (d) of this section who is enrolled and
is regularly attending classes at the school, college, or university.
(2) Services performed in the employ of an organization which is--
(i) Described in section 509(a)(3) and Sec. 1.509(a)-4;
(ii) Organized, and at all times thereafter operated, exclusively
for the benefit of, to perform the functions of, or to carry out the
purposes of a school, college, or university within the meaning of
paragraph (c) of this section; and
(iii) Operated, supervised, or controlled by or in connection with
the school, college, or university; are excepted from employment, if the
services are performed by a student who is enrolled and regularly
attending classes within the meaning of paragraph (d) of this section at
the school, college, or university. The preceding sentence shall not
apply to services performed in the employ of a school, college, or
university of a State or a political subdivision thereof by a student
referred to in section 218(c)(5) of the Social Security Act (42 U.S.C.
418(c)(5)) if such services are covered under the agreement between the
Commissioner of Social Security and such State entered into pursuant to
section 218 of such Act. For the definitions of ``operated, supervised,
or controlled by'', ``supervised or controlled in connection with'', and
[[Page 63]]
``operated in connection with'', see paragraphs (g), (h), and (i),
respectively, of Sec. 1.509(a)-4.
(b) Statutory tests. For purposes of this section, if an employee
has the status of a student within the meaning of paragraph (d) of this
section, the amount of remuneration for services performed by the
employee, the type of services performed by the employee, and the place
where the services are performed are not material. The statutory tests
are:
(1) The character of the organization in the employ of which the
services are performed as a school, college, or university within the
meaning of paragraph (c) of this section, or as an organization
described in paragraph (a)(2) of this section, and
(2) The status of the employee as a student enrolled and regularly
attending classes within the meaning of paragraph (d) of this section at
the school, college, or university within the meaning of paragraph (c)
of this section by which the employee is employed or with which the
employee's employer is affiliated within the meaning of paragraph (a)(2)
of this section.
(c) School, College, or University. An organization is a school,
college, or university within the meaning of section 3121(b)(10) if its
primary function is the presentation of formal instruction, it normally
maintains a regular faculty and curriculum, and it normally has a
regularly enrolled body of students in attendance at the place where its
educational activities are regularly carried on. See section
170(b)(1)(A)(ii) and the regulations thereunder.
(d) Student Status--general rule. Whether an employee has the status
of a student performing the services shall be determined based on the
relationship of the employee with the organization employing the
employee. In order to have the status of a student, the employee must
perform services in the employ of a school, college, or university
within the meaning of paragraph (c) of this section at which the
employee is enrolled and regularly attending classes in pursuit of a
course of study within the meaning of paragraphs (d)(1) and (2) of this
section. In addition, the employee's services must be incident to and
for the purpose of pursuing a course of study within the meaning of
paragraph (d)(3) of this section at such school, college, or university.
An employee who performs services in the employ of an affiliated
organization within the meaning of paragraph (a)(2) of this section must
be enrolled and regularly attending classes at the affiliated school,
college, or university within the meaning of paragraph (c) of this
section in pursuit of a course of study within the meaning of paragraphs
(d)(1) and (2) of this section. In addition, the employee's services
must be incident to and for the purpose of pursuing a course of study
within the meaning of paragraph (d)(3) of this section at such school,
college, or university.
(1) Enrolled and regularly attending classes. An employee must be
enrolled and regularly attending classes at a school, college, or
university within the meaning of paragraph (c) of this section at which
the employee is employed to have the status of a student within the
meaning of section 3121(b)(10). An employee is enrolled within the
meaning of section 3121(b)(10) if the employee is registered for a
course or courses creditable toward an educational credential described
in paragraph (d)(2) of this section. In addition, the employee must be
regularly attending classes to have the status of a student. For
purposes of this paragraph (d)(1), a class is an instructional activity
led by a faculty member or other qualified individual hired by the
school, college, or university within the meaning of paragraph (c) of
this section for identified students following an established
curriculum. Traditional classroom activities are not the sole means of
satisfying this requirement. For example, research activities under the
supervision of a faculty advisor necessary to complete the requirements
for a Ph.D. degree may constitute classes within the meaning of section
3121(b)(10). The frequency of these and similar activities determines
whether an employee may be considered to be regularly attending classes.
(2) Course of study. An employee must be pursuing a course of study
in order to have the status of a student. A course of study is one or
more courses
[[Page 64]]
the completion of which fulfills the requirements necessary to receive
an educational credential granted by a school, college, or university
within the meaning of paragraph (c) of this section. For purposes of
this paragraph, an educational credential is a degree, certificate, or
other recognized educational credential granted by an organization
described in paragraph (c) of this section. A course of study also
includes one or more courses at a school, college or university within
the meaning of paragraph (c) of this section the completion of which
fulfills the requirements necessary for the employee to sit for an
examination required to receive certification by a recognized
organization in a field.
(3) Incident to and for the purpose of pursuing a course of study.
(i) General rule. An employee's services must be incident to and for the
purpose of pursuing a course of study in order for the employee to have
the status of a student. Whether an employee's services are incident to
and for the purpose of pursuing a course of study shall be determined on
the basis of the relationship of the employee with the organization for
which such services are performed as an employee. The educational aspect
of the relationship between the employer and the employee, as compared
to the service aspect of the relationship, must be predominant in order
for the employee's services to be incident to and for the purpose of
pursuing a course of study. The educational aspect of the relationship
is evaluated based on all the relevant facts and circumstances related
to the educational aspect of the relationship. The service aspect of the
relationship is evaluated based on all the relevant facts and
circumstances related to the employee's employment. The evaluation of
the service aspect of the relationship is not affected by the fact that
the services performed by the employee may have an educational,
instructional, or training aspect. Except as provided in paragraph
(d)(3)(iii) of this section, whether the educational aspect or the
service aspect of an employee's relationship with the employer is
predominant is determined by considering all the relevant facts and
circumstances. Relevant factors in evaluating the educational and
service aspects of an employee's relationship with the employer are
described in paragraphs (d)(3)(iv) and (v) of this section respectively.
There may be facts and circumstances that are relevant in evaluating the
educational and service aspects of the relationship in addition to those
described in paragraphs (d)(3)(iv) and (v) of this section.
(ii) Student status determined with respect to each academic term.
Whether an employee's services are incident to and for the purpose of
pursuing a course of study is determined separately with respect to each
academic term. If the relevant facts and circumstances with respect to
an employee's relationship with the employer change significantly during
an academic term, whether the employee's services are incident to and
for the purpose of pursuing a course of study is reevaluated with
respect to services performed during the remainder of the academic term.
(iii) Full-time employee. The services of a full-time employee are
not incident to and for the purpose of pursuing a course of study. The
determination of whether an employee is a full-time employee is based on
the employer's standards and practices, except regardless of the
employer's classification of the employee, an employee whose normal work
schedule is 40 hours or more per week is considered a full-time
employee. An employee's normal work schedule is not affected by
increases in hours worked caused by work demands unforeseen at the start
of an academic term. However, whether an employee is a full-time
employee is reevaluated for the remainder of the academic term if the
employee changes employment positions with the employer. An employee's
work schedule during academic breaks is not considered in determining
whether the employee's normal work schedule is 40 hours or more per
week. The determination of an employee's normal work schedule is not
affected by the fact that the services performed by the employee may
have an educational, instructional, or training aspect.
(iv) Evaluating educational aspect. The educational aspect of an
employee's relationship with the employer is evaluated based on all the
relevant facts and
[[Page 65]]
circumstances related to the educational aspect of the relationship. The
educational aspect of an employee's relationship with the employer is
generally evaluated based on the employee's course workload. Whether an
employee's course workload is sufficient in order for the employee's
employment to be incident to and for the purpose of pursuing a course of
study depends on the particular facts and circumstances. A relevant
factor in evaluating an employee's course workload is the employee's
course workload relative to a full-time course workload at the school,
college or university within the meaning of paragraph (c) of this
section at which the employee is enrolled and regularly attending
classes.
(v) Evaluating service aspect. The service aspect of an employee's
relationship with the employer is evaluated based on the facts and
circumstances related to the employee's employment. Services of an
employee with the status of a full-time employee within the meaning of
paragraph (d)(3)(iii) of this section are not incident to and for the
purpose of pursuing a course of study. Relevant factors in evaluating
the service aspect of an employee's relationship with the employer are
described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
(A) Normal work schedule and hours worked. If an employee is not a
full-time employee within the meaning of paragraph (d)(3)(iii) of this
section, then the employee's normal work schedule and number of hours
worked per week are relevant factors in evaluating the service aspect of
the employee's relationship with the employer. As an employee's normal
work schedule or actual number of hours worked approaches 40 hours per
week, it is more likely that the service aspect of the employee's
relationship with the employer is predominant. The determination of an
employee's normal work schedule and actual number of hours worked is not
affected by the fact that some of the services performed by the employee
may have an educational, instructional, or training aspect.
(B) Professional employee. (1) If an employee has the status of a
professional employee, then that suggests the service aspect of the
employee's relationship with the employer is predominant. A professional
employee is an employee--
(i) Whose primary duty consists of the performance of work requiring
knowledge of an advanced type in a field of science or learning
customarily acquired by a prolonged course of specialized intellectual
instruction and study, as distinguished from a general academic
education, from an apprenticeship, and from training in the performance
of routine mental, manual, or physical processes;
(ii) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(iii) Whose work is predominantly intellectual and varied in
character (as opposed to routine mental, manual, mechanical, or physical
work) and is of such character that the output produced or the result
accomplished cannot be standardized in relation to a given period of
time.
(2) Licensed, professional employee. If an employee is a licensed,
professional employee, then that further suggests the service aspect of
the employee's relationship with the employer is predominant. An
employee is a licensed, professional employee if the employee is
required to be licensed under state or local law to work in the field in
which the employee performs services and the employee is a professional
employee within the meaning of paragraph (d)(3)(v)(B)(1) of this
section.
(C) Employment Benefits. Whether an employee is eligible to receive
one or more employment benefits is a relevant factor in evaluating the
service aspect of an employee's relationship with the employer. For
example, eligibility to receive vacation, paid holiday, and paid sick
leave benefits; eligibility to participate in a retirement plan or
arrangement described in sections 401(a), 403(b), or 457(a); or
eligibility to receive employment benefits such as reduced tuition
(other than qualified tuition reduction under section 117(d)(5) provided
to a teaching or research assistant who is a graduate student), or
benefits under sections 79 (life insurance), 127 (qualified educational
assistance), 129 (dependent care assistance programs), or 137 (adoption
assistance) suggest that the service aspect of
[[Page 66]]
an employee's relationship with the employer is predominant. Eligibility
to receive health insurance employment benefits is not considered in
determining whether the service aspect of an employee's relationship
with the employer is predominant. The weight to be given the fact that
an employee is eligible for a particular employment benefit may vary
depending on the type of benefit. For example, eligibility to
participate in a retirement plan is generally more significant than
eligibility to receive a dependent care employment benefit. Additional
weight is given to the fact that an employee is eligible to receive an
employment benefit if the benefit is generally provided by the employer
to employees in positions generally held by non-students. Less weight is
given to the fact that an employee is eligible to receive an employment
benefit if eligibility for the benefit is mandated by state or local
law.
(e) Examples. The following examples illustrate the principles of
paragraphs (a) through (d) of this section:
Example 1. (i) Employee C is employed by State University T to
provide services as a clerk in T's administrative offices, and is
enrolled and regularly attending classes at T in pursuit of a B.S.
degree in biology. C has a course workload during the academic term
which constitutes a full-time course workload at T. C is considered a
part-time employee by T during the academic term, and C's normal work
schedule is 20 hours per week, but occasionally due to work demands
unforeseen at the start of the academic term C works 40 hours or more
during a week. C is compensated by hourly wages, and receives no other
compensation or employment benefits.
(ii) In this example, C is employed by T, a school, college, or
university within the meaning of paragraph (c) of this section. C is
enrolled and regularly attending classes at T in pursuit of a course of
study. C is not a full-time employee based on T's standards, and C's
normal work schedule does not cause C to have the status of a full-time
employee, even though C may occasionally work 40 hours or more during a
week due to unforeseen work demands. C's part-time employment relative
to C's full-time course workload indicates that the educational aspect
of C's relationship with T is predominant. Additional facts supporting
this conclusion are that C is not a professional employee, and C does
not receive any employment benefits. Thus, C's services are incident to
and for the purpose of pursuing a course of study. Accordingly, C's
services are excepted from employment under section 3121(b)(10).
Example 2. (i) Employee D is employed in the accounting department
of University U, and is enrolled and regularly attending classes at U in
pursuit of an M.B.A. degree. D has a course workload which constitutes a
half-time course workload at U. D is considered a full-time employee by
U under U's standards and practices.
(ii) In this example, D is employed by U, a school, college, or
university within the meaning of paragraph (c) of this section. In
addition, D is enrolled and regularly attending classes at U in pursuit
of a course of study. However, because D is considered a full-time
employee by U under its standards and practices, D's services are not
incident to and for the purpose of pursuing a course of study.
Accordingly, D's services are not excepted from employment under section
3121(b)(10).
Example 3. (i) The facts are the same as in Example 2, except that D
is not considered a full-time employee by U, and D's normal work
schedule is 32 hours per week. In addition, D's work is repetitive in
nature and does not require the consistent exercise of discretion and
judgment, and is not predominantly intellectual and varied in character.
However, D receives vacation, sick leave, and paid holiday employment
benefits, and D is eligible to participate in a retirement plan
maintained by U described in section 401(a).
(ii) In this example, D's half-time course workload relative to D's
hours worked and eligibility for employment benefits indicates that the
service aspect of D's relationship with U is predominant, and thus D's
services are not incident to and for the purpose of pursuing a course of
study. Accordingly, D's services are not excepted from employment under
section 3121(b)(10).
Example 4. (i) Employee E is employed by University V to provide
patient care services at a teaching hospital that is an unincorporated
division of V. These services are performed as part of a medical
residency program in a medical specialty sponsored by V. The residency
program in which E participates is accredited by the Accreditation
Counsel for Graduate Medical Education. Upon completion of the program,
E will receive a certificate of completion, and be eligible to sit for
an examination required to be certified by a recognized organization in
the medical specialty. E's normal work schedule, which includes services
having an educational, instructional, or training aspect, is 40 hours or
more per week.
(ii) In this example, E is employed by V, a school, college, or
university within the meaning of paragraph (c) of this section. However,
E's normal work schedule calls for E to perform services 40 or more
hours per week. E is therefore a full-time employee, and the fact that
some of E's services have
[[Page 67]]
an educational, instructional, or training aspect does not affect that
conclusion. Thus, E's services are not incident to and for the purpose
of pursuing a course of study. Accordingly, E's services are not
excepted from employment under section 3121(b)(10) and there is no need
to consider other relevant factors, such as whether E is a professional
employee or whether E is eligible for employment benefits.
Example 5. (i) Employee F is employed in the facilities management
department of University W. F has a B.S. degree in engineering, and is
completing the work experience required to sit for an examination to
become a professional engineer eligible for licensure under state or
local law. F is not attending classes at W.
(ii) In this example, F is employed by W, a school, college, or
university within the meaning of paragraph (c) of this section. However,
F is not enrolled and regularly attending classes at W in pursuit of a
course of study. F's work experience required to sit for the examination
is not a course of study for purposes of paragraph (d)(2) of this
section. Accordingly, F's services are not excepted from employment
under section 3121(b)(10).
Example 6. (i) Employee G is employed by Employer X as an apprentice
in a skilled trade. X is a subcontractor providing services in the field
in which G wishes to specialize. G is pursuing a certificate in the
skilled trade from Community College C. G is performing services for X
pursuant to an internship program sponsored by C under which its
students gain experience, and receive credit toward a certificate in the
trade.
(ii) In this example, G is employed by X. X is not a school, college
or university within the meaning of paragraph (c) of this section. Thus,
the exception from employment under section 3121(b)(10) is not available
with respect to G's services for X.
Example 7. (i) Employee H is employed by a cosmetology school Y at
which H is enrolled and regularly attending classes in pursuit of a
certificate of completion. Y's primary function is to carry on
educational activities to prepare its students to work in the field of
cosmetology. Prior to issuing a certificate, Y requires that its
students gain experience in cosmetology services by performing services
for the general public on Y's premises. H is scheduled to work and in
fact works significantly less than 30 hours per week. H's work does not
require knowledge of an advanced type in a field of science or learning,
nor is it predominantly intellectual and varied in character. H receives
remuneration in the form of hourly compensation from Y for providing
cosmetology services to clients of Y, and does not receive any other
compensation and is not eligible for employment benefits provided by Y.
(ii) In this example, H is employed by Y, a school, college or
university within the meaning of paragraph (c) of this section, and is
enrolled and regularly attending classes at Y in pursuit of a course of
study. Factors indicating the educational aspect of H's relationship
with Y is predominant are that H's hours worked are significantly less
than 30 per week, H is not a professional employee, and H is not
eligible for employment benefits. Based on the relevant facts and
circumstances, the educational aspect of H's relationship with Y is
predominant. Thus, H's services are incident to and for the purpose of
pursuing a course of study. Accordingly, H's services are excepted from
employment under section 3121(b)(10).
Example 8. (i) Employee J is a graduate teaching assistant at
University Z. J is enrolled and regularly attending classes at Z in
pursuit of a graduate degree. J has a course workload which constitutes
a full-time course workload at Z. J's normal work schedule is 20 hours
per week, but occasionally due to work demands unforeseen at the start
of the academic term J works more than 40 hours during a week. J's
duties include grading quizzes and exams pursuant to guidelines set
forth by the professor, providing class and laboratory instruction
pursuant to a lesson plan developed by the professor, and preparing
laboratory equipment for demonstrations. J receives a cash stipend and
employment benefits in the form of eligibility to make elective employee
contributions to an arrangement described in section 403(b). In
addition, J receives qualified tuition reduction benefits within the
meaning of section 117(d)(5) with respect to the tuition charged for the
credits earned for being a graduate teaching assistant.
(ii) In this example, J is employed by Z, a school, college, or
university within the meaning of paragraph (c) of this section, and is
enrolled and regularly attending classes at Z in pursuit of a course of
study. J's full-time course workload relative to J's normal work
schedule of 20 hours per week indicates that the educational aspect of
J's relationship with Z is predominant. In addition, J is not a
professional employee because J's work does not require the consistent
exercise of discretion and judgment in its performance. On the other
hand, the fact that J receives employment benefits in the form of
eligibility to make elective employee contributions to an arrangement
described in section 403(b) indicates that the employment aspect of J's
relationship with Z is predominant. Balancing the relevant facts and
circumstances, the educational aspect of J's relationship with Z is
predominant. Thus, J's services are incident to and for the purpose of
pursuing a course of study. Accordingly, J services are excepted from
employment under section 3121(b)(10).
(f) Effective date. Paragraphs (a), (b), (c), (d) and (e) of this
section apply to
[[Page 68]]
services performed on or after April 1, 2005.
(g) For provisions relating to domestic service performed by a
student in a local college club, or local chapter of a college
fraternity or sorority, see Sec. 31.3121(b)(2)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 7373, 40 FR 30958, July 24, 1975; T.D. 9167, 69 FR
76407, Dec. 21, 2004]
Sec. 31.3121(b)(11)-1 Services in the employ of a foreign government.
(a) Services performed by an employee in the employ of a foreign
government are excepted from employment. The exception includes not only
services performed by ambassadors, ministers, and other diplomatic
officers and employees but also services performed as a consular or
other officer or employee of a foreign government, or as a nondiplomatic
representative thereof.
(b) For purposes of this exception, the citizenship or residence of
the employee is immaterial. It is also immaterial whether the foreign
government grants an equivalent exemption with respect to similar
services performed in the foreign country by citizens of the United
States.
Sec. 31.3121(b)(12)-1 Services in employ of wholly owned
instrumentality of foreign government.
(a) Services performed by an employee in the employ of certain
instrumentalities of a foreign government are excepted from employment.
The exception includes all services performed in the employ of an
instrumentality of the government of a foreign country, if--
(1) The instrumentality is wholly owned by the foreign government;
(2) The services are of a character similar to those performed in
foreign countries by employees of the United States Government or of an
instrumentality thereof; and
(3) The Secretary of State certifies to the Secretary of the
Treasury that the foreign government, with respect to whose
instrumentality and employees thereof exemption is claimed, grants an
equivalent exemption with respect to services performed in the foreign
country by employees of the United States Government and of
instrumentalities thereof.
(b) For purposes of this exception, the citizenship or residence of
the employee is immaterial.
Sec. 31.3121(b)(13)-1 Services of student nurse or hospital intern.
(a) Services performed as a student nurse in the employ of a
hospital or a nurses' training school are excepted from employment, if
the student nurse is enrolled and regularly attending classes in a
nurses' training school and such nurses' training school is chartered or
approved pursuant to State law.
(b) Services performed before 1966 as an intern (as distinguished
from a resident doctor), in the employ of a hospital are excepted from
employment, if the intern has completed a 4 years' course in a medical
school chartered or approved pursuant to State law.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR
18017, Dec. 4, 1968]
Sec. 31.3121(b)(14)-1 Services in delivery or distribution of
newspapers, shopping news, or magazines.
(a) Services of individuals under age 18. Services performed by an
employee under the age of 18 in the delivery or distribution of
newspapers or shopping news, not including delivery or distribution (as,
for example, by a regional distributor) to any point for subsequent
delivery or distribution, are excepted from employment. Thus, the
services performed by an employee under the age of 18 in making house-
to-house delivery or sale of newspapers or shopping news, including
handbills and other similar types of advertising material, are excepted
from employment. The services are excepted irrespective of the form or
method of compensation. Incidental services by the employees who makes
the house-to-house delivery, such as services in assembling newspapers,
are considered to be within the exception. The exception continues only
during the time that the employee is under the age of 18.
(b) Services of individuals of any age. Services performed by an
employee in,
[[Page 69]]
and at the time of, the sale of newspapers or magazines to ultimate
consumers under an arrangement under which the newspapers or magazines
are to be sold by him at a fixed price, his compensation being based on
the retention of the excess of such price over the amount at which the
newspapers or magazines are charged to him, are excepted from
employment. The services are excepted whether or not the employee is
guaranteed a minimum amount of compensation for such services, or is
entitled to be credited with the unsold newspapers or magazines turned
back. Moreover, the services are excepted without regard to the age of
the employee. Services performed other than at the time of sale to the
ultimate consumer are not within the exception. Thus, the services of a
regional distributor which are antecedent to but not immediately part of
the sale to the ultimate consumer are not within the exception. However,
incidental services by the employee who makes the sale to the ultimate
consumer, such as services in assembling newspapers or in taking
newspapers or magazines to the place of sale, are considered to be
within the exception.
Sec. 31.3121(b)(15)-1 Services in employ of international
organization.
(a) Subject to the provisions of section 1 of the International
Organizations Immunities Act (22 U.S.C. 288), services performed in the
employ of an international organization as defined in section
7701(a)(18) are excepted from employment.
(b) (1) Section 7701(a)(18) provides as follows:
Sec. 7701. Definitions. (a) When used in this title, where not
otherwise distinctly expressed or manifestly incompatible with the
intent thereof--
* * * * *
(18) International organization. The term ``international
organization'' means a public international organization entitled to
enjoy privileges, exemptions, and immunities as an international
organization under the International Organizations Immunities Act (22
U.S.C. 288-288f).
(2) Section 1 of the International Organizations Immunities Act
provides as follows:
Sec. 1 [International Organizations Immunities Act.] For the
purposes of this title [International Organizations Immunities Act], the
term ``international organization'' means a public international
organization in which the United States participates pursuant to any
treaty or under the authority of any Act of Congress authorizing such
participation or making an appropriation for such participation, and
which shall have been designated by the President through appropriate
Executive order as being entitled to enjoy the privileges, exemptions,
and immunities herein provided. The President shall be authorized, in
the light of the functions performed by any such international
organization, by appropriate Executive order to withhold or withdraw
from any such organization or its officers or employees any of the
privileges, exemptions, and immunities provided for in this title
(including the amendments made by this title) or to condition or limit
the enjoyment by any such organization or its officers or employees of
any such privilege, exemption, or immunity. The president shall be
authorized, if in his judgment such action should be justified by reason
of the abuse by an international organization or its officers and
employees of the privileges, exemptions, and immunities herein provided
or for any other reason, at any time to revoke the designation of any
international organization under this section, whereupon the
international organization in question shall cease to be classed as an
international organization for the purposes of this title.
Sec. 31.3121(b)(16)-1 Services performed under share-farming
arrangement.
(a) The term ``employment'' does not include services performed by
an individual under an arrangement with the owner or tenant of land
pursuant to which--
(1) Such individual undertakes to produce agricultural or
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
(2) The agricultural or horticultural commodities produced by such
individual, or the proceeds therefrom, are to be divided between such
individual and such owner or tenant, and
(3) The amount of such individual's share depends on the amount of
the agricultural or horticultural commodities produced.
For purposes of this exception, the arrangement pursuant to which the
individual's services are performed must meet the specified statutory
conditions.
[[Page 70]]
(b) If the arrangement between the parties provides that the
individual who undertakes to produce a crop or livestock is to be
compensated at a specified rate of pay or is to receive a fixed sum of
money or a stipulated quantity of the commodities to be produced,
without regard to the amount actually produced, as distinguished from a
proportionate share of the crop or livestock, or the proceeds therefrom,
the services performed by such individual in the production of such crop
or livestock is not within the exception.
(c) For provisions relating to the status, under the Self-Employment
Contributions Act of 1954, of the services which are excepted from
``employment'' under this section, see the regulations under section
1402(a) in Part 1 of this chapter (Income Tax Regulations).
[T.D. 6744, 29 FR 8313, July 2, 1964]
Sec. 31.3121(b)(17)-1 Services in employ of Communist organization.
The term ``employment'' does not include services performed in the
employ of any organization in any calendar quarter beginning after June
30, 1956, and during any part of which such organization is registered,
or there is in effect a final order of the Subversive Activities Control
Board requiring such organization to register, under the Internal
Security Act of 1950 (50 U.S.C. 781 et seq.), as amended, as a
Communist-action organization, a Communist-front organization, or a
Communist-infiltrated organization.
[T.D. 6744, 29 FR 8313, July 2, 1964]
Sec. 31.3121(b)(18)-1 Services performed by a resident of the Republic
of the Philippines while temporarily in Guam.
(a) Services performed after 1960 by a resident of the Republic of
the Philippines while in Guam on a temporary basis as a nonimmigrant
alien admitted to Guam pursuant to section 101(a)(15)(H)(ii) of the
Immigration and Nationality Act (8 U.S.C. 1101) are excepted from
employment.
(b) Section 101(a)(15)(H) of the Immigration and Nationality Act
provides as follows:
Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat.
166)]
(a) As used in this chapter--
* * * * *
(15) The term ``immigrant'' means every alien except an alien who is
within one of the following classes of nonimmigrant aliens--
* * * * *
(H) An alien having a residence in a foreign country which he has no
intention of abandoning (i) who is of distinguished merit and ability
and who is coming temporarily to the United States to perform temporary
services of an exceptional nature requiring merit and ability; or (ii)
who is coming temporarily to the United States to perform other
temporary services or labor, if unemployed persons capable of performing
such service or labor cannot be found in this country; or (iii) who is
coming temporarily to the United States as an industrial trainee;
[T.D. 6744, 29 FR 8313, July 2, 1964]
Sec. 31.3121(b)(19)-1 Services of certain nonresident aliens.
(a) (1) Services performed after 1961 by a nonresident alien
individual who is temporarily present in the United States as a
nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the
Immigration and Nationality Act (8 U.S.C. 1101), as amended, are
excepted from employment if the services are performed to carry out a
purpose for which the individual was admitted. For purposes of this
section an alien individual who is temporarily present in the United
States as a nonimmigrant under such subparagraph (F) or (J) is deemed to
be a nonresident alien individual. The preceding sentence does not apply
to the extent it is inconsistent with section 7701(b) and the
regulations under that section. A nonresident alien individual who is
temporarily present in the United States as a nonimmigrant under such
subparagraph (J) includes an alien individual admitted to the United
States as an ``exchange visitor'' under section 201 of the United States
Information and Educational Exchange Act of 1948 (22 U.S.C. 1446).
(2) If services are performed by a nonresident alien individual's
alien spouse or minor child, who is temporarily present in the United
States as a nonimmigrant under subparagraph (F) or
[[Page 71]]
(J) of section 101(a)(15) of the Immigration and Nationality Act, as
amended, the services are not deemed for purposes of this section to be
performed to carry out a purpose for which such individual was admitted.
The services of such spouse or child are excepted from employment under
this section only if the spouse or child was admitted for a purpose
specified in such subparagraph (F) or (J) and if the services are
performed to carry out such purpose.
(b) Section 101 of the Immigration and Nationality Act (8 U.S.C.
1101), as amended, provides in part as follows:
Sec. 101. Definitions. [Immigration and Nationality Act (68 Stat.
166)]
(a) As used in this chapter--* * *
(15) The term ``immigrant'' means every alien except an alien who is
within one of the following classes of nonimmigrant aliens--
* * * * *
(F) (i) An alien having a residence in a foreign country which he
has no intention of abandoning, who is a bona fide student qualified to
pursue a full course of study and who seeks to enter the United States
temporarily and solely for the purpose of pursuing such a course of
study at an established institution of learning or other recognized
place of study in the United States, particularly designated by him and
approved by the Attorney General after consultation with the Office of
Education of the United States, which institution or place of study
shall have agreed to report to the Attorney General the termination of
attendance of each nonimmigrant student, and if any such institution of
learning or place of study fails to make reports promptly the approval
shall be withdrawn, and (ii) the alien spouse and minor children of any
such alien if accompanying him or following to join him;
* * * * *
(J) An alien having a residence in a foreign country which he has no
intention of abandoning who is a bona fide student, scholar, trainee,
teacher, professor, research assistant, specialist, or leader in a field
of specialized knowledge or skill, or other person of similar
description, who is coming temporarily to the United States as a
participant in a program designated by the Secretary of State, for the
purpose of teaching, instructing or lecturing, studying, observing,
conducting research, consulting, demonstrating special skills, or
receiving training, and the alien spouse and minor children of any such
alien if accompanying him or following to join him.
* * * * *
(Sec. 101, Immigration and Nationality Act, as amended by sec. 101, Act
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75
Stat. 534)
[T.D. 6744, 29 FR 8313, July 2, 1964, as amended by T.D. 8411, 57 FR
15241, Apr. 27, 1992]
Sec. 31.3121(b)(20)-1 Service performed on a boat engaged in catching
fish.
(a) In general. (1) Service performed on or after December 31, 1954,
by an individual on a boat engaged in catching fish or other forms of
aquatic animal life (hereinafter ``fish'') are excepted from employment
if--
(i) The individual receives a share of the boat's (or boats' for a
fishing operation involving more than one boat) catch of fish or a share
of the proceeds from the sale of the catch,
(ii) The amount of the individual's share depends solely on the
amount of the boat's (or boats' for a fishing operation involving more
than one boat) catch of fish.
(iii) The individual does not receive and is not entitled to
receive, any cash remuneration, other than remuneration that is
described in sub-division (1) of this subparagraph, and
(iv) The crew of the boat (or of each boat from which the individual
receives a share of the catch) normally is made up of fewer than 10
individuals.
(2) The requirement of paragraph (a)(1)(ii) is not satisfied if
there exists an agreement with the boat's (or boats') owner or operator
by which the individual's remuneration is determined partially or fully
by a factor not dependent on the size of the catch. For example, if a
boat is operated under a remuneration arrangement, e.g., a collective
agreement which specifies that crew members, in addition to receiving a
share of the catch, are entitled to an hourly wage for repairing nets,
regardless of whether this wage is actually paid, then all the crew
members covered by the arrangement are entitled to receive cash
remuneration other than a share of the catch and their services are not
excepted from employment by section 3121(b)(20).
[[Page 72]]
(3) The operating crew of a boat includes all persons on the boat
(including the captain) who receive any form of remuneration in exchange
for services rendered while on a boat engaged in catching fish. See
Sec. 1.6050A-1 for reporting requirements for the operator of a boat
engaged in catching fish with respect to individuals performing services
described in this section.
(4) During the same return period, service performed by a crew
member may be excepted from employment by section 3121(b)(20) and this
section for one voyage and not so excepted on a subsequent voyage on the
same or on a different boat.
(5) During the same voyage, service performed by one crew member may
be excepted from employment by section 3121(b)(20) and this section but
service performed by another crew member may not be so excepted.
(b) Special rule. Services performed after December 31, 1954, and
before October 4, 1976, on a boat by an individual engaged in catching
fish are not excepted from employment for any voyage (for purposes of
section 3121(b) and the corresponding regulations), even though the
individual satisfies the requirements of paragraphs (a)(1)(i) through
(iv) of this section, if the owner or operator of the boat engaged in
catching fish treated the individual as an employee. For purposes of
this subparagraph, the individual was treated as an employee if--
(1) Form 941 was voluntarily filed by the boat operator or owner,
regardless of whether the tax imposed by chapter 21 was withheld. For
purposes of this subdivision, the filing of Form 941 is not voluntary if
the filing was the result of action taken by the Service pursuant to
section 6651(a) (relating to addition to the tax for failure to file tax
return or to pay tax);
(2) The boat owner or operator withheld from the individual's share
the tax imposed by chapter 21, regardless of whether the tax was paid
over to the Service; or
(3) The boat owner or operator made full or partial payment of the
tax imposed by chapter 21, unless the payment was made pursuant to
section 7422(a) (relating to no civil actions for refund prior to filing
claim for refund). However, for purposes of this paragraph crew members
whose services, but for paragraphs (a)(1)(i) through (iii), would have
been excepted from employment by section 3121(b)(20) are not required to
pay self-employment tax on income earned in performing those services.
See Sec. 1.1402(c)-3(g). Moreover, in such cases the employer is not
entitled to a refund of the employer's share of any tax imposed by
chapter 21 that was paid.
[T.D. 7716, 45 FR 57123, Aug. 27, 1980]
Sec. 31.3121(c)-1 Included and excluded services.
(a) If a portion of the services performed by an employee for an
employer during a pay period constitutes employment, and the remainder
does not constitute employment, all the services performed by the
employee for the employer during the period shall for purposes of the
taxes be treated alike, that is, either all as included or all as
excluded. The time during which the employee performs services which
under section 3121(b) constitute employment, and the time during which
he performs services which under such section do not constitute
employment, within the pay period, determine whether all the services
during the pay period shall be deemed to be included or excluded.
(b) If one-half or more of the employee's time in the employ of a
particular person in a pay period is spent in performing services which
constitute employment, then all the services of that employee for that
person in that pay period shall be deemed to be employment.
(c) If less than one-half of the employee's time in the employ of a
particular person in a pay period is spent in performing services which
constitute employment, then none of the services of that employee for
that person in that pay period shall be deemed to be employment.
(d) The application of the provisions of paragraphs (a), (b), and
(c) of this section may be illustrated by the following example:
Example. The AB Club, which is a local college club within the
meaning of section 3121(b)(2), employs D, a student who is enrolled and
is regularly attending classes at a
[[Page 73]]
university, to perform domestic service for the club and to keep the
club's books. The domestic services performed by D for the AB Club do
not constitute employment, and his services as the club's bookkeeper
constitute employment. D receives a payment at the end of each month for
all services which he performs for the club. During a particular month D
spends 60 hours in performing domestic service for the club and 40 hours
as the club's bookkeeper. None of D's services during the month are
deemed to be employment, since less than one-half of his services during
the month constitutes employment. During another month D spends 35 hours
in the performance of domestic services and 60 hours in keeping the
club's books. All of D's services during the month are deemed to be
employment, since one-half or more of his services during the month
constitutes employment.
(e) For purposes of this section, a ``pay period'' is the period (of
not more than 31 consecutive calendar days) for which a payment of
remuneration is ordinarily made to the employee by the employer. Thus,
if the periods for which payments of remuneration are made to the
employee by the employer are of uniform duration, each such period
constitutes a ``pay period''. If, however, the periods occasionally vary
in duration, the ``pay period'' is the period for which a payment of
remuneration is ordinarily made to the employee by the employer, even
though that period does not coincide with the actual period for which a
particular payment of remuneration is made. For example, if an employer
ordinarily pays a particular employee for each calendar week at the end
of the week, but the employee receives a payment in the middle of the
week for the portion of the week already elapsed and receives the
remainder at the end of the week, the ``pay period'' is still the
calendar week; or if, instead, that employee is sent on a trip by such
employer and receives at the end of the third week a single remuneration
payment for three weeks' services, the ``pay period'' is still the
calendar week.
(f) If there is only one period (and such period does not exceed 31
consecutive calendar days) for which a payment of remuneration is made
to the employee by the employer, such period is deemed to be a ``pay
period'' for purposes of this section.
(g) The rules set forth in this section do not apply (1) with
respect to any services performed by the employee for the employer if
the periods for which such employer makes payments of remuneration to
the employee vary to the extent that there is no period ``for which a
payment of remuneration is ordinarily made to the employee'', or (2)
with respect to any services performed by the employee for the employer
if the period for which a payment of remuneration is ordinarily made to
the employee by such employer exceeds 31 consecutive calendar days, or
(3) with respect to any service performed by the employee for the
employer during a pay period if any of such service is excepted by
section 3121(b)(9) (see Sec. 31.3121(b)(9)-1).
(h) If during any period for which a person makes a payment of
remuneration to an employee only a portion of the employee's services
constitutes employment, but the rules prescribed in this section are not
applicable, the taxes attach with respect to such services as constitute
employment as defined in section 3121(b).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8313, July 2, 1964]
Sec. 31.3121(d)-1 Who are employees.
(a) In general. (1) Whether an individual is an employee with
respect to services performed after 1954 is determined in accordance
with section 3121(d) and (o) and section 3506. This section of the
regulations applies with respect only to services performed after 1954.
Whether an individual is an employee with respect to services performed
after 1936 and before 1940 shall be determined in accordance with the
applicable provisions of law and of 26 CFR (1939) Part 401 (Regulations
91). Whether an individual is an employee with respect to services
performed after 1939 and before 1951 shall be determined in accordance
with the applicable provisions of law and of 26 CFR (1939) Part 402
(Regulations 106). Whether an individual is an employee with respect to
services performed after 1950 and before 1955 shall be determined in
accordance with the applicable provisions of law and of 26 CFR (1939)
Part 408 (Regulations 128).
[[Page 74]]
(2) Section 3121(d) contains three separate and independent tests
for determining who are employees. Paragraphs (b), (c), and (d) of this
section relate to the respective tests. Paragraph (b) relates to the
test for determining whether an officer of a corporation is an employee
of the corporation. Paragraph (c) relates to the test for determining
whether an individual is an employee under the usual common law rules.
Paragraph (d) relates to the test for determining which individuals in
certain occupational groups who are not employees under the usual common
law rules are included as employees. If an individual is an employee
under any one of the tests, he is to be considered an employee for
purposes of the regulations in this subpart whether or not he is an
employee under any of the other tests.
(3) If the relationship of employer and employee exists, the
designation or description of the relationship by the parties as
anything other than that of employer and employee is immaterial. Thus,
if such relationship exists, it is of no consequence that the employee
is designated as a partner, coadventurer, agent, independent contractor,
or the like.
(4) All classes or grades of employees are included within the
relationship of employer and employee. Thus, superintendents, managers,
and other supervisory personnel are employees.
(5) Although an individual may be an employee under this section,
his services may be of such a nature, or performed under such
circumstances, as not to constitute employment (see Sec. 31.3121(b)-3).
(b) Corporate officers. Generally, an officer of a corporation is an
employee of the corporation. However, an officer of a corporation who as
such does not perform any services or performs only minor services and
who neither receives nor is entitled to receive, directly or indirectly,
any remuneration is considered not to be an employee of the corporation.
A director of a corporation in his capacity as such is not an employee
of the corporation.
(c) Common law employees. (1) Every individual is an employee if
under the usual common law rules the relationship between him and the
person for whom he performs services is the legal relationship of
employer and employee.
(2) Generally such relationship exists when the person for whom
services are performed has the right to control and direct the
individual who performs the services, not only as to the result to be
accomplished by the work but also as to the details and means by which
that result is accomplished. That is, an employee is subject to the will
and control of the employer not only as to what shall be done but how it
shall be done. In this connection, it is not necessary that the employer
actually direct or control the manner in which the services are
performed; it is sufficient if he has the right to do so. The right to
discharge is also an important factor indicating that the person
possessing that right is an employer. Other factors characteristic of an
employer, but not necessarily present in every case, are the furnishing
of tools and the furnishing of a place to work, to the individual who
performs the services. In general, if an individual is subject to the
control or direction of another merely as to the result to be
accomplished by the work and not as to the means and methods for
accomplishing the result, he is an independent contractor. An individual
performing services as an independent contractor is not as to such
services an employee under the usual common law rules. Individuals such
as physicians, lawyers, dentists, veterinarians, construction
contractors, public stenographers, and auctioneers, engaged in the
pursuit of an independent trade, business, or profession, in which they
offer their services to the public, are independent contractors and not
employees.
(3) Whether the relationship of employer and employee exists under
the usual common law rules will in doubtful cases be determined upon an
examination of the particular facts of each case.
(d) Special classes of employees. (1) In addition to individuals who
are employees under paragraph (b) or (c) of this section, other
individuals are employees if they perform services for remuneration
under certain prescribed circumstances in the following occupational
groups:
[[Page 75]]
(i) As an agent-driver or commission-driver engaged in distributing
meat products, vegetable products, fruit products, bakery products,
beverages (other than milk), or laundry or dry-cleaning services for his
principal;
(ii) As a full-time life insurance salesman;
(iii) As a home worker performing work, according to specifications
furnished by the person for whom the services are performed, on
materials or goods furnished by such person which are required to be
returned to such person or a person designated by him; or
(iv) As a traveling or city salesman, other than as an agent-driver
or commission-driver, engaged upon a full-time basis in the solicitation
on behalf of, and the transmission to, his principal (except for side-
line sales activities on behalf of some other person) of orders from
wholesalers, retailers, contractors, or operators of hotels,
restaurants, or other similar establishments for merchandise for resale
or supplies for use in their business operations.
(2) In order for an individual to be an employee under this
paragraph, the individual must perform services in an occupation falling
within one of the enumerated groups. If the individual does not perform
services in one of the designated occupational groups, he is not an
employee under this paragraph. An individual who is not an employee
under this paragraph may nevertheless be an employee under paragraph (b)
or (c) of this section. The language used to designate the respective
occupational groups relates to fields of endeavor in which particular
designations are not necessarily in universal use with respect to the
same service. The designations are addressed to the actual services
without regard to any technical or colloquial labels which may be
attached to such services. Thus, a determination whether services fall
within one of the designated occupational groups depends upon the facts
of the particular situation.
(3) The factual situations set forth below are illustrative of some
of the individuals falling within each of the above enumerated
occupational groups. The illustrative factual situations are as follows:
(i) Agent-driver or commission-driver. This occupational group
includes agent-drivers or commission-drivers who are engaged in
distributing meat or meat products, vegetables or vegetable products,
fruit or fruit products, bakery products, beverages (other than milk),
or laundry or dry-cleaning services for their principals. An agent-
driver or commission-driver includes an individual who operates his own
truck or the truck of the person for whom he performs services, serves
customers designated by such person as well as those solicited on his
own, and whose compensation is a commission on his sales or the
difference between the price he charges his customers and the price he
pays to such person for the product or service.
(ii) Full-time life insurance salesman. An individual whose entire
or principal business activity is devoted to the solicitation of life
insurance or annuity contracts, or both, primarily for one life
insurance company is a full-time life insurance salesman. Such a
salesman ordinarily uses the office space provided by the company or its
general agent, and stenographic assistance, telephone facilities, forms,
rate books, and advertising materials are usually made available to him
without cost. An individual who is engaged in the general insurance
business under a contract or contracts of service which do not
contemplate that the individual's principal business activity will be
the solicitation of life insurance or annuity contracts, or both, for
one company, or any individual who devotes only part time to the
solicitation of life insurance contracts, including annuity contracts,
and is principally engaged in other endeavors, is not a full-time life
insurance salesman.
(iii) Home workers. This occupational group includes a worker who
performs services off the premises of the person for whom the services
are performed, according to specifications furnished by such person, on
materials or goods furnished by such person which are required to be
returned to such person or a person designated by him. For provisions
relating to the determination of wages in the case of a home worker to
whom this subdivision is applicable, see Sec. 31.3121(a)(10)-1.
[[Page 76]]
(iv) Traveling or city salesman. (a) This occupational group
includes a city or traveling salesman who is engaged upon a full-time
basis in the solicitation on behalf of, and the transmission to, his
principal (except for side-line sales activities on behalf of some other
person or persons) of orders from wholesalers, retailers, contractors,
or operators of hotels, restaurants, or other similar establishments for
merchandise for resale or supplies for use in their business operations.
An agent-driver or commission-driver is not within this occupational
group. City or traveling salesmen who sell to retailers or to the others
specified, operate off the premises of their principals, and are
generally compensated on a commission basis, are within this
occupational group. Such salesmen are generally not controlled as to the
details of their services or the means by which they cover their
territories, but in the ordinary case they are expected to call on
regular customers with a fair degree of regularity.
(b) In order for a city or traveling salesman to be included within
this occupational group, his entire or principal business activity must
be devoted to the solicitation of orders for one principal. Thus, the
multiple-line salesman generally is not within this occupational group.
However, if the salesman solicits orders primarily for one principal, he
is not excluded from this occupational group solely because of side-line
sales activities on behalf of one or more other persons. In such a case,
the salesman is within this occupational group only with respect to the
services performed for the person for whom he primarily solicits orders
and not with respect to the services performed for such other persons.
The following examples illustrate the application of the foregoing
provisions:
Example 1. Salesman A's principal business activity is the
solicitation of orders from retail pharmacies on behalf of the X
Wholesale Drug Company. A also occasionally solicits orders for drugs on
behalf of the Y and Z Companies. A is within this occupational group
with respect to his services for the X Company but not with respect to
his services for either the Y Company or the Z Company.
Example 2. Salesman B's principal business activity is the
solicitation of orders from retail hardware stores on behalf of the R
Tool Company and the S Cooking Utensil Company. B regularly solicits
orders on behalf of both companies. B is not within this occupational
group with respect to the services performed for either the R Company or
the S Company.
Example 3. Salesman C's principal business activity is the house-to-
house solicitation of orders on behalf of the T Brush Company. C
occasionally solicits such orders from retail stores and restaurants. C
is not within this occupational group.
(4)(i) The fact that an individual falls within one of the
enumerated occupational groups, however, does not make such individual
an employee under this paragraph unless (a) the contract of service
contemplates that substantially all the services to which the contract
relates in the particular designated occupation are to be performed
personally by such individual, (b) such individual has no substantial
investment in the facilities used in connection with the performance of
such services (other than in facilities for transportation) and (c) such
services are part of a continuing relationship with the person for whom
the services are performed and are not in the nature of a single
transaction.
(ii) The term ``contract of service'', as used in this paragraph,
means an arrangement, formal or informal, under which the particular
services are performed. The requirement that the contract of service
shall contemplate that substantially all the services to which the
contract relates in the particular designated occupation are to be
performed personally by the individual means that it is not contemplated
that any material part of the services to which the contract relates in
such occupation will be delegated to any other person by the individual
who undertakes under the contract to perform such services.
(iii) The facilities to which reference is made in this paragraph
include equipment and premises available for the work or enterprise as
distinguished from education, training, and experience, but do not
include such tools, instruments, equipment, or clothing, as are commonly
or frequently provided by employees. An investment in an automobile by
an individual which is
[[Page 77]]
used primarily for his own transportation in connection with the
performance of services for another person has no significance under
this paragraph, since such investment is comparable to outlays for
transportation by an individual performing similar services who does not
own an automobile. Moreover, the investment in facilities for the
transportation of the goods or commodities to which the services relate
is to be excluded in determining the investment in a particular case. If
an individual has a substantial investment in facilities of the
requisite character, he is not an employee within the meaning of this
paragraph, since a substantial investment of the requisite character
standing alone is sufficient to exclude the individual from the employee
concept under this paragraph.
(iv) If the services are not performed as part of a continuing
relationship with the person for whom the services are performed, but
are in the nature of a single transaction, the individual performing
such services is not an employee of such person within the meaning of
this paragraph. The fact that the services are not performed on
consecutive workdays does not indicate that the services are not
performed as part of a continuing relationship.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8314, July 2, 1964; T.D. 7691, 45 FR 24129, Apr. 9, 1980]
Sec. 31.3121(d)-2 Who are employers.
(a) Every person is an employer if he employs one or more employees.
Neither the number of employees employed nor the period during which any
such employee is employed is material for the purpose of determining
whether the person for whom the services are performed is an employer.
(b) An employer may be an individual, a corporation, a partnership,
a trust, an estate, a joint-stock company, an association, or a
syndicate, group, pool, joint venture, or other unincorporated
organization, group, or entity. A trust or estate, rather than the
fiduciary acting for on behalf of the trust or estate, is generally the
employer.
(c) Although a person may be an employer under this section,
services performed in his employ may be of such a nature, or performed
under such circumstances, as not to constitute employment (see Sec.
31.3121(b)-3).
Sec. 31.3121(e)-1 State, United States, and citizen.
(a) When used in the regulations in this subpart, the term ``State''
includes the District of Columbia, the Commonwealth of Puerto Rico, the
Virgin Islands, the Territories of Alaska and Hawaii before their
admission as States, and (when used with respect to services performed
after 1960) Guam and American Samoa.
(b) When used in the regulations in this subpart, the term ``United
States'', when used in a geographical sense, means the several states
(including the Territories of Alaska and Hawaii before their admission
as States), the District of Columbia, the Commonwealth of Puerto Rico,
and the Virgin Islands. When used in the regulations in this subpart
with respect to services performed after 1960, the term ``United
States'' also includes Guam and American Samoa when the term is used in
a geographical sense. The term ``citizen of the United States'' includes
a citizen of the Commonwealth of Puerto Rico or the Virgin Islands, and,
effective January 1, 1961, a citizen of Guam or American Samoa.
[T.D. 6744, 29 FR 8314, July 2, 1964]
Sec. 31.3121(f)-1 American vessel and aircraft.
(a) The term ``American vessel'' means any vessel which is
documented (that is, registered, enrolled, or licensed) or numbered in
conformity with the laws of the United States. It also includes any
vessel which is neither documented nor numbered under the laws of the
United States, nor documented under the laws of any foreign country, if
the crew of such vessel is employed solely by one or more citizens or
residents of the United States or corporations organized under the laws
of the United States or of any State. (For provisions relating to the
terms ``State'' and ``citizen'', see Sec. 31.3121 (e)-1.)
(b) The term ``American aircraft'' means any aircraft registered
under the laws of the United States.
[[Page 78]]
(c) For provisions relating to services performed outside the United
States on or in connection with an American vessel or American aircraft,
see paragraph (c)(2) of Sec. 31.3121(b)-3.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8314, July 2, 1964]
Sec. 31.3121(g)-1 Agricultural labor.
(a) In general. (1) The term ``agricultural labor'' as defined in
section 3121(g) includes services of the character described in
paragraph (b), (c), (d), (e), and (f) of this section. In general,
however, the term does not include services performed in connection with
forestry, lumbering, or landscaping.
(2) The term ``farm'' as used in the regulations in this subpart
includes stock, dairy, poultry, fruit, fur-bearing animal, and truck
farms, plantations, ranches, nurseries, ranges, orchards, and such
greenhouses and other similar structures as are used primarily for the
raising of agricultural or horticultural commodities. Greenhouses and
other similar structures used primarily for other purposes (for example,
display, storage, and fabrication of wreaths, corsages, and bouquets) do
not constitute ``farms''.
(3) For provisions relating to the exception from employment
provided with respect to services performed by certain foreign
agricultural workers and to services performed before 1959 in connection
with the production or harvesting of certain oleoresinous products, see
Sec. 31.3121(b)(1)-1. For provisions relating to the exclusion from
wages of remuneration paid in any medium other than cash for
agricultural labor and to the test for determining whether cash
remuneration paid for agricultural labor constitutes wages, see Sec.
31.3121(a)(8)-1.
(b) Services described in section 3121(g)(1). (1) Services performed
on a farm by an employee of any person in connection with any of the
following activities constitute agricultural labor:
(i) The cultivation of the soil;
(ii) The raising, shearing, feeding, caring for, training, or
management of livestock, bees, poultry, fur-bearing animals, or
wildlife; or
(iii) The raising or harvesting of any other agricultural or
horticultural commodity.
(2) Services performed in connection with the production or
harvesting of maple sap, or in connection with the raising or harvesting
of mushrooms, or in connection with the hatching of poultry constitute
agricultural labor only if such services are performed on a farm. Thus,
services performed in connection with the operation of a hatchery, if
not operated as part of a poultry or other farm, do not constitute
agricultural labor.
(c) Services described in section 3121(g)(2). (1) The following
services performed by an employee in the employ of the owner or tenant
or other operator of one or more farms constitute agricultural labor,
provided the major part of such services is performed on a farm:
(i) Services performed in connection with the operation, management,
conservation, improvement, or maintenance of any of such farms or its
tools or equipment; or
(ii) Services performed in salvaging timber, or clearing land of
brush and other debris, left by a hurricane.
(2) The services described in paragraph (c)(1)(i) of this section
may include, for example, services performed by carpenters, painters,
mechanics, farm supervisors, irrigation engineers, bookkeepers, and
other skilled or semiskilled workers, which contribute in any way to the
conduct of the farm or farms, as such, operated by the person employing
them, as distinguished from any other enterprise in which such person
may be engaged.
(3) Since the services described in this paragraph must be performed
in the employ of the owner or tenant or other operator of the farm, the
term ``agricultural labor'' does not include services performed by
employees of a commercial painting concern, for example, which contracts
with a farmer to renovate his farm properties.
(d) Services described in section 3121(g)(3). Services performed by
an employee in the employ of any person in connection with any of the
following operations constitute agricultural labor without regard to the
place where such services are performed:
[[Page 79]]
(1) The ginning of cotton;
(2) The operation or maintenance of ditches, canals, reservoirs, or
waterways, not owned or operated for profit, used exclusively for
supplying or storing water for farming purposes; or
(3) The production or harvesting of crude gum (oleoresin) from a
living tree or the processing of such crude gum into gum spirits of
turpentine and gum rosin, provided such processing is carried on by the
original producer of such crude gum.
(e) Services described in section 3121(g)(4). (1) Services performed
by an employee in the handling, planting, drying, packing, packaging,
processing, freezing, grading, storing, or delivering to storage or to
market or to a carrier for transportation to market, of any agricultural
or horticultural commodity constitute agricultural labor if:
(i) Such services are performed by the employee in the employ of an
operator of a farm or in the employ of a group of operators of farms
(other than a cooperative organization);
(ii) Such services are performed with respect to the commodity in
its unmanufactured state; and
(iii) Such operator produced more than one-half of the commodity
with respect to which such services are performed during the pay period,
or such group of operators produced all of the commodity with respect to
which such services are performed during the pay period.
(2) The term ``operator of a farm'' as used in this paragraph means
an owner, tenant, or other person, in possession of a farm and engaged
in the operation of such farm.
(3) The services described in this paragraph do not constitute
agricultural labor if performed in the employ of a cooperative
organization. The term ``organization'' includes corporations, joint-
stock companies, and associations which are treated as corporations
pursuant to section 7701(a)(3) of the Internal Revenue Code. For
purposes of this paragraph, any unincorporated group of operators shall
be deemed a cooperative organization if the number of operators
comprising such group is more than 20 at any time during the calendar
quarter in which the services involved are performed.
(4) Processing services which change the commodity from its raw or
natural state do not constitute agricultural labor. For example the
extraction of juices from fruits or vegetables is a processing operation
which changes the character of the fruits or vegetables from their raw
or natural state and, therefore, does not constitute agricultural labor.
Likewise, services performed in the processing of maple sap into maple
sirup or maple sugar do not constitute agricultural labor. On the other
hand, services rendered in the cutting and drying of fruits or
vegetables are processing operations which do not change the character
of the fruits or vegetables and, therefore, constitute agricultural
labor, if the other requisite conditions are met. Services performed
with respect to a commodity after its character has been changed from
its raw or natural state by a processing operation do not constitute
agricultural labor.
(5) The term ``commodity'' refers to a single agricultural or
horticultural product, for example, all apples are to be treated as a
single commodity, while apples and peaches are to be treated as two
separate commodities. The services with respect to each such commodity
are to be considered separately in determining whether the condition set
forth in paragraph (e)(1)(iii) of this section has been satisfied. The
portion of the commodity produced by an operator or group of operators
with respect to which the services described in this paragraph are
performed by a particular employee shall be determined on the basis of
the pay period in which such services were performed by such employee.
(6) The services described in this paragraph do not include services
performed in connection with commercial canning or commercial freezing
or in connection with any commodity after its delivery to a terminal
market for distribution for consumption. Moreover, since the services
described in this paragraph must be rendered in the actual handling,
planting, drying, packing, packaging, processing, freezing, grading,
storing, or delivering to storage or to market or to a carrier for
[[Page 80]]
transportation to market, of the commodity, such services do not, for
example, include services performed as stenographers, bookkeepers,
clerks, and other office employees, even though such services may be in
connection with such activities. However, to the extent that the
services of such individuals are performed in the employ of the owner or
tenant or other operator of a farm and are rendered in major part on a
farm, they may be within the provisions of paragraph (c) of this
section.
(f) Services described in section 3121(g)(5). (1) Service not in the
course of the employer's trade or business (see paragraph (a)(1) of
Sec. 31.3121(a)(7)-1) or domestic service in a private home of the
employer (see paragraph (a)(2) of Sec. 31.3121(a)(7)-1) constitutes
agricultural labor if such service is performed on a farm operated for
profit. The determination whether remuneration for any such service
performed on a farm operated for profit constitutes wages is to be made
under Sec. 31.3121(a)(8)-1 rather than under Sec. 31.3121(a)(7)-1. For
provisions relating to the exception from employment provided with
respect to any such service performed after 1960 by a father or mother
in the employ of his or her son or daughter, see Sec. 31.3121(b)(3)-1.
(2) Generally, a farm is not operated for profit if it is occupied
by the employer primarily for residential purposes, or is used primarily
for the pleasure of the employer or his family such as for the
entertainment of guests or as a hobby of the employer or his family.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8315, July 2, 1964]
Sec. 31.3121(h)-1 American employer.
(a) The term ``American employer'' means an employer which is (1)
the United States or any instrumentality thereof, (2) an individual who
is a resident of the United States, (3) a partnership, if two-thirds or
more of the partners are residents of the United States, (4) a trust, if
all of the trustees are residents of the United States, or (5) a
corporation organized under the laws of the United States or of any
State. For provisions relating to the terms ``State'' and ``United
States'', see Sec. 31.3121(e)-1.
(b) For provisions relating to services performed outside the United
States by a citizen of the United States as an employee for an American
employer, see paragraph (c)(3) of Sec. 31.3121(b)-3 and paragraph (e)
of Sec. 31.3121(b)(4)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR
8315, July 2, 1964]
Sec. 31.3121(i)-1 Computation to nearest dollar of cash remuneration
for domestic service.
(a) An employer may, for purposes of the act, elect to compute to
the nearest dollar any payment of cash remuneration for domestic service
described in section 3121(a)(7)(B) (see Sec. 31.3121(a)(7)-1) which is
more or less than a whole-dollar amount. For the purpose of the
computation to the nearest dollar, the payment of a fractional part of a
dollar shall be disregarded unless it amounts to one-half dollar or
more, in which case it shall be increased to one dollar. For example,
any amount actually paid between $4.50 and $5.49, inclusive, may be
treated as $5 for purposes of the taxes imposed by the act. If an
employer elects this method of computation with respect to any payment
of cash remuneration made in a calendar year for domestic service in his
private home, he must use the same method in computing each payment of
cash remuneration of more or less than a whole-dollar amount made to
each of his employees in such calendar year for domestic service in his
private home. Moreover, if an employer elects this method of computation
with respect to payments of the prescribed character made in any
calendar year, the amount of each payment of cash remuneration so
computed to the nearest dollar shall, in lieu of the amount actually
paid, be deemed to constitute the amount of cash remuneration for
purposes of the act. Thus, the amount of cash payments so computed to
the nearest dollar shall be used for purposes of determining whether
such payments constitute wages; for purposes of applying the employee
and employer tax rates to the wage payments; for purposes of any
required record keeping; and for
[[Page 81]]
purposes of reporting and paying the employee tax and employer tax with
respect to such wage payments.
(b) The provisions of this section apply to any cash payment for
domestic service in a private home of the employer made on or after
January 1, 1994. For rules applicable to any cash payment for domestic
service in a private home of the employer made prior to January 1, 1994,
see Sec. 31.3121(i)-1 in effect at such time (see 26 CFR part 31
contained in the edition of 26 CFR parts 30 to 39, revised as of April
1, 2006).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 9266, 71 FR
35157, June 19, 2006]
Sec. 31.3121(i)-2 Computation of remuneration for service performed by
an individual as a member of a uniformed service.
In the case of an individual performing service after December 31,
1956, as a member of a uniformed service (see section 31.3121(n)), to
which the provisions of section 3121(m)(1) (see Sec. 31.3121(m)) are
applicable, the term ``wages'' shall, subject to the provisions of
section 3121(a)(1) (see Sec. 31.3121(a)-1), include as the individual's
remuneration for such service only his basic pay as described in section
102(10) of the Servicemen's and Veterans' Survivor Benefits Act (38
U.S.C. 401(1), 403; 72 Stat. 1126).
[T.D. 6744, 29 FR 8315, July 2, 1964]
Sec. 31.3121(i)-3 Computation of remuneration for service performed by
an individual as a volunteer or volunteer leader within the meaning of
the Peace Corps
Act.
In the case of an individual performing service in his capacity as a
volunteer or volunteer leader within the meaning of the Peace Corps Act
(see section 31.3121(p)), the term ``wages'' shall, subject to the
provisions of section 3121(a)(1) (see Sec. 31.3121(a)-1), include as
such individual's remuneration for such service only amounts paid
pursuant to section 5(c) or section 6(1) of the Peace Corps Act (22
U.S.C. 2501; 75 Stat. 612).
[T.D. 6744, 29 FR 8315, July 2, 1964]
Sec. 31.3121(i)-4 Computation of remuneration for service performed by
certain members of religious orders.
In any case where an individual is a member of a religious order (as
defined in section 3121(r)(2) and paragraph (b) of Sec. 31.3121(r)-1)
performing service in the exercise of duties required by such order, and
an election of coverage under section 3121(r) and Sec. 31.3121(r)-1 is
in effect with respect to such order or the autonomous subdivision
thereof to which such member belongs, the term ``wages'' shall, subject
to the provisions of section 3121(a)(1) (relating to definition of
wages), include as such individual's remuneration for such service the
fair market value of any board, lodging, clothing, and other perquisites
furnished to such member by such order or subdivision or by any other
person or organization pursuant to an agreement (whether written or
oral) with such order or subdivision. Such other perquisites shall
include any cash either paid by such order or subdivision or paid by
another employer and not required by such order or subdivision to be
remitted to it. For purposes of this section, perquisites shall be
considered to be furnished over the period during which the member
receives the benefit of them. (See example 4 of this section.) In no
case shall the amount included as such individual's remuneration under
this paragraph be less than $100 a month. All relevant facts and
elements of value shall be considered in every case. Where the fair
market value of any board, lodging, clothing, and other perquisites
furnished to all members of an electing religious order or autonomous
subdivision (or to all in a group of members) does not vary
significantly, such order or subdivision may treat all of its members
(or all in such group of members) as having a uniform wage. The
provisions of this section may be illustrated by the following examples
of the treatment of particular perquisites:
Example 1. M is a religious order which requires its members to take
a vow of poverty and which has made an election under section 3121(r).
Under section 3121(i)(4), M must include in the wages of its members the
fair market value of the clothing it provides for
[[Page 82]]
its members. M and several other religious orders using essentially the
same type of religious habit purchase clothing for their members from
either of two suppliers in arms-length transactions. The fair market
value of such clothing (i.e., the price at which such items would change
hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or to sell) is determined by reference to the
actual sales price of these suppliers to the religious orders.
Example 2. N is a religious order which requires its members to take
a vow of poverty and which has made an election under section 3121(r). N
operates a seminary adjacent to a university. Students at the university
obtain lodging and board on campus from the university for its fair
market value of $2,000 for the school year. Such lodging and board is
essentially the same as that provided by N at its seminary to N's
members subject to a vow of poverty. Accordingly, the amount to be
included in the ``wages'' of such members with respect to lodging and
board for the same period of time is $2,000.
Example 3. O is a religious order which requires its members to take
a vow of poverty and to observe silence, and which has made an election
under section 3121(r). O operates a monastery in a remote rural area.
Under section 3121(i)(4), O must include in the wages of its members
assigned to this monastery the fair market value of the board and
lodging furnished to them. In making a determination of the fair market
value of such board and lodging, the remoteness of the monastery, as
well as the smallness of the rooms and the simplicity of their
furnishings, affect this determination. However, the facts that the
facility is used by a religious order as a monastery and that the
order's members maintain silence do not affect the fair market value of
such items.
Example 4. P is a religious order which requires its members to take
a vow of poverty and which has made an election under section 3121(r).
Several of P's members are attending a university on a full-time basis.
The fair market value of the board and lodging of each of such members
at the university is $1,000 per semester. P pays the university $1,000
at the beginning of each semester for the board and lodging of each of
such members. In addition, P gives each such member a $400 cash advance
to cover his miscellaneous expenses during the semester. Under section
3121(i)(4), P must prorate the fair market value of such members' board
and lodging, as well as the miscellaneous items, over the semester and
include such value in the determination of ``wages''.
Example 5. Q is a religious order which is a corporation organized
under the laws of Wisconsin, which requires its members to take a vow of
poverty, and which has made an election under section 3121(r). Q has
convents in rural South America and in suburbs and central city areas of
the United States. Characteristically, in the United States its suburban
convents provide somewhat larger and newer rooms for its members than do
its convents in city areas. Moreover, its suburban convents have more
extensive grounds and somewhat more elaborate facilities than do its
older convents in city areas. However, both types of convents limit
resident members to a single, plainly furnished room and provide them
meals which are comparable. Q's members in South America live in
extremely primitive dwellings and otherwise have extremely modest
perquisites. Under section 3121(i)(4), Q may report a uniform wage for
its members who live in suburban convents and city convents in the
United States, as the board, lodging, and perquisites furnished these
members do not vary significantly from one convent to the other. Q may
report another uniform wage (but not less than $100 per month apiece)
for its members who are citizens of the United States and who reside in
South America based on the fair market value of the perquisites
furnished these individuals, as the fair market value of the perquisites
furnished these individuals varies significantly from that of those
furnished its members who live in its domestic convents but does not
vary significantly among members in South America whose wages are
subject to tax.
[T.D. 7280, 38 FR 18369, July 10, 1973]
Sec. 31.3121(j)-1 Covered transportation service.
(a) Transportation systems acquired in whole or in part after 1936
and before 1951--(1) In general. Except as provided in subparagraph (2)
of this paragraph, all service performed in the employ of a State or
political subdivision thereof in connection with its operation of a
public transportation system constitutes covered transportation service
if any part of the transportation system was acquired from private
ownership after 1936 and before 1951. For purposes of this subparagraph,
it is immaterial whether any part of the transportation system was
acquired before 1937 or after 1950, whether the employee was hired
before, during, or after 1950, or whether the employee had been employed
by the employer from whom the State or political subdivision acquired
its transportation system or any part thereof.
(2) General retirement system protected by State constitution.
Except as provided in paragraph (a)(3) of this section, service
performed in the employ of a State
[[Page 83]]
or political subdivision in connection with its operation of a public
transportation system acquired in whole or in part from private
ownership after 1936 and before 1951 does not constitute covered
transportation service, if substantially all service in connection with
the operation of the transportation system was, on December 31, 1950,
covered under a general retirement system providing benefits which are
protected from diminution or impairment under the State constitution by
reason of an express provision, dealing specifically with retirement
systems established by the State or political subdivisions of the State,
which forbids such diminution or impairment.
(3) Additions to certain transportation systems by acquisition after
1950. This subparagraph is applicable only in case of an acquisition
after 1950 from private ownership of an addition to an existing public
transportation system which was acquired in whole or in part by a State
or political subdivision thereof from private ownership after 1936 and
before 1951 and then only in case service for such existing
transportation system did not constitute covered transportation service
by reason of the provisions of subparagraph (2) of this paragraph.
Service in connection with the operation of such transportation system
(including any additions acquired after 1950) constitutes covered
transportation service commencing with the first day of the third
calendar quarter following the calendar quarter in which the addition to
the existing transportation system was acquired, if such service is
performed by an employee who became an employee of the State or
political subdivision in connection with and at the time of its
acquisition from private ownership of such addition and who before the
acquisition of such addition rendered service in employment in
connection with the operation of the addition so acquired by such State
or political subdivision. However, service performed by such employee in
connection with the operation of the transportation system does not
constitute covered transportation service if, on the first day of the
third calendar quarter following the calendar quarter in which the
addition was acquired, such service is covered by a general retirement
system which does not, with respect to such employee, contain special
provisions applicable only to employees who became employees of the
State or political subdivision in connection with and at the time of its
acquisition of such addition.
(b) Transportation systems in operation on December 31, 1950, no
part of which was acquired after 1936 and before 1951--(1) In general.
Except as provided in paragraph (b)(2) of this section, no service
performed in the employ of a State or a political subdivision thereof in
connection with its operation of a public transportation system
constitutes covered transportation service if no part of such
transportation system operated by the State or political subdivision on
December 31, 1950, was acquired from private ownership after 1936 and
before 1951.
(2) Additions acquired after 1950. This subparagraph is applicable
only in case of an acquisition after 1950 from private ownership of an
addition to an existing public transportation system which was operated
by a State or political subdivision on December 31, 1950, but no part of
which was acquired from private ownership after 1936 and before 1951.
Service in connection with the operation of such transportation system
(including any additions acquired after 1950) constitutes covered
transportation service commencing with the first day of the third
calendar quarter following the calendar quarter in which the addition to
the existing transportation system was acquired, if such service is
performed by an employee who became an employee of the State or
political subdivision in connection with and at the time of its
acquisition from private ownership of such addition and who before the
acquisition of such addition rendered service in employment in
connection with the operation of the addition so acquired by such State
or political subdivision. However, service performed by such employee in
connection with the operation of the transportation system does not
constitute covered transportation service if, on the first day of the
third calendar quarter following the calendar quarter in which the
addition was acquired, such service is covered
[[Page 84]]
by a general retirement system which does not, with respect to such
employee, contain special provisions applicable only to employees who
became employees of the State or political subdivision in connection
with and at the time of its acquisition of such addition.
(c) Transportation systems acquired after 1950. All service
performed in the employ of a State or political subdivision thereof in
connection with its operation of a public transportation system
constitutes covered transportation service if the transportation system
was not operated by the State or political subdivision before 1951 and,
at the time of its first acquisition after 1950 from private ownership
of any part of its transportation system, the State or political
subdivision did not have a general retirement system covering
substantially all service performed in connection with the operation of
the transportation system.
(d) Definitions. For purposes of this section:
(1) The term ``general retirement system'' means any pension,
annuity, retirement, or similar fund or system established by a State or
by a political subdivision thereof for employees of the State, political
subdivision, or both; but such term does not include such a fund or
system which covers only service performed in positions connected with
the operation of its public transportation system.
(2) A transportation system or a part thereof is considered to have
been acquired by a State or political subdivision from private ownership
if prior to the acquisition service performed by the employees in
connection with the operation of the system or an acquired part thereof
constituted employment under the act or under subchapter A of chapter 9
of the Internal Revenue Code of 1939 or was covered by an agreement
entered into pursuant to section 218 of the Social Security Act (42
U.S.C. 418), and some of such employees became employees of the State or
political subdivision in connection with and at the time of such
acquisition.
(3) The term ``political subdivision'' includes an instrumentality
of a State, of one or more political subdivisions of a State, or of a
State and one or more of its political subdivisions.
(4) The term ``employment'' includes service covered by an agreement
entered into pursuant to section 218 of the Social Security Act.
Sec. 31.3121(k)-1 Waiver of exemption from taxes.
(a) Who may file a waiver certificate--(1) In general. If services
performed in the employ of an organization are excepted from employment
under section 3121(b)(8)(B), the organization may file a waiver
certificate on Form SS-15, together with a list on Form SS-15a,
certifying that it desires to have the Federal old-age, survivors, and
disability insurance system established by title II of the Social
Security Act extended to services performed by its employees. (For
provisions relating to the exception under section 3121(b)(8)(B), see
that section and Sec. 31.3121(b)(8)-2.) A certificate in effect under
section 1426(1) of the Internal Revenue Code of 1939 on December 31,
1954, remains in effect under, and is subject to the provisions of,
section 3121(k). If the period covered by a certificate filed under
section 3121(k), or under section 1426(l) of the Internal Revenue Code
of 1939, is terminated by an organization, a certificate may not
thereafter be filed by the organization under section 3121(k). For
regulations relating to certificates filed under section 1426(l) of the
Internal Revenue Code of 1939, see 26 CFR (1939) 408.216 (Regulations
128).
(2) Organizations having two separate groups of employees. If an
organization is eligible to file a certificate under section 3121(k),
and the organization employs both individuals who are in positions
covered by a pension, annuity, retirement, or similar fund or system
established by a State or by a political subdivision thereof and
individuals who are not in such positions, the organization shall divide
its employees into two separate groups for purposes of any certificate
filed after August 28, 1958. One group shall consist of all employees
who are in positions covered by such a fund or system and (i) are
members of such fund or system, or (ii) are not members of such fund or
system but are eligible to become members thereof. The other group shall
consist
[[Page 85]]
of all remaining employees. An organization which has so divided its
employees into two groups may file a certificate after August 28, 1958,
with respect to the employees in either group, or may file a separate
certificate after such date with respect to employees in each group.
(3) Certificates filed before September 14, 1960. A certificate
filed before September 14, 1960, is void unless at least two-thirds of
the employees, determined on the basis of the facts which existed as of
the date the certificate was filed, concurred in the filing of the
certificate, and the organization certified to such concurrence in the
certificate. All individuals who were employees of the organization
within the meaning of section 3121(d) (see Sec. 31.3121(d)-1) shall be
included in determining whether two-thirds of the employees of the
organization concurred in the filing of the certificate; except that
there shall not be included (i) those employees who at the time of the
filing of the certificate were performing for the organization services
only of the character specified in paragraphs (8)(A), (10)(B), and (13)
of section 3121(b) (see Sec. Sec. 31.3121(b)(8)-1, 31.3121(b)(10)-2,
and 31.3121(b)(13)-1, respectively), (ii) those alien employees who at
the time of the filing of the certificate were performing services for
such organization under an arrangement which provided for the
performance only of services outside the United States not on or in
connection with an American vessel or American aircraft, and (iii) in
connection with certificates filed after August 28, 1958, those
employees who at the time of the filing of the certificate were in a
group to which such certificate was not applicable because of the
provisions of section 3121(k)(1)(E). (See paragraph (a)(2) of this
section.) As used in this subparagraph, the term ``alien employee'' does
not include an employee who was a citizen of the Commonwealth of Puerto
Rico or a citizen of the Virgin Islands, and the term ``United States''
includes Puerto Rico and the Virgin Islands.
(b) Execution and amendment of certificate--(1) Use of prescribed
forms. An organization filing a certificate pursuant to section 3121(k)
shall use Form SS-15, in accordance with the regulations and
instructions applicable thereto. The certificate may be filed only if it
is accompanied by a list on Form SS-15a, containing the signature,
address, and social security account number, if any, of each employee,
if any, who concurs in the filing of the certificate. (For provisions
relating to account numbers, see Sec. 31.6011(b)-2.) If no employee
concurs in a certificate filed after September 13, 1960, that fact
should be stated on the Form SS-15a. (For provisions relating to the
concurrence of employees in certificates filed before September 14,
1960, see paragraph (a)(3) of this section.)
(2) Amendment of list on Form SS- 15a--(i) Certificate filed after
August 28, 1958. The list on Form SS-15a accompanying a certificate
filed after August 28, 1958, under section 3121(k), may be amended at
any time before the expiration of the twenty-fourth month following the
calendar quarter in which the certificate is filed, by filing a
supplemental list or lists on Form SS-15a Supplement, containing the
signature, address, and social security account number, if any, of each
additional employee who concurs in the filing of the certificate.
(ii) Certificate filed before August 29, 1958. The list on Form SS-
15a which accompanied a certificate filed before August 29, 1958, under
section 3121(k) or under section 1426(l) of the Internal Revenue Code of
1939, may be amended by filing a supplemental list or lists on Form SS-
15a Supplement at any time after August 31, 1954, and before the
expiration of the twenty-fourth month following the first calendar
quarter for which the certificate was in effect, or before January 1,
1959, whichever is the later.
(3) Where to file certificate or amendment. The certificate on Form
SS-15 and accompanying list on Form SS-15a of an organization which is
required to make a return on Form 941 pursuant to Sec. 31.6011(a)-1 or
Sec. 31.6011(a)-4 shall be filed with the internal revenue officer
designated in the instructions applicable to Form SS-15 and Form SS-15a.
The Form SS-15 and Form SS-15a of any other organization shall be filed
in accordance with the provisions of
[[Page 86]]
Sec. 31.6091-1 which are otherwise applicable to returns. Each Form SS-
15a Supplement shall be filed with the internal revenue officer with
whom the related Forms SS-15 and SS-15a were filed.
(c) Effect of waiver--(1) In general. The exception from employment
under section 3121(b)(8)(B) does not apply to services with respect to
which a certificate, filed pursuant to section 3121(k), or section
1426(l) of the Internal Revenue Code of 1939, is in effect. (See
Sec. Sec. 31.3121(b)(8) and 31.3121(b)(8)-2). If an organization has
divided its employees into two groups, as set forth in paragraph (a)(2)
of this section, a certificate filed with respect to either group shall
have no effect with respect to services performed by an employee as a
member of the other group; and the provisions of this subparagraph shall
apply as if each group were separately employed by a different
organization. A certificate is not terminated if the organization loses
its exemption under section 501(a) as an organization of the character
described in section 501(c)(3), but continues effective with respect to
any subsequent periods during which the organization is so exempt. The
certificate of an organization may be in effect without being applicable
to services performed by every employee of the organization.
Subparagraph (2) of this paragraph relates to the beginning of the
period for which a certificate is in effect. Subparagraph (3) of this
paragraph relates to the services with respect to which a certificate is
in effect. Even though a certificate is in effect with respect to the
services of an employee, such services may be excepted from employment
under some provision of section 3121(b) other than paragraph (8)(B)
thereof. For example, service performed in any calendar quarter in the
employ of an organization described in section 501(c)(3) and exempt from
income tax under section 501(a) is excepted from employment under
section 3121(b)(10)(A) if the remuneration for such service is less than
$50, regardless of whether the organization files a certificate.
(2) Beginning of effective period of waiver--(i) Certificate filed
after July 30, 1965. A certificate filed after July 30, 1965, by an
organization pursuant to section 3121(k) shall be in effect for the
period beginning with one of the following dates, which shall be
designated by the organization on the certificate:
(a) The first day of the calendar quarter in which the certificate
is filed,
(b) The first day of the calendar quarter immediately following the
quarter in which the certificate is filed, or
(c) The first day of any calendar quarter preceding the calendar
quarter in which the certificate is filed, except that such date may not
be earlier than the first day of the 20th calendar quarter preceding the
quarter in which such certificate is filed. Thus, a certificate filed in
December 1965 may be made effective, pursuant to this paragraph
(c)(2)(i)(c), for the period beginning with the first day of the
calendar quarter beginning October 1, 1960, or the first day of any
other calendar quarter beginning after October 1, 1960, and before
October 1, 1965.
(ii) Certificate filed after August 28, 1958, and before July 31,
1965. A certificate filed after August 28, 1958, and before July 31,
1965, by an organization pursuant to section 3121(k) shall be in effect
for the period beginning with one of the following dates, which shall be
designated by the organization on the certificate:
(a) The first day of the calendar quarter in which the certificate
is filed,
(b) The first day of the calendar quarter immediately following the
quarter in which the certificate is filed, or
(c) The first day of any calendar quarter preceding the calendar
quarter in which the certificate is filed, except that, in the case of a
certificate filed before 1960, such date may not be earlier than January
1, 1956, and in the case of a certificate filed after 1959 (but before
July 31, 1965), such date may not be earlier than the first day of the
fourth calendar quarter preceding the quarter in which the certificate
is filed. Thus, a certificate filed in December 1959 may be made
effective for the calendar quarter beginning January 1, 1956; but a
certificate filed in January 1960 may not be made effective for a
calendar quarter beginning before January 1, 1959.
(iii) Certificate filed after 1956 and before August 29, 1958. A
certificate filed by an organization after 1956 and before August 29,
1958 pursuant to section
[[Page 87]]
3121(k), became effective for the period beginning with one of the
following dates, as designated by the organization on the certificate:
(a) The first day of the calendar quarter in which the certificate
was filed, or
(b) The first day of the calendar quarter immediately following the
quarter in which the certificate was filed.
(iv) Certificate filed before 1957. A certificate filed before 1957
pursuant to section 3121(k) became effective for the period beginning
with the first day following the close of the calendar quarter in which
the certificate was filed. In no case, however, shall a certificate
filed under the provisions of section 3121(k) be in effect with respect
to services performed before January 1, 1955. (For regulations relating
to waiver certificates filed under section 1426(l) of the Internal
Revenue Code of 1939, see 26 CFR (1939) 408.216 (Regulations 128).)
(3) Services to which certificate applies--(i) In general. If an
organization's certificate is in effect (see paragraph (c)(2) of this
section), the certificate becomes effective with respect to services
performed in its employ by each individual (a) who enters the employ of
the organization after the calendar quarter in which the certificate is
filed, as set forth in paragraph (c)(3)(ii) of this section, or (b)
whose signature appears on the list on Form SS-15a, as set forth in
paragraph (c)(3)(iii) of this section, or (c) whose signature appears on
a Form SS-15a Supplement, as set forth in paragraph (c)(3)(iv) or (v) of
this section. The first date on which such a certificate becomes
effective with respect to an employee's services shall be the earliest
date applicable under this subparagraph. An organization's certificate
is not effective with respect to the services of an employee who is in
its employ in the calendar quarter in which the certificate is filed and
who does not sign Form SS-15a or Form SS-15a Supplement, so long as his
employment relationship with the organization, at the close of the
calendar quarter in which the certificate is filed and thereafter,
continues without interruption.
(ii) Employee hired after quarter in which certificate is filed. If
an individual enters the employ of an organization on or after the first
day following the close of the calendar quarter in which the
organization files a certificate pursuant to section 3121(k), the
certificate shall be in effect with respect to services performed by the
individual in the employ of the organization on and after the day he
enters the employ of the organization. A former employee of the
organization who is rehired on or after the first day following the
close of the calendar quarter in which such a certificate is filed shall
be considered to have entered the employ of the organization after such
calendar quarter, regardless of whether such individual concurred in the
filing of the certificate.
(iii) Employee who signs Form SS-15a. A certificate on Form SS-15
filed by an organization pursuant to section 3121(k) shall be in effect
with respect to services performed by an individual in the employ of the
organization on and after the first day for which the certificate is in
effect, if such individual's signature appears on the list on Form SS-
15a which accompanies such certificate.
(iv) Employee who signs Form SS-15a Supplement to concur in
certificate filed after August 28, 1958. If the list on Form SS-15a
accompanying a certificate filed after August 28, 1958, by an
organization pursuant to section 3121(k) is amended in accordance with
paragraph (b)(2)(i) of this section by the filing of a supplemental list
on Form SS-15a Supplement, the certificate shall be in effect with
respect to the services of each individual whose signature appears on
the supplemental list, performed in the employ of the organization--
(a) On and after the first day for which the certificate is in
effect, if the supplemental list is filed on or before the last day of
the month following the calendar quarter in which the certificate is
filed, or
(b) On and after the first day of the calendar quarter in which the
supplemental list is filed, if such list is filed after the close of the
first month following the calendar quarter in which the certificate is
filed.
(v) Employee who signed Form SS-15a Supplement to concur in
certificate filed before August 29, 1958. If the list on
[[Page 88]]
Form SS-15a which accompanied a certificate filed before August 29,
1958, by an organization pursuant to section 3121(k), or pursuant to
section 1426(l) of the Internal Revenue Code of 1939, was amended in
accordance with paragraph (b)(2)(ii) of this section by the filing of a
supplemental list on Form SS-15a Supplement, the certificate shall be in
effect with respect to the services of each individual whose signature
appears on the supplemental list, performed in the employ of the
organization--
(a) On and after the first day for which the certificate is in
effect, if the supplemental list was filed on or before the last day of
the month following the first calendar quarter for which the certificate
was in effect, or
(b) On and after the first day following the close of the calendar
quarter in which the supplemental list was filed, but not before January
1, 1955, if such list was filed after the close of the first month
following the first calendar quarter for which the certificate is in
effect.
(4) Administrative provisions applicable when certificate has
retroactive effect. For purposes of computing interest and for purposes
of section 6651 (relating to addition to tax for failure to file tax
return), in any case in which a certificate filed pursuant to section
3121(k)(1) is effective pursuant to section 3121(k)(1)(B)(iii) (as
originally enacted and as amended by section 316(a) of the Social
Security Amendments of 1965) for one or more calendar quarters prior to
the quarter in which the certificate is filed, the due date for the
return and payment of the tax for such prior calendar quarters resulting
from the filing of such certificate shall be the last day of the
calendar month following the calendar quarter in which the certificate
is filed. The statutory period for the assessment of the tax for such
prior calendar quarters shall not expire before the expiration of 3
years from such due date. A waiver certificate (as described in section
3121(k)(1) and this section) furnished to the Internal Revenue Service
after February 12, 1976, shall not be considered filed with the Internal
Revenue Service unless interest paid to the organization (or credited to
its account) in connection with a claim for credit or refund of taxes,
which claim was based upon the exemption from taxes the organization is
waiving by such certificate, is repaid. The interest so paid must be
repaid only to the extent such interest relates to any taxes for which
the organization or its employees would be liable by reason of the
waiver certificate. Furthermore, when a waiver certificate has been
filed prior to the payment of a refund of taxes based upon the exemption
from taxes the organization in waiving, no credit or refund in respect
of the taxes for which the exemption has been waived shall be allowed.
If repayment of the interest is made as required by this subparagraph,
on or before the last day of the calendar month following the calendar
quarter in which the certificate is furnished to the Internal Revenue
Service, such certificate shall be considered to have been filed on the
date it was originally furnished. If repayment occurs after that day,
such certificate shall be considered to have been filed on the date of
the repayment. References in this subparagraph to a waiver certificate
refer also to any supplement to such a certificate.
(d) Termination of waiver by organization. (1) The period for which
a certificate filed pursuant to section 3121(k), or pursuant to section
1426(l) of the Internal Revenue Code of 1939, is in effect may be
terminated by the organization upon giving to the district director with
whom the organization is filing returns 2 years' advance notice in
writing of its desire to terminate the effect of the certificate at the
end of a specified calendar quarter, but only if, at the time of the
receipt of such notice by the district director, the certificate has
been in effect for a period of not less than 8 years. The notice of
termination shall be signed by the president or other principal officer
of the organization. Such notice shall be dated and shall show (i) the
title of the officer signing the notice, (ii) the name, address, and
identification number of the organization, (iii) the district director
with whom the certificate was filed, (iv) the date on which the
certificate became effective, and (v) the date on which the certificate
is to be terminated. No particular form is prescribed for the notice of
termination.
[[Page 89]]
(2) In computing the effective period which must precede the date of
receipt of the notice of termination, there shall be disregarded any
period or periods as to which the organization was not exempt from
income tax under section 501(a) as an organization of the character
described in section 501(c)(3) or under section 101(6) of the Internal
Revenue Code of 1939.
(3) The notice of termination may be revoked by the organization by
giving, prior to the close of the calendar quarter specified in the
notice of termination, a written notice of such revocation. The notice
of revocation shall be filed with the district director with whom the
notice of termination was filed. The notice of revocation shall be
signed by the president or other principal officer of the organization.
Such notice shall be dated and shall show (i) the title of the officer
signing the notice, (ii) the name, address, and identification number of
the organization, and (iii) the date of the notice of termination to be
revoked. No particular form is prescribed for the notice of revocation.
(e) Termination of waiver by Commissioner. (1) The period for which
a certificate filed pursuant to section 3121(k), or pursuant to section
1426(l) of the Internal Revenue Code of 1939, is in effect may be
terminated by the Commissioner, with the prior concurrence of the
Secretary of Health, Education, and Welfare, upon a finding by the
Commissioner that the organization has failed to comply substantially
with the requirements applicable with respect to the taxes imposed by
the act (or the corresponding provisions of prior law) or is no longer
able to comply therewith. The Commissioner shall give the organization
not less than 60 days' advance notice in writing that the period covered
by the certificate will terminate at the end of the calendar quarter
specified in the notice of termination.
(2) The notice of termination may be revoked by the Commissioner,
with the prior concurrence of the Secretary of Health, Education, and
Welfare, by giving written notice of revocation to the organization
before the close of the calendar quarter specified in the notice of
termination.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR
18018, Dec. 4, 1968; T.D. 7012, 34 FR 7693, May 15, 1969; T.D. 7476, 42
FR 17874, Apr. 4, 1977]
Sec. 31.3121(k)-2 Waivers of exemption; original effective date
changed retroactively.
(a) Certificates filed after 1955 and before August 29, 1958. (1) An
organization which filed a certificate under section 3121(k) after 1955
and before August 29, 1958, may file a request on Form SS-15b at any
time before 1960 to have such certificate made effective, with respect
to the services of individuals who concurred in the filing of such
certificate (initially, or by signing a supplemental list on Form SS-15a
Supplement which was filed before Aug. 29, 1958) and whose signatures
also appeared on such request on Form SS-15b, for the period beginning
with the first day of any calendar quarter after 1955 which preceded the
first calendar quarter for which the certificate originally was
effective.
(2) For purposes of computing interest and for purposes of section
6651 (relating to addition to tax for failure to file tax return), the
due date for the return and payment of the tax for any calendar quarter
resulting from the filing of a request referred to in paragraph (a)(1)
of this section shall be the last day of the calendar month following
the calendar quarter in which the request is filed. The statutory period
for the assessment of such tax shall not expire before the expiration of
3 years from such due date.
(b) Certificate filed before 1966. (1) An organization which filed a
certificate on Form SS-15 under section 3121(k)(1)(A) before January 1,
1966, may amend such certificate during 1965 or 1966 to make the
certificate effective beginning with the first day of a calendar quarter
preceding the date designated by the organization on the certificate
(see paragraph (c)(2) of Sec. 31.3121(k)-1). The amendment of the
certificate shall be made by filing a Certificate For Retroactive
Coverage on Form SS-15b. A certificate on Form SS-15 may be amended to
be effective for the period beginning with the first
[[Page 90]]
day of any calendar quarter which precedes the calendar quarter for
which the certificate was originally effective, except that such a
certificate may not be made effective, through an amendment, for any
calendar quarter which begins earlier than the 20th calendar quarter
preceding the calendar quarter in which the organization files a
Certificate For Retroactive Coverage on Form SS-15b. Thus, if a
Certificate For Retroactive Coverage is filed in May 1966 in respect of
a certificate on Form SS-15 filed in 1965, the certificate on Form SS-15
may not be made effective for a calendar quarter preceding the quarter
beginning April 1, 1961. A certificate on Form SS-15 which is amended by
a Certificate For Retroactive Coverage on Form SS-15b will be effective
for the period preceding the first calendar quarter for which the
certificate originally was effective only with respect to the services
of individuals who concurred in the filing of the certificate
(initially, or by signing a supplemental list on Form SS-15a Supplement
which was filed prior to the date on which the Certificate For
Retroactive Coverage was filed) and whose signatures also appear on the
Certificate For Retroactive Coverage on Form SS-15b. A Certificate For
Retroactive Coverage shall be filed with the district director with whom
the related Form SS-15 was filed.
(2) For purposes of computing interest and for purposes of section
6651 (relating to addition to tax for failure to file tax return), the
due date for the return and payment of the tax for any calendar quarter
resulting from the filing of an amendment referred to in paragraph
(b)(1) of this section shall be the last day of the calendar month
following the calendar quarter in which the amendment is filed. The
statutory period for the assessment of such tax shall not expire before
the expiration of 3 years from such due date.
[T.D. 6983, 33 FR 18018, Dec. 4, 1968]
Sec. 31.3121(k)-3 Request for coverage of individual employed by
exempt organization before August 1, 1956.
(a) Application of this section. This section is applicable to
requests made after July 31, 1956, and before September 14, 1960, under
section 403 of the Social Security Amendments of 1954, as amended,
except that nothing in this section shall render invalid any act
performed pursuant to, and in accordance with, Revenue Ruling 57-11,
Cumulative Bulletin 1957-1, page 344, or Revenue Ruling 58-514,
Cumulative Bulletin 1958-2, page 733. (For regulations relating to
requests made before August 1, 1956, under section 403 of the Social
Security Amendments of 1954, see 26 CFR (1939) 408.216(c) and (d)
(Regulations 128).)
(b) Organization which did not have waiver certificate in effect--
(1) Coverage requested by employee before August 27, 1958. Pursuant to
section 403(a) of the Social Security Amendments of 1954, as amended by
section 401 of the Social Security Amendments of 1956, any individual
who, as an employee, performed services after December 31, 1950, and
before August 1, 1956, for an organization described in section
501(c)(3) which was exempt from income tax under section 501(a), or
which was exempt from income tax under section 101(6) of the Internal
Revenue Code of 1939, but which failed to file, before August 1, 1956, a
valid waiver certificate under section 3121(k), or under section 1426(l)
of the Internal Revenue Code of 1939, may request after July 31, 1956,
and before August 27, 1958, that such part of the remuneration received
by him for services performed in the employ of the organization after
1950 and before 1957 with respect to which employee and employer taxes
were paid be deemed to constitute remuneration for employment, if:
(i) Any of the services performed by the individual after December
31, 1950, and before January 1, 1957, would have constituted employment
if such a certificate on Form SS-15 filed by the organization had been
in effect for the period during which the services were performed and
the individual's signature had appeared on the accompanying list on Form
SS-15a;
(ii) The employee and employer taxes were paid with respect to any
part of the remuneration received by the individual from the
organization for such services;
(iii) A part of such taxes was paid before August 1, 1956;
[[Page 91]]
(iv) Such taxes as were paid before August 1, 1956, were paid by the
organization in good faith and upon the assumption that it had filed a
valid certificate under section 3121(k), or under section 1426(l) of the
Internal Revenue Code of 1939; and
(v) No refund (or credit) of such taxes had been obtained by either
the employee or the employer, exclusive of any refund (or credit) which
would have been allowable if the services performed by the individual
had constituted employment.
(2) Coverage requested by employee after August 26, 1958, and before
September 14, 1960. Requests may be made after August 26, 1958, and
before September 14, 1960, pursuant to section 403(a) of the Social
Security Amendments of 1954, as amended by section 401 of the Social
Security Amendments of 1956, by the Act of August 27, 1958 (Pub. L. 85-
785, 72 Stat. 938), and by section 105(b)(6) of the Social Security
Amendments of 1960. Any individual who, as an employee, performed
services after December 31, 1950, and before August 1, 1956, for an
organization described in section 501(c)(3) which was exempt from income
tax under section 501(a), or which was exempt from income tax under
section 101(6) of the Internal Revenue Code of 1939, but which did not
have in effect during the entire period in which the individual was so
employed a valid waiver certificate under section 3121(k), or under
section 1326(l) of the Internal Revenue Code of 1939, may request after
August 26, 1958, and before September 14, 1960, that such part of the
remuneration received by him for services performed in the employ of the
organization after 1950 and before 1957 with respect to which employee
and employer taxes were paid be deemed to constitute remuneration for
employment, if:
(i) Any of the services performed by the individual after December
31, 1950, and before January 1, 1957, would have constituted employment
if such a certificate on Form SS-15 filed by the organization had been
in effect for the period during which the services were performed and
the individual's signature had appeared on the accompanying list on Form
SS-15a;
(ii) The employee and employer taxes were paid with respect to any
part of the remuneration received by the individual from the
organization for such services performed during the period in which the
organization did not have a valid waiver certificate in effect;
(iii) A part of such taxes was paid before August 1, 1956;
(iv) Such taxes as were paid before August 1, 1956, were paid by the
organization in good faith, and either without knowledge that a waiver
certificate was necessary or upon the assumption that it had filed a
valid certificate under section 3121(k), or under section 1426(l) of the
Internal Revenue Code of 1939; and
(v) No refund (or credit) of such taxes has been obtained by either
the employee or the employer, exclusive of any refund (or credit) which
would be allowable if the services performed by the individual had
constituted employment.
(3) Execution and filing of request. (i) Except where the
alternative procedure set forth in paragraph (b)(3)(ii) of this section
is followed, the request of an individual under section 403(a) of the
Social Security Amendments of 1954, as amended, is required to be made
and filed as provided in this subdivision. The request shall be made in
writing, be signed and dated by the individual, and include:
(a) The name and address of the organization for which the services
were performed;
(b) The name, address, and social security account number of the
individual;
(c) A statement that the individual has not obtained refund or
credit (other than a refund or credit which would have been allowable if
the services had constituted employment) from the district director of
any part of the employee tax paid with respect to remuneration received
by him from the organization for services performed after 1950 and
before 1957; and
(d) A request that all remuneration received by him from the
organization for such services with respect to which employee and
employer taxes had been paid shall be deemed to constitute remuneration
for employment to the extent authorized by section 403(a) of the
[[Page 92]]
Social Security Amendments of 1954, as amended.
The request of an individual shall be accompanied by a statement of the
organization incorporating the substance of each of the five conditions
listed in paragraph (b) (1) or (2), whichever is appropriate, of this
section. The statement of the organization shall show also that the
individual performed services for the organization after December 31,
1950, and before August 1, 1956; that the organization was an
organization described in section 501(c)(3) which was exempt from income
tax under section 501(a) or was exempt from income tax under section
101(6) of the Internal Revenue Code of 1939, and the district director
with whom returns on Form 941 were filed. The organization's statement
shall be signed by the president or other principal officer of the
organization who shall certify that the statement is correct to the best
of his knowledge and belief. If the statement of the organization is not
submitted with the individual's request, the individual shall include in
his request an explanation of his inability to submit the statement.
Other information may be required, but should be submitted only upon
receipt of a specific request therefore. No particular form is
prescribed for the request of the individual or the statement of the
organization required to be submitted with the request. The individual's
request should be filed with the district director with whom the
organization files returns on Form 941. If the individual is deceased or
mentally incompetent and the request is made by the legal representative
of the individual or other person authorized to act on his behalf, the
request shall be accompanied by evidence showing such person's authority
to make the request.
(ii) An organization which has or had in its employ individuals with
respect to whom section 403(a) of the Social Security Amendments of
1954, as amended, is applicable may, if it so desires, prepare a form or
forms for use by any such individual or individuals in making requests
under such section. Any such form shall provide space for the signature
of the individual or individuals and contain such information as
required to be included in a request (see paragraph (b)(3)(i) of this
section). Any such form used by more than one individual, and any such
form used by one individual which is signed and returned to the
organization, shall be submitted by the organization, together with its
statement (as required in paragraph (b)(3)(i) of this section), to the
district director with whom the organization files its returns on Form
941. An individual is not required to use a form prepared by the
organization but may, at his election, file his request in accordance
with the provisions of paragraph (b)(3)(i) of this section.
(4) Optional tax payments by organization. An organization which
prior to August 1, 1956, reported and paid employee and employer taxes
with respect to any portion of the remuneration paid to an individual,
who is eligible to file a request under section 403(a) of the Social
Security Amendments of 1954, as amended, for services performed by him
after 1950 and before 1957, may report and pay such taxes before
September 14, 1960, with respect to any remaining portion of such
remuneration which would have constituted wages if a certificate had
been in effect with respect to such services. Such taxes may be reported
as an adjustment without interest in the manner prescribed in Subpart G
of the regulations in this part.
(5) Effect of request. If a request is made and filed under the
conditions stated in this paragraph with respect to one or more
individuals, remuneration for services performed by each such individual
after 1950 and before 1957, with respect to which the employee and
employer taxes are paid on or before the date on which the request was
filed with the district director, will be deemed to constitute
remuneration for employment to the extent that such services would have
constituted employment as defined in section 3121(b), or in section
1426(b) of the Internal Revenue Code of 1939, if a certificate had been
in effect with respect to such services. However, the provisions of
section 3121(a) and Sec. Sec. 31.3121(a)-1 to 31.3121(a)(10)-1,
inclusive, of the regulations in this part or the provisions of section
1426(a) of the Internal Revenue Code of 1939 and the regulations in 26
[[Page 93]]
CFR (1939) 408.226 and 408.227 (Regulations 128), as the case may be,
are applicable in determining the extent to which such remuneration for
employment constitutes wages for purposes of the employee and employer
taxes.
(c) Individual who failed to sign list of concurring employees--(1)
In general. Pursuant to section 403(b) of the Social Security Amendments
of 1954, as amended, any individual who, as an employee, performed
services after December 31, 1950, and before August 1, 1956, for an
organization which filed a valid certificate under section 3121(k), or
under section 1426(l) of the Internal Revenue Code of 1939, but who
failed to sign the list of employees concurring in the filing of such
certificate, may request on or before January 1, 1959, that the
remuneration received by him for such services be deemed to constitute
remuneration for employment, if:
(i) Any of the services performed by the individual after December
31, 1950, and before August 1, 1956, would have constituted employment
if the signature of such individual had appeared on the list of
employees who concurred in the filing of the certificate;
(ii) The employee and employer taxes were paid before August 1,
1956, with respect to any part of the remuneration received by the
individual from the organization for such services; and
(iii) No refund (or credit) of such taxes has been obtained either
by the employee or the employer, exclusive of any refund (or credit)
which would be allowable if the services performed by the individual had
constituted employment.
(2) Execution and filing of request. (i) Except where the
alternative procedure set forth in subdivision (ii) of this subparagraph
is followed, the request of an individual under section 403(b) of the
Social Security Amendments of 1954, as amended, shall be made and filed
as provided in this subdivision. The request shall be filed on or before
January 1, 1959, be made in writing, be signed and dated by the
individual, and include:
(a) The name and address of the organization for which the services
were performed;
(b) The name, address, and social security account number of the
individual;
(c) A statement that the individual has not obtained a refund or
credit (other than a refund or credit which would be allowable if the
services had constituted employment) from the district director of any
part of the employee tax paid before August 1, 1956, with respect to
remuneration received by him from the organization;
(d) A request that all remuneration received by the individual from
the organization for services performed after 1950 and before August 1,
1956, with respect to which employee and employer taxes were paid before
August 1, 1956, shall be deemed to constitute remuneration for
employment to the extent authorized by section 403(b) of the Social
Security Amendments of 1954, as amended; and
(e) A statement that the individual understands that, upon the
filing of such request with the district director, (1) he will be deemed
to have concurred in the certificate which was previously filed by the
organization, and (2) the employee and employer taxes will be applicable
to all wages received, and to be received, by him for services performed
for the organization on or after the effective date of such certificate
to the extent that such taxes would have been applicable if he had
signed the list on Form SS-15a submitted with the certificate.
The request of an individual shall be accompanied by a statement of the
organization incorporating the substance of each of the three conditions
listed in paragraph (c)(1) of this section. The statement of the
organization should also show that the individual performed services for
the organization after December 31, 1950, and before August 1, 1956;
that the organization filed a valid certificate under section 3121(k),
or under section 1426(l) of the Internal Revenue Code of 1939; and the
district director with whom returns on Form 941 are filed. Such
statement shall be signed by the president or other principal officer of
the organization who shall certify that the statement is correct to the
best of his knowledge and belief. If the statement of the organization
is not submitted
[[Page 94]]
with the individual's request, the individual shall include in his
request an explanation of his inability to submit such statement. Other
information may be required, but should be submitted only upon receipt
of a specific request therefor. No particular form is prescribed for the
request of the individual or the statement of the organization required
to be submitted with the request. The individual's request should be
filed with the district director with whom the organization files
returns on Form 941. If the individual is deceased or mentally
incompetent and the request is made by the legal representative of the
individual or other person authorized to act on his behalf, the request
shall be accompanied by evidence showing such persons' authority to make
the request.
(ii) An organization which has or had in its employ individuals with
respect to whom section 403(b) of the Social Security Amendments of
1954, as amended, is applicable, may, if it so desires, prepare a form
or forms for use by any such individual or individuals in making
requests under such section. Any such form shall provide space for the
signature of the individual or individuals and contain such information
as is required by paragraph (c)(1)(i) of this section to be included in
a request. Any such form used by more than one individual, and any such
form used by one individual, and any such form used by one individual
which is signed and returned to the organization, shall be submitted by
the organization, together with its statement (as required in paragraph
(c)(1)(i) of this section), to the district director with whom the
organization files returns on Form 941. An individual is not required to
use a form prepared by the organization but may, at his election, file
his request in accordance with the provisions of subdivisions (i) of
this subparagraph.
(3) Effect of request. An individual who makes and files a request
under the conditions stated in this paragraph with respect to services
performed as an employee of an organization described in section
501(c)(3) which was exempt from income tax under section 501(a), or
which was exempt from income tax under section 101(6) of the Internal
Revenue Code of 1939, will be deemed to have signed the list
accompanying the certificate filed by the organization under section
3121(k), or under section 1426(l) of the Internal Revenue Code of 1939.
Accordingly, all services performed by the individual for the
organization on and after the effective date of the certificate will
constitute employment to the same extent as if he had, in fact, signed
the list. The employee tax and employer tax are applicable with respect
to any remuneration paid to the employee by the organization which
constitutes wages. If less than the correct amount of such taxes has
been paid, the additional amount due should be reported as an adjustment
without interest within the time specified in subpart G of the
regulations in this part.
[T.D. 6744, 29 FR 8318, July 2, 1964]
Sec. 31.3121(k)-4 Constructive filing of waivers of exemption from
social security taxes by certain tax-exempt organizations.
(a) Constructive filing of waiver certificate where no refund or
credit has been allowed. (1) This paragraph applies (except as provided
in subparagraph (3) of this paragraph) to an organization if all of the
following four conditions are met.
(i) The organization is one described in section 501(c)(3) of the
Internal Revenue Code of 1954, which is exempt from income tax under
section 501(a) of the Code.
(ii) The organization did not file a valid waiver certificate under
section 3121(k)(1) of the Internal Revenue Code of 1954 (or the
corresponding provision of prior law) as of the later of October 19,
1976, or the earliest date on which it satisfies paragraph (a)(1)(iii)
of this section.
(iii) The taxes imposed by sections 3101 and 3111 of the Code were
paid with respect to remuneration paid by the organization to its
employees, as though such certificate had been filed, during any period
that includes all or part of at least three consecutive calendar
quarters and that did not terminate before the end of the third calendar
quarter of 1973.
(iv) The Internal Revenue Service did not allow (or erroneously
allowed) a refund or credit of any part of the taxes
[[Page 95]]
paid as described in subdivision (iii) of this subparagraph with respect
to remuneration for services performed on or after April 1, 1973. For
purposes of the previous sentence, a refund or credit which would have
been allowed, even if a valid waiver certificate filed under section
3121(k)(1) had been in effect, shall be disregarded. A refund or credit
will be regarded as having been erroneously allowed if it was credited
by the Internal Revenue Service to the taxpayer account of the
organization or any of its employees on or after September 9, 1976, even
though it was properly made under the law in effect when made.
(2) (i) An organization to which this paragraph applies shall be
deemed to have filed a valid waiver certificate under section 3121(k)(1)
(or the corresponding provision of prior law) for purposes of section
210(a)(8)(B) of the Social Security Act and section 3121(b)(8)(B). The
waiver certificate shall be deemed to have been filed on the first day
of the period described in paragraph (a)(1)(iii) of this section and
shall be effective on the first day of the calendar quarter in which
such period began. However, such waiver is effective only with respect
to remuneration for services performed after 1950.
(ii) The waiver certificate shall be deemed to have been accompanied
by a list containing the signature, address, and social security number
(if any) of each employee with respect to whom the taxes imposed by
sections 3101 and 3111 were paid as described in paragraph (a)(1)(iii)
of this section. Each such employee shall be deemed to have concurred in
the filing of the certificate for purposes of section 210(a)(8)(B) of
the Social Security Act and section 3121(b)(8)(B). A statement
containing the name, address, and employer identification number of the
organization, and the name, last known address, and social security
number (if any) of each employee described in the preceding sentence
shall be filed by the organization at the request of the Internal
Revenue Service.
(iii) The services of all employees entering or reentering the
employ of an organization on or after the first day following the close
of the calendar quarter in which the organization is deemed to have
filed the waiver certificate, performed on or after the day of such
entry or reentry, shall be covered by the certificate.
(3) This paragraph (a) shall not apply to an organization if--
(i) Prior to the end of the period referred to in paragraph
(a)(1)(iii) (and, in addition, in the case of an organization organized
on or before October 9, 1969, prior to October 19, 1976), the
organization had applied for a ruling or determination letter
acknowledging it to be exempt from income tax under section 501(c)(3);
(ii) The organization subsequently received such ruling or
determination letter;
(iii) The organization did not pay any taxes under sections 3101 and
3111 with respect to any employee for any calendar quarter ending after
the twelfth month following the date of mailing of the ruling or
determination letter; and
(iv) The organization did not pay any taxes under sections 3101 and
3111 with respect to any calendar quarter beginning after the later of
December 31, 1975, or the date on which the ruling or determination
letter was issued.
(4) In the case of an organization which is deemed under this
paragraph to have filed a valid waiver certificate under section
3121(k)(1), if the period with respect to which the taxes imposed by
sections 3101 and 3111 were paid by the organization (as described in
paragraph (a)(1)(iii) of this section) terminated prior to October 1,
1976, taxes under sections 3101 and 3111 with respect to remuneration
paid by the organization after the termination of such period and prior
to July 1, 1977, which remained unpaid on December 20, 1977 (or which
were paid after October 19, 1976, but prior to December 20, 1977), shall
not be due or payable (or, if paid, shall be refunded). Similarly, an
organization that received a refund or credit of the taxes described in
paragraph (a)(1)(iii) of this section after September 8, 1976, shall not
be liable for the taxes imposed by sections 3101 and 3111 with respect
to remuneration paid by it prior to July 1, 1977, for which the
organization received the refund or credit. The waiver certificate,
which an organization described in this subparagraph is deemed to have
filed,
[[Page 96]]
shall not apply to any service with respect to the remuneration for
which the taxes imposed by sections 3101 and 3111 are not due or payable
(or are refunded) by reason of this subparagraph.
(5) In the case of an organization which is deemed under this
paragraph to have filed a valid waiver certificate under section
3121(k)(1), if the taxes imposed by sections 3101 and 3111 were not paid
during the period referred to in paragraph (a)(1)(iii) of this section
(whether the period has terminated or not) with respect to remuneration
paid by the organization to individuals who became its employees after
the close of the calendar quarter in which such period began, taxes
under sections 3101 and 3111 with respect to remuneration paid prior to
July 1, 1977, to such employees, which remain unpaid on December 20,
1977 (or which were paid after October 19, 1976, but prior to December
20, 1977), shall not be due or payable (or, if paid, shall be refunded).
The waiver certificate, which an organization described in this
subparagraph is deemed to have filed, shall not apply to any service
with respect to remuneration for which the taxes imposed by sections
3101 and 3111 are not due or payable (or are refunded) by reason of this
subparagraph.
(6) This subparagraph allows certain employees to obtain social
security coverage for service not covered by a deemed-filed waiver
certificate by reason of section 3121(k)(4)(C) and paragraph (a)(4) or
(5) of this section. To qualify under this subparagraph, all of the
following conditions must be met.
(i) An individual performed service as an employee of an
organization which is deemed under this paragraph to have filed a waiver
certificate under section 3121(k)(1), on or after the first day of the
period described in paragraph (a)(1)(iii) of this section and before
July 1, 1977.
(ii) The service performed by the individual does not constitute
employment (as defined in section 210 (a) of the Social Security Act and
section 3121(b) of the Code) because the waiver certificate which the
organization is deemed to have filed is inapplicable to such service by
reason of section 3121(k)(4)(C), but would constitute employment (as so
defined) in the absence of section 3121(k)(4)(C).
(iii) The individual files a request on or before April 15, 1980, in
the manner and form, and with such official, as may be prescribed by
regulations under title II of the Social Security Act.
(iv) That request is accompanied by full payment of the taxes, which
would have been paid under section 3101 with respect to the remuneration
for the service described in paragraph (a)(6)(ii) of this section but
for the application of section 3121(k)(4)(C) (or by satisfactory
evidence that appropriate arrangements have been made for the payment of
such taxes in installments as provided in section 3121(k)(8) and
paragraph (d) of this section).
If these conditions are satisfied, the remuneration paid for the service
described in paragraph (a)(6)(i) of this section shall be deemed to
constitute remuneration for employment. In any case where remuneration
paid by an organization to an individual is deemed under this
subparagraph to constitute remuneration for employment, such
organization shall be liable (notwithstanding any other provision of the
Code or regulations) for payment of the taxes it would have been
required to pay under section 3111 with respect to such remuneration but
for the application of section 3121(k)(4)(C). The due date for the
return and payment by the organization of the taxes described in the
preceding sentence shall be the last day of the calendar month following
the calendar quarter in which the organization is notified in writing of
the employee's request. However, see paragraph (d) of this section which
permits the payment of these taxes in installments.
(b) Constructive filing of waiver certificate where refund or credit
has been allowed and new certificate is not filed. (1) This paragraph
applies to an organization which meets two conditions. First, it must be
an organization to which paragraph (a) of this section would apply but
for its failure to satisfy the requirement of paragraph (a)(1)(iv) of
this section because a refund or credit of taxes was allowed before
September 9, 1976. Second, it must not have filed an actual valid waiver
certificate under section 3121(k)(1) in accordance
[[Page 97]]
with the requirements of paragraph (c) of this section.
(2) An organization to which this paragraph applies shall be deemed,
for purposes of section 210(a)(8)(B) of the Social Security Act and
section 3121(b)(8)(B), to have filed a valid waiver certificate under
section 3121(k)(1) on April 1, 1978. Such certificate shall be effective
for the period beginning on the first day of the first calendar quarter
with respect to which the refund or credit referred to in paragraph
(b)(1) of this section was allowed (or, if later, on July 1, 1973).
(3) If an organization is deemed under this paragraph to have filed
a waiver certificate on April 1, 1978, the provisions of paragraph
(a)(2)(ii) and (iii) of this section (relating to employees covered by a
deemed-filed waiver certificate) shall apply. Such certificate shall
supersede any certificate which may have been actually filed by such
organization prior to that date.
(4) Where an organization is deemed under this paragraph to have
filed a waiver certificate on April 1, 1978, the due date for the return
and payment of the taxes imposed by sections 3101 and 3111 for wages
paid prior to April 1, 1978, with respect to services constituting
employment by reason of such certificate shall be August 1, 1978.
However, see paragraph (d) of this section which permits the payment of
these taxes in installments. Such taxes (along with the amount of any
interest paid in connection with the refund or credit described in
paragraph (b)(1) of this section) shall be a liability of such
organization, payable from its own funds. No portion of such taxes (or
interest) shall be deducted from the wages of (or otherwise collected
from) the individuals who performed such services, and those individuals
shall have no liability for the payment thereof.
(5) This subparagraph allows certain employees of organizations
covered under this paragraph to obtain social security coverage for
periods prior to those covered by a deemed-filed waiver certificate. To
qualify under this subparagraph, all of the following conditions must be
met.
(i) An individual performed service, as an employee of an
organization deemed under this paragraph to have filed a waiver
certificate under section 3121(k)(1), at any time prior to the period
for which such certificate is effective.
(ii) The taxes imposed by sections 3101 and 3111 were paid with
respect to remuneration paid for such service, but such service (or any
part thereof) does not constitute employment (as defined in section
210(a) of the Social Security Act and section 3121(b)) because the
applicable taxes so paid were refunded or credited (otherwise than
through a refund or credit which would have been allowed if a valid
waiver certificate filed under section 3121(k)(1) had been in effect)
prior to September 9, 1976.
(iii) Any portion of such service (with respect to which taxes were
paid and refunded or credited as described in paragraph (b)(5)(ii) of
this section) would constitute employment (as so defined) if the
organization had actually filed under section 3121(k)(1) a valid waiver
certificate effective as provided in paragraph (c)(2) of this section
(with such individual's signature appearing on the accompanying list).
If this subparagraph applies, the remuneration paid for the portion of
such service described in paragraph (b)(5)(iii) of this section shall be
deemed to constitute remuneration for employment (as defined in section
210(a) of the Social Security Act and section 3121(b)), where such
individual filed a request on or before April 15, 1980 (in the manner
and form, and with such official, as may be prescribed by regulations
under title II of the Social Security Act), accompanied by full
repayment of the taxes which were paid under section 3101 with respect
to such remuneration and were refunded or credited (or by satisfactory
evidence that arrangements have been made for the payment of such taxes
in installments as provided in section 3121(k)(8) and paragraph (d) of
this section). In any case where remuneration paid by an organization to
an individual is deemed under this subparagraph to constitute
remuneration for employment such organization shall be liable
(notwithstanding any other provision of the Code or regulations) for
repayment of any taxes which it paid under
[[Page 98]]
section 3111 with respect to such remuneration and which were refunded
or credited to it. Any interest received by the organization or its
employees in connection with a refund or credit with respect to such
taxes shall be remitted with the repayment of taxes pursuant to this
subparagraph.
(c) Actual filing of waiver certificate by April 1, 1978, where
refund or credit has been allowed. (1) An organization may file an
actual waiver certificate in accordance with paragraphs (c)(2) and (3)
of this section if it is an organization to which paragraph (a) of this
section would apply but for its failure to meet the condition set forth
in paragraph (a)(1)(iv) of this section.
(2) An organization described in paragraph (c)(1) of this section
was permitted to file an actual waiver certificate on or before April 1,
1978. This certificate must be effective for the period beginning on or
before the first day of the first calendar quarter with respect to which
a refund or credit described in paragraph (b)(1) of this section was
allowed (or, if later, with the first day of the earliest calendar
quarter for which such certificate may be in effect under section
3121(k)(1)(B)(iii)). Such waiver certificate must have been accompanied
by a list described in section 3121(k)(1)(A), containing the signature,
address, and social security number of each concurring employee (if
any).
(3) Such a waiver certificate shall be valid only if the
organization complied with the following notification requirements and,
on or before April 30, 1978, filed (with the service center of the
Internal Revenue Service with which the waiver certificate was filed) a
certification that it had complied with these notification requirements.
However, these requirements shall be conclusively presumed to have been
met with respect to any employees who concurred in the filing of the
waiver certificate.
(i) Written notification of the option to obtain social security
coverage for the retroactive period covered by the waiver certificate is
required to have been given to all current and former employees of the
organization with respect to whose remuneration taxes imposed by
sections 3101 and 3111 were paid for any part of the period covered by
the waiver certificate. For purposes of the preceding sentence, in the
case of a former employee a mailing of notification to his or her last
known address shall constitute delivery to the former employee. This
notification must have been given at least 30 days prior to the date by
which the employee was required to inform the organization whether he or
she elects the retroactive social security coverage.
(ii) The notification required by this subparagraph must have stated
the earliest date for which the waiver certificate is effective and the
date by which the employee must have informed the organization of a
decision to elect the retroactive coverage. In addition, the
notification must have advised the employee how to obtain information as
to the quarters of social security coverage to be obtained and any taxes
or interest for which the employee would be liable if the election was
made. The organization must have provided this information to any
interested employee at least 14 days prior to the last day on which such
employee was to have informed the organization of any election.
(iii) If the notification resulted in any employee electing the
retroactive coverage whose signature did not appear on the list of
concurring employees which accompanied a previously filed waiver
certificate, the certification that was supplied on or before April 30,
1978, must have been accompanied by a special amendment to that list.
Any employee whose name appears on this special amended list shall be
treated as if his or her name appeared on the list of concurring
employees filed with the waiver certificate. The preceding sentence
shall only apply with respect to amended lists of concurring employees
filed to comply with the requirements of this subparagraph.
(4) Any interest received in connection with a refund or credit
described in paragraph (b)(1) of this section must have been repaid on
or before April 30, 1978, with respect to each employee who concurs in
the filing of a waiver certificate pursuant to this paragraph.
Notwithstanding the provisions of paragraph (c)(4) of Sec. 31.3121(k)-
1, if such interest was repaid on or before April 30, 1978, the waiver
certificate shall be
[[Page 99]]
considered to have been filed on the date it was originally furnished to
the Internal Revenue Service.
(d) Installment payment of taxes for retroactive coverage. This
paragraph applies if--
(1) An organization is deemed under paragraph (a) of this section to
have filed a valid waiver certificate, but the applicable period
described in paragraph (a)(1)(iii) has terminated and all or part of the
taxes imposed by sections 3101 and 3111, with respect to remuneration
paid by such organization to its employees after the close of such
period, remains payable notwithstanding section 3121(k)(4)(C) and
paragraph (a)(4) of this section; or
(2) An organization described in paragraph (c) files a valid waiver
certificate by March 31, 1978, or, not having filed the certificate by
that date, is seemed to have filed the certificate on April 1, 1978,
under paragraph (b); or
(3) An individual files a request under paragraph (a)(6) or (b)(5)
to have service treated as constituting remuneration for employment (as
defined in section 210(a) of the Social Security Act and section
3121(b)).
If this paragraph applies, the taxes due under sections 3101 and 3111
(together with any additions to tax or interest other than interest
described in paragraph (c)(4)) with respect to service constituting
employment by reason of the waiver certificate for any period prior to
the first day of the calendar quarter in which the certificate is filed
or deemed filed, or with respect to service constituting employment by
reason of an employee request, may be paid in installments over an
appropriate period of time, as determined by the district director. In
determining the appropriate period of time, the district director shall
exercise forbearance and, to the extent possible, grant the organization
an installment agreement that will allow it sufficient funds to carry
out its basic mission. If any installment is not paid on or before the
date fixed for its payment, the total unpaid amount shall become payable
immediately and shall be paid upon notice and demand.
(e) Application of certain provisions to cases of constructive
filing. (1) Except as provided in paragraphs (e)(2) and (3) of this
section, all of the provisions of section 3121(k) (other than
subparagraphs (B), (F), and (H) of section 3121(k)(1)) and the
regulations thereunder (including the provisions requiring the payment
of taxes under sections 3101 and 3111 with respect to the services
involved), shall apply with respect to any certificate which is deemed
to have been filed under paragraph (a) or (b) of this section, in the
same way they would apply if the certificate had been actually filed on
that day under section 3121(k)(1).
(2) The provisions of section 3121(k)(1)(E) shall not apply unless
the taxes described in paragraph (a)(1)(iii) of this section were paid
by the organization as though a separate certificate had been filed with
respect to one or both of the groups to which such provisions relate.
(3) The action of the organization in obtaining the refund or credit
described in paragraph (b)(1) of this section shall not be considered a
termination of such organization's coverage period for purposes of
section 3121(k)(3).
(4) Any organization which is deemed to have filed a waiver
certificate under paragraph (a) or (b) of this section shall be
considered for purposes of section 3102(b) to have been required to
deduct the taxes imposed by section 3101 with respect to the services
involved.
[T.D. 7647, 44 FR 59524, Oct. 16, 1979]
Sec. 31.3121(l)-1 Agreements entered into by domestic corporations
with respect to foreign subsidiaries.
For provisions relating to the extension of the Federal old-age,
survivors, and disability insurance system established by title II of
the Social Security Act to certain services performed outside the United
States by citizens of the United States in the employ of a foreign
subsidiary of a domestic corporation, see the Regulations Relating to
Contract Coverage of Employees of Foreign Subsidiaries (part 36 of this
chapter).
Sec. 31.3121(o)-1 Crew leader.
The term ``crew leader'' means an individual who furnishes
individuals to perform agricultural labor for another person, if such
individual pays (either on his own behalf or on behalf of such
[[Page 100]]
person) the individuals so furnished by him for the agricultural labor
performed by them and if such individual has not entered into a written
agreement with such person whereby such individual has been designated
as an employee of such person. For purposes of this chapter a crew
leader is deemed to be the employer of the individuals furnished by him
to perform agricultural labor, after 1956, for another person, and the
crew leader is deemed not to be an employee of such other person with
respect to the performance of services by him after 1956 in furnishing
such individuals or as a member of the crew. An individual is not a crew
leader within the meaning of section 3121(o) and of this section if he
does not pay the agricultural workers furnished by him to perform
agricultural labor for another person, or if there is an agreement
between such individual and the person for whom the agricultural labor
is performed whereby such individual is designated as an employee of
such person. Whether or not such individual is an employee will be
determined under the usual common-law rules (see paragraph (c) of Sec.
31.3121(d)-1).
[T.D. 6744, 29 FR 8320, July 2, 1964]
Sec. 31.3121(q)-1 Tips included for employee taxes.
(a) In general. Except as otherwise provided in paragraph (b) of
this section, tips received after 1965 by an employee in the course of
his employment shall be considered remuneration for employment. (For
definition of the term ``employee'' see 3121(d) and Sec. 31.3121(d)-1.)
Tips reported by an employee to his employer in a written statement
furnished to the employer pursuant to section 6053(a) (see Sec.
31.6053-1) shall be deemed to be paid to the employee at the time the
written statement is furnished to the employer. Tips received by an
employee which are not reported to his employer in a written statement
furnished pursuant to section 6053(a) shall be deemed to be paid to the
employee at the time the tips are actually received by the employee. For
provisions relating to the collection of employee tax in respect of tips
from the employee, see Sec. 31.3102-3.
(b) Tips not included for employer taxes. Tips received after 1965
by an employee in the course of his employment do not constitute
remuneration for employment for purposes of computing wages subject to
the taxes imposed by subsections (a) and (b) of section 3111.
(c) Tips received by an employee in course of his employment. Tips
are considered to be received by an employee in the course of his
employment for an employer regardless of whether the tips are received
by the employee from a person other than his employer or are paid to the
employee by the employer. However, only those tips which are received by
an employee on his own behalf (as distinguished from tips received on
behalf of another employee) shall be considered as remuneration paid to
the employee. Thus, where employees practice tip splitting (for example,
where waiters pay a portion of the tips received by them to the
busboys), each employee who receives a portion of a tip left by a
customer of the employer is considered to have received tips in the
course of his employment.
(d) Computation of annual wage limitation. In connection with the
application of the annual wage limitation (see Sec. 31.3121(a)(1)-1),
tips reported by an employee to his employer in a written statement
furnished to the employer pursuant to section 6053(a) shall be taken
into account for purposes of the tax imposed by section 3101. However,
since tips received by an employee in the course of his employment do
not constitute remuneration for employment for purposes of the tax
imposed by section 3111, they are disregarded for purposes of the annual
wage limitation in respect of such tax. Accordingly, separate
computations for purposes of the annual wage limitation may be required
in respect of an employee who receives tips. The provisions of this
paragraph may be illustrated by the following example:
Example. During 1966, A is employed as a waiter by X restaurant and
is paid wages by X restaurant at the rate of $100 a week. At the end of
October 1966, A has been paid weekly wages in the amount of $4,300 and
has reported tips in the amount of $2,200. On November 6, 1966, A is
paid an additional week's wages in the amount of $100 and on November 9,
1966, A furnishes X restaurant a report
[[Page 101]]
of tips actually received by him during October. The annual wage
limitation of $6,600 (weekly wages of $4,400 ($4,300 plus $100) and tips
of $2,200) had been reached for purposes of the tax imposed by section
3101 prior to November 9 and, accordingly, no portion of the tips
included in the report furnished on that date constitutes wages.
However, since tips do not constitute remuneration for employment for
purposes of the tax imposed by section 3111, the weekly wages paid to A
during the remainder of 1966 will be subject to the tax imposed by
section 3111.
[T.D. 7001, 34 FR 1000, Jan. 23, 1969]
Sec. 31.3121(r)-1 Election of coverage by religious orders.
(a) In general. A religious order whose members are required to take
a vow of poverty, or any autonomous subdivision of such an order, may
elect to have the Federal old-age, survivors, and disability insurance
system established by title II of the Social Security Act extended to
services performed by its members in the exercise of duties required by
such order or subdivision. See section 3121(i)(4) and Sec. 31.3121(i)-4
for provisions relating to the computation of the amount of remuneration
of such members. For purposes of this section, a subdivision of a
religious order is autonomous if it directs and governs its members, if
it is responsible for its members' care and maintenance, if it is
responsible for the members' support and maintenance in retirement, and
if the members live under the authority of a religious superior who is
elected by them or appointed by higher authority.
(b) Definition of member--(1) In general. For purposes of section
3121(r) and this section, a member of a religious order means any
individual who is subject to a vow of poverty as a member of such order,
who performs tasks usually required (and to the extent usually required)
of an active member of such order, and who is not considered retired
because of old age or total disability.
(2) Retirement because of old age--(i) In general. For purposes of
section 3121(r)(2) and this paragraph, an individual is considered
retired because of old age if (A) in view of all the services performed
by the individual and the surrounding circumstances it is reasonable to
consider him to be retired, and (B) his retirement occurred by reason of
old age. Even though an individual performs some services in the
exercise of duties required by the religious order, the first test (the
retirement test) is met where it is reasonable to consider the
individual to be retired.
(ii) Factors to be considered. In determining whether it is
reasonable to consider an individual to be retired, consideration is
first to be given to all of the following factors:
(A) Nature of services. Consideration is given to the nature of the
services performed by the individual in the exercise of duties required
by his religious order. The more highly skilled and valuable such
services are, the more likely the individual rendering such services is
not reasonably considered retired. Also, whether such services are of a
type performed principally by retired members of the individual's
religious order may be significant.
(B) Amount of time. Consideration is also given to the amount of
time the individual devotes to the performance of services in the
exercise of duties required by his religious order. This time includes
all the time spent by him in any activity in connection with services
that might appropriately be performed in the exercise of duties required
of active members by the order. Normally, an individual who, solely by
reason of his advanced age, performs services of less than 45 hours per
month shall be considered retired. In no event shall an individual who,
solely by reason of his advanced age, performs services of less than 15
hours per month not be considered retired.
(C) Comparison of services rendered before and after retirement. In
addition, consideration is given to the nature and extent of the
services rendered by the individual before he ``retired,'' as compared
with the services performed thereafter. A large reduction in the
importance or amount of services performed by the individual in the
exercise of duties required by his religious order tends to show that
the individual is retired; absence of such reduction tends to show that
the individual is not retired. Normally, an individual who reduces by at
least 75 percent the amount of services performed shall be considered
retired.
[[Page 102]]
Where consideration of the factors described in paragraph (b)(2)(ii) of
this section does not establish whether an individual is or is not
reasonably considered retired, all other factors are considered.
(iii) Examples. The rules of this subparagraph may be illustrated by
the following examples:
Example 1. A is a member of a religious order who is subject to a
vow of poverty. A's religious order is principally engaged in providing
nursing services, and A has been fully trained in the nursing
profession. In accordance with the practices of her order, upon
attaining the age of 65, A is relieved of her nursing duties by reason
of her age, and is assigned to a mother house where she is required to
perform only such duties as light housekeeping and ordinary gardening. A
is reasonably considered retired since the services she is performing
are simple in nature, are markedly less skilled than those professional
services which she previously performed, are of a type performed
principally by retired members of her order, and are performed at a
location to which members frequently retire.
Example 2. Assume the same facts as in example 1 except that A is
not reassigned to a mother house. Instead, she is reassigned to full-
time duties in a hospital not utilizing her nursing skills. Whether A
has met the retirement test requires consideration of the nature of her
work. If A's new duties are almost entirely of a make-work nature
primarily to occupy her body and mind, she is reasonably considered
retired. However, if they are essential to the operation of the
hospital, she is not reasonably considered retired.
Example 3. B is a member of a religious order who is subject to a
vow of poverty. As such, he provides supportive services to his order,
such as housekeeping, cooking, and gardening. By reason of having
attained the age of 62, he reduces the number of hours spent per day in
these services from 8 hours to 2 hours. B is reasonably considered
retired in view of the large reduction in the amount of time he devotes
to his duties.
Example 4. C is a member of a religious order who is subject to a
vow of poverty. In his capacity as a member of the order, he performs
duties as president of a university. Upon attaining the age of 65, C is
relieved of his duties as president of the university and instead
becomes a member of its faculty, teaching two courses whereas full-time
members of the faculty normally teach four comparable courses. Although
C's duties are no longer as demanding as those he previously performed,
and although the amount of his time required for them is less than full
time, he is nonetheless performing duties requiring a high degree of
skill for a substantial amount of time. Accordingly, C is not reasonably
considered retired.
Example 5. Assume the same facts as in example 4, except that C
teaches only one course upon being relieved of his position as president
by reason of age. C is reasonably considered retired.
Example 6. D is a member of a contemplative order who is subject to
a vow of poverty. In accordance with the practices of his order, upon
attaining the age of 70, D reduces by 50 percent the amount of time
spent performing the normal duties of active members of his order. D is
not reasonably considered retired.
Example 7. Assume the same facts as in example 6, except that
because of his age D no longer participates in the more rigorous
liturgical services of the order and that the amount of time which he
spends in all duties which might appropriately be performed by active
members of his order is reduced by 75 percent. D is reasonably
considered retired in view of the large reduction in his participation
in the usual devotional routine of his order.
(3) Retirement because of total disability. For purposes of section
3121(r)(2) and this paragraph, an individual is considered retired
because of total disability (i) if he is unable, by reason of a
medically determinable physical or mental impairment, to perform the
tasks usually required of an active member of his order to the extent
necessary to maintain his status as an active member, and (ii) if such
impairment is reasonably expected to prevent his resumption of the
performance of such tasks to such extent. A physical or mental
impairment is an impairment that results from anatomical, physiological,
or psychological abnormalities which are demonstrable by medically
acceptable clinical and laboratory diagnostic techniques. Statements of
the individual, including his own description of his impairment
(symptoms), are, alone, insufficient to establish the presence of a
physical or mental impairment.
(4) Evidentiary requirements with respect to retirement. There shall
be attached to the return of taxes paid pursuant to an election under
section 3121(r) a summary of the facts upon which any determination has
been made by the religious order or autonomous subdivision that one or
more of its members retired during the period covered by such return.
Each summary
[[Page 103]]
shall contain the name and social security number of each such retired
member as well as the date of his retirement. Such order or subdivision
shall maintain records of the details relating to each such
``retirement'' sufficient to show whether or not such member or members
has in fact retired.
(c) Certificates of election--(1) In general. A religious order or
an autonomous subdivision of such an order desiring to make an election
of coverage pursuant to section 3121(r) and this section shall file a
certificate of election on Form SS-16 in accordance with the
instructions thereto. However, in the case of an election made before
August 9, 1973, a document other than Form SS-16 shall constitute a
certificate of election if it purports to be a binding election of
coverage and if it is filed with an appropriate official of the Internal
Revenue Service. Such a document shall be given the effect it would have
if it were a certificate of election containing the provisions required
by paragraph (c)(2) of this section. However, it should subsequently be
supplemented by a Form SS-16.
(2) Provisions of certificates. Each certificate of election shall
provide that--
(i) Such election of coverage by such order or subdivision shall be
irrevocable,
(ii) Such election shall apply to all current and future members of
such order, or in the case of a subdivision thereof to all current and
future members of such order who belong to such subdivision,
(iii) All services performed by a member of such order or
subdivision in the exercise of duties required by such order or
subdivision shall be deemed to have been performed by such member as an
employee of such order or subdivision, and
(iv) The wages of each member, upon which such order or subdivision
shall pay the taxes imposed on employees and employers by sections 3101
and 3111, will be determined as provided in section 3121(i)(4).
(d) Effective date of election--(1) In general. Except as provided
in paragraph (e) of this section, a certificate of election of coverage
filed by a religious order or its subdivision pursuant to section
3121(r) and this section shall be in effect, for purposes of section
3121(b)(8)(A) and for purposes of section 210(a)(8)(A) of the Social
Security Act, for the period beginning with whichever of the following
may be designated by the electing religious order or subdivision:
(i) The first day of the calendar quarter in which the certificate
is filed,
(ii) The first day of the calendar quarter immediately following the
quarter in which the certificate is filed, or
(iii) The first day of any calendar quarter preceding the calendar
quarter in which the certificate is filed, except that such date may not
be earlier than the first day of the 20th calendar quarter preceding the
quarter in which such certificate is filed.
(2) Retroactive elections. Whenever a date is designated as provided
in paragraph (d)(1)(iii) of this section, the election shall apply to
services performed before the quarter in which the certificate is filed
only if the member performing such services was a member at the time
such services were performed and is living on the first day of the
quarter in which such certificate is filed. Thus, the election applies
to an individual who is no longer a member of a religious order on the
first day of such quarter if he performed services as a member at any
time on or after the date so designated and is living on the first day
of the quarter in which such certificate is filed. For purposes of
computing interest and for purposes of section 6651 (relating to
additions to tax for failure to file tax return or to pay tax), in any
case in which such a date is designated the due date for the return and
payment of the tax, for calendar quarters prior to the quarter in which
the certificate is filed, resulting from the filing of such certificate
shall be the last day of the calendar month following the calendar
quarter in which the certificate is filed. The statutory period for the
assessment of the tax for such prior calendar quarters shall not expire
before the expiration of 3 years from such due date.
(e) Coordination with coverage of lay employees. If at the time the
certificate of election of coverage is filed by a religious order or
autonomous subdivision, a certificate of waiver of exemption
[[Page 104]]
under section 3121(k) (extending coverage to any lay employees) is not
in effect, the certificate of election shall not become effective unless
the order or subdivision files a Form SS-15, and a Form SS-15a to
accompany the certificate on Form SS-15, as provided by section 3121(k)
and Sec. Sec. 31.3121(k)-1 through 31.3121(k)-3. The preceding sentence
applies even though an order or subdivision has no lay employees at the
time it files a certificate of election of coverage. The effective date
of the certificate of waiver of exemption must be no later than the date
on which the certificate of election becomes effective, and it must be
specified on the certificate of waiver of exemption that such
certificate is irrevocable. The certificate of waiver of exemption
required under this paragraph shall be filed notwithstanding the
provisions of section 3121(k)(3) (relating to no renewal of the waiver
of exemption) which otherwise would prohibit the filing of a waiver of
exemption if an earlier waiver of exemption had previously been
terminated. If at the time the certificate of election of coverage is
filed a certificate of waiver of exemption is in effect with respect to
the electing religious order or autonomous subdivision, the filing of
the certificate of election shall constitute an amendment of the
certificate of waiver of exemption making the latter certificate
irrevocable.
[T.D. 7280, 38 FR 18370, July 10, 1973]
Sec. 31.3121(s)-1 Concurrent employment by related corporations with
common paymaster.
(a) In general. For purposes of sections 3102, 3111, and 3121(a)(1),
except as otherwise provided in paragraph (c) of this section, when two
or more related corporations concurrently employ the same individual and
compensate that individual through a common paymaster which is one of
the related corporations that employs the individual, each of the
corporations is considered to have paid only the remuneration it
actually disburses to that individual. This rule applies whether the
remuneration was paid with respect to the employment relationship of the
individual with the disbursing corporation or was paid on behalf of
another related corporation. Accordingly, if all of the remuneration to
the individual from the related corporations is disbursed through the
common paymaster, the total amount of taxes imposed with respect to the
remuneration under sections 3102 and 3111 is determined as though the
individual has only one employer (the common paymaster). The common
paymaster is responsible for filing information and tax returns and
issuing Forms W-2 with respect to wages it is considered to have paid
under this section. Section 3121(s) and this section apply only to
remuneration disbursed in the form of money, check or similar instrument
by one of the related corporations or its agent.
(b) Definitions. The definitions contained in this paragraph are
applicable only for purposes of this section and Sec. 31.3306(p)-1.
(1) Related corporations. Corporations shall be considered related
corporations for an entire calendar quarter (as defined in Sec. 31.0-
2(a)(9)) if they satisfy any one of the following four tests at any time
during that calendar quarter:
(i) The corporations are members of a ``controlled group of
corporations'', as defined in section 1563 of the Code, or would be
members if section 1563(a)(4) and (b) did not apply and if the phrase
``more than 50 percent'' were substituted for the phrase ``at least 80
percent'' wherever it appears in section 1563(a).
(ii) In the case of a corporation that does not issue stock, either
fifty percent or more of the members of one corporation's board of
directors (or other governing body) are members of the other
corporation's board of directors (or other governing body), or the
holders of fifty percent or more of the voting power to select such
members are concurrently the holders of more than fifty percent of that
power with respect to the other corporation.
(iii) Fifty percent or more of one corporation's officers are
concurrently officers of the other corporation.
(iv) Thirty percent or more of one corporation's employees are
concurrently employees of the other corporation.
The following examples illustrate the application of this paragraph:
[[Page 105]]
Example 1. (a) X Corporation employs individuals A, B, D, E, F, G,
and H. Y Corporation employs individuals A, B, and C. Z Corporation
employs individuals A, C, I, J, K, L, and M. X Corporation is the
paymaster for all thirteen individuals. The corporations have no
officers or stockholders in common.
(b) X and Y are related corporations because at least 30 percent of
Y's employees are also employees of X. Y and Z are related corporations
because at least 30 percent of Y's employees are also employees of Z. X
and Z are not related corporations because neither corporation has 30
percent of its employees concurrently employed by the other corporation.
(c) For purposes of determining the amount of the tax liability
under sections 3102 and 3111, individual B is treated as having one
employer. Individual C has two employers for these purposes, although Y
and Z are related corporations, because C is not employed by X
Corporation, the common paymaster. Individual A also is treated as
having two employers for the purposes of these sections because X and Y
Corporations are treated as one employer, and Z Corporation is treated
as a second employer (since it is not related to the paymaster, X
Corporation). Of course, individuals D, E, F, G, H, I, J, K, L, and M
are not concurrently employed by two or more corporations, and,
accordingly, section 3121 (s) is inapplicable to them.
Example 2. M and N Corporations are both related to Corporation O
but are not related to each other. Individual A is concurrently employed
by all three corporations and paid by O, their common paymaster.
Although M and N are not related, O is treated as the employer for A's
employment with M, N, and O.
Example 3. Corporations X, Y, and Z meet the definition of related
corporations for the first time on April 12, 1979, and cease to meet it
on July 5, 1979. A is concurrently employed by X, Y, and Z throughout
1979. In each of the four calendar quarters of 1979, A's remuneration
from X, Y, and Z is $2,000, $10,000, and $30,000, respectively. All of
the remuneration to A from X, Y, and Z for the year is disbursed by X,
the common paymaster. Under these circumstances, the amount of wages
subject to sections 3102 and 3111 is as follows:
For the first calendar quarter
X Y Z
$2,000 $10,000 $22,900
For the second calendar quarter
X Y Z
$20,900 0 0
($22,900-$2,000)
For the third calendar quarter
X Y Z
0 0 0
For the fourth calendar quarter
X Y Z
0 $10,000 0
Of course, if the corporations had been related throughout all of 1979,
only $22,900 of X's first quarter disbursement would have constituted
wages subject to sections 3102 and 3111.
(2) Common paymaster--(i) In general. A common paymaster of a group
of related corporations is any member thereof that disburses
remuneration to employees of two or more of those corporations on their
behalf and that is responsible for keeping books and records for the
payroll with respect to those employees. The common paymaster is not
required to disburse remuneration to all the employees of those two or
more related corporations, but the provisions of this section do not
apply to any remuneration to an employee that is not disbursed through a
common paymaster. The common paymaster may pay concurrently employed
individuals under this section by one combined paycheck, drawn on a
single bank account, or by separate paychecks, drawn by the common
paymaster on the accounts of one or more employing corporations.
(ii) Multiple common paymasters. A group of related corporations may
have more than one common paymaster. Some of the related corporations
may use one common paymaster and others of the related corporations use
another common paymaster with respect to a certain class of employees. A
corporation that uses a common paymaster to disburse remuneration to
certain of its employees may use a different common paymaster to
disburse remuneration to other employees.
(iii) Examples. The rules of this subparagraph are illustrated by
the following examples:
Example 1. S, T, U, and V are related corporations with 2,000
employees collectively. Forty of these employees are concurrently
[[Page 106]]
employed by two or more of the corporations, during a calendar quarter.
The four corporations arrange for S to disburse remuneration to thirty
of these forty employees for their services. Under these facts, S is the
common paymaster of S, T, U, and V with respect to the thirty employees.
S is not a common paymaster with respect to the remaining employees.
Example 2. (a) W, X, Y, and Z are related corporations. The
corporations collectively have 20,000 employees. Two hundred of the
employees are top-level executives and managers, sixty of whom are
concurrently employed by two or more of the corporations during a
calendar quarter. Six thousand of the employees are skilled artisans,
all of whom are concurrently employed by two or more of the corporations
during the calendar year. The four corporations arrange for Z to
disburse remuneration to the sixty executives who are concurrently
employed by two or more of the corporations. W and X arrange for X to
disburse remuneration to the artisans who are concurrently employed by W
and X.
(b) A is an executive who is concurrently employed only by W, Y, and
Z during the calendar year. Under these facts, Z is a common paymaster
for W, Y, and Z with respect to A. Assuming that the other requirements
of this section are met, the amount of the tax liability under sections
3102 and 3111 is determined as if Z were A's only employer for the
calendar quarter.
(c) B is a skilled artisan who is concurrently employed only by W
and X during the calendar year. Under these facts, X is a common
paymaster for S and X with respect to B. Assuming that the other
requirements of this section are met, the amount of the tax liability
under sections 3102 and 3111 is determined as if X were B's only
employer for the calendar quarter.
(3) Concurrent employment. For purposes of this section, the term
``concurrent employment'' means the contemporaneous existence of an
employment relationship (within the meaning of section 3121(b)) between
an individual and two or more corporations. Such a relationship
contemplates the performance of services by the employee for the benefit
of the employing corporation (not merely for the benefit of the group of
corporations), in exchange for remuneration which, if deductible for the
purposes of Federal income tax, would be deductible by the employing
corporation. The contemporaneous existence of an employment relationship
with each corporation is the decisive factor; if it exists, the fact
that a particular employee is on leave or otherwise temporarily inactive
is immaterial. However, employment is not concurrent with respect to one
of the related corporations if the employee's employment relationship
with that corporation is completely nonexistent during periods when the
employee is not performing services for that corporation. An employment
relationship is completely nonexistent if all rights and obligations of
the employer and employee with respect to employment have terminated,
other than those that customarily exist after employment relationships
terminate. Examples of rights and obligations that customarily exist
after employment relationships terminate include those with respect to
remuneration not yet paid, employer's property used by the employee not
yet returned to the employer, severance pay, and lump-sum termination
payments from a deferred compensation plan. Circumstances that suggest
that an employment relationship has become completely nonexistent
include unconditional termination of participation in deferred
compensation plans of the employer, forfeiture of seniority claims, and
forfeiture of unused fringe benefits such as vacation or sick pay. Of
course, the continued existence of an employment relationship between an
individual and a corporation is not necessarily established by the
individual's continued participation in a deferred compensation plan,
retention of seniority rights, etc., since continuation of those
benefits may be attributable to employment with a second corporation
related to the first corporation if the corporations have common
benefits plans or if the benefits are continued as a matter of corporate
reciprocity. An individual who does not perform substantial services in
exchange for remuneration from a corporation is presumed not employed by
that corporation. Concurrent employment need not exist for any
particular length of time to meet the requirements of this section, but
this section only applies to remuneration disbursed by a common
paymaster to an individual who is concurrently employed by the common
paymaster and at least one other related corporation at the time the
individual performs the services for which the remuneration is
[[Page 107]]
paid. If the employment relationship is nonexistent during a quarter,
that employee may not be counted towards the 30-percent test set forth
in paragraph (b)(1)(iv) of this section; however, even if the employment
relationship is nonexistent, section 3121(s) of the Code would apply to
remuneration paid to the former employee for services rendered while the
employee was a common employee. The principles of this subparagraph are
illustrated by the following examples.
Example 1. M, N, and O are related corporations which use N as a
common paymaster with respect to officers. Their respective headquarters
are located in three separate cities several hundred miles apart. A is
an officer of M, N, and O who performs substantial services for each
corporation. A does not work a set length of time at each corporate
headquarters, and when A leaves one corporate headquarters, it is not
known when A will return, although it is expected that A will return.
Under these facts, A is concurrently employed by the three corporations.
Example 2. P, Q, and R are related corporations whose geographical
zones of business activity do not overlap. P, Q, and R have a common
pension plan and arrange for Q to be a common paymaster for managers and
executives. All three corporations maintain cafeterias for the use of
their employees. B is a cafeteria manager who has worked at P's
headquarters for 3 years. On June 1, 1980, B is transferred from P to
the position of cafeteria manager of R. There are no plans for B's
return to P. B's accrued pension benefits, vacation and sick pay, do not
change as a result of the transfer. The decision to transfer B was made
by Q, the parent corporation. Under these facts, B is not concurrently
employed by P and R, because B's employment relationship with P was
completely nonexistent during B's employment with R. Furthermore,
section 3121(s) is inapplicable since B also was not employed by Q, the
common paymaster, because B never contracted to perform services for
remuneration from Q, and Q did not have the right to control the day-to-
day duties of B's work.
Example 3. C is employed by two related corporations, S and T. C was
concurrently employed by these corporations between April 1, 1979, and
June 30, 1979. The corporations used T as the common paymaster with
respect to C's wages between May 1, 1979, and September 30, 1979. T pays
C on May 15 for services performed between April 1 and April 30, on July
15 for services performed between June 1 and June 30, and on August 15
for services performed between July 1 and July 31. Section 3121 (s)
applies to the first two payments but does not apply to the third
payment (there was no concurrent employment). However, if the third
payment was made by T for services performed for T, T counts the amounts
previously disbursed to C in 1979 while C was concurrently employed by S
and T towards the wage base (see section 3121 (a)(1)).
(c) Allocation of employment taxes--(1) Responsibility to pay tax.
If the requirements of this section are met, the common paymaster has
the primary responsibility for remitting taxes pursuant to sections 3102
and 3111 with respect to the remuneration it disburses as the common
paymaster. The common paymaster computes these taxes as though it were
the sole employer of the concurrently employed individuals. If the
common paymaster fails to remit these taxes (in whole or in part), it
remains liable for the full amount of the unpaid portion of these taxes.
In addition, each of the other related corporations using the common
paymaster is jointly and severally liable for its appropriate share of
these taxes. That share is an amount equal to the lesser of:
(i) The amount of the liability of the common paymaster under
section 3121(s), after taking account of any tax payments made, or
(ii) The amount of the liability under sections 3102 and 3111 which,
but for section 3121(s), would have existed with respect to the
remuneration from such other related corporation, reduced by an
allocable portion of any taxes previously paid by the common paymaster
with respect to that remuneration.
The portion of taxes previously paid by the common paymaster that is
allocable to each related corporation is determined by multiplying the
amount of taxes paid by a fraction, the numerator of which is the
portion of the amount of employment tax liability of the common
paymaster under section 3121(s) that is allocable to such related
corporation under paragraph (c)(2) of this section, and the denominator
of which is the total amount of the common paymaster's liability under
section 3121(s), both determined without regard to any prior tax
payments. These rules apply whether or not the tax on employees was
withheld from the employees' wages.
[[Page 108]]
(2) Allocation of tax--(i) In general. If the related corporations
maintain a record of the remuneration disbursed to the employee for
services performed for each corporation, the remuneration-based
allocation rules of paragraph (c)(2)(ii) of this section apply. If the
related corporations do not maintain this record of remuneration, the
group-wide allocation rules of paragraph (c)(2)(iii) of this section
apply. In all cases, allocations must be made with respect to each
payment of wages. The allocation of employment tax liabilities pursuant
to this subparagraph also determines which related corporation may be
entitled to income tax deductions with respect to the payments of those
taxes.
(ii) Remuneration-based allocation rules. Under the remuneration-
based method of allocation, each related corporation that remunerates an
employee through a common paymaster has allocated to it for each pay
period an amount of tax determined according to the following formula:
Portion of wage payment constituting
re-
muneration to the employee for .. Tax on employees under
services section 3102 and
performed for the corporation .. tax on employers under
section 3111
------------------------------------- x that the common paymaster is
--------- required
Total wage payment constituting remu- .. to remit with respect to the
wage pay-
neration to the employee for all .. ment
services
performed for the related
corporations
using the common paymaster
If the remuneration disbursed to an employee for services performed for
a corporation is inappropriate, the district director may adjust the
remuneration records of the related corporations to reflect appropriate
remuneration. The district director may use the principles of Sec.
1.482-2(b) in making the adjustments.
Example. (i) X and Y are related corporations which use Y as common
paymaster for their executives. A is a concurrently employed executive
who performs services during the first quarter of 1979 for X and Y. Y
remunerates $4,000 gross pay every week to A, calculated as follows:
----------------------------------------------------------------------------------------------------------------
Remuneration Tax on
------------------------------------------ Tax on employees
Wage payments employers withheld Total
X Y Total under under
section 3111 section 3102
----------------------------------------------------------------------------------------------------------------
1........................... $3,000 $1,000 $4,000 $245.20 $245.20 $490.40
2-3......................... ............ 8,000 8,000 490.40 490.40 980.80
4........................... 1,000 3,000 4,000 245.20 245.20 490.40
5........................... 4,000 ............ 4,000 245.20 245.20 490.40
6........................... 2,000 2,000 4,000 177.77 177.77 355.54
7-13........................ 10,000 18,000 28,000 0 0 0
-----------------------------------------------------------------------------------
Total................... 20,000 32,000 52,000 1,403.77 1,403.77 2,807.54
----------------------------------------------------------------------------------------------------------------
The amounts of remuneration to A are determined by the district
director to be appropriate. Under these facts, the tax is allocated to X
and Y in the following amounts:
[[Page 109]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.016
(ii) If Y remits none of the taxes to the Internal Revenue Service,
X is liable for $2,452.00 (the entire amount due pursuant to sections
3102 and 3111 with respect to the remuneration to A from X) (12.26% x
$20,000). Any amount remitted by X to the Internal Revenue Service under
these circumstances is also credited against the liability of the common
paymaster, Y. However, only the portion of the employment taxes
allocated to X under (i) above may be deducted by X as employment taxes
paid by it in respect of wages paid by it to its employees.
(iii) If Y remits $1,000.00 of the total $2,807.54 due, Y as common
paymaster remains liable for $1,807.54 ($2,807.54 minus $1,000). X's
liability is the lesser of $1,807.54 (the liability of the common
paymaster), or X's total liability, in the absence of section 3121 (s),
on wages paid through the common paymaster ($2,452.00) minus a credit
for an allocable part of the amount remitted by Y. The part is $412.66
[GRAPHIC] [TIFF OMITTED] TC05OC91.017
(iii) Group-wide allocation rules. Under the group-wide method of
allocation, the Commissioner may allocate the taxes imposed by sections
3102 and 3111 in an appropriate manner to a related corporation that
remunerates an employee through a common paymaster if the common
paymaster fails to remit the taxes to the Internal Revenue Service.
Allocation in an appropriate manner varies according to the
circumstances. It may be based on sales, property, corporate payroll, or
any other basis that reflects the distribution of the services performed
by the employee, or a combination of the foregoing bases. To the extent
practicable, the Commissioner may use the principles of Sec. 1.482-2(b)
of this chapter in making the allocations with respect to wages paid
after December 31, 1978, and on or before July 31, 2009. To the extent
practicable, the Commissioner may use the principles of Sec. 1.482-9 of
this chapter in making the allocations with respect to wages paid after
July 31, 2009.
(d) Effective/applicability date--(1) In general. This section is
applicable with respect to wages paid after December 31, 1978. The
fourth sentence of paragraph (c)(2)(iii) of this section is applicable
with respect to wages paid after December 31, 1978, and on or before
July 31, 2009. The fifth sentence of paragraph (c)(2)(iii) of this
section is applicable with respect to wages paid after July 31, 2009.
(2) Election to apply regulation to earlier taxable years. A person
may elect to apply the fifth sentence of paragraph (c)(2)(iii) of this
section to earlier taxable years in accordance with the rules set forth
in Sec. 1.482-9(n)(2) of this chapter.
[T.D. 7660, 44 FR 75139, Dec. 19, 1979; 45 FR 17986, Mar. 20, 1980, as
amended by T.D. 9278, 71 FR 44519, Aug. 4, 2006; T.D. 9456, 74 FR 38876,
Aug. 4, 2009]
[[Page 110]]
Sec. 31.3121(v)(2)-1 Treatment of amounts deferred under certain
nonqualified deferred compensation plans.
(a) Timing of wage inclusion--(1) General timing rule for wages.
Remuneration for employment that constitutes wages within the meaning of
section 3121(a) generally is taken into account for purposes of the
Federal Insurance Contributions Act (FICA) taxes imposed under sections
3101 and 3111 at the time the remuneration is actually or constructively
paid. See Sec. 31.3121(a)-2(a).
(2) Special timing rule for an amount deferred under a nonqualified
deferred compensation plan--(i) In general. To the extent that
remuneration deferred under a nonqualified deferred compensation plan
constitutes wages within the meaning of section 3121(a), the
remuneration is subject to the special timing rule described in this
paragraph (a)(2). Remuneration is considered deferred under a
nonqualified deferred compensation plan within the meaning of section
3121(v)(2) and this section only if it is provided pursuant to a plan
described in paragraph (b) of this section. The amount deferred under a
nonqualified deferred compensation plan is determined under paragraph
(c) of this section.
(ii) Special timing rule. Except as otherwise provided in this
section, an amount deferred under a nonqualified deferred compensation
plan is required to be taken into account as wages for FICA tax purposes
as of the later of--
(A) The date on which the services creating the right to that amount
are performed (within the meaning of paragraph (e)(2) of this section);
or
(B) The date on which the right to that amount is no longer subject
to a substantial risk of forfeiture (within the meaning of paragraph
(e)(3) of this section).
(iii) Inclusion in wages only once (nonduplication rule). Once an
amount deferred under a nonqualified deferred compensation plan is taken
into account (within the meaning of paragraph (d)(1) of this section),
then neither the amount taken into account nor the income attributable
to the amount taken into account (within the meaning of paragraph (d)(2)
of this section) is treated as wages for FICA tax purposes at any time
thereafter.
(iv) Benefits that do not result from a deferral of compensation. If
a nonqualified deferred compensation plan (within the meaning of
paragraph (b)(1) of this section) provides both a benefit that results
from the deferral of compensation (within the meaning of paragraph
(b)(3) of this section) and a benefit that does not result from the
deferral of compensation, the benefit that does not result from the
deferral of compensation is not subject to the special timing rule
described in this paragraph (a)(2). For example, if a nonqualified
deferred compensation plan provides retirement benefits which result
from the deferral of compensation and disability pay (within the meaning
of paragraph (b)(4)(iv)(C) of this section) which does not result from
the deferral of compensation, the retirement benefits provided under the
plan are subject to the special timing rule in this paragraph (a)(2) and
the disability pay is not.
(v) Remuneration that does not constitute wages. If remuneration
under a nonqualified deferred compensation plan does not constitute
wages within the meaning of section 3121(a), then that remuneration is
not taken into account as wages for FICA tax purposes under either the
general timing rule described in paragraph (a)(1) of this section or the
special timing rule described in this paragraph (a)(2). For example,
benefits under a death benefit plan described in section 3121(a)(13) do
not constitute wages for FICA tax purposes. Therefore, these benefits
are not included as wages under the general timing rule described in
paragraph (a)(1) of this section or the special timing rule described in
this paragraph (a)(2), even if the death benefit plan would otherwise be
considered a nonqualified deferred compensation plan within the meaning
of paragraph (b)(1) of this section.
(b) Nonqualified deferred compensation plan--(1) In general. For
purposes of this section, the term nonqualified deferred compensation
plan means any plan or other arrangement, other than a plan described in
section 3121(a)(5), that is established (within the meaning of paragraph
(b)(2) of this section) by
[[Page 111]]
an employer for one or more of its employees, and that provides for the
deferral of compensation (within the meaning of paragraph (b)(3) of this
section). A nonqualified deferred compensation plan may be adopted
unilaterally by the employer or may be negotiated among or agreed to by
the employer and one or more employees or employee representatives. A
plan may constitute a nonqualified deferred compensation plan under this
section without regard to whether the deferrals under the plan are made
pursuant to an election by the employee or whether the amounts deferred
are treated as deferred compensation for income tax purposes (e.g.,
whether the amounts are subject to the deduction rules of section 404).
In addition, a plan may constitute a nonqualified deferred compensation
plan under this section whether or not it is an employee benefit plan
under section 3(3) of the Employee Retirement Income Security Act of
1974 (ERISA), as amended (29 U.S.C. 1002(3)). For purposes of this
section, except where the context indicates otherwise, the term plan
includes a plan or other arrangement.
(2) Plan establishment--(i) Date plan is established. For purposes
of this section, a plan is established on the latest of the date on
which it is adopted, the date on which it is effective, and the date on
which the material terms of the plan are set forth in writing. For
purposes of this section, a plan will be deemed to be set forth in
writing if it is set forth in any other form that is approved by the
Commissioner. The material terms of the plan include the amount (or the
method or formula for determining the amount) of deferred compensation
to be provided under the plan and the time when it may or will be
provided.
(ii) Plan amendments. In the case of an amendment that increases the
amount deferred under a nonqualified deferred compensation plan, the
plan is not considered established with respect to the additional amount
deferred until the plan, as amended, is established in accordance with
paragraph (b)(2)(i) of this section.
(iii) Transition rule for written plan requirement. For purposes of
this section, an unwritten plan that was adopted and effective before
March 25, 1996, is treated as established under this section as of the
later of the date on which it was adopted or became effective, provided
that the material terms of the plan are set forth in writing before
January 1, 2000.
(3) Plan must provide for the deferral of compensation--(i) Deferral
of compensation defined. A plan provides for the deferral of
compensation with respect to an employee only if, under the terms of the
plan and the relevant facts and circumstances, the employee has a
legally binding right during a calendar year to compensation that has
not been actually or constructively received and that, pursuant to the
terms of the plan, is payable to (or on behalf of) the employee in a
later year. An employee does not have a legally binding right to
compensation if that compensation may be unilaterally reduced or
eliminated by the employer after the services creating the right to the
compensation have been performed. For this purpose, compensation is not
considered subject to unilateral reduction or elimination merely because
it may be reduced or eliminated by operation of the objective terms of
the plan, such as the application of an objective provision creating a
substantial risk of forfeiture (within the meaning of section 83).
Similarly, an employee does not fail to have a legally binding right to
compensation merely because the amount of compensation is determined
under a formula that provides for benefits to be offset by benefits
provided under a plan that is qualified under section 401(a), or because
benefits are reduced due to investment losses or, in a final average pay
plan, subsequent decreases in compensation.
(ii) Compensation payable pursuant to the employer's customary
payment timing arrangement. There is no deferral of compensation (within
the meaning of this paragraph (b)(3)) merely because compensation is
paid after the last day of a calendar year pursuant to the timing
arrangement under which the employer ordinarily compensates employees
for services performed during a payroll period described in section
3401(b).
(iii) Short-term deferrals. If, under a nonqualified deferred
compensation
[[Page 112]]
plan, there is a deferral of compensation (within the meaning of this
paragraph (b)(3)) that causes an amount to be deferred from a calendar
year to a date that is not more than a brief period of time after the
end of that calendar year, then, at the employer's option, that amount
may be treated as if it were not subject to the special timing rule
described in paragraph (a)(2) of this section. An employer may apply
this option only if the employer does so for all employees covered by
the plan and all substantially similar nonqualified deferred
compensation plans. For purposes of this paragraph (b)(3)(iii), whether
compensation is deferred to a date that is not more than a brief period
of time after the end of a calendar year is determined in accordance
with Sec. 1.404(b)-1T, Q&A-2, of this chapter.
(4) Plans, arrangements, and benefits that do not provide for the
deferral of compensation--(i) In general. Notwithstanding paragraph
(b)(3)(i) of this section, an amount or benefit described in any of
paragraphs (b)(4)(ii) through (viii) of this section is not treated as
resulting from the deferral of compensation for purposes of section
3121(v)(2) and this section and, thus, is not subject to the special
timing rule of paragraph (a)(2) of this section.
(ii) Stock options, stock appreciation rights, and other stock value
rights. The grant of a stock option, stock appreciation right, or other
stock value right does not constitute the deferral of compensation for
purposes of section 3121(v)(2). In addition, amounts received as a
result of the exercise of a stock option, stock appreciation right, or
other stock value right do not result from the deferral of compensation
for purposes of section 3121(v)(2) if such amounts are actually or
constructively received in the calendar year of the exercise. For
purposes of this paragraph (b)(4)(ii), a stock value right is a right
granted to an employee with respect to one or more shares of employer
stock that, to the extent exercised, entitles the employee to a payment
for each share of stock equal to the excess, or a percentage of the
excess, of the value of a share of the employer's stock on the date of
exercise over a specified price (greater than zero).
Thus, for example, the term stock value right does not include a
phantom stock or other arrangement under which an employee is awarded
the right to receive a fixed payment equal to the value of a specified
number of shares of employer stock.
(iii) Restricted property. If an employee receives property from, or
pursuant to, a plan maintained by an employer, there is no deferral of
compensation (within the meaning of section 3121(v)(2)) merely because
the value of the property is not includible in income (under section 83)
in the year of receipt by reason of the property being nontransferable
and subject to a substantial risk of forfeiture. However, a plan under
which an employee obtains a legally binding right to receive property
(whether or not the property is restricted property) in a future year
may provide for the deferral of compensation within the meaning of
paragraph (b)(3) of this section and, accordingly, may constitute a
nonqualified deferred compensation plan, even though benefits under the
plan are or may be paid in the form of property.
(iv) Certain welfare benefits--(A) In general. Vacation benefits,
sick leave, compensatory time, disability pay, severance pay, and death
benefits do not result from the deferral of compensation for purposes of
section 3121(v)(2), even if those benefits constitute wages within the
meaning of section 3121(a).
(B) Severance pay. Benefits that are provided under a severance pay
arrangement (within the meaning of section 3(2)(B)(i) of ERISA) that
satisfies the conditions in 29 CFR 2510.3-2(b)(1)(i) through (iii) are
considered severance pay for purposes of this paragraph (b)(4)(iv). If
benefits are provided under a severance pay arrangement (within the
meaning of section 3(2)(B)(i) of ERISA), but do not satisfy one or more
of the conditions in 29 CFR 2510.3-2(b)(1)(i) through (iii), then
whether those benefits are severance pay within the meaning of this
paragraph (b)(4)(iv) depends upon the relevant facts and circumstances.
For this purpose, relevant facts and circumstances include whether the
benefits are provided over a short period of time commencing immediately
after
[[Page 113]]
(or shortly after) termination of employment or for a substantial period
of time following termination of employment and whether the benefits are
provided after any termination or only after retirement (or another
specified type of termination). Benefits provided under a severance pay
arrangement (within the meaning of section 3(2)(B)(i) of ERISA) are in
all cases severance pay within the meaning of this paragraph (b)(4)(iv)
if the benefits payable under the plan upon an employee's termination of
employment are payable only if that termination is involuntary.
(C) Death benefits and disability pay--(1) General definition.
Payments made under a nonqualified deferred compensation plan in the
event of death are death benefits within the meaning of this paragraph
(b)(4)(iv), but only to the extent the total benefits payable under the
plan exceed the lifetime benefits payable under the plan. Similarly,
payments made under a nonqualified deferred compensation plan in the
event of disability are disability pay within the meaning of this
paragraph (b)(4)(iv), but only to the extent the disability benefits
payable under the plan exceed the lifetime benefits payable under the
plan. Accordingly, any benefits that a nonqualified deferred
compensation plan provides in the event of death or disability that are
associated with an amount deferred under this section are disregarded in
applying this section to the extent the benefits payable under the plan
in the event of death or in the event of disability have a value in
excess of the lifetime benefits payable under the plan.
(2) Total benefits payable defined. For purposes of paragraph
(b)(4)(iv)(C)(1) of this section, the term total benefits payable under
a plan means the present value of the total benefits payable to or on
behalf of the employee (including benefits payable in the event of the
employee's death) under the plan, disregarding any benefits that are
payable only in the event of disability and determined separately with
respect to each form of distribution or other election that may apply
with respect to the employee.
(3) Disability benefits payable defined. For purposes of paragraph
(b)(4)(iv)(C)(1) of this section, the term disability benefits payable
under a plan means the present value of the benefits payable to or on
behalf of the employee under the plan, including benefits payable in the
event of the employee's disability but excluding death benefits within
the meaning of this paragraph (b)(4)(iv).
(4) Lifetime benefits payable defined. For purposes of paragraph
(b)(4)(iv)(C)(1) of this section, the term lifetime benefits payable
under a plan means the present value of the benefits that could be
payable to the employee under the plan during the employee's lifetime,
determined under the plan's optional form of distribution or other
election that is or was available to the employee at any time with
respect to the amount deferred and that provides the largest present
value to the employee during the employee's lifetime of any such form or
election so available.
(5) Rules of application. For purposes of determining present value
under this paragraph (b)(4)(iv)(C), present value is determined as of
the time immediately preceding the time the amount deferred under a
nonqualified deferred compensation plan is required to be taken into
account under paragraph (e) of this section, using actuarial assumptions
that are reasonable as of that date but taking into consideration only
benefits that result from the deferral of compensation, as determined
under this paragraph (b), and benefits payable in the event of death or
disability. In addition, for purposes of paragraph (b)(4)(iv)(C)(4) of
this section, present value must be determined without any discount for
the probability that the employee may die before benefit payments
commence and without regard to any benefits payable solely in the event
of disability.
(v) Certain benefits provided in connection with impending
termination--(A) In general. Benefits provided in connection with
impending termination of employment under paragraph (b)(4)(v)(B) or (C)
of this section do not result from the deferral of compensation within
the meaning of section 3121(v)(2).
[[Page 114]]
(B) Window benefits--(1) In general. For purposes of this paragraph
(b)(4)(v), except as provided in paragraph (b)(4)(v)(B)(3) of this
section, a window benefit is provided in connection with impending
termination of employment. For this purpose, a window benefit is an
early retirement benefit, retirement-type subsidy, social security
supplement, or other form of benefit made available by an employer for a
limited period of time (no greater than one year) to employees who
terminate employment during that period or to employees who terminate
employment during that period under specified circumstances.
(2) Special rule for recurring window benefits. A benefit will not
be considered a window benefit if an employer establishes a pattern of
repeatedly providing for similar benefits in similar situations for
substantially consecutive, limited periods of time. Whether the
recurrence of these benefits constitutes a pattern of amendments is
determined based on the facts and circumstances. Although no one factor
is determinative, relevant factors include whether the benefits are on
account of a specific business event or condition, the degree to which
the benefits relate to the event or condition, and whether the event or
condition is temporary or discrete or is a permanent aspect of the
employer's business.
(3) Transition rule for window benefits. In the case of a window
benefit that is made available for a period of time that begins before
January 1, 2000, an employer may choose to treat the window benefit as a
benefit that results from the deferral of compensation if the sole
reason the window benefit would otherwise fail to be provided pursuant
to a nonqualified deferred compensation plan is the application of
paragraph (b)(4)(v)(B)(1) of this section.
(C) Termination within 12 months of establishment of a benefit or
plan. For purposes of this paragraph (b)(4)(v), a benefit is provided in
connection with impending termination of employment, without regard to
whether it constitutes a window benefit, if--
(1) An employee's termination of employment occurs within 12 months
of the establishment of the plan (or amendment) providing the benefit;
and
(2) The facts and circumstances indicate that the plan (or
amendment) is established in contemplation of the employee's impending
termination of employment.
(vi) Benefits established after termination. Benefits established
with respect to an employee after the employee's termination of
employment do not result from a deferral of compensation within the
meaning of section 3121(v)(2). However, cost-of-living adjustments on
benefit payments under a nonqualified deferred compensation plan (within
the meaning of paragraph (b) of this section) shall not be considered
benefits established after the employee's termination of employment for
purposes of this paragraph (b)(4)(vi) merely because the employee does
not obtain the right to the adjustment until after the employee's
termination of employment. For purposes of the preceding sentence, cost-
of-living adjustments are payments that satisfy conditions similar to
those of 29 CFR 2510.3-2(g)(1)(ii) and (iii).
(vii) Excess parachute payments. An excess parachute payment (as
defined in section 280G(b)) under an agreement entered into or renewed
after June 14, 1984, in taxable years ending after such date, does not
result from the deferral of compensation within the meaning of section
3121(v)(2). For this purpose, any contract entered into before June 15,
1984, that is amended after June 14, 1984, in any relevant significant
aspect, is treated as a contract entered into after June 14, 1984.
(viii) Compensation for current services. A plan does not provide
for the deferral of compensation within the meaning of section
3121(v)(2) if, based on the relevant facts and circumstances, the
compensation is paid for current services.
(5) Examples. This paragraph (b) is illustrated by the following
examples:
Example 1: (i) In December of 2001, Employer L tells Employee A
that, if specified goals are satisfied for 2002, Employee A will receive
a bonus on July 1, 2003, equal to a specified percentage of 2002
compensation. Because Employee A meets the specified goals, Employer L
pays the bonus to Employee A on July 1, 2003, consistent with its oral
commitment.
[[Page 115]]
(ii) This arrangement is not a nonqualified deferred compensation
plan under this section because its terms were not set forth in writing
and, therefore, it was not established in accordance with paragraph
(b)(2) of this section.
Example 2: (i) In 2004, Employer M establishes a compensation
arrangement for Employee B under which Employer M agrees to pay Employee
B a specified amount based on a percentage of his salary for 2004. The
amount due is to be paid out of the general assets of Employer M and is
payable in 2008.
(ii) Employee B has a legally binding right during 2004 to an amount
of compensation that has not been actually or constructively received
and that, pursuant to the terms of the arrangement, is payable in a
later year. Therefore, the arrangement provides for the deferral of
compensation.
Example 3: (i) Employer N establishes a nonqualified deferred
compensation plan (within the meaning of paragraph (b)(1) of this
section) for Employee C in 1984. The plan is amended on January 1, 2001,
to increase benefits, and the amendment provides that the increase in
benefits is on account of Employee C's performance of services for
Employer N from 1985 through 2000.
(ii) The additional benefits that resulted from the plan amendment
cannot be taken into account as amounts deferred for 1985 through 2000,
even though the plan was established before then. Pursuant to paragraphs
(b)(2)(ii) and (e)(1) of this section, the additional benefits cannot be
taken into account before the latest of the date on which the amendment
is adopted, the date on which the amendment is effective, or the date on
which the material terms of the plan, as amended, are set forth in
writing.
Example 4: (i) In 2002, Employer O, a state or local government,
establishes a plan for certain employees that provides for the deferral
of compensation and that is subject to section 457(a).
(ii) Paragraph (b)(1) of this section provides that nonqualified
deferred compensation plan means any plan that is established by an
employer and that provides for the deferral of compensation, other than
a plan described in section 3121(a)(5). Section 3121(a)(5) lists, among
other plans, an exempt governmental deferred compensation plan as
defined in section 3121(v)(3). Under section 3121(v)(3)(A), this
definition does not include any plan to which section 457(a) applies.
Thus, the plan established by Employer O is not an exempt governmental
deferred compensation plan described in section 3121(v)(3) and,
consequently, is not a plan described in section 3121(a)(5).
Accordingly, the plan is a nonqualified deferred compensation plan
within the meaning of section 3121(v)(2) and paragraph (b)(1) of this
section.
(iii) However, the general timing rule of paragraph (a)(1) of this
section and the special timing rule of paragraph (a)(2) of this section
apply only to remuneration for employment that constitutes wages. Under
section 3121(b)(7), certain service performed in the employ of a state,
or any political subdivision of a state, is not employment. Thus, even
though the plan is a nonqualified deferred compensation plan, the extent
to which section 3121(v)(2) applies to a participating employee will
depend on whether or not the service performed for Employer O is
excluded from the definition of employment under section 3121(b)(7).
Example 5: (i) In 2000, Employer P establishes a plan that provides
for bonuses to be paid to employees based on an objective formula that
takes into account the employees' performance for the year. Employer P
does not have the discretion to reduce the amount of any employee's
bonus after the end of the year. The bonus is not actually calculated
until March 1 of the following year, and is paid on March 15 of that
following year.
(ii) The plan provides for the deferral of compensation because the
employees have a legally binding right, as of the last day of a calendar
year, to an amount of compensation that has not been actually or
constructively received and, pursuant to the terms of the plan, that
compensation is payable in a later year. However, because the bonuses
under the plan are paid within a brief period of time after the end of
the calendar year from which they are deferred, Employer P may choose,
pursuant to paragraph (b)(3)(iii) of this section, to treat all the
bonuses as if they are not subject to the special timing rule of
paragraph (a)(2) of this section.
(iii) If the employer uses the special timing rule, the amount
deferred would be taken into account as wages on December 31, 2000. If
the employer chooses not to use the special timing rule, the amount of
the bonus is wages on the date it is actually or constructively paid,
March 15, 2000.
Example 6: (i) Employer Q establishes a plan under which bonuses
based on performance in one year may be paid on February 1 of the
following year at the discretion of the board of directors. The board of
directors meets in January of each year to determine the amount, if any,
of the bonuses to be paid based on performance in the prior year.
(ii) Because an employee does not have a legally binding right to
any bonus until January of the year in which the bonus is paid, any
bonus paid under the plan in that year is not deferred from the
preceding calendar year, and the plan does not provide for the deferral
of compensation within the meaning of paragraph (b)(3)(i) of this
section.
Example 7: (i) Employer R maintains a plan for employees that
provides nonqualified stock options described in Sec. 1.83-7(a) of this
chapter. Under the plan, employees are granted in 2001 the option to
acquire shares of employer stock at the fair market value of
[[Page 116]]
the shares on the date of grant ($50 per share). The options can be
exercised at any time from the date of grant through 2010. The options
do not have a readily ascertainable fair market value for purposes of
section 83 at the date of grant, and shares are issued upon the exercise
of the options without being subject to a substantial risk of forfeiture
within the meaning of section 83. In 2005, when the fair market value of
a share of employer stock is $80, Employee D exercises an option to
acquire 1,000 shares.
(ii) Under paragraph (b)(4)(ii) of this section, neither the grant
of a stock option nor amounts received currently as a result of the
exercise of a stock option result from the deferral of compensation for
purposes of section 3121(v)(2). Thus, under the general timing rule of
paragraph (a)(1) of this section, the $30,000 spread between the amount
paid for the shares ($50,000) and the fair market value of the shares on
the date of exercise ($80,000) is taken into account as wages for FICA
tax purposes in the year of exercise.
(iii) If the options had been granted at $45 per share, $5 per share
below the fair market value on date of grant, the $35,000 spread between
the amount paid for the shares ($45,000) and the fair market value of
the shares on the date of exercise ($80,000) would similarly be taken
into account as wages for FICA tax purposes in the year of exercise.
Example 8: (i) Employer T establishes a phantom stock plan for
certain employees. Under the plan, an employee is credited on the last
day of each calendar year with a dollar amount equal to the fair market
value of 1,000 shares of employer stock. Upon termination of employment
for any reason, each employee is entitled to receive the value on the
date of termination, in cash or employer stock, of the shares with which
he or she has been credited.
(ii) Because compensation to which the employee has a legally
binding right as of the last day of one year is paid in a subsequent
year, the phantom stock plan provides for the deferral of compensation.
The phantom stock plan does not provide stock value rights within the
meaning of paragraph (b)(4)(ii) of this section because it provides for
awards equal in value to the full fair market value of a specified
number of shares of Employer T stock, rather than the excess of that
fair market value over a specified price.
Example 9: (i) Employer U establishes a severance pay arrangement
(within the meaning of section 3(2)(b)(i) of ERISA) which provides for
payments solely upon an employee's death, disability, or dismissal from
employment. The amount of the payments to an employee is based on the
length of continuous active service with Employer U at the time of
dismissal, and is paid in monthly installments over a period of three
years.
(ii) Because benefits payable under the plan upon termination of
employment are payable only upon an employee's involuntary termination,
the plan is a severance pay plan within the meaning of paragraph
(b)(4)(iv)(B) of this section. Thus, the benefits are not treated as
resulting from the deferral of compensation for purposes of section
3121(v)(2).
Example 10: (i) Employer V establishes a nonqualified deferred
compensation plan under which employees will receive benefit payments
commencing at age 65 as a life annuity or in one of several actuarially
equivalent annuity forms. If an employee dies before benefit payments
commence under the plan, a benefit is payable to the employee's
designated beneficiary in a single lump sum payment equal to the present
value of the employee's annuity benefit. This benefit (sometimes called
a full reserve death benefit) is calculated using the applicable
interest rate specified in section 417(e) and, for the period after age
65, the applicable mortality table specified in section 417(e), both of
which are reasonable actuarial assumptions. During 2002, Employee E
obtains a legally binding right to an annuity benefit under the plan,
payable at age 65. This annuity benefit has a present value of $10,000
at the end of 2002, determined using the same assumptions as are used
under the plan to calculate the full reserve death benefit.
(ii) The present value, at the end of 2002, of the total benefits
payable to or on behalf of Employee E (i.e., the sum of the present
value of the annuity benefit commencing at age 65, and the present value
of the full reserve death benefit, with both determined using the
actuarial assumptions described in paragraph (i) of this Example 10,
except also taking into account the probability of death prior to age
65) is $10,000. This present value does not exceed the present value of
the annuity benefits that could be payable to Employee E under the plan
during Employee E's lifetime determined without a discount for the
possibility that Employee E might die before age 65 (also $10,000).
Thus, the benefit payable in the event of Employee E's death is not a
death benefit for purposes of paragraph (b)(4)(iv) of this section.
(iii) The same result would apply in the case of a plan that bases
benefits on an interest bearing account balance and pays the account
balance at termination of employment or death (because the sum of the
deferred benefits payable in the future if the employee terminates
employment before death with a discount for the probability of death
before that date plus the present value of the benefit payable in the
event of death necessarily equals the present value of the deferred
benefits payable with no discount for the probability of death).
Example 11: (i) The facts are the same as in Example 10, except
that, in lieu of the full
[[Page 117]]
reserve death benefit, the plan provides a monthly life annuity benefit
to an employee's spouse in the event of the employee's death before
benefit payments commence equal to 100 percent of the monthly annuity
that would be payable to the employee at age 65 under the life annuity
form. Employee E is age 63 and has a spouse who is age 51. The sum of
the present value of Employee E's annuity benefit commencing at age 65
determined with a discount for the possibility that Employee E might die
before age 65 and the present value of the 100 percent annuity death
benefit for Employee E's spouse exceeds $10,000.
(ii) The amount deferred for 2002 is $10,000 (because the 100
percent annuity death benefit for Employee E's spouse is disregarded to
the extent that the total benefits payable to or on behalf of Employee E
exceeds the present value of the annuity benefits that could be payable
to Employee E under the plan during Employee E's lifetime without a
discount for the probability of Employee E's death before benefit
payments commence).
Example 12: (i) On January 1, 2001, Employer W establishes a plan
that covers only Employee F, who owns a significant portion of the
business and who has 30 years of service as of that date. The plan
provides that, upon Employee F's termination of employment at any time,
he will receive $200,000 per year for each of the immediately succeeding
five years. Employee F terminates employment on March 1, 2001.
(ii) Because Employee F terminates employment within 12 months of
the establishment of the plan and the facts and circumstances set forth
above indicate that the plan was established in contemplation of
impending termination of employment, the plan is considered to be
established in connection with impending termination within the meaning
of paragraph (b)(4)(v) of this section. Therefore, the benefits provided
under the plan are not treated as resulting from the deferral of
compensation for purposes of section 3121(v)(2).
Example 13: (i) Employer X establishes a plan on January 1, 2004, to
supplement the qualified retirement benefits of recently hired 55-year
old Employee G, who forfeited retirement benefits with her former
employer in order to accept employment with Employer X. The plan
provides that Employee G will receive $50,000 per year for life
beginning at age 65, regardless of when she terminates employment. On
April 15, 2004, Employee G unexpectedly terminates employment.
(ii) The facts and circumstances indicate that the plan was not
established in contemplation of impending termination. Thus, even though
Employee G terminated employment within 12 months of the establishment
of the plan, the plan is not considered to be established in connection
with impending termination within the meaning of paragraph (b)(4)(v) of
this section. Benefits provided under the plan are treated as resulting
from the deferral of compensation for purposes of section 3121(v)(2).
Example 14: (i) Employer Y establishes a plan to provide
supplemental retirement benefits to a group of management employees who
are at various stages of their careers. All employees covered by the
plan are subject to the same benefit formula. Employee H is planning to
(and actually does) retire within six months of the date on which the
plan is established.
(ii) Even though Employee H terminated employment within 12 months
of the establishment of the plan, the plan is not considered to have
been established in connection with Employee H's impending termination
within the meaning of paragraph (b)(4)(v) of this section because the
facts and circumstances indicate otherwise.
Example 15: (i) Employee J owns 100 percent of Employer Z, a
corporation that provides consulting services. Substantially all of
Employer Z's revenue is derived as a result of the services performed by
Employee J. In each of 2001, 2002, and 2003, Employer Z has gross
receipts of $180,000 and expenses (other than salary) of $80,000. In
each of 2001 and 2002, Employer Z pays Employee J a salary of $100,000
for services performed in each of those years. On December 31, 2002,
Employer Z establishes a plan to pay Employee J $80,000 in 2003. The
plan recites that the payment is in recognition of prior services. In
2003, Employer Z pays Employee J a salary of $20,000 and the $80,000 due
under the plan.
(ii) The facts and circumstances described above indicate that the
$80,000 paid pursuant to the plan is based on services performed by
Employee J in 2003 and, thus, is paid for current services within the
meaning of paragraph (b)(4)(viii) of this section. Accordingly, the plan
does not provide for the deferral of compensation within the meaning of
section 3121(v)(2), and the $80,000 payment is included as wages in 2003
under the general timing rule of paragraph (a)(1) of this section.
(c) Determination of the amount deferred--(1) Account balance
plans--(i) General rule. For purposes of this section, if benefits for
an employee are provided under a nonqualified deferred compensation plan
that is an account balance plan, the amount deferred for a period equals
the principal amount credited to the employee's account for the period,
increased or decreased by any income attributable to the principal
amount through the date the principal amount is required to be taken
into account as wages under paragraph (e) of this section.
[[Page 118]]
(ii) Definitions--(A) Account balance plan. For purposes of this
section, an account balance plan is a nonqualified deferred compensation
plan under the terms of which a principal amount (or amounts) is
credited to an individual account for an employee, the income
attributable to each principal amount is credited (or debited) to the
individual account, and the benefits payable to the employee are based
solely on the balance credited to the individual account.
(B) Income. For purposes of this section, income means any increase
or decrease in the amount credited to an employee's account that is
attributable to amounts previously credited to the employee's account,
regardless of whether the plan denominates that increase or decrease as
income.
(iii) Additional rules--(A) Commingled accounts. A plan does not
fail to be an account balance plan merely because, under the terms of
the plan, benefits payable to an employee are based solely on a
specified percentage of an account maintained for all (or a portion of)
plan participants under which principal amounts and income are credited
(or debited) to such account.
(B) Bifurcation permitted. An employer may treat a portion of a
nonqualified deferred compensation plan as a separate account balance
plan if that portion satisfies the requirements of this paragraph (c)(1)
and the amount payable to employees under that portion is determined
independently of the amount payable under the other portion of the plan.
(C) Actuarial equivalents. A plan does not fail to be an account
balance plan merely because the plan permits employees to elect to
receive their benefits under the plan in a form of benefit other than
payment of the account balance, provided the amount of benefit payable
in that other form is actuarially equivalent to payment of the account
balance using actuarial assumptions that are reasonable. Conversely, a
plan is not an account balance plan if it provides an optional form of
benefit that is not actuarially equivalent to the account balance using
actuarial assumptions that are reasonable. For this purpose, the
determination of whether forms are actuarially equivalent using
actuarial assumptions that are reasonable is determined under the rules
applicable to nonaccount balance plans under paragraph (c)(2)(iii) of
this section.
(2) Nonaccount balance plans--(i) General rule. For purposes of this
section, if benefits for an employee are provided under a nonqualified
deferred compensation plan that is not an account balance plan (a
nonaccount balance plan), the amount deferred for a period equals the
present value of the additional future payment or payments to which the
employee has obtained a legally binding right (as described in paragraph
(b)(3)(i) of this section) under the plan during that period.
(ii) Present value defined. For purposes of this section, present
value means the value as of a specified date of an amount or series of
amounts due thereafter, where each amount is multiplied by the
probability that the condition or conditions on which payment of the
amount is contingent will be satisfied, and is discounted according to
an assumed rate of interest to reflect the time value of money. For
purposes of this section, the present value must be determined as of the
date the amount deferred is required to be taken into account as wages
under paragraph (e) of this section using actuarial assumptions and
methods that are reasonable as of that date. For this purpose, a
discount for the probability that an employee will die before
commencement of benefit payments is permitted, but only to the extent
that benefits will be forfeited upon death. In addition, the present
value cannot be discounted for the probability that payments will not be
made (or will be reduced) because of the unfunded status of the plan,
the risk associated with any deemed or actual investment of amounts
deferred under the plan, the risk that the employer, the trustee, or
another party will be unwilling or unable to pay, the possibility of
future plan amendments, the possibility of a future change in the law,
or similar risks or contingencies. Nor is the present value affected by
the possibility that some of the payments due under the plan will be
eligible for one of the exclusions from wages in section 3121(a).
[[Page 119]]
(iii) Treatment of actuarially equivalent benefits--(A) In general.
In the case of a nonaccount balance plan that permits employees to
receive their benefits in more than one form or commencing at more than
one date, the amount deferred is determined by assuming that payments
are made in the normal form of benefit commencing at normal commencement
date if the requirements of paragraph (c)(2)(iii)(B) of this section are
satisfied. Accordingly, in the case of a nonaccount balance plan that
permits employees to receive their benefits in more than one form or
commencing at more than one date, unless the requirements of paragraph
(c)(2)(iii)(B) of this section are satisfied, the amount deferred is
treated as not reasonably ascertainable under the rules of paragraph
(e)(4)(i)(B) of this section until a form of benefit and a time of
commencement are selected.
(B) Use of normal form commencing at normal commencement date. The
requirements of this paragraph (c)(2)(iii)(B) are satisfied by a
nonaccount balance plan if the plan has a single normal form of benefit
commencing at normal commencement date for the amount deferred and each
other optional form is actuarially equivalent to the normal form of
benefit commencing at normal commencement date using actuarial
assumptions that are reasonable. For this purpose, each form of benefit
for payment of the amount deferred commencing at a date is a separate
optional form. For purposes of this paragraph (c)(2)(iii)(B), each
optional form is actuarially equivalent to the normal form of benefit
commencing at normal commencement date only if the terms of the plan in
effect when the amount is deferred provide for every optional form to be
actuarially equivalent and further provide for actuarial assumptions to
determine actuarial equivalency that will be reasonable at the time the
optional form is selected, without regard to whether market interest
rates are higher or lower at the time the optional form is selected than
at the time the amount is deferred. Thus, a plan that provides for every
optional form to be actuarially equivalent satisfies this paragraph
(c)(2)(iii)(B) if it provides for actuarial equivalence to be
determined--
(1) When an optional form is selected or when benefit payments under
the optional form commence, based on assumptions that are reasonable
then;
(2) Based on an index that reflects market rates of interest from
time to time (for example, the plan specifies that all benefits will be
actuarially equivalent using the applicable interest rate and applicable
mortality table specified in section 417(e)); or
(3) Based on actuarial assumptions specified in the plan and
provides for those assumptions to be revised to be reasonable
assumptions if they cease to be reasonable assumptions.
(C) Fixed mortality assumptions permitted. A plan does not fail to
satisfy paragraph (c)(2)(iii)(B) of this section merely because the plan
specifies a fixed mortality assumption that is reasonable at the time
the amount is deferred, even if that assumption is not reasonable at the
time the optional form is selected. (But see paragraph (c)(2)(iii)(E) of
this section for additional rules that apply if the mortality assumption
is not reasonable at the time the optional form is selected.)
(D) Normal form of benefit commencing at normal commencement date
defined. For purposes of this paragraph (c)(2)(iii), the normal form of
benefit commencing at normal commencement date under the plan is the
form, and date of commencement, under which the payments due to the
employee under the plan are expressed, prior to adjustments for form or
timing of commencement of payments.
(E) Rule applicable if actuarial assumptions cease to be reasonable.
If the terms of the plan in effect when an amount is deferred provide
for actuarial assumptions to determine actuarial equivalency that will
be reasonable at the time the optional form is selected or payments
commence as provided in paragraph (c)(2)(iii)(B) of this section, but,
at that time, the actuarial assumptions used under the plan are not
reasonable, the employee will be treated as obtaining a legally binding
right at that time (or, if earlier, at the date on which the plan is
amended to provide actuarial assumptions that are not reasonable) to any
additional benefits that result from the use of an unreasonable
actuarial assumption. This
[[Page 120]]
might occur, for example, if the plan specifies that the actuarial
assumptions will be reasonable assumptions to be set at the time the
optional form is selected and the assumptions used are in fact not
reasonable at that time.
(3) Separate determination for each period. The amount deferred
under this paragraph (c) is determined separately for each period for
which there is an amount deferred under the plan. In addition,
paragraphs (d) and (e) of this section are applied separately with
respect to the amount deferred for each such period. Thus, for example,
the fraction described in paragraph (d)(1)(ii)(B) of this section and
the amount of the true-up at the resolution date described in paragraph
(e)(4)(ii)(B) of this section are determined separately with respect to
each amount deferred. See paragraph (e)(4)(ii)(D) of this section for
special rules for allocating amounts deferred over more than one year.
(4) Examples. This paragraph (c) is illustrated by the following
examples. (The examples illustrate the rules in this paragraph (c) and
include various interest rate and mortality table assumptions, including
the applicable section 417(e) mortality table, the GAM 83 (male)
mortality table, and UP-84 mortality table. These tables can be obtained
from the Society of Actuaries at its internet site at http://
www.soa.org.) The examples are as follows:
Example 1: (i) Employer M establishes a nonqualified deferred
compensation plan for Employee A. Under the plan, 10 percent of annual
compensation is credited on behalf of Employee A on December 31 of each
year. In addition, a reasonable rate of interest is credited quarterly
on the balance credited to Employee A as of the last day of the
preceding quarter. All amounts credited under the plan are 100 percent
vested and the benefits payable to Employee A are based solely on the
balance credited to Employee A's account.
(ii) The plan is an account balance plan. Thus, pursuant to
paragraph (c)(1) of this section, the amount deferred for a calendar
year is equal to 10 percent of annual compensation.
Example 2: (i) Employer N establishes a nonqualified deferred
compensation plan for Employee B. Under the plan, 2.5 percent of annual
compensation is credited quarterly on behalf of Employee B. In addition,
a reasonable rate of interest is credited quarterly on the balance
credited to Employee B's account as of the last day of the preceding
quarter. All amounts credited under the plan are 100 percent vested, and
the benefits payable to Employee B are based solely on the balance
credited to Employee B's account. As permitted by paragraph (e)(5) of
this section, any amount deferred under the plan for the calendar year
is taken into account as wages on the last day of the year.
(ii) The plan is an account balance plan. Thus, pursuant to
paragraph (c)(1) of this section, the amount deferred for a calendar
year equals 10 percent of annual compensation (i.e., the sum of the
principal amounts credited to Employee B's account for the year) plus
the interest credited with respect to that 10 percent principal amount
through the last day of the calendar year. If Employer N had not chosen
to apply paragraph (e)(5) of this section and, thus, had taken into
account 2.5 percent of compensation quarterly, the interest credited
with respect to those quarterly amounts would not have been treated as
part of the amount deferred for the year.
Example 3: (i) Employer O establishes a nonqualified deferred
compensation plan for a group of five employees. Under the plan, a
specified sum is credited to an account for the benefit of the group of
employees on July 31 of each year. Income on the balance of the account
is credited annually at a rate that is reasonable for each year. The
benefit payable to an employee is equal to one-fifth of the account
balance and is payable, at the employee's option, in a lump sum or in 10
annual installments that reflect income on the balance.
(ii) The plan is an account balance plan notwithstanding the fact
that the employee's benefit is equal to a specified percentage of an
account maintained for a group of employees.
Example 4: (i) The facts are the same as in Example 3, except that
the plan also permits an employee to elect a life annuity that is
actuarially equivalent to the account balance based on the applicable
interest rate and applicable mortality table specified in section 417(e)
at the time the benefit is elected by the employee.
(ii) Under paragraphs (c)(1)(iii)(C) and (c)(2)(iii) of this
section, the plan does not fail to be an account balance plan merely
because the plan permits employees to elect to receive their benefits
under the plan in a form that is actuarially equivalent to payment of
the account balance using actuarial assumptions that are reasonable at
the time the form is selected.
Example 5: (i) Employer P establishes a nonqualified deferred
compensation plan for a group of employees. Under the plan, each
participating employee has a fully vested right to receive a life
annuity, payable
[[Page 121]]
monthly beginning at age 65, equal to the product of 2 percent for each
year of service and the employee's highest average annual compensation
for any 3-year period. The plan also provides that, if an employee dies
before age 65, the present value of the future payments will be paid to
his or her beneficiary. As permitted under paragraph (e)(5) of this
section, any amount deferred under the plan for a calendar year is taken
into account as FICA wages as of the last day of the year. As of
December 31, 2002, Employee C is age 60, has 25 years of service, and
high 3-year average compensation of $100,000 (the average for the years
2000 through 2002). As of December 31, 2003, Employee C is age 61, has
26 years of service, and has high 3-year average compensation of
$104,000. As of December 31, 2004, Employee C is age 62, has 27 years of
service, and has high 3-year average compensation of $105,000. The
assumptions that Employer P uses to determine the amount deferred for
2003 (a 7 percent interest rate and, for the period after commencement
of benefit payments, the GAM 83 (male) mortality table) and for 2004 (a
7.5 percent interest rate and, for the period after commencement of
benefit payments, the GAM 83 (male) mortality table) are assumed, solely
for purposes of this example, to be reasonable actuarial assumptions.
(ii) As of December 31, 2002, Employee C has a legally binding right
to receive lifetime payments of $50,000 (2 percent x 25 years x
$100,000) per year. As of December 31, 2003, Employee C has a legally
binding right to receive lifetime payments of $54,080 (2 percent x 26
years x $104,000) per year. Thus, during 2003, Employee C has earned a
legally binding right to additional lifetime payments of $4,080
($54,080-$50,000) per year beginning at age 65. The amount deferred for
2003 is the present value, as of December 31, 2003, of these additional
payments, which is $28,767 ($4,080 x the present value factor for a
deferred annuity payable at age 65, using the specified actuarial
assumptions for 2003). Similarly, during 2004, Employee C has earned a
legally binding right to additional lifetime payments of $2,620 (2
percent x 27 years x $105,000, minus $54,080) per year beginning at age
65. The amount deferred for 2004 is the present value, as of December
31, 2004, of these additional payments, which is $18,845 ($2,620 x the
present value factor for a deferred annuity payable at age 65, using the
specified actuarial assumptions for 2004).
Example 6: (i) Employer Q establishes a nonqualified deferred
compensation plan for Employee D on January 1, 2001, when Employee D is
age 63. During 2001, Employee D obtains a fully vested right to receive
a life annuity under the nonqualified deferred compensation plan equal
to the excess of $200,000 over the life annuity benefits payable to
Employee D under a qualified defined benefit pension plan sponsored by
Employer Q. The life annuity benefit payable annually under the
qualified plan is the lesser of $200,000 and the section 415(b)(1)(A)
limitation in effect for the year, where the section 415(b)(1)(A)
limitation is automatically adjusted to reflect changes in the cost of
living. Benefits under both the qualified and nonqualified plan are
payable monthly beginning at age 65. For purposes of this example, the
section 415(b)(1)(A) limit for 2001 is assumed to be $140,000. The
nonqualified plan provides no benefits in the event Employee D dies
prior to commencement of benefit payments. As permitted under paragraph
(e)(5) of this section, any amount deferred under the plan for a
calendar year is taken into account as FICA wages as of the last day of
the year. The assumptions that Employer Q uses to determine the amount
deferred for 2001 (a 7 percent interest rate, a 3 percent increase in
the cost of living and the GAM 83 (male) mortality table) are assumed,
solely for purposes of this example, to be reasonable actuarial
assumptions. As of December 31, 2001, Employee D has a legally binding
right to receive lifetime payments as set forth in the following table:
----------------------------------------------------------------------------------------------------------------
Assumed
qualified plan Net annual
Year Annual gross annual payment payment under
amount (based on cost nonqualified
of living) plan
----------------------------------------------------------------------------------------------------------------
2003............................................................ $200,000 $145,000 $55,000
2004............................................................ 200,000 150,000 50,000
2005............................................................ 200,000 155,000 45,000
2006............................................................ 200,000 160,000 40,000
2007............................................................ 200,000 165,000 35,000
2008............................................................ 200,000 170,000 30,000
2009............................................................ 200,000 175,000 25,000
2010............................................................ 200,000 180,000 20,000
2011............................................................ 200,000 185,000 15,000
2012............................................................ 200,000 190,000 10,000
2013............................................................ 200,000 195,000 5,000
2014 and thereafter............................................. 200,000 205,000 or 0
greater
----------------------------------------------------------------------------------------------------------------
[[Page 122]]
(ii) The amount deferred for 2001 is the present value, as of
December 31, 2001, of the net lifetime payments under the nonqualified
plan, or $223,753.
(d) Amounts taken into account and income attributable thereto--(1)
Amounts taken into account--(i) In general. For purposes of this
section, an amount deferred under a nonqualified deferred compensation
plan is taken into account as of the date it is included in computing
the amount of wages as defined in section 3121(a), but only to the
extent that any additional FICA tax that results from such inclusion
(including any interest and penalties for late payment) is actually paid
before the expiration of the applicable period of limitations for the
period in which the amount deferred was required to be taken into
account under paragraph (e) of this section. Because an amount deferred
for a calendar year is combined with the employee's other wages for the
year for purposes of computing FICA taxes with respect to the employee
for the year, if the employee has other wages that equal or exceed the
wage base limitations for the Old-Age, Survivors, and Disability
Insurance (OASDI) portion (or, in the case of years before 1994, the
Hospital Insurance (HI) portion) of FICA for the year, no portion of the
amount deferred will actually result in additional OASDI (or HI) tax.
However, because there is no wage base limitation for the HI portion of
FICA for years after 1993, the entire amount deferred (in addition to
all other wages) is subject to the HI tax for the year and, thus, will
not be considered taken into account for purposes of this section unless
the HI tax relating to the amount deferred is actually paid. In
determining whether any additional FICA tax relating to the amount
deferred is actually paid, any FICA tax paid in a year is treated as
paid with respect to an amount deferred only after FICA tax is paid on
all other wages for the year.
(ii) Amounts not taken into account--(A) Failure to take an amount
deferred into account under the special timing rule. If an amount
deferred for a period (as determined under paragraph (c) of this
section) is not taken into account, then the nonduplication rule of
paragraph (a)(2)(iii) of this section does not apply, and benefit
payments attributable to that amount deferred are included as wages in
accordance with the general timing rule of paragraph (a)(1) of this
section. For example, if an amount deferred is required to be taken into
account in a particular year under paragraph (e) of this section, but
the employer fails to pay the additional FICA tax resulting from that
amount, then the amount deferred and the income attributable to that
amount must be included as wages when actually or constructively paid.
(B) Failure to take a portion of an amount deferred into account
under the special timing rule. If, as of the date an amount deferred is
required to be taken into account, only a portion of the amount deferred
(as determined under paragraph (c) of this section) has been taken into
account, then a portion of each subsequent benefit payment that is
attributable to that amount is excluded from wages pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of this section and the
balance is subject to the general timing rule of paragraph (a)(1) of
this section. The portion that is excluded from wages is fixed
immediately before the attributable benefit payments commence (or, if
later, the date the amount deferred is required to be taken into
account) and is determined by multiplying each such payment by a
fraction, the numerator of which is the amount that was taken into
account (plus income attributable to that amount determined under
paragraph (d)(2) of this section through the date the portion is fixed)
and the denominator of which is the present value of the future benefit
payments attributable to the amount deferred, determined as of the date
the portion is fixed. For this purpose, if the requirements of paragraph
(c)(2)(iii)(B) of this section are satisfied, the present value is
determined by assuming that payments are made in the normal form of
benefit commencing at normal commencement date. In addition, if the
employer demonstrates that the amount deferred was determined using
reasonable actuarial assumptions as determined by the Commissioner, the
[[Page 123]]
present value of the future benefit payments attributable to the amount
deferred is determined using those assumptions. In any other case, see
paragraph (d)(2)(iii) of this section.
(2) Income attributable to the amount taken into account--(i)
Account balance plans--(A) In general. For purposes of the
nonduplication rule of paragraph (a)(2)(iii) of this section, in the
case of an account balance plan, the income attributable to the amount
taken into account means any amount credited on behalf of an employee
under the terms of the plan that is income (within the meaning of
paragraph (c)(1)(ii)(B) of this section) attributable to an amount
previously taken into account (within the meaning of paragraph (d)(1) of
this section), but only if the income reflects a rate of return that
does not exceed either the rate of return on a predetermined actual
investment (as determined in accordance with paragraph (d)(2)(i)(B) of
this section) or, if the income does not reflect the rate of return on a
predetermined actual investment (as so determined), a reasonable rate of
interest (as determined in accordance with paragraph (d)(2)(i)(C) of
this section).
(B) Rules relating to actual investment--(1) In general. For
purposes of this paragraph (d)(2)(i), the rate of return on a
predetermined actual investment for any period means the rate of total
return (including increases or decreases in fair market value) that
would apply if the account balance were, during the applicable period,
actually invested in one or more investments that are identified in
accordance with the plan before the beginning of the period. For this
purpose, an account balance plan can determine income based on the rate
of return of a predetermined actual investment regardless of whether
assets associated with the plan or the employer are actually invested
therein and regardless of whether that investment is generally available
to the public. For example, an account balance plan could provide that
income on the account balance is determined based on an employee's
prospective election among various investment alternatives that are
available under the employer's section 401(k) plan, even if one of those
investment alternatives is not generally available to the public. In
addition, an actual investment includes an investment identified by
reference to any stock index with respect to which there are positions
traded on a national securities exchange described in section
1256(g)(7)(A).
(2) Certain rates of return not based on predetermined actual
investment. A rate of return will not be treated as the rate of return
on a predetermined actual investment within the meaning of this
paragraph (d)(2)(i)(B) if the rate of return (to any extent or under any
conditions) is based on the greater of the rate of return of two or more
actual investments, is based on the greater of the rate of return on an
actual investment and a rate of interest (whether or not the rate of
interest would otherwise be reasonable under paragraph (d)(2)(i)(C) of
this section), or is based on the rate of return on an actual investment
that is not predetermined. For example, if a plan bases the rate of
return on the greater of the rate of return on a predetermined actual
investment (such as the value of the employer's stock), and a 0 percent
interest rate (i.e., without regard to decreases in the value of that
investment), the plan is using a rate of return that is not a rate of
return on a predetermined actual investment within the meaning of this
paragraph (d)(2)(i)(B).
(C) Rules relating to reasonable interest rates--(1) In general. If
income for a period is credited to an account balance plan on a basis
other than the rate of return on a predetermined actual investment (as
determined in accordance with paragraph (d)(2)(i)(B) of this section),
then, except as otherwise provided in this paragraph (d)(2)(i)(C), the
determination of whether the income for the period is based on a
reasonable rate of interest will be made at the time the amount deferred
is required to be taken into account and annually thereafter.
(2) Fixed rates permitted. If, with respect to an amount deferred
for a period, an account balance plan provides for a fixed rate of
interest to be credited, and the rate is to be reset under the plan at a
specified future date that is not later than the end of the fifth
[[Page 124]]
calendar year that begins after the beginning of the period, the rate is
reasonable at the beginning of the period, and the rate is not changed
before the reset date, then the rate will be treated as reasonable in
all future periods before the reset date.
(ii) Nonaccount balance plans. For purposes of the nonduplication
rule of paragraph (a)(2)(iii) of this section, in the case of a
nonaccount balance plan, the income attributable to the amount taken
into account means the increase, due solely to the passage of time, in
the present value of the future payments to which the employee has
obtained a legally binding right, the present value of which constituted
the amount taken into account (determined as of the date such amount was
taken into account), but only if the amount taken into account was
determined using reasonable actuarial assumptions and methods. Thus, for
each year, there will be an increase (determined using the same interest
rate used to determine the amount taken into account) resulting from the
shortening of the discount period before the future payments are made,
plus, if applicable, an increase in the present value resulting from the
employee's survivorship during the year. As a result, if the amount
deferred for a period is determined using a reasonable interest rate and
other reasonable actuarial assumptions and methods, and the amount is
taken into account when required under paragraph (e) of this section,
then, under the nonduplication rule of paragraph (a)(2)(iii) of this
section, none of the future payments attributable to that amount will be
subject to FICA tax when paid.
(iii) Unreasonable rates of return--(A) Account balance plans. This
paragraph (d)(2)(iii)(A) applies to an account balance plan under which
the income credited is based on neither a predetermined actual
investment, within the meaning of paragraph (d)(2)(i)(B) of this
section, nor a rate of interest that is reasonable, within the meaning
of paragraph (d)(2)(i)(C) of this section, as determined by the
Commissioner. In that event, the employer must calculate the amount that
would be credited as income under a reasonable rate of interest,
determine the excess (if any) of the amount credited under the plan over
the income that would be credited using the reasonable rate of interest,
and take that excess into account as an additional amount deferred in
the year the income is credited. If the employer fails to calculate the
amount that would be credited as income under a reasonable rate of
interest and to take the excess into account as an additional amount
deferred in the year the income is credited, or the employer otherwise
fails to take the full amount deferred into account, then the excess of
the income credited under the plan over the income that would be
credited using AFR will be treated as an amount deferred in the year the
income is credited. For purposes of this section, AFR means the mid-term
applicable federal rate (as defined pursuant to section 1274(d)) for
January 1 of the calendar year, compounded annually. In addition,
pursuant to paragraph (d)(1)(ii) of this section, the excess over the
income that would result from the application of AFR and any income
attributable to that excess are subject to the general timing rule of
paragraph (a)(1) of this section.
(B) Nonaccount balance plans. If any actuarial assumption or method
used to determine the amount taken into account under a nonaccount
balance plan is not reasonable, as determined by the Commissioner, then
the income attributable to the amount taken into account is limited to
the income that would result from the application of the AFR and, if
applicable, the applicable mortality table under section
417(e)(3)(A)(ii)(I) (the 417(e) mortality table), both determined as of
the January 1 of the calendar year in which the amount was taken into
account. In addition, paragraph (d)(1)(ii)(B) of this section applies
and, in calculating the fraction described in paragraph (d)(1)(ii)(B) of
this section (at the date specified in paragraph (d)(1)(ii)(B) of this
section), the numerator is the amount taken into account plus income (as
limited under this paragraph (d)(2)(iii)(B)), and the present value in
the denominator is determined using the AFR, the 417(e) mortality table,
and reasonable assumptions as to cost of living, each determined as of
the
[[Page 125]]
time the amount deferred was required to be taken into account.
(3) Examples. This paragraph (d) is illustrated by the following
examples:
Example 1: (i) In 2001, Employer M establishes a nonqualified
deferred compensation plan for Employee A under which all benefits are
100 percent vested. In 2002, Employee A has $200,000 of current annual
compensation from Employer M that is subject to FICA tax. The amount
deferred under the plan on behalf of Employee A for 2002 is $20,000.
Thus, Employee A has total wages for FICA tax purposes of $220,000.
Because Employee A has other wages that exceed the OASDI wage base for
2002, no additional OASDI tax is due as a result of the $20,000 amount
deferred. Because there is no wage base limitation for the HI portion of
FICA, additional HI tax liability results from the $20,000 amount
deferred. However, Employer M fails to pay the additional HI tax.
(ii) Under paragraph (d)(1)(i) of this section, an amount deferred
is considered taken into account as wages for FICA tax purposes as of
the date it is included in computing FICA wages, but only if any
additional FICA tax liability that results from inclusion of the amount
deferred is actually paid. Because the HI tax resulting from the $20,000
amount deferred was not paid, that amount deferred was not taken into
account within the meaning of paragraph (d)(1) of this section. Thus,
pursuant to paragraph (d)(1)(ii) of this section, benefit payments
attributable to the $20,000 amount deferred will be included as wages in
accordance with the general timing rule of paragraph (a)(1) of this
section and will be subject to the HI portion of FICA tax when actually
or constructively paid (and the OASDI portion of FICA tax to the extent
Employee A's wages do not exceed the OASDI wage base limitation).
Example 2: (i) The facts are the same as in Example 1, except that
Employer M takes all actions necessary to correct its failure to pay the
additional tax before the applicable period of limitations expires for
2002 (including payment of any applicable interest and penalties).
(ii) Because the HI tax resulting from the $20,000 amount deferred
is paid, that amount deferred is considered taken into account for 2002.
Thus, in accordance with paragraph (a)(2)(iii) of this section, neither
the amount deferred nor the income attributable to the amount taken into
account will be treated as wages for FICA tax purposes at any time
thereafter.
Example 3: (i) Employer N establishes a nonqualified deferred
compensation plan under which all benefits are 100 percent vested. Under
the plan, an employee's account is credited with a contribution equal to
10 percent of salary on December 31 of each year. The employee's account
balance also is increased each December 31 by interest on the total
amounts credited to the employee's account as of the preceding December
31. The interest rate specified in the plan results in income credits
that are not based on the rate of return on a predetermined actual
investment within the meaning of paragraph (d)(2)(i)(B) of this section,
and that are greater than the income that would result from application
of a reasonable rate of interest within the meaning of paragraph
(d)(2)(i)(C) of this section. Employer N fails to take into account an
additional amount for the excess of the income credited under the plan
over a reasonable rate of interest.
(ii) Pursuant to paragraph (d)(2)(iii)(A) of this section, the
income credits in excess of the income that would be credited using the
AFR are considered additional amounts deferred in the year credited.
Example 4: (i) The facts are the same as in Example 3, except that
the annual increase is based on Moody's Average Corporate Bond Yield.
(ii) Because this index reflects a reasonable rate of interest, the
income credited under the plan is considered income attributable to the
amount taken into account within the meaning of paragraph (d)(2)(i) of
this section.
Example 5: (i) The facts are the same as in Example 3, except that
the annual increase (or decrease) is based on the rate of total return
on Employer N's publicly traded common stock.
(ii) Because the income credited under the plan does not exceed the
actual rate of return on a predetermined actual investment, the income
credited is considered income attributable to the amount taken into
account within the meaning of paragraph (d)(2)(i) of this section.
Example 6: (i) The facts are the same as in Example 3, except that
the annual rate of increase or decrease is equal to the greater of the
rate of total return on a specified aggressive growth mutual fund or the
rate of return on a specified income-oriented mutual fund. Employer N
fails to take into account an additional amount for the excess of the
income credited under the plan over a reasonable rate of interest.
(ii) Because the rate of increase or decrease is based on the
greater of two rates of returns, the increase is not based on the return
on a predetermined actual investment within the meaning of paragraph
(d)(2)(i)(B) of this section. Thus, if the rate of return credited under
the plan (i.e., the greater of the rates of return of the two mutual
funds) exceeds the income that would be credited using the AFR, the
excess is not considered income attributable to the amount taken into
account within the meaning of paragraph (d)(2)(i) of this section and,
pursuant to paragraph (d)(2)(iii)(A) of this section, is considered an
additional amount deferred.
[[Page 126]]
Example 7: (i) The facts are the same as in Example 6, except that
the annual increase or decrease with respect to 50 percent of the
employee's account is equal to the rate of total return on the specified
aggressive growth mutual fund and the annual increase or decrease with
respect to the other 50 percent of the employee's account is equal to
the increase or decrease in the Standard & Poor's 500 Index.
(ii) Because the increase or decrease attributable to any portion of
the employee's account is based on the return on a predetermined actual
investment, the entire increase or decrease is considered income
attributable to the amount taken into account within the meaning of
paragraph (d)(2)(i) of this section.
Example 8: (i) The facts are the same as in Example 3, except that,
pursuant to the terms of the plan, before the beginning of each year,
the board of directors of Employer N designates a specific investment on
which the following year's annual increase or decrease will be based.
The board is authorized to switch investments more frequently on a
prospective basis. Before the beginning of 2004, the board designates
Company A stock as the investment for 2004. Before the beginning of
2005, the board designates Company B stock as the investment for 2005.
At the end of 2005, the board determines that the return on Company B
stock was lower than expected and changes its designation for 2005 to
the rate of return on Company C stock, which had a higher return during
2005. Employer N fails to take into account an additional amount for the
excess of the income credited under the plan over a reasonable rate of
interest.
(ii) The annual increase or decrease for 2004 is based on the return
of a predetermined actual investment. Although the annual increase or
decrease for 2005 is based on an actual investment, the actual
investment is not predetermined since it was not designated before the
beginning of 2005. Pursuant to paragraph (d)(2)(iii)(A) of this section,
the excess of the income credited under the plan over the income
determined using AFR is an additional amount deferred for 2005.
Example 9: (i) Employer O establishes a nonqualified deferred
compensation plan for Employee B. Under the plan, if Employee B survives
until age 65, he has a fully vested right to receive a lump sum payment
at that age, equal to the product of 10 percent per year of service and
Employee B's highest average annual compensation for any 3-year period,
but no benefits are payable in the event Employee B dies prior to age
65. As permitted under paragraph (e)(5) of this section, any amount
deferred under the plan for the calendar year is taken into account as
wages as of the last day of the year. As of December 31, 2002, Employee
B has 25 years of service and Employee B's high 3-year average
compensation is $100,000 (the average for the years 2000 through 2002).
As of December 31, 2002, Employee B has a legally binding right to
receive a payment at age 65 of $250,000 (10 percent x 25 years x
$100,000). As of December 31, 2003, Employee B is age 63, has 26 years
of service, and has high 3-year average compensation of $104,000. As of
December 31, 2003, Employee B has a legally binding right to receive a
payment at age 65 of $270,400 (10 percent x 26 years x $104,000). Thus,
during 2003, Employee B has earned a legally binding right to an
additional payment at age 65 of $20,400 ($270,400-$250,000). The
assumptions that Employer O uses to determine the amount deferred for
2003 are a 7 percent interest rate and the GAM 83 (male) mortality
table, which, solely for purposes of this example, are assumed to be
reasonable actuarial assumptions. The amount deferred for 2003 is the
present value, as of December 31, 2003, of the $20,400 payment, which is
$17,353. Employer O takes this amount into account by including it in
Employee B's FICA wages for 2003 and paying the additional FICA tax.
(ii) Under paragraph (d)(2)(ii) of this section, the income
attributable to the amount that was taken into account is the increase
in the present value of the future payment due solely to the passage of
time, because the amount deferred was determined using reasonable
actuarial assumptions and methods. As of the payment date at age 65, the
present value of the future payment earned during 2003 is $20,400. The
entire difference between the $20,400 and the $17,353 amount deferred
($3,047) is the increase in the present value of the future payment due
solely to the passage of time, and thus constitutes income attributable
to the amount taken into account. Because the amount deferred was taken
into account, the entire payment of $20,400 represents either an amount
deferred that was previously taken into account ($17,353) or income
attributable to that amount ($3,047). Accordingly, pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of this section, none of
the payment is included in wages.
Example 10: (i) The facts are the same as in Example 9, except that,
instead of providing a lump sum equal to 10 percent of average
compensation per year of service, the plan provides Employee B with a
fully vested right to receive a life annuity, payable monthly beginning
at age 65, equal to the product of 2 percent for each year of service
and Employee B's highest average annual compensation for any 3-year
period. The plan also provides that, if Employee B dies before age 65,
the present value of the future payments will be paid to his or her
beneficiary. As of December 31, 2002, Employee B has a legally binding
right to receive lifetime payments of $50,000 (2 percent x 25 years x
$100,000) per year. As of December 31, 2003,
[[Page 127]]
Employee B has a legally binding right to receive lifetime payments of
$54,080 (2 percent x 26 years x $104,000) per year. Thus, during 2003,
Employee B has earned a legally binding right to additional lifetime
payments of $4,080 ($54,080-$50,000) per year beginning at age 65. The
amount deferred for 2003 is $32,935, which is the present value, as of
December 31, 2003, of these additional payments, determined using the
same actuarial assumptions and methods used in Example 9, except that
there is no discount for the probability of death prior to age 65.
Employer O takes this amount into account by including it in Employee
B's FICA wages for 2003 and paying the additional FICA tax.
(ii) Under paragraph (d)(2)(ii) of this section, the income
attributable to the amount that was taken into account is the increase
in the present value of the future payments due solely to the passage of
time, because the amount deferred was determined using reasonable
actuarial assumptions and methods. Because the amount deferred was taken
into account, each annual payment of $4,080 attributable to the amount
deferred in 2003 represents either an amount deferred that was
previously taken into account or income attributable to that amount.
Accordingly, pursuant to the nonduplication rule of paragraph
(a)(2)(iii) of this section, none of the payments are included in wages.
Example 11: (i) The facts are the same as in Example 10, except that
no amount is taken into account for 2003 because Employer O fails to pay
the additional FICA tax.
(ii) Under paragraph (d)(1)(ii)(A) of this section, if an amount
deferred for a period is not taken into account, then the benefit
payments attributable to that amount deferred are included as wages in
accordance with the general timing rule of paragraph (a)(1) of this
section. In this case, assuming that the amounts deferred in other
periods were taken into account, $4,080 of each year's total benefit
payments will be included in wages when actually or constructively paid,
in accordance with the general timing rule.
Example 12: (i) Employer P establishes an account balance plan on
January 1, 2002, under which all benefits are 100 percent vested. The
plan provides that amounts deferred will be credited annually with
interest beginning in 2002 at a rate that is greater than a reasonable
rate of interest. Employer P treats the excess over the applicable
interest rate in section 417(e) as an additional amount deferred for
2002 and in each year thereafter, and takes the additional amount into
account by including it in FICA wages and paying the additional FICA tax
for the year.
(ii) Under the nonduplication rule in paragraph (a)(2)(iii) of this
section, the benefits paid under the plan will be excluded from wages
for FICA tax purposes.
Example 13: (i) The facts are the same as in Example 9, except that,
in determining the amount deferred, Employer O uses a 15 percent
interest rate, which, solely for purposes of this example, is assumed
not to be a reasonable interest rate. Employer O determines that the
amount deferred for 2003 is the present value, as of December 31, 2003,
of the $20,400 payment, which is $15,023. Employer O includes $15,023 in
wages and pays any resulting FICA tax. Solely for purposes of this
example, it is assumed that the AFR as of January 1, 2003, is 7 percent.
(ii) Under paragraph (d)(2)(iii)(B) of this section, if any
actuarial assumption or method is not reasonable, then the income
attributable to the amount taken into account is limited to the income
that would result from application of the AFR and, if applicable, the
417(e) mortality table. Because the 15 percent interest rate is
unreasonable, the income attributable to the amount taken into account
is limited to the income that would result from using a 7 percent
interest rate and, in this case, an increase for survivorship using the
417(e) mortality table. Under these assumptions, the income attributable
to the $15,023 amount taken into account for 2003 is $1,199 in 2004 and
$1,313 in 2005. Under paragraph (d)(1)(ii) of this section, the sum of
these amounts ($17,535) is excluded from Employee B's wages pursuant to
the nonduplication rule of paragraph (a)(2)(iii) of this section, and
the balance of the payment ($2,865) is subject to the general timing
rule of paragraph (a)(1) of this section and, thus, is included in
Employee B's wages when actually or constructively paid.
(iii) The same result can be reached by multiplying the attributable
benefit payments by a fraction, the numerator of which is the amount
taken into account, and the denominator of which is the amount deferred
that would have been taken into account at the same time had the amount
deferred been calculated using the AFR and the 417(e) mortality table.
These assumptions are determined as of January 1 of the calendar year in
which the amount was taken into account. In this Example 13, the
fraction would be $15,023 divided by $17,478, which equals .85954. The
$20,400 payment is multiplied by this fraction to determine the amount
of the payment that is excluded from wages pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of this section. Thus,
$17,535 ($20,400x.85954) is excluded from wages and the balance ($2,865)
is subject to FICA tax when actually or constructively paid.
Example 14: (i) The facts are the same as Example 10, except that
Employer O calculates the amount deferred for 2003 as $18,252 and takes
that amount into account by including that amount in wages and paying
any resulting FICA tax. The assumptions that Employer O uses to
determine the amount deferred are a 15 percent interest
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rate and, for the period after commencement of benefit payments, the GAM
83 (male) mortality table. The 15 percent interest rate is assumed,
solely for purposes of this example, not to be a reasonable actuarial
assumption. Solely for purposes of this example, it is assumed that the
AFR as of January 1, 2003, is 7 percent.
(ii) Under paragraph (d)(2)(iii)(B) of this section, if any
actuarial assumption or method used is not reasonable, then the income
attributable to the amount taken into account is limited to the income
that would result from application of the AFR and, if applicable, the
417(e) mortality table. Because the 15 percent interest rate is not
reasonable, the income attributable to the amount taken into account is
equal to the income that would result from using a 7 percent interest
rate and the amount taken into account is treated as if it represented a
portion of the amount deferred for purposes of applying paragraph
(d)(1)(ii)(B) of this section. Under these assumptions, the income
attributable to the $18,252 amount taken into account for 2003 is $1,278
in 2004 and $1,367 in 2005. Under paragraph (d)(1)(ii)(B) of this
section, the portion of each benefit payment attributable to the amount
deferred that is excluded from wages pursuant to the nonduplication rule
of paragraph (a)(2)(iii) of this section is determined at benefit
commencement by multiplying each benefit payment by a fraction, the
numerator of which is the amount taken into account (plus income
attributable to that amount) and the denominator of which is the present
value of future benefit payments attributable to the amount deferred.
Because the interest rate assumption is not reasonable, not only is the
income limited to the application of the AFR, but the present value in
the denominator must be determined using the AFR and (if applicable) the
417(e) mortality table. In this case, the present value is $40,283 and
thus the fraction is $20,897 divided by $40,283, or .51875. Thus, $2,116
(.51875 x $4,080) of each year's benefit payment is excluded from wages
and the balance of each year's payment ($1,964) is subject to the
general timing rule of paragraph (a)(1) of this section and is included
in wages when actually or constructively paid.
(iii) The same result can be reached by multiplying the attributable
benefit payments by a fraction the numerator of which is the amount
taken into account, and the denominator of which is the amount deferred
that would have been taken into account at the same time had the amount
deferred been calculated using the AFR and the 417(e) mortality table.
These assumptions are determined as of January 1 of the calendar year in
which the amount was taken into account. In this Example 14, the
fraction would be $18,252 divided by $35,185, which equals .51875. The
$4,080 annual payment is multiplied by this fraction to determine the
amount of the payment that is excluded from wages pursuant to the
nonduplication rule of paragraph (a)(2)(iii) of this section. Thus,
$2,116 ($4,080 x .51875) is excluded from wages and the balance ($1,964)
is subject to FICA tax when actually or constructively paid.
(e) Time amounts deferred are required to be taken into account--(1)
In general. Except as otherwise provided in this paragraph (e), an
amount deferred under a nonqualified deferred compensation plan must be
taken into account as wages for FICA tax purposes as of the later of the
date on which services creating the right to the amount deferred are
performed (within the meaning of paragraph (e)(2) of this section) or
the date on which the right to the amount deferred is no longer subject
to a substantial risk of forfeiture (within the meaning of paragraph
(e)(3) of this section). However, in no event may any amount deferred
under a nonqualified deferred compensation plan be taken into account as
wages for FICA tax purposes prior to the establishment of the plan
providing for the amount deferred (or, if later, the plan amendment
providing for the amount deferred). Therefore, if an amount is deferred
pursuant to the terms of a legally binding agreement that is not put in
writing until after the amount would otherwise be taken into account
under this paragraph (e)(1), the amount deferred (including any
attributable income) must be taken into account as wages for FICA tax
purposes as of the date the material terms of the plan are put in
writing.
(2) Services creating the right to an amount deferred. For purposes
of this section, services creating the right to an amount deferred under
a nonqualified deferred compensation plan are considered to be performed
as of the date on which, under the terms of the plan and all the facts
and circumstances, the employee has performed all of the services
necessary to obtain a legally binding right (as described in paragraph
(b)(3)(i) of this section) to the amount deferred.
(3) Substantial risk of forfeiture. For purposes of this section,
the determination of whether a substantial risk of
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forfeiture exists must be made in accordance with the principles of
section 83 and the regulations thereunder.
(4) Amount deferred that is not reasonably ascertainable under a
nonaccount balance plan--(i) In general--(A) Date required to be taken
into account. Notwithstanding any other provision of this paragraph (e),
an amount deferred under a nonaccount balance plan is not required to be
taken into account as wages under the special timing rule of paragraph
(a)(2) of this section until the first date on which all of the amount
deferred is reasonably ascertainable (the resolution date). In this
case, the amount required to be taken into account as of the resolution
date is determined in accordance with paragraph (c)(2) of this section.
(B) Definition of reasonably ascertainable. For purposes of this
paragraph (e)(4), an amount deferred is considered reasonably
ascertainable on the first date on which the amount, form, and
commencement date of the benefit payments attributable to the amount
deferred are known, and the only actuarial or other assumptions
regarding future events or circumstances needed to determine the amount
deferred are interest and mortality. For this purpose, the form and
commencement date of the benefit payments attributable to the amount
deferred are treated as known if the requirements of paragraph
(c)(2)(iii)(B) of this section (under which payments are treated as
being made in the normal form of benefit commencing at normal
commencement date) are satisfied. In addition, an amount deferred does
not fail to be reasonably ascertainable on a date merely because the
exact amount of the benefit payable cannot readily be calculated on that
date or merely because the exact amount of the benefit payable depends
on future changes in the cost of living. If the exact amount of the
benefit payable depends on future changes in the cost of living, the
amount deferred must be determined using a reasonable assumption as to
the future changes in the cost of living. For example, the amount of a
benefit is treated as known even if the exact amount of the benefit
payable cannot be determined until future changes in the cost of living
are reflected in the section 415 limitation on benefits payable under a
qualified retirement plan.
(ii) Earlier inclusion permitted--(A) In general. With respect to an
amount deferred that is not reasonably ascertainable, an employer may
choose to take an amount into account at any date or dates (an early
inclusion date or dates) before the resolution date (but not before the
date described in paragraph (e)(1) of this section with respect to the
amount deferred). Thus, for example, with respect to an amount deferred
under a nonaccount balance plan that is not reasonably ascertainable
because the plan permits employees to receive their benefits in more
than one form or commencing at more than one date (and the requirements
of paragraph (c)(2)(iii) of this section are not satisfied), an employer
may choose to take an amount into account on the date otherwise
described in paragraph (e)(1) of this section before the form and
commencement date are selected (based on assumptions as to the form and
commencement date for the benefit payments) or may choose to wait until
the form and commencement date of the benefit payments are selected. An
employer that chooses to take an amount into account at an early
inclusion date under this paragraph (e)(4)(ii) for an employee under a
plan is not required until the resolution date to identify the period to
which the amount taken into account relates.
(B) True-up at resolution date. If, with respect to an amount
deferred for a period, an employer chooses to take an amount into
account as of an early inclusion date in accordance with this paragraph
(e)(4)(ii) and the benefit payments attributable to the amount deferred
exceed the benefit payments that are actuarially equivalent to the
amount taken into account at the early inclusion date (payable in the
same form and using the same commencement date as the benefit payments
attributable to the amount deferred), then the present value of the
difference in the benefits, determined in accordance with paragraph
(c)(2) of this section, must be taken into account as of the resolution
date.
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(C) Actuarial assumptions. For purposes of determining the benefits
that are actuarially equivalent to the amount taken into account as of
an early inclusion date, the amount taken into account is converted to
an actuarially equivalent benefit payable in the same form and
commencing on the same date as the actual benefit payments attributable
to the amount deferred using an interest rate, and, if applicable,
mortality and cost-of-living assumptions, that were reasonable as of the
early inclusion date. Thus, with respect to an amount deferred for a
period, the amount required to be taken into account as of the
resolution date is the present value (determined using an interest rate,
and, if applicable, mortality and cost-of-living assumptions, that are
reasonable as of the resolution date) of the excess, if any, of the
future benefit payments attributable to the amount deferred over the
future benefits payable in the same form and commencing on the same date
that are actuarially equivalent to the portion of the amount deferred
that was taken into account as of the early inclusion date (where
actuarial equivalence is determined using an interest rate, and, if
applicable, mortality and cost-of-living assumptions, that were
reasonable as of the early inclusion date).
(D) Allocation rules for amounts deferred over more than one
period--(1) General rule. The rules of this paragraph (e)(4)(ii)(D)
apply for purposes of determining whether an amount has been included
under this paragraph (e)(4) before the earliest date permitted under
paragraph (e)(1) of this section.
(2) Future compensation increases. Increases in an employee's
compensation after the early inclusion date must be disregarded.
(3) Early retirement subsidies. An early retirement subsidy that the
employee ultimately receives may be taken into account at an early
inclusion date if the employee would have a legally binding right to the
subsidy at the early inclusion date but for any condition that the
employee continue to render services. Accordingly, an employer may take
into account at an early inclusion date any early retirement subsidy
that the employee ultimately receives to the extent that elimination or
reduction of that subsidy would violate section 411(d)(6)(B)(i) if that
section applied to the plan.
(4) Allocation with respect to offsets. In any case in which a
series of amounts are deferred over more than one period, the amounts
deferred are not reasonably ascertainable until a single resolution date
and the benefit payments attributable to the entire series are
determined under a formula that provides a gross benefit that in the
aggregate is subject to an objective reduction for future events under
the terms of the plan, such as an offset for the aggregate benefits
payable under a plan qualified under section 401(a), the attribution of
benefit payments to the amount deferred in each period is determined
under the rules of this paragraph (e)(4)(ii)(D)(4). In a case described
in the preceding sentence, the benefit payments made as a result of the
series of amounts deferred may be treated as attributable to the amount
deferred as of the earliest period in which the employee obtained a
legally binding right to a benefit under the plan equal to the excess,
if any, of the amount of the gross benefit attributable to that period
(determined at the resolution date), over the amount of the reduction
determined as of the end of that period. Thus, for example, if an
employee obtains a legally binding right in each of several years to
benefit payments from a nonqualified deferred compensation plan that
provides for a specified gross benefit for the years to be offset by the
benefits payable under a qualified plan, the amount deferred in the
first year may be treated as equal to the gross benefit for the year,
reduced by the offset applicable at the end of the year (even if the
offset increases after the end of the year).
(E) Treatment of benefits paid before the resolution date. If a
benefit payment is attributable to an amount deferred that is not
reasonably ascertainable at the time of payment (or is paid before the
date selected under paragraph (e)(5) of this section), and the employer
has previously taken an amount into account with respect to the amount
deferred under the early inclusion rule of
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this paragraph (e)(4), then, in lieu of the pro rata rule provided in
paragraph (d)(1)(ii)(B) of this section, a first-in-first-out rule
applies in determining the portion of the benefit payment attributable
to the amount taken into account. Under this first-in-first-out rule,
the benefit payment is compared to the sum of the amount taken into
account at the early inclusion date and the income attributable to that
amount. If the benefit payment equals or exceeds the amount taken into
account at the early inclusion date and the income attributable to that
amount as of the date of the benefit payment, the benefit payment is
included as wages under the general timing rule of paragraph (a)(1) of
this section to the extent of any excess, and the amount taken into
account at the early inclusion date (and income attributable to that
amount) is disregarded thereafter with respect to the amount deferred.
If the amount taken into account at the early inclusion date and the
income attributable to that amount as of the date of the benefit payment
exceeds the benefit payment, the benefit payment is not included as
wages under the general timing rule of paragraph (a)(1) of this section
and, in determining the amount that must be taken into account
thereafter with respect to the amount deferred, the amount taken into
account at the early inclusion date, plus attributable income as of the
date of the benefit payment, is reduced by the amount of the benefit
payment, and only the excess plus future income attributable to the
excess (credited using assumptions that were reasonable on the early
inclusion date) is taken into consideration. If amounts have been taken
into account at more than one early inclusion date, this paragraph
(e)(4)(ii)(E) applies on a first-in-first-out basis, beginning with the
amount taken into account at the earliest early inclusion date
(including income attributable thereto).
(5) Rule of administrative convenience. For purposes of this
section, an employer may treat an amount deferred as required to be
taken into account under this paragraph (e) on any date that is later
than, but within the same calendar year as, the actual date on which the
amount deferred is otherwise required to be taken into account under
this paragraph (e). For example, if services creating the right to an
amount deferred are considered performed under paragraph (e)(2) of this
section periodically throughout a year, the employer may nevertheless
treat the services creating the right to that amount deferred as
performed on December 31 of that year. If an employer uses the rule of
administrative convenience described in this paragraph (e)(5), any
determination of whether the income attributable to an amount deferred
under an account balance plan is based on a reasonable rate of interest
or whether the actuarial assumptions used to determine the present value
of an amount deferred in a nonaccount balance plan are reasonable will
be made as of the date the employer selects to take the amount into
account.
(6) Portions of an amount deferred required to be taken into account
on more than one date. If different portions of an amount deferred are
required to be taken into account under paragraph (e)(1) of this section
on more than one date (e.g., on account of a graded vesting schedule),
then each such portion is considered a separate amount deferred for
purposes of this section.
(7) Examples. This paragraph (e) is illustrated by the following
examples:
Example 1: (i) Employer M establishes a nonqualified deferred
compensation plan for Employee A on November 1, 2005. Under the plan,
which is an account balance plan, Employee A obtains a legally binding
right on the last day of each calendar year (if Employee A is employed
on that date) to be credited with a principal amount equal to 5 percent
of compensation for the year. In addition, a reasonable rate of interest
is credited quarterly. Employee A's account balance is nonforfeitable
and is payable upon Employee A's termination of employment. For 2006,
the principal amount credited to Employee A under the plan (which, in
this case, is also the amount deferred within the meaning of paragraph
(c) of this section) is $25,000.
(ii) Under paragraph (e)(2) of this section, the services creating
the right to the $25,000 amount deferred are considered performed as of
December 31, 2006, the date on which Employee A has performed all of the
services necessary to obtain a legally binding right to the amount
deferred. Thus, in accordance with paragraph (e)(1) of this section, the
$25,000 amount deferred must be taken into
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account as of December 31, 2006, which is the later of the date on which
services creating the right to the amount deferred are performed or the
date on which the right to the amount deferred is no longer subject to a
substantial risk of forfeiture.
Example 2: (i) The facts are the same as in Example 1, except that
the principal amount credited under the plan on the last day of each
year (and attributable interest) is forfeited if the employee terminates
employment within five years of that date.
(ii) Under paragraph (e)(3) of this section, the determination of
whether the right to an amount deferred is subject to a substantial risk
of forfeiture is made in accordance with the principles of section 83.
Under Sec. 1.83-3(c) of this chapter, a substantial risk of forfeiture
generally exists where rights in property that are transferred are
conditioned, directly or indirectly, upon the future performance of
substantial services. Because Employee A's right to receive the $25,000
principal amount (and attributable interest) is conditioned on the
performance of services for five years, a substantial risk of forfeiture
exists with respect to that amount deferred until December 31, 2011.
(iii) December 31, 2011, is the later of the date on which services
creating the right to the amount deferred are performed or the date on
which the right to the amount deferred is no longer subject to a
substantial risk of forfeiture. Thus, in accordance with paragraph
(e)(1) of this section, the amount deferred (which, pursuant to
paragraph (c)(1) of this section, is equal to the $25,000 principal
amount credited to Employee A's account on December 31, 2006, plus the
interest credited with respect to that principal amount through December
31, 2011) must be taken into account as of December 31, 2011.
Example 3: (i) The facts are the same as in Example 2, except that
the principal amount credited under the plan on the last day of each
year (and attributable interest) becomes nonforfeitable according to a
graded vesting schedule under which 20 percent is vested as of December
31, 2007; 40 percent is vested as of December 31, 2008; 60 percent is
vested as of December 31, 2009; 80 percent is vested as of December 31,
2010; and 100 percent is vested as of December 31, 2011. Because these
dates are later than the date on which the services creating the right
to the amount deferred are considered performed (December 31, 2006), the
amount deferred is required to be taken into account as of these dates
that fall in five different years.
(ii) Paragraph (e)(6) of this section provides that, if different
portions of an amount deferred are required to be taken into account
under paragraph (e)(1) of this section on more than one date, then each
such portion is considered a separate amount deferred for purposes of
this section. Thus, $5,000 of the principal amount, plus interest
credited through December 31, 2007, is taken into account as an amount
deferred on December 31, 2007; $5,000 of the principal amount, plus
interest credited through December 31, 2008, is taken into account as a
separate amount deferred on December 31, 2008; etc.
Example 4: (i) On November 21, 2001, Employer N establishes a
nonqualified deferred compensation plan under which all benefits are 100
percent vested. The plan provides for Employee B (who is age 45) to
receive a lump sum benefit of $500,000 at age 65. This benefit will be
forfeited if Employee B dies before age 65.
(ii) Because the amount, form, and commencement date of the benefit
are known, and the only assumptions needed to determine the amount
deferred are interest and mortality, the amount deferred is reasonably
ascertainable within the meaning of paragraph (e)(4)(i) of this section
on November 21, 2001.
Example 5: (i) The facts are the same as in Example 4, except that
plan provides that the lump sum will be paid at the later of age 65 or
termination of employment and provides that the $500,000 payable to
Employee B is increased by 5 percent per year for each year that payment
is deferred beyond age 65.
(ii) Because the commencement date of the benefit payment is
contingent on when Employee B terminates employment, the commencement
date of the benefit payment is not known. Thus, the amount deferred is
not reasonably ascertainable within the meaning of paragraph (e)(4)(i)
of this section, unless the plan satisfies the requirements of paragraph
(c)(2)(iii)(B) of this section. Because the fixed 5 percent factor may
not be reasonable at the time benefit payments commence (i.e., 5 percent
might be higher or lower than a reasonable interest rate when payments
commence), the plan fails to satisfy paragraph (c)(2)(iii)(B) of this
section and accordingly the amount deferred is not reasonably
ascertainable until termination of employment.
Example 6: (i) The facts are the same as in Example 4, except that
the $500,000 is payable to Employee B at the later of age 55 or
termination of employment.
(ii) Because the commencement date of the benefit payment is
contingent on when Employee B terminates employment, the commencement
date of the benefit payment is not known. Thus, the amount deferred is
not reasonably ascertainable until termination of employment.
Example 7: (i) The facts are the same as in Example 4, except that
Employee B may elect to take the benefit in the form of a life annuity
of $50,000 per year (commencing at age 65).
(ii) Because the plan permits employees to elect to receive benefits
in more than one form and the alternative forms may not have
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the same value when Employee B makes his election, the plan fails to
satisfy the requirements of paragraph (c)(2)(iii)(B) of this section
until a form of benefit is selected. Thus, the amount deferred is not
reasonably ascertainable until then.
Example 8: (i) Employer O establishes a nonqualified deferred
compensation plan. The plan is a supplemental executive retirement plan
(SERP) that provides Employee C with a fully vested right to receive a
pension, in the form of a life annuity payable monthly, beginning at age
65, equal to the excess of 3 percent of Employee C's final 3-year
average pay for each year of participation up to 15 years, over the
amount payable to Employee C from Employer O's qualified pension plan.
The amount payable under the qualified pension plan is a life annuity
payable monthly, beginning at age 65, equal to 1.5 percent of final 3-
year average pay for each year of employment, excluding pay in excess of
the section 401(a)(17) compensation limit. No benefits are payable under
the SERP if Employee C dies before age 65. Employee C becomes a
participant in the SERP on January 1, 2001, at age 44. The amount
deferred under the SERP for any year is not reasonably ascertainable
prior to termination of employment because the amount of the benefit is
not known and the determination of the amount deferred requires
assumptions other than interest and mortality (e.g., an assumption as to
Employee C's average pay for the final three years of employment). As
permitted by paragraph (e)(4)(i) of this section, Employer O chooses not
to take any amount into account for any year before the resolution date.
Employee C terminates employment on December 31, 2018 when he is age 62.
(ii) As of the date Employee C terminates employment, the amount of
the benefit is known and the only actuarial or other assumptions needed
to determine the amount deferred are an interest rate assumption and a
mortality assumption. At that time, the amount deferred in each past
year becomes reasonably ascertainable, and Employer O is able to
determine that during 2001 Employee C earned a legally binding right to
a life annuity of $4,000 per year beginning in 2021 when Employee C is
age 65. Employer O determines the present value of Employee C's future
benefit payments under the SERP as of this resolution date (December 31,
2018), using a 7 percent interest rate and the UP-84 mortality table,
which, solely for purposes of this example, are assumed to be reasonable
actuarial assumptions for December 31, 2018. The special timing rule
will be satisfied if the resulting present value, $26,950, is taken into
account on that date in accordance with paragraph (d)(1) of this
section.
Example 9: (i) The facts are the same as in Example 8, except that
the plan provides that Employee C may choose to receive early retirement
benefits on an unreduced basis at any time after age 60 if Employee C
has completed 15 years of service by that date.
(ii) As of the date Employee C terminates employment, the amount of
the benefit is known and the only actuarial or other assumptions needed
to determine the amount deferred are an interest rate assumption and a
mortality assumption. At that time, the amount deferred in each past
year becomes reasonably ascertainable, and Employer O is able to
determine that during 2001 Employee C earned a legally binding right to
a life annuity of $4,000 per year beginning on December 31, 2018 when
Employee C is age 62. Employer O determines the present value of
Employee C's future benefit payments under the SERP as of this
resolution date (December 31, 2018), using a 7 percent interest rate and
the UP-84 mortality table, which, solely for purposes of this example,
are assumed to be reasonable actuarial assumptions for December 31,
2018. The special timing rule will be satisfied if the resulting present
value, $37,576, is taken into account on that date in accordance with
paragraph (d)(1) of this section.
Example 10: (i) The facts are the same as in Example 9, except that,
as permitted under paragraph (e)(4)(ii) of this section, Employer O
chooses to take an amount into account before the amount deferred for
2001 is reasonably ascertainable. The amount that Employer O takes into
account on December 31, 2001, is $13,043 (the present value of a life
annuity of $4,000 per year, payable at age 62, using a 6 percent
interest rate and the UP-84 mortality table). Employer O does not take
any other amount into account before the resolution date.
(ii) In accordance with paragraph (e)(4)(ii)(B) of this section,
Employer O must determine any additional amount required to be taken
into account in 2018. If the $4,000 payable in the form of a life
annuity beginning at age 62 exceeds the life annuity which is
actuarially equivalent to the $13,043 previously taken into account, the
present value of the excess must be taken into account. In this Example
10, the $13,043 previously taken into account is actuarially equivalent
to a $4,000 annuity commencing at age 62 using a 6 percent interest rate
and the UP-84 mortality table (which, solely for purposes of this
example, are assumed to be reasonable actuarial assumptions for December
31, 2001). Accordingly, no additional amount need be taken into account
in 2018, regardless of any changes in market rates of interest between
2001 and 2018.
Example 11: (i) The facts are the same as in Example 9, except that,
as permitted under paragraph (e)(4)(ii) of this section, Employer O
chooses to take an amount into account before the amount deferred for
2001 is reasonably ascertainable. The amount that Employer O takes into
account on December 31,
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2001, is $9,569 (the present value of a life annuity of $4,000 per year,
payable at age 65, using a 6 percent interest rate and the UP-84
mortality table). Employer O does not take any other amount into account
before the resolution date.
(ii) In accordance with paragraph (e)(4)(ii)(B) of this section,
Employer O must determine any additional amount required to be taken
into account in 2018. If the $4,000 payable in the form of a life
annuity beginning in 2018 at age 62 exceeds the life annuity which is
actuarially equivalent to the $9,569 previously taken into account, the
present value of the excess must be taken into account. In this case,
the $9,569 previously taken into account is actuarially equivalent to a
$2,935 annuity commencing at age 62 using a 6 percent interest rate and
the UP-84 mortality table (which, solely for purposes of this example,
are assumed to be reasonable actuarial assumptions for December 31,
2001). Accordingly, an additional amount needs to be taken into account
in 2018 equal to the present value of the excess of the $4,000 annual
stream of benefit payments to which Employee C obtained a legally
binding right during 2001 over the $2,935 annual stream of benefit
payments which is actuarially equivalent to the amount previously taken
into account. This present value (i.e., the present value of a life
annuity equal to $4,000 minus $2,935, or $1,065 annually) is determined
by Employer O to be $10,005 as of the resolution date using a 7 percent
interest rate and the UP-84 mortality table (which, solely for purposes
of this example, are assumed to be reasonable actuarial assumptions for
December 31, 2018).
Example 12: (i) The facts are the same as in Example 9, except that
the amount that Employer O takes into account on December 31, 2001, is
$15,834 (the present value of $4,000, payable at age 60, using a 6
percent interest rate and the UP-84 mortality table). Employer O does
not take any other amount into account before the resolution date.
(ii) In accordance with paragraph (e)(4)(ii)(B) of this section,
Employer O must determine any additional amount required to be taken
into account in 2018. If the $4,000 payable in the form of a life
annuity beginning at age 62 exceeds the life annuity which is
actuarially equivalent to the $15,834 previously taken into account, the
present value of the excess must be taken into account. In this case,
the $15,834 previously taken into account is actuarially equivalent to a
$4,856 annuity commencing at age 62 using a 6 percent interest rate and
the UP-84 mortality table (which, solely for purposes of this example,
are assumed to be reasonable actuarial assumptions for December 31,
2001). Because the life annuity of $4,856 per year (which is equivalent
to the amount taken into account at the early inclusion date) exceeds
the $4,000 annuity attributable to the amount deferred in 2001, no
additional amount is required to be taken into account for that amount
deferred as of the resolution date. Employer O may claim a refund or
credit for the overpayment of FICA tax with respect to amounts taken
into account prior to the resolution date to the extent permitted by
sections 6402, 6413, and 6511.
Example 13: (i) The facts are the same as in Example 12, except that
Employee C became a participant in the SERP on January 1, 2000. In
addition, Employer O determines in 2018 that during 2000 Employee C
earned a legally binding right to a life annuity of $1,500 per year
beginning on December 31, 2018.
(ii) Employer O may allocate the $15,834 previously taken into
account among any amounts deferred on or before the early inclusion
date. At the resolution date, Employer O will have to take into account
the present value of an annuity equal to the excess of the life annuity
attributable to the amounts deferred for 2000 and 2001 over a life
annuity of $4,856 per year.
Example 14: (i) In 2003, Employer P establishes a nonqualified
deferred compensation plan for Employee D. The plan provides that, in
consideration of Employee D's services to be performed on Project X in
2004, Employee D will have a nonforfeitable right to receive 1 percent
per year of Employer P's net profits associated with Project X for each
of the immediately succeeding three years. No services beyond 2004 are
required. The 1 percent of net profits payable each year will be paid on
March 31 of the immediately succeeding year. One percent of net profits
associated with Project X is $750,000 in 2005, $400,000 in 2006, and
$90,000 in 2007. Employee D receives $750,000 on March 31, 2006,
$400,000 on March 31, 2007, and $90,000 on March 31, 2008.
(ii) Because the services creating the right to all of the amount
deferred are performed in 2004, the benefit payments based on the 2005,
2006, and 2007 net profits are all attributable to the amount deferred
in 2004. However, because the present value of Employee D's future
benefit is contingent on future profits, the determination of the amount
deferred requires the use of assumptions other than interest, mortality,
and cost of living. Thus, all of the amount deferred in 2004 will not be
reasonably ascertainable within the meaning of paragraph (e)(4)(i) of
this section until December 31, 2007 (which is the resolution date).
Employer P does not choose to take any amount into account prior to the
amount deferred becoming reasonably ascertainable.
(iii) However, paragraph (d)(1)(ii)(A) of this section provides that
a benefit payment attributable to an amount deferred under a
nonqualified deferred compensation plan must be included as wages when
actually or constructively paid if the amount deferred has not been
taken into account as wages
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under the special timing rule of paragraph (a)(2) of this section. Thus,
the benefit payments in 2006 and 2007 must be included as wages when
paid.
(iv) As of December 31, 2007, all of the amount deferred under the
plan becomes reasonably ascertainable because the amount of the benefit
payable attributable to the amount deferred is treated as known under
paragraph (e)(4)(i)(B) of this section, and the only assumption needed
to determine the present value of the future benefits is interest.
However, since Employer P was required to treat the payments in 2006 and
2007 as wages when paid under the general timing rule of paragraph
(a)(1) of this section, only the present value of the payment to be made
in 2008 is required to be taken into account as of the resolution date
(December 31, 2007) under the special timing rule of paragraph (a)(2) of
this section. Using an interest rate of 10 percent per year (which,
solely for purposes of this Example 14, is assumed to be reasonable),
Employer P determines that on December 31, 2007, the present value of
the future benefits is $87,881, and Employer P includes that additional
amount in wages for 2007. (Note that Employer P can choose to use the
lag method of withholding described in paragraph (f)(3) of this section,
which allows the resolution date amount to be taken into account no
later than March 31, 2008, provided that the amount deferred is
increased by interest using the AFR for January of 2008.)
Example 15: (i) The facts are the same as in Example 14, except that
Employer P chooses the early inclusion option permitted by paragraph
(e)(4)(ii) of this section to take $1,000,000 into account on December
31, 2004, before the amount deferred for 2004 is reasonably
ascertainable.
(ii) Pursuant to paragraph (e)(4)(ii)(E) of this section, in
applying the nonduplication rule of paragraph (a)(2)(iii) of this
section, a first-in-first-out rule applies in determining the benefit
payments that are attributable to amounts previously taken into account.
Using the 10 percent interest rate, Employer P determines that the
$750,000 benefit payment on March 31, 2006, and the March 31, 2007,
benefit payment of $400,000 are less than the $1,000,000 taken into
account at the early inclusion date, plus attributable income, and,
therefore, are not included in wages when paid.
(iii) Under paragraph (e)(4)(ii)(E) of this section, if an employer
chooses to take an amount into account before the resolution date, the
amount taken into account (plus income attributable to that amount) is
disregarded to the extent the amount is attributed to benefit payments
made before the resolution date. Thus, Employer P must reduce the
$1,000,000 taken into account in 2004 (plus income attributable to that
amount) based upon the two benefit payments ($750,000 and $400,000) that
were excluded from wages. Using an interest rate of 10 percent, Employer
P determines that the amount taken into account in 2004 plus interest to
the resolution date and reduced based upon the two benefit payments is
$15,228 and the additional amount that is required to be taken into
account as of December 31, 2007, is $72,653 ($87,881-$15,228).
Example 16: (i) Employee E obtains a fully vested, legally binding
right during 2002, 2003, and 2004 to payments from a nonqualified
deferred compensation plan of Employer Q under which the benefits are
based on a formula that includes an actuarial offset by the account
balance under a qualified defined contribution plan of Employer Q as of
December 31, 2004. The payments from the nonqualified deferred
compensation plan are to commence on December 31, 2005. At the
resolution date for the amounts earned during 2002, 2003, and 2004,
which is December 31, 2004, Employee E has a legally binding right to a
net annual benefit of $100,000 payable for life to commence on December
31, 2005. On the resolution date, Employer Q determines that on December
31, 2002, Employee E had a legally binding right to receive $100,000
annually for life beginning on December 31, 2005 (as a result of the
gross benefit under the nonqualified plan being $120,000 annually for
life, and the offset being $20,000 annually for life, as of December 31,
2002). On December 31, 2003, Employee E had a legally binding right to
receive $95,000 annually for life beginning on December 31, 2005 (as a
result of the gross benefit under the nonqualified plan being $135,000
annually for life, and the offset being $40,000 annually for life, as of
December 31, 2003). On December 31, 2004, Employee E had a legally
binding right to receive $100,000 annually for life beginning on
December 31, 2005 (as a result of the gross benefit under the
nonqualified plan being $145,000 annually for life, and the offset being
$45,000 annually for life, as of December 31, 2004).
(ii) In this case, pursuant to paragraph (e)(4)(ii)(D)(4) of this
section, Employer Q can attribute the entire $100,000 life annuity to
the amount deferred for 2002, even though Employee E's benefit under the
nonqualified deferred compensation plan is reduced to $95,000 in 2003.
Example 17: (i) In 2010, Employee F performs services for which she
earns a right to 10 percent of the proceeds from the sale of a motion
picture. In 2011, Employee F performs services for which she earns a
right to 10 percent of the proceeds from the sale of another motion
picture. These proceeds are calculated by subtracting the total
advertising expenses for both movies. Payment is to be made in the year
following the date on which both pictures have been sold, but not later
than 2018. At the end of 2010, the advertising expenses for both
pictures totaled
[[Page 136]]
$300,000. The first motion picture is sold for $10,000,000 in 2014. The
second motion picture is sold for $17,000,000 in 2017. At the end of
2017, the advertising expenses totaled $1,700,000. In 2018, Employee F
is paid $2,530,000 (10 percent of the sum of $10,000,000 and $17,000,000
minus $1,700,000).
(ii) Pursuant to paragraph (e)(4)(ii)(D)(4) of this section,
$970,000 (10 percent of the excess of the gross proceeds from the sale
of the first motion picture at the resolution date in 2017 over the
advertising expenses incurred at the end of 2010) of the payment made in
2018 can be attributed to the amount deferred in 2010 (and with the
remaining payment of $1,560,000 to be attributed to the amount deferred
in 2011).
(f) Withholding--(1) In general. Unless an employer applies an
alternative method described in paragraph (f)(2) or (3) of this section,
an amount deferred under a nonqualified deferred compensation plan for
any employee is treated, for purposes of withholding and depositing FICA
tax, as wages paid by the employer and received by the employee at the
time it is taken into account in accordance with paragraph (e) of this
section. However, paragraphs (f)(2) and (3) of this section provide
alternative methods which may be used with respect to an amount deferred
for an employee. An employer is not required to be consistent in
applying the alternatives described in this paragraph (f) with respect
to different employees or amounts deferred.
(2) Estimated method--(i) In general. Under the alternative method
provided in this paragraph (f)(2), the employer may make a reasonable
estimate of the amount deferred on the date on which the amount is taken
into account in accordance with paragraph (e) of this section and take
that estimated amount into account as wages paid by the employer and
received by the employee on that date (the estimate date), for purposes
of withholding and depositing FICA tax.
(ii) Underestimate of the amount deferred--(A) General rule. If the
employer underestimates the amount deferred (as determined after
calculating the actual amount deferred that should have been taken into
account as of the date on which the amount was taken into account in
accordance with paragraph (e) of this section, using an interest rate
and other actuarial assumptions that are reasonable as of that date),
the employer may treat the shortfall as wages paid as of the estimate
date or as of any date that is no later than three months after the
estimate date. In either case, the shortfall does not include the income
credited to the amount deferred after the amount is taken into account
in accordance with paragraph (e) of this section.
(B) Shortfall is treated as wages paid on a date after the estimate
date. If the employer chooses to treat the shortfall as wages paid on a
date that is no later than three months after the estimate date, the
employer must take that shortfall into account as wages paid by the
employer and received by the employee on that date, for purposes of
withholding and depositing FICA tax.
(C) Shortfall is treated as wages paid on the estimate date. If the
employer chooses to treat the shortfall as wages paid as of the estimate
date, the shortfall is treated as an error for purposes of withholding
and depositing FICA tax. Appropriate adjustments may be made in
accordance with section 6205(a) and the regulations thereunder; however,
for purposes of Sec. 31.6205-1(b), the error need not be treated as
ascertained before the date that is three months after the estimate
date.
(D) Reporting. The employer must report the shortfall as wages on
Form 941, Employer's Quarterly Federal Tax Return (and, if applicable,
Form 941c, Supporting Statement to Correct Information) and Form W-2,
Wage and Tax Statement (or, if applicable, Form W-2c, Corrected Wage and
Tax Statement) in accordance with its treatment of the shortfall under
paragraph (f)(2)(ii) (B) or (C) of this section.
(iii) Overestimate of the amount deferred. If the employer
overestimates the amount deferred (as determined after calculating the
actual amount deferred that should have been taken into account as of
the date on which the amount was taken into account in accordance with
paragraph (e) of this section, using an interest rate and actuarial
assumptions that are reasonable as of that date) and deposits more than
the amount required, the employer may claim a refund or credit in
accordance with sections 6402, 6413, and 6511. A Form 941c, or an
equivalent statement, must accompany each claim for
[[Page 137]]
refund. In addition, Form W-2 or, if applicable, Form W-2c must also
reflect the actual amount deferred that should have been taken into
account.
(3) Lag method. Under the alternative method provided in this
paragraph (f)(3), an amount deferred, plus interest, may be treated as
wages paid by the employer and received by the employee, for purposes of
withholding and depositing FICA tax, on any date that is no later than
three months after the date the amount is required to be taken into
account in accordance with paragraph (e) of this section. For purposes
of this paragraph (f)(3), the amount deferred must be increased by
interest through the date on which the wages are treated as paid, at a
rate that is not less than AFR. If the employer withholds and deposits
FICA tax in accordance with this paragraph (f)(3), the employer will be
treated as having taken into account the amount deferred plus income to
the date on which the wages are treated as paid.
(4) Examples. This paragraph (f) is illustrated by the following
examples:
Example 1: (i) Employer M maintains a nonqualified deferred
compensation plan that is an account balance plan. The plan provides for
annual bonuses based on current year profits to be deferred until
termination of employment. Employer M's profits for 2003, and thus the
amount deferred, is reasonably ascertainable, but Employer M calculates
the amount deferred on March 3, 2004, when the relevant data is
available.
(ii) In accordance with the alternative method described in
paragraph (f)(2) of this section, Employer M makes a reasonable estimate
that the amount deferred that must be taken into account as of December
31, 2003, for Employee A is $20,000, and withholds and deposits FICA tax
on that amount as if it were wages paid by Employer M and received by
Employee A on that date. In January of 2004, Employer M files and
furnishes Form W-2 for Employee A including the $20,000 in FICA wages.
On March 3, 2004, Employer M determines that the actual amount deferred
that should have been taken into account on December 31, 2003, was
$22,000.
(iii) In accordance with the alternative method described in
paragraph (f)(2)(ii) of this section, Employer M may treat the
additional $2,000 as wages paid to and received by Employee A on
December 31, 2003, the estimate date. Employer M may treat the $2,000
shortfall as an error ascertained on March 3, 2004, and withhold and
deposit FICA tax on that amount. Form W-2c for Employee A for 2003 must
include the $2,000 shortfall in FICA wages. Employer M must also correct
the information on Form 941 for the last quarter of 2003, reporting the
adjustment on Form 941 for the first quarter of 2004, accompanied by
Form 941c for the last quarter of 2003.
(iv) Instead, Employer M may treat the $2,000 shortfall as wages
paid on March 31, 2004, and withhold and deposit FICA tax on that amount
as if it were wages paid by Employer M and received by Employee A on
that date. Form W-2 for Employee A for 2004 and Form 941 for the first
quarter of 2004 must include the $2,000 shortfall in FICA wages.
Example 2: (i) The facts are the same as in Example 1, except that
on March 3, 2004, Employer M determines that the actual amount deferred
that should have been taken into account on December 31, 2003, was
$19,000.
(ii) Under paragraph (f)(2)(iii) of this section, Employer M may, in
accordance with sections 6402, 6413, and 6511, claim a refund or credit
for the overpayment of tax resulting from the overestimate. In addition,
Employer M must file and furnish a Form W-2c for Employee A and must
correct the information on Form 941 for the last quarter of 2003.
Example 3: (i) The facts are the same as in Example 1, except that
Employer M does not make a reasonable estimate of the amount deferred
that must be taken into account as of December 31, 2003. Instead,
Employer M withholds and deposits FICA tax on the amount deferred plus
interest on that amount using AFR (for January 2004) as if it were wages
paid by Employer M and received by Employee A on March 15, 2004.
(ii) Under the alternative method described in paragraph (f)(3) of
this section, the amount taken into account on March 15, 2004 (including
the interest), will be treated as FICA wages paid to and received by
Employee A on March 15, 2004.
Example 4: (i) The facts are the same as in Example 1, except that
an amount is also deferred for Employee B which is required to be taken
into account on October 15, 2003, and Employer M chooses to use the lag
method in paragraph (f)(3) of this section in order to provide time to
calculate the amount deferred.
(ii) Employer M may use any date not later than January 15, 2004, to
take the amount deferred into account (provided that the amount deferred
includes interest, at AFR for January 1, 2003, through December 31,
2003, and at AFR for January 1, 2004, through January 15, 2004).
(g) Effective date and transition rules--(1) General effective date.
Except for paragraphs (g)(2) through (4) of this section, this section
is applicable on and after January 1, 2000. Thus, paragraphs (a) through
(f) of this section
[[Page 138]]
apply to amounts deferred on or after January 1, 2000; to amounts
deferred before January 1, 2000, which cease to be subject to a
substantial risk of forfeiture on or after January 1, 2000, or for which
a resolution date occurs on or after January 1, 2000; and to benefits
actually or constructively paid on or after January 1, 2000.
(2) Reasonable, good faith interpretation for amounts deferred and
benefits paid before January 1, 2000--(i) In general. For periods before
January 1, 2000 (including amounts deferred before January 1, 2000, and
any benefits actually or constructively paid before January 1, 2000,
that are attributable to those amounts deferred), an employer may rely
on a reasonable, good faith interpretation of section 3121(v)(2), taking
into account pre-existing guidance. An employer will be deemed to have
determined FICA tax liability and satisfied FICA withholding
requirements in accordance with a reasonable, good faith interpretation
of section 3121(v)(2) if the employer has complied with paragraphs (a)
through (f) of this section. For purposes of paragraphs (g)(2) through
(4) of this section, and subject to paragraphs (g)(2)(ii) and (iii) of
this section, whether an employer that has not complied with paragraphs
(a) through (f) of this section has determined FICA tax liability and
satisfied FICA withholding requirements in accordance with a reasonable,
good faith interpretation of section 3121(v)(2) will be determined based
on the relevant facts and circumstances, including consistency of
treatment by the employer and the extent to which the employer has
resolved unclear issues in its favor.
(ii) Plan must be established or adopted. If an amount is deferred
under a plan before January 1, 2000, and benefit payments attributable
to that amount are actually or constructively paid on or after January
1, 2000, then in no event will an employer's treatment of the amount
deferred be considered to be in accordance with a reasonable, good faith
interpretation of section 3121(v)(2) if the employer treats that amount
as taken into account as wages for FICA tax purposes prior to the
establishment of the plan (within the meaning of paragraph (b)(2) of
this section) providing for the deferred compensation (or, if later, the
establishment of the plan as amended to provide for the deferred
compensation, as provided in paragraph (b)(2)(ii) of this section). If
an amount is deferred under a plan before January 1, 2000, and benefit
payments attributable to that amount are actually or constructively paid
before January 1, 2000, then in no event will the employer's treatment
of that amount deferred be considered to be in accordance with a
reasonable, good faith interpretation of section 3121(v)(2) if the
employer treats that amount as taken into account as wages for FICA tax
purposes prior to the adoption of the plan providing for the deferred
compensation (or, if later, the adoption of the plan amendment providing
the deferred compensation). For example, awards, bonuses, raises,
incentive payments, and other similar amounts granted under a plan as
compensation for past services may not be taken into account under
section 3121(v)(2) prior to the establishment (or, if applicable, the
adoption) of the plan.
(iii) Certain changes in position for stock options, stock
appreciation rights, and other stock value rights not reasonable, good
faith interpretation. In the case of a stock option, stock appreciation
right, or other stock value right (as defined in paragraph (b)(4)(ii) of
this section) that is exercised before January 1, 2000, an employer that
treats the exercise as not subject to FICA tax as a result of the
nonduplication rule of section 3121(v)(2)(B) is not acting in accordance
with a reasonable, good faith interpretation of section 3121(v)(2) if
the employer has not treated that grant and all earlier grants as
subject to section 3121(v)(2) by reporting the current value of such
options and rights as FICA wages on Form 941 filed for the quarter
during which each grant was made (or, if later, for the quarter during
which each grant ceased to be subject to a substantial risk of
forfeiture).
(3) Optional adjustments to conform with this section for pre-
effective-date open periods--(i) General rule. If an employer determined
FICA tax liability with respect to section 3121(v)(2) in any period
ending before January 1, 2000, for which the applicable period of
limitations has not expired on January 1,
[[Page 139]]
2000 (pre-effective-date open periods), in a manner that was not in
accordance with this section, the employer may adjust its FICA tax
determination for that period to conform to this section. Thus, if an
amount deferred was taken into account in a pre-effective-date open
period when it was not required to be taken into account (e.g., an
amount taken into account before it became reasonably ascertainable),
the employer may claim a refund or credit for any FICA tax paid on that
amount to the extent permitted by sections 6402, 6413, and 6511.
(ii) Consistency required. In the case of a plan that is not a
nonqualified deferred compensation plan (within the meaning of paragraph
(b)(1) of this section), if any payment was actually or constructively
paid to an employee under the plan in a pre-effective-date open period
and that payment was not included in FICA wages by reason of the
employer's treatment of the plan as a nonqualified deferred compensation
plan, then the employer may claim a refund or credit for FICA tax paid
on amounts treated as amounts deferred under the plan (in accordance
with the employer's treatment of the plan as a nonqualified deferred
compensation plan) for that employee for pre-effective-date open periods
only to the extent that the FICA tax paid on all amounts treated as
amounts deferred for the employee in all pre-effective-date open periods
under the plan exceeds the FICA tax that would have been due on the
benefits actually or constructively paid to the employee in those
periods under the plan if those benefits were included in FICA wages
when paid. If any benefit payments attributable to amounts deferred
after December 31, 1993, were actually or constructively paid to an
employee under a nonqualified deferred compensation plan (within the
meaning of paragraph (b)(1) of this section) in a pre-effective-date
open period, but these payments were treated as subject to FICA tax
because the employer treated the plan as not being a nonqualified
deferred compensation plan, then the employer may claim a refund or
credit for the FICA tax paid on those benefit payments only to the
extent that the FICA tax paid on those benefit payments exceeds the FICA
tax that would have been due on the amounts deferred to which those
benefit payments are attributable if those amounts deferred had been
taken into account when they would have been required to have been taken
into account under this section (if this section had been in effect
then).
(iii) Reporting. Any employer that adjusts its FICA tax
determination in accordance with paragraphs (g)(3)(i) and (ii) of this
section must make appropriate adjustments on Form 941 and Form 941c for
the affected periods, and, in addition, must file and furnish Form W-2,
or, if applicable, Form W-2c, for any affected employee so that the
Social Security Administration may correctly post the amount deferred to
the employee's earnings record. The adjustments may be made in
accordance with section 6205(a) and the regulations thereunder; however,
for purposes of Sec. 31.6205-1(b), the error is not required to be
treated as ascertained before March 31, 2000.
(4) Application of reasonable, good faith standard--(i) Plans that
are not subject to section 3121(v)(2). If a plan is not a nonqualified
deferred compensation plan within the meaning of paragraph (b)(1) of
this section, but, for a period ending prior to January 1, 2000, and,
pursuant to a reasonable, good faith interpretation of section
3121(v)(2), an amount under the plan was taken into account (within the
meaning of paragraph (d)(1) of this section) as an amount deferred under
a nonqualified deferred compensation plan, then, pursuant to paragraph
(g)(2) of this section, the following rules shall apply--
(A) With respect to benefit payments actually or constructively paid
before January 1, 2000, that are attributable to amounts previously
taken into account under the plan, no additional FICA tax will be due;
(B) On or after January 1, 2000, benefit payments under the plan
must be taken into account as wages when actually or constructively paid
in accordance with paragraph (a)(1) of this section; and
(C) To the extent permitted by paragraph (g)(3) of this section, the
employer may claim a refund or credit for FICA tax actually paid on
amounts
[[Page 140]]
taken into account prior to January 1, 2000.
(ii) Plans that are subject to section 3121(v)(2) for which the
amount deferred has not been fully taken into account--(A) In general.
The rules of paragraphs (g)(4)(ii)(B) through (E) of this section apply
if a plan is a nonqualified deferred compensation plan (within the
meaning of paragraph (b)(1) of this section) and, with respect to an
amount deferred under the plan for an employee prior to January 1, 2000,
the employer, in accordance with a reasonable, good faith interpretation
of section 3121(v)(2), either took into account an amount that is less
than the amount that would have been required to be taken into account
if paragraphs (a) through (f) of this section had been in effect for
that period or took no amount into account. Thus, paragraphs
(g)(4)(ii)(B) through (E) of this section apply both to an employer that
treated the plan as if it were not a nonqualified deferred compensation
plan within the meaning of section 3121(v)(2) (by withholding and paying
FICA tax due on benefits actually or constructively paid under the plan
during that period, if any) and to an employer that treated the plan as
a nonqualified deferred compensation plan within the meaning of section
3121(v)(2).
(B) No additional tax required. Pursuant to paragraph (g)(2) of this
section, no additional FICA tax will be due for any period ending prior
to January 1, 2000.
(C) General timing rule applicable. In accordance with paragraph
(d)(1)(ii) of this section, except as provided in paragraphs (g)(4)(ii)
(D) and (E), the general timing rule described in paragraph (a)(1) of
this section applies to benefits actually or constructively paid on or
after January 1, 2000, attributable to an amount deferred in a period
before January 1, 2000, to the extent the amount taken into account was
less than the amount that would have been required to be taken into
account if paragraphs (a) through (f) of this section had been in effect
before January 1, 2000.
(D) Special rule for amounts deferred before 1994. The difference
between the amount that was taken into account in any period ending
prior to January 1, 1994, and the amount that would have been required
or permitted to be taken into account in that period if paragraphs (a)
through (f) of this section had been in effect is treated as if it had
been taken into account within the meaning of paragraph (d)(1) of this
section. For example, in the case of an amount deferred before 1994 that
was not reasonably ascertainable (and which was not subject to a
substantial risk of forfeiture), the employer is treated as if it had
anticipated the actual amount, form, and commencement date for the
benefit payments attributable to the amount deferred and had taken the
amount deferred into account at an early inclusion date before 1994
using a method permitted under this section. Thus, with respect to such
an amount deferred, the employer is not required to take any additional
amount into account when the amount deferred becomes reasonably
ascertainable, and no additional FICA tax will be due when the benefit
payments attributable to the amount deferred are actually or
constructively paid.
(E) Special rule for amounts required to be taken into account in
1994 or 1995. In the case of an amount deferred that would have been
required to be taken into account in 1994 or 1995 if paragraphs (a)
through (f) of this section had been in effect, an employer will be
treated as taking the amount deferred into account under paragraph
(d)(1) of this section to the extent the employer takes the amount into
account by treating it as wages paid by the employer and received by the
employee as of any date prior to April 1, 2000.
(iii) Plans that are subject to section 3121(v)(2) for which more
than the amount deferred has been taken into account. If a plan is a
nonqualified deferred compensation plan (within the meaning of paragraph
(b)(1) of this section) and an amount was taken into account under the
plan for an employee before January 1, 2000, in accordance with a
reasonable, good faith interpretation of section 3121(v)(2), but that
amount could not have been taken into account before January 1, 2000, if
paragraphs (a) through (f) of this section had been in effect then, the
following rules apply--
[[Page 141]]
(A) The determination of the amount deferred for any period
beginning on or after January 1, 2000, must be made in accordance with
paragraph (c) of this section, and the time when amounts deferred under
the plan are required to be taken into account must be determined in
accordance with paragraph (e) of this section, without regard to any
such amount that was taken into account for any period ending before
January 1, 2000; and
(B) To the extent permitted by sections 6402, 6413, and 6511, the
employer may claim a refund or credit for an overpayment of tax caused
by the overinclusion of wages that occurred before January 1, 2000.
(5) Examples. This paragraph (g) is illustrated by the following
examples:
Example 1: (i) In 1996, Employer M establishes a nonqualified
deferred compensation plan that is a nonaccount balance plan for
Employee A. All benefits under the plan are 100 percent vested. In order
to determine the amount deferred on behalf of Employee A under the plan
for 1996 and 1997, Employer M must make assumptions as to the date on
which Employee A will retire and the form of benefit Employee A will
elect, in addition to interest, mortality, and cost-of-living
assumptions. Based on assumptions made with respect to all of these
contingencies, Employer M determines that the amount deferred for 1996
is $50,000 and the amount deferred for 1997 is $55,000. In 1996 and
1997, Employee A's total wages (without regard to the amounts deferred)
exceed the OASDI wage bases. Employer M withholds and deposits HI tax on
the $50,000 and $55,000 amounts. Employee A does not retire before
January 1, 2000. Employer M chooses under paragraph (g)(3) of this
section to apply this section to 1996 and 1997 before the January 1,
2000, general effective date.
(ii) Under this section, the amounts deferred in 1996 and 1997 are
not reasonably ascertainable (within the meaning of paragraph (e)(4)(i)
of this section) before January 1, 2000. Thus, as long as the applicable
period of limitations has not expired for the periods in 1996 and 1997,
Employer M may, to the extent permitted under paragraph (g)(3) of this
section, apply for a refund or credit for the HI tax paid on the amounts
deferred for 1996 and 1997 and, in accordance with paragraph (e)(4) of
this section, take into account the amounts deferred when they become
reasonably ascertainable.
Example 2: (i) Employer N adopts a plan on January 1, 1994, that
covers Employee B, who has 10 years of service as of that date. The plan
provides that, in consideration of Employee B's outstanding services
over the past 10 years, Employee B will be paid a $500,000 lump sum
distribution upon termination of employment at any time. On January 15,
1996, Employee B terminates employment with Employer N. Employer N
determines, based on a reasonable, good faith interpretation of section
3121(v)(2), that the plan is a nonqualified deferred compensation plan
under that section. Employer N treats the $500,000 as having been taken
into account as an amount deferred in 1993 and earlier years.
(ii) Under paragraph (g)(2)(ii) of this section, if all amounts are
deferred and all benefits are paid under a plan before January 1, 2000,
then in no event will an employer's treatment of amounts deferred under
the plan be considered to be in accordance with a reasonable, good faith
interpretation of section 3121(v)(2) if the employer treats these
amounts as taken into account as wages for FICA tax purposes prior to
the adoption of the plan. Accordingly, Employer N's treatment is not in
accordance with a reasonable, good faith interpretation of section
3121(v)(2) because Employer N treated amounts as taken into account in
years before the adoption of the plan. As a result, the payment made to
Employee B in 1996 was subject to both the OASDI and HI portions of FICA
tax when paid.
Example 3: (i) Employer O adopts a bonus plan on December 1, 1993,
that becomes effective and legally binding on January 1, 1994. Under the
plan, which is not set forth in writing, a specified bonus amount (which
is 100 percent vested) is credited to Employee C's account each December
31. A reasonable rate of interest on Employee C's account balance is
credited quarterly. Employee C's account balance will begin to be paid
in equal annual installments over 10 years beginning on January 1, 2000.
Employer O determines, based on a reasonable, good faith interpretation
of section 3121(v)(2), that the bonus plan is a nonqualified deferred
compensation plan under that section and, therefore, treats the amounts
credited from January 1, 1994, through December 31, 1999, as amounts
deferred and, in accordance with a reasonable, good faith interpretation
of section 3121(v)(2), takes those amounts deferred into account as
wages for FICA tax purposes as of those dates. The bonus plan is set
forth in writing on May 1, 1999, and, thus, is treated as established as
of January 1, 1994.
(ii) Under paragraph (g)(2)(ii) of this section, if an amount is
deferred before January 1, 2000, and the attributable benefit is paid on
or after January 1, 2000, then in no event will an employer's treatment
of the amount deferred under a plan be considered to be in accordance
with a reasonable, good faith interpretation of section 3121(v)(2) if
the employer treats the amount deferred as taken into account as wages
for FICA tax purposes prior to the establishment of the plan (within the
meaning of paragraph (b)(2) of this
[[Page 142]]
section). Because the bonus plan is treated as established on January 1,
1994 (pursuant to the transition rule for unwritten plans in paragraph
(b)(2)(iii) of this section), and because Employer O, in accordance with
a reasonable, good faith interpretation of section 3121(v)(2), took
amounts deferred into account in 1994 through 1999, the amounts paid to
Employee C attributable to those amounts deferred will not be subject to
FICA tax when paid.
Example 4: (i) In 1985, Employer P establishes a compensation
arrangement for Employee D that provides for a lump sum payment to be
made after termination of employment but the arrangement is not a
nonqualified deferred compensation plan (within the meaning of paragraph
(b)(1) of this section). However, prior to January 1, 2000, and in
accordance with a reasonable, good faith interpretation of section
3121(v)(2), Employer P treats the arrangement as a nonqualified deferred
compensation plan under section 3121(v)(2). Employer P determines that
Employee D's total wages (without regard to the amount deferred) for
each year from 1985 through 1993 exceed the applicable OASDI and HI wage
bases for each of those years and, consequently, there is no FICA tax
liability with respect to the amounts deferred for those years. In 1994,
Employee D's total wages (without regard to the amount deferred) exceed
the OASDI wage base. However, because there is no limit on the HI wage
base, the amount deferred for 1994 results in additional HI tax
liability of $290, which is timely paid by Employer P.
(ii) Employee D terminates employment with Employer P in 1995 and
receives a plan payment of $50,000. In that year, Employee D also
receives wages of $60,000 from Employer P. In accordance with its
treatment of the plan as a nonqualified deferred compensation plan under
section 3121(v)(2), Employer P does not treat the $50,000 payment in
1995 as wages for FICA tax purposes in that year.
(iii) Because amounts under a plan were taken into account (within
the meaning of paragraph (d)(1) of this section) as amounts deferred
under a nonqualified deferred compensation plan pursuant to a
reasonable, good faith interpretation of section 3121(v)(2)(A), but that
plan is not a nonqualified deferred compensation plan within the meaning
of paragraph (b)(1) of this section, the transition rules provided in
paragraph (g)(4)(i) of this section apply. Thus, no additional FICA tax
will be due on the benefits paid in 1995.
(iv) Because $290 of HI tax was paid on the amount deferred in 1994,
Employer P is entitled to a refund or credit for that amount to the
extent permitted under sections 6402, 6413, and 6511--but only to the
extent that $290 exceeds the FICA tax that would have been due on the
$50,000 payment in 1995 if that payment had been subject to FICA tax
when paid (i.e., if paragraphs (a) through (f) of this section had been
effective for those years). In 1995, Employee D had other wages of
$60,000. Thus, only $1,200 (the $61,200 OASDI wage base, less the
$60,000 of other wages) of the $50,000 payment would have been subject
to OASDI; the full $50,000 would have been subject to HI. This would
have resulted in $148.80 of OASDI tax ($1,200 x 12.4 percent) and $1,450
of HI tax ($50,000 x 2.9 percent). Employer P is not entitled to a
refund or credit under the consistency rule of paragraph (g)(3)(ii)
because the $290 of HI tax paid in 1994 is less than the total $1,598.80
of FICA tax liability that would have resulted if this section had
applied for 1995.
(v) However, if the benefit payment is instead actually or
constructively paid on or after January 1, 2000, the benefit payment
must be taken into account as wages when actually or constructively paid
in accordance with the general timing rule of paragraph (a)(1) of this
section (and paragraph (g)(4)(i)(B) of this section).
Example 5: (i) In 1985, Employer Q establishes a compensation
arrangement for Employee E that is a nonqualified deferred compensation
plan within the meaning of paragraph (b)(1) of this section. However,
prior to January 1, 2000, Employer Q determines, based on a reasonable,
good faith interpretation of section 3121(v)(2), that the arrangement is
not a nonqualified deferred compensation plan within the meaning of that
section. Thus, when Employee E retires at the end of 1996 and benefit
payments under the arrangement begin in 1997, Employer Q withholds and
deposits FICA tax on the amounts paid to Employee E. Payments under the
arrangement continue on or after January 1, 2000. Employer Q does not
choose (under paragraph (g)(3) of this section) to adjust its FICA tax
determination for a pre-effective-date open period by treating this
section as in effect for all amounts deferred and benefits actually or
constructively paid for any such period. The periods in 1994 and 1995
are not pre-effective-date open periods for Employer Q.
(ii) Under paragraph (g)(4)(ii) of this section, for purposes of
determining whether benefits actually or constructively paid on or after
January 1, 2000, were previously taken into account for purposes of
applying the nonduplication rule of section 3121(v)(2)(B), any amount
that would have been required to have been taken into account before
1994 will be treated as if it had been taken into account within the
meaning of paragraph (d)(1) of this section. Under the nonduplication
rule, benefit payments attributable to an amount that has been so
treated as taken into account is not treated as wages for FICA tax
purposes at any later time (such as upon payment).
(iii) Because Employer Q does not adjust its FICA tax determination
by treating this
[[Page 143]]
section as in effect for all amounts deferred for periods ending after
December 31, 1993, any benefit payments attributable to amounts deferred
in periods ending after December 31, 1993, will be included in wages
when actually or constructively paid in accordance with the general
timing rule of paragraph (a)(1) of this section.
Example 6: (i) The facts are the same as in Example 5, except that
Employer Q chooses (in accordance with paragraph (g)(3) of this section)
to adjust its FICA tax determination for all pre-effective-date open
periods by treating this section as in effect for all amounts deferred
for those periods. In addition, Employer Q chooses (in accordance with
paragraph (g)(4)(ii)(E) of this section) to take the amounts deferred
for 1994 and 1995 into account by treating these amounts as FICA wages
paid and received by Employee E on January 15, 2000.
(ii) In accordance with the nonduplication rule of paragraph
(a)(2)(iii) of this section, because all amounts deferred for Employee E
under the plan were taken into account (or treated as taken into
account), any benefit payments made to Employee E under the plan will
not be included as FICA wages when actually or constructively paid.
Example 7: (i) The facts are the same as in Example 5, except that
Employer Q does not withhold and deposit the FICA tax due on benefits
actually or constructively paid before January 1, 2000.
(ii) Because Employer Q did not withhold and deposit the FICA tax
due on benefits actually or constructively paid before January 1, 2000,
Employer Q did not determine FICA tax liability and satisfy FICA tax
withholding requirements in accordance with a reasonable, good faith
interpretation of section 3121(v)(2). Thus, the transition rules
provided in paragraphs (g)(3) and (4) of this section do not apply. As a
result, any amount that would have been required to have been taken into
account under this section before 1994 is not treated as if it had been
so taken into account under paragraph (g)(4)(ii)(D) of this section, and
benefit payments attributable to amounts deferred before January 1,
2000, are treated as FICA wages when actually or constructively paid in
accordance with the general timing rule of paragraph (a)(1) of this
section.
Example 8: (i) In 1993, Employer R establishes a nonqualified
deferred compensation plan for Employee F under which Employee F will
have a fully vested right to receive a lump sum payment in 2000 equal to
50 percent of Employee F's highest rate of salary. On December 31, 1993,
Employee F's highest salary is $1 million. In accordance with a
reasonable, good faith interpretation of section 3121(v)(2), Employer R
determines that, for 1993, there is an amount deferred that must be
taken into account as wages for FICA tax purposes. Based on Employer R's
estimate that Employee F's highest salary will be $3 million in 2000,
Employer R determines that the amount deferred is equal to the present
value in 1993 of $1.5 million payable in 2000. However, because Employee
F has other wages in 1993 that exceed the applicable OASDI and HI wage
bases for that year, no additional FICA tax is paid as a result of that
amount deferred being taken into account for 1993. In addition, Employer
R takes no amounts into account under the plan after 1993 for Employee
F. Under paragraphs (e)(1) and (4)(ii)(D)(2) of this section, the
largest amount that could have been taken into account in 1993 is the
present value of a lump sum payment of $500,000, payable in 2000,
because that is the maximum amount to which Employee F has a legally
binding right as of December 31, 1993. Employee F's highest salary is,
in fact, $3 million in 2000 and Employee F receives $1.5 million under
the plan on December 31, 2000.
(ii) In accordance with paragraphs (g)(1) and (4)(iii)(A) of this
section, the determination of the amount deferred under the plan for any
period beginning on or after January 1, 2000, and the time when that
amount deferred is required to be taken into account must be determined
in accordance with this section. In addition, these determinations must
be made without regard to any amount deferred that was taken into
account for any period ending before January 1, 2000, that could not be
taken into account before January 1, 2000, if paragraphs (a) through (f)
of this section had been in effect. Because no FICA tax was actually
paid on that $1 million in 1993, no overpayment of tax was caused by the
overinclusion of wages in 1993 and, thus, Employer R is not entitled to
a refund or credit (even assuming that the period of limitations has
been kept open for periods in 1993). In addition, because the difference
between the present value of the $1.5 million payment and the present
value of a $500,000 payment was not taken into account for periods
beginning on or after January 1, 1994, $1 million must be included in
FICA wages under the general timing rule when paid.
[64 FR 4547, Jan. 29, 1999; 64 FR 15687, Apr. 1, 1999]
Sec. 31.3121(v)(2)-2 Effective dates and transition rules.
(a) General statutory effective date. Except as otherwise provided
in paragraphs (b) through (e) of this section, section 3121(v)(2) and
the amendments made to section 3121(a)(2), (a)(3), and (a)(13) by the
Social Security Amendments of 1983 (Pub. L. 98-21, 97 Stat. 65), as
amended by section 2662(f)(2) of the Deficit Reduction Act of 1984 (Pub.
L. 98-369, 98 Stat. 494), apply to
[[Page 144]]
amounts deferred and benefits paid after December 31, 1983.
(b) Definitions. For purposes of Sec. 31.3121(v)(2)-1 and this
section, the following definitions apply:
(1) FICA. FICA means the Federal Insurance Contributions Act (26
U.S.C. 3101 et seq.).
(2) 457(a) plan. A 457(a) plan means an eligible deferred
compensation plan of a State or local government or of a tax-exempt
organization to which section 457(a) applies.
(3) Gap agreement. Gap agreement means an agreement adopted after
March 24, 1983, and on or before December 31, 1983, between an
individual and a nonqualified deferred compensation plan within the
meaning of Sec. 31.3121(v)(2)-1(b). Such an agreement does not fail to
be a gap agreement merely because the terms of the plan are changed
after December 31, 1983.
(4) Individual party to a gap agreement. Individual party to a gap
agreement means an individual who was eligible to participate in a gap
agreement on December 31, 1983, under the terms of the agreement on that
date. An individual will be treated as an individual party to a gap
agreement even if the individual has not accrued any benefits under the
plan by December 31, 1983, and regardless of whether the individual has
taken any specific action to become a party to the agreement. However,
an individual who becomes eligible to participate in a gap agreement
after December 31, 1983, is not an individual party to a gap agreement.
(5) Individual party to a March 24, 1983 agreement. Individual party
to a March 24, 1983 agreement means an individual who was eligible to
participate in a March 24, 1983 agreement under the terms of the
agreement on March 24, 1983. An individual will be treated as an
individual party to a March 24, 1983 agreement even if the individual
has not accrued any benefits under the plan by March 24, 1983, and
regardless of whether the individual has taken any specific action to
become a party to the agreement. However, an individual who becomes
eligible to participate in a March 24, 1983 agreement after March 24,
1983, is not an individual party to a March 24, 1983 agreement.
(6) March 24, 1983 agreement. March 24, 1983 agreement means an
agreement in existence on March 24, 1983, between an individual and a
nonqualified deferred compensation plan within the meaning of Sec.
31.3121(v)(2)-1(b). Such an agreement does not fail to be a March 24,
1983 agreement merely because the terms of the plan are changed after
March 24, 1983. In addition, for purposes of this paragraph (b)(6) only,
any plan (or agreement) that provides for payments that qualify for one
of the retirement payment exclusions is treated as a nonqualified
deferred compensation plan. For example, Sec. 31.3121(v)(2)-1(b)(4)(v)
provides that certain benefits established in connection with impending
termination do not result from the deferral of compensation and thus are
not considered deferred under a nonqualified deferred compensation plan.
However, a plan that provides such benefits and that was in existence on
March 24, 1983, is treated as a nonqualified deferred compensation plan
for purposes of this paragraph (b) to the extent it provides benefits
that would have satisfied one of the retirement payment exclusions.
(7) Retirement payment exclusions. Retirement payment exclusions are
the exclusions from wages (for FICA tax purposes) for retirement
payments under section 3121(a)(2)(A), (a)(3), and (a)(13)(A)(iii), as in
effect on April 19, 1983 (the day before enactment of the Social
Security Amendments of 1983).
(8) Transition benefits. Transition benefits are payments made after
December 31, 1983, attributable to services rendered before January 1,
1984. For this purpose, transition benefits are determined without
regard to any changes made in the terms of the plan after March 24,
1983, in the case of a March 24, 1983 agreement or after December 31,
1983, in the case of a gap agreement.
(c) Transition rules--(1) In general. Except as provided in
paragraph (c)(2) or (3) of this section, the general statutory effective
date described in paragraph (a) of this section applies to benefit
payments after December 31, 1983. Thus, except as provided in paragraph
(c)(2) or (3) of this section, section 3121(v)(2) applies, and the
retirement payment exclusions do not apply, to benefit payments made
after December
[[Page 145]]
31, 1983, even if the benefit payments are made under a March 24, 1983
agreement or a gap agreement.
(2) Transition benefits under a March 24, 1983 agreement. With
respect to an individual party to a March 24, 1983 agreement, transition
benefits paid under that March 24, 1983 agreement (except for those paid
under a 457(a) plan) are not subject to the special timing rule of
section 3121(v)(2) and are subject to section 3121(a) as in effect on
April 19, 1983. Thus, transition benefits under a March 24, 1983
agreement (except for those under a 457(a) plan) to an individual party
to a March 24, 1983 agreement are excluded from wages (for FICA tax
purposes) only if they qualify for any of the retirement payment
exclusions (or any other exclusion provided under section 3121(a) as in
effect on April 19, 1983).
(3) Transition benefits under a gap agreement. With respect to an
individual party to a gap agreement, the payor of transition benefits
under the gap agreement must choose to either--
(i) Take the transition benefits into account as wages when paid; or
(ii) Take the amount deferred (within the meaning of Sec.
31.3121(v)(2)-1(c)) with respect to the transition benefits into account
as wages under section 3121(v)(2) (as if section 3121(v)(2) had applied
before its general statutory effective date).
(d) Determining transition benefit portion. For purposes of
determining the portion of total benefits under a nonqualified deferred
compensation plan that represents transition benefits, if, under the
terms of the plan, benefit payments are not attributed to specific years
of service, the employer may use any reasonable method. For example, if
a plan provides that the employee will receive benefits equal to 2
percent of high 3-year average compensation multiplied by years of
service, and the employee retires after 25 years of service, 9 of which
are before 1984, the employer may determine that \9/25\ of the total
benefit payments to be received beginning in 2000 are transition
benefits attributable to services performed before 1984.
(e) Order of payment. If an employer determines, in accordance with
paragraph (d) of this section, that a portion of the total benefits
under a nonqualified deferred compensation plan constitutes transition
benefits, then, for purposes of determining the portion of each benefit
payment that constitutes transition benefits, the employer must treat
each benefit payment as consisting of transition benefits in the same
proportion as the transition benefits that have not been paid (as of
January 1, 2000) bear to total benefits that have not been paid (as of
January 1, 2000), unless such allocation is inconsistent with the terms
of the plan. However, for a benefit payment made before January 1, 2000,
the employer may use any reasonable allocation method to determine the
portion of a payment that consists of transition benefits, provided that
the allocation method is consistent with the terms of the plan.
[64 FR 4567, Jan. 29, 1999]
Sec. 31.3123-1 Deductions by an employer from remuneration of an employee.
Any amount deducted by an employer from the remuneration of an
employee is considered to be part of the employee's remuneration and is
considered to be paid to the employee as remuneration at the time that
the deduction is made. It is immaterial that any act of Congress or the
law of any State requires or permits such deductions and the payment of
the amount thereof to the United States, a State, or any political
subdivision thereof.
Sec. 31.3127-1T Exemption for employers and their employees where both
are members of religious faiths opposed to participation in Social
Security Act programs (temporary).
(a) If an employer (or if the employer is a partnership, each
partner therein) and their employee are members of a recognized
religious sect or division described in section 1402(g)(1) of the Code,
both the employer and employee adhere to the tenets and teachings of
that sect, and both the employer and employee have filed and had
approved applications under section 3127(b) for exemption from the taxes
imposed by sections 3111 and 3101 then the employer is exempt from taxes
imposed by section 3111 with respect to the wages
[[Page 146]]
paid to the eligible employee, and the employee is exempt from the taxes
imposed by section 3101 with respect to the wages paid by that employer.
(b) Services performed in the employ of a corporation are not within
the exception, except as provided in paragraph (c) of this section.
(c) A disregarded entity that is treated as a corporation under
Sec. 301.7701-2(c)(2)(iv)(B) of this chapter (Procedure and
Administration Regulations) shall not be treated as a corporation for
purposes of applying section 3127. For purposes of section 3127, the
owner of the disregarded entity will be treated as the employer and the
payor of the employee's wages.
(d) This section applies with respect to wages paid on or after
November 1, 2011. However, taxpayers may apply this section to wages
paid on or after January 1, 2009.
(e) Expiration date. The applicability of this section expires on or
before [October 31, 2014].
[T.D. 9554, 76 FR 67365, Nov. 1, 2011]
Subpart C_Railroad Retirement Tax Act (Chapter 22, Internal Revenue Code
of 1954)
Tax on Employees
Sec. 31.3201-1 Measure of employee tax.
The employee tax is measured by the amount of compensation received
for services rendered as an employee. For provisions relating to
compensation, see Sec. 31.3231(e)-1. For provisions relating to the
circumstances under which certain compensation is to be disregarded for
the purpose of determining the employee tax, see paragraphs (b)(1) and
(2) of Sec. 31.3231(e)-1.
[T.D. 8582, 59 FR 66189, Dec. 23, 1994]
Sec. 31.3201-2 Rates and computation of employee tax.
(a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee tax rate equals
the sum of the tax rates in effect under section 3101(a), relating to
old-age, survivors, and disability insurance, and section 3101(b),
relating to hospital insurance. The Tier 1 employee tax rate is applied
to compensation up to the contribution base described in section
3231(e)(2)(B)(i). The contribution base is determined under section 230
of the Social Security Act and is identical to the old-age, survivors,
and disability insurance wage base and the hospital insurance wage base,
respectively, under the Federal Insurance Contributions Act.
(ii) Example. The rule in paragraph (a)(1)(i) of this section is
illustrated by the following example.
Example. A received compensation of $60,000 in 1992. The section
3101(a) rate of 6.2 percent would be applied to A's compensation up to
$55,500, the applicable contribution base for 1992. The section 3101(b)
rate of 1.45 percent would be applied to the entire $60,000 of A's
compensation because the applicable contribution base for 1992 is
$130,200.
(2)(i) Tier 2 tax. The Tier 2 employee tax rate equals the
percentage set forth in section 3201(b) of the Code. This rate is
applied to compensation up to the contribution base described in section
3231(e)(2)(B)(ii).
(ii) Example. The rule in paragraph (a)(2)(i) of this section is
illustrated by the following example.
Example. A received compensation of $60,000 in 1992. The section
3201(b) rate of 4.90 percent would be applied to A's compensation up to
$41,400, the applicable contribution base for 1992.
(b)(1) Computation. The employee tax is computed by multiplying the
amount of the employee's compensation with respect to which the employee
tax is imposed by the rate applicable to such compensation, as
determined under paragraph (a) of this section. The applicable rate is
the rate in effect when the compensation is received by the employee.
For rules relating to the time of receipt, see Sec. 31.3121(a)-2 (a)
and (b).
(2) Example. The rule in paragraph (b)(1) of this section is
illustrated by the following example.
Example. In 1990, employee A received compensation of $1,000 as
remuneration for services performed for employer R in 1989. The employee
tax is payable at the rate of 12.55 percent (7.65 percent plus 4.90
percent) in effect for 1990 (the year the compensation was received),
and not the 12.41 percent rate (7.51 percent plus 4.90 percent) in
effect for 1989 (the year the services were performed).
[T.D. 8582, 59 FR 66189, Dec. 23, 1994]
[[Page 147]]
Sec. 31.3202-1 Collection of, and liability for, employee tax.
(a) Collection; general rule. The employer shall collect from each
of his employees the employee tax imposed with respect to the
compensation of the employee by deducting or causing to be deducted the
amount of such tax from the compensation subject to the tax as and when
such compensation is paid. As to the measure of the employee tax, see
Sec. 31.3201-1.
(b) Collection; payments by two or more employers in excess of
annual compensation limitation. For rules relating to payments by two or
more employers in excess of the annual compensation limitation see Sec.
31.3121(a)(1)-1.
(c) Undercollections or overcollections. Any undercollection or
overcollection of employee tax resulting from the employer's inability
to determine, at the time compensation is paid, the correct amount of
compensation with respect to which the deduction should be made shall be
corrected in accordance with the provisions of Subpart G of the
regulations in this part relating to adjustments, credits, refunds, and
abatements.
(d) When fractional part of cent may be disregarded. In collecting
the employee tax, the employer shall disregard any fractional part of a
cent of such tax unless it amounts to one-half cent or more, in which
case it shall be increased to one cent.
(e) Employer's liability. The employer is liable for the employee
tax with respect to compensation paid by him, whether or not collected
from the employee. If the employer deducts less than the correct amount
of employee tax or fails to deduct any part of the tax, he is
nevertheless liable for the correct amount of the tax. Until collected
from him, the employee is also liable for the employee tax. Any employee
tax collected by or on behalf of an employer is a special fund in trust
for the United States. See section 7501. An employer is not liable to
any person for the amount of the employee tax deducted by him and paid
to the district director.
(f) Concurrent employment. If two or more related corporations who
are rail employers concurrently employ the same individual and
compensate that individual through a common paymaster, which is one of
the related corporations employing the individual, see Sec. 31.3121(s)-
1.
(g) Special rules regarding Additional Medicare Tax. (1) An employer
is required to collect from each of its employees the portion of the tax
imposed by section 3201(a) (as calculated under section 3101(b)(2))
(Additional Medicare Tax) with respect to compensation for employment
performed for the employer by the employee only to the extent the
employer pays compensation to the employee in excess of $200,000 in a
calendar year. This rule applies regardless of the employee's filing
status or other income. Thus, the employer disregards any amount of
compensation or Federal Insurance Contributions Act (FICA) wages paid to
the employee's spouse. The employer also disregards any FICA wages paid
by the employer to the employee or any compensation or FICA wages paid
to the employee by another employer.
Example. A, who is married and files a joint return, receives
$100,000 in compensation from her employer for the calendar year. B, A's
spouse, receives $300,000 in compensation from his employer for the same
calendar year. A's compensation is not in excess of $200,000, so A's
employer does not withhold Additional Medicare Tax. B's employer is
required to collect Additional Medicare Tax only with respect to
compensation it pays to B that is in excess of the $200,000 threshold
(that is, $100,000) for the calendar year.
(2) To the extent the employer does not collect Additional Medicare
Tax imposed on the employee by section 3201(a) (as calculated under
section 3101(b)(2)), the employee is liable to pay the tax.
Example. C, who is married and files a joint return, receives
$190,000 in compensation from her employer for the calendar year. D, C's
spouse, receives $150,000 in compensation from his employer for the same
calendar year. Neither C's nor D's compensation is in excess of
$200,000, so neither C's nor D's employers are required to withhold
Additional Medicare Tax. C and D are liable to pay Additional Medicare
Tax on $90,000 ($340,000 minus the $250,000 threshold for a joint
return).
(3) If the employer deducts less than the correct amount of
Additional Medicare Tax, or if it fails to deduct any part of Additional
Medicare Tax, it is
[[Page 148]]
nevertheless liable for the correct amount of tax that it was required
to withhold, unless and until the employee pays the tax. If an employee
subsequently pays the tax that the employer failed to deduct, the tax
will not be collected from the employer. The employer will not be
relieved of its liability for payment of the tax required to be withheld
unless it can show that the tax under section 3201(a) (as calculated
under section 3101(b)(2)) has been paid. The employer, however, will
remain subject to any applicable penalties or additions to tax resulting
from the failure to withhold as required.
(h) Effective/applicability date. Paragraph (g) of this section
applies to quarters beginning on or after November 29, 2013.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6541, 26 FR
553, Jan. 20, 1961; T.D. 6727, 29 FR 5866, May 5, 1964; T.D. 8582, 59 FR
66189, Dec. 23, 1994; T.D. 9645, 78 FR 71472, Nov. 29, 2013]
Tax on Employee Representatives
Sec. 31.3211-1 Measure of employee representative tax.
The employee representative tax is measured by the amount of
compensation received for services rendered as an employee
representative. For provisions relating to compensation, see Sec.
31.3231(e)-1.
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]
Sec. 31.3211-2 Rates and computation of employee representative tax.
(a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee representative tax
rate equals the sum of the tax rates in effect under sections 3101(a)
and 3111(a), relating to the employee and the employer tax for old-age,
survivors, and disability insurance, and sections 3101(b) and 3111(b),
relating to the employee and the employer tax for hospital insurance.
The Tier 1 employee representative tax rate is applied to compensation
up to the contribution base described in section 3231(e)(2)(B)(i). The
contribution base is determined under section 230 of the Social Security
Act, and is identical to the old-age, survivors, and disability
insurance wage base and the hospital insurance wage base, respectively,
under the Federal Insurance Contributions Act.
(ii) Example. The rule in paragraph (a)(1)(i) of this section is
illustrated by the following example.
Example. B, an employee representative, received compensation of
$60,000 in 1992. The sections 3101(a) and 3111(a) rates of 12.4 percent
(6.2 percent plus 6.2 percent) would be applied to B's compensation up
to $55,500, the applicable contribution base for 1992. The sections
3101(b) and 3111(b) rates of 2.9 percent (1.45 percent plus 1.45
percent) would be applied to the entire $60,000 of B's compensation
because the applicable contribution base for 1992 is $130,200.
(2) (i) Tier 2 tax. The Tier 2 employee representative tax rate
equals the percentage set forth in section 3211(a)(2) of the Code. This
rate is applied up to the contribution base described in section
3231(e)(2)(B)(ii).
(ii) Example. The rule in paragraph (a)(2)(i) of this section is
illustrated by the following example.
Example. B received compensation of $60,000 in 1992. The section
3211(a)(2) rate of 14.75 percent would be applied to B's compensation up
to $41,400, the applicable contribution base for 1992.
(3) Supplemental Annuity Tax. The supplemental annuity tax for each
work-hour for which compensation is paid to an employee representative
for services rendered as an employee representative is imposed at the
same rate as the excise tax imposed on every employer under section
3221(c). See also Sec. 31.3211-3.
(b) (1) Computation. The employee representative tax is computed by
multiplying the amount of the employee representative's compensation
with respect to which the employee representative tax is imposed by the
rate applicable to such compensation, as determined under paragraph (a)
of this section. The applicable rate is the rate in effect when the
compensation is received by the employee representative. For rules
relating to the time of receipt, see Sec. 31.3121(a)-2 (a) and (b).
(2) Example. The rule in paragraph (b)(1) of this section is
illustrated by the following example.
Example. In 1990, employee representative B received $1,000 as
remuneration for services performed for employer R in 1989. The
[[Page 149]]
employee representative tax is payable at the rate of 30.05 percent
(15.30 percent plus 14.75 percent) in effect for 1990 (the year the
compensation was received), and not the 29.77 percent rate (15.02
percent plus 14.75 percent) in effect for 1989 (the year the services
were performed).
(c) (1) Rule where compensation is received both as an employee
representative and employee. The following rule applies to an individual
who renders service both as an employee representative and as an
employee. The employee representative tax is imposed on compensation
received as an employee representative under the rules described in
Sec. 31.3211-2. The employee tax is imposed on compensation received as
an employee under the rules described in Sec. 31.3201-2. However, if
the total compensation received is greater than the applicable
contribution base, the employee representative tax is imposed on the
amount equal to the contribution base less the amount received for
services rendered as an employee.
(2) Example. The rule in paragraph (c)(1) of this section is
illustrated by the following example.
Example. C performed services both as an employee and an employee
representative in 1992. C received compensation of $40,000 as an
employee and $20,000 as an employee representative. C's entire
compensation of $40,000 is subject to tax under the rules described in
Sec. 31.3201-2. The amount of employee representative compensation
subject to the section 3101(a) and the section 3111(a) rate is $15,500
($55,500-$40,000). The entire $20,000 is subject to the sections 3101(b)
and 3111(b) rates since the combined compensation is less than $130,200,
the applicable contribution base for 1992. The amount of the employee
representative compensation subject to the section 3211(a)(2) rate is
$1,400 ($41,400-$40,000).
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]
Sec. 31.3211-3 Employee representative supplemental tax.
See paragraphs (a), (b), and (c) of Sec. 31.3221-3 for rules
applicable to the supplemental tax for each work-hour for which
compensation is paid to an employee representative for services rendered
as an employee representative.
[T.D. 8525, 59 FR 9666, Mar. 1, 1994]
Sec. 31.3212-1 Determination of compensation.
See Sec. 31.3231(e)-1 for regulations applicable to compensation.
Tax on Employers
Sec. 31.3221-1 Measure of employer tax.
(a) General Rule--The employer tax is measured by the amount of
compensation paid by an employer to its employees. For provisions
relating to compensation, see Sec. 31.3231(e)-1. For provisions
relating to the circumstances under which certain compensation is to be
disregarded for purposes of determining the employer tax, see paragraphs
(b) (1) and (2) of Sec. 31.3231(e)-1.
(b) Payments by two or more employers in excess of annual
compensation limitation. For rules relating to payments by two or more
employers in excess of the annual compensation limitation, see Sec.
31.3121(a)(1)-1.
(c) Underpayments or overpayments. Any underpayment or overpayment
of employer tax resulting from the employer's inability to determine, at
the time such tax is paid, the correct amount of compensation with
respect to which the tax should be paid shall be corrected in accordance
with the provisions of Subpart G of the regulations in this part
relating to adjustments, credits, refunds, and abatements.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6541, 26 FR
555, Jan. 20, 1961; T.D. 8582, 59 FR 66190, Dec. 23, 1994]
Sec. 31.3221-2 Rates and computation of employer tax.
(a) Rates--(1)(i) Tier 1 tax. The Tier 1 employer tax rate equals
the sum of the tax rates in effect under section 3111(a), relating to
old-age, survivors, and disability insurance, and section 3111(b),
relating to hospital insurance. The Tier 1 employer tax rate is applied
to compensation up to the contribution base described in section
3231(e)(2)(B)(i). The contribution base is determined under section 230
of the Social Security Act and is identical to the old-age, survivors,
and disability insurance wage base and the hospital insurance wage base,
respectively, under the Federal Insurance Contributions Act.
[[Page 150]]
(ii) Example. The rule in paragraph (a)(1)(i) of this section is
illustrated by the following example.
Example. R's employee, A, received compensation of $60,000 in 1992.
The section 3111(a) rate of 6.2 percent would be applied to A's
compensation up to $55,500, the applicable contribution base for 1992.
The section 3111(b) rate of 1.45 percent would be applied to the entire
$60,000 of A's compensation because the applicable contribution base for
1992 is $130,200.
(2)(i) Tier 2 tax. The Tier 2 employer tax rate equals the
percentage set forth in section 3221(b) of the Internal Revenue Code.
This rate is applied up to the contribution base described in section
3231(e)(2)(B)(ii).
(ii) Example. The rule in paragraph (a)(2)(i) of this section is
illustrated by the following example.
Example. R's employee, A, received compensation of $60,000 in 1992.
The section 3221(b) rate of 16.10 percent would be applied to A's
compensation up to $41,400, the applicable contribution base for 1992.
(3) Supplemental Annuity Tax. The supplemental annuity tax for each
work-hour for which compensation is paid by an employer for services
rendered during any calendar quarter by employees is imposed at the tax
rate determined each calendar quarter by the Railroad Retirement Board.
See also Sec. 31.3221-3.
(b)(1) Computation. The employer tax is computed by multiplying the
amount of the compensation with respect to which the employer tax is
imposed by the rate applicable to such compensation, as determined under
paragraph (a) of this section. The applicable rate is the rate in effect
at the time the compensation is paid. For rules relating to the time of
payment, see Sec. 31.3121(a)-2(a) and (b).
(2) Example. The rule in paragraph (b)(1) of this section is
illustrated by the following example.
Example. In 1990, R's employee A received $1,000 as remuneration for
services performed for R in 1989. The employer tax is payable at the
rate of 23.75 percent (7.65 percent plus 16.10 percent) in effect for
1990 (the year the compensation was received) and not the 23.61 percent
rate (7.51 percent plus 16.10 percent) in effect for 1989 (the year the
services were performed).
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]
Sec. 31.3221-3 Supplemental tax.
(a) Introduction--(1) In general. Section 3221(c) imposes an excise
tax on every employer, as defined in section 3231(a) and Sec.
31.3231(a)-1, with respect to individuals employed by the employer. The
tax is imposed for each work-hour for which the employer pays
compensation, as defined in section 3231(e) and Sec. 31.3231(e)-1, for
services rendered to the employer during a calendar quarter. This Sec.
31.3221-3 provides rules for determining the number of taxable work-
hours.
(2) Overview. Paragraph (b) of this section defines work-hours.
Paragraph (c) of this section demonstrates the calculation of work-
hours. Paragraph (d) of this section offers a safe harbor calculation of
work-hours for use by any employer in lieu of calculating the number of
work-hours for each employee.
(b) Definition of work-hours--(1) In general. For purposes of
section 3221(c) and this section, work-hours are hours for which the
employee is compensated, whether or not the employee performs services.
(i) Payments included in work-hours. Work-hours include regular time
worked; overtime; time paid for vacations and holidays; time allowed for
meals; away-from-home terminal time; called and not used, runaround, and
deadheading time; time for attending court, participating in
investigations, and attending claim and safety meetings; and guaranteed
time not worked. Work-hours also include conversion hours, that is,
compensation converted into work-hours. Conversion hours may be derived
from payment by the mile or by the piece. Work-hours also include time
for which the employee is paid for periods of absence not due to
sickness or accident disability, such as for routine medical and dental
examinations or for time lost.
(ii) Payments excluded from work-hours. Certain kinds of payments
are not subject to conversion into work-hours. These include those
payments that are specifically excluded from compensation within the
meaning of section 3231(e), such as certain sick pay payments (section
3231(e)(1)(i)); tips (section 3231(e)(1)(ii)); and amounts paid
specifically (either as an advance,
[[Page 151]]
as reimbursement, or allowance) for traveling expenses (section
3231(e)(1)(iii)). Traveling expenses paid under a nonaccountable plan
are excluded from work-hours even though they are includible in
compensation. See Sec. 31.3231(e)-1(a)(5). Also excluded from work-
hours are amounts representing bonuses, amounts received pursuant to the
exercise of an employee stock option, and all separation payments or
severance allowances.
(2) Hourly compensation. Because the tax under section 3221(c) is
calculated on the basis of work-hours, the number of hours for which an
employee receives compensation is the figure used to determine work-
hours. In the case of an hourly-rated employee, each hour for which the
employee receives compensation is one work-hour.
(3) Daily, weekly, monthly compensation. (i) If an employee is paid
by the day, week, month, or other period of time, the tax is imposed on
the number of hours comprehended in the rate and, if any, the number of
overtime hours for which additional compensation is paid. Thus, in the
case of an office worker who receives an annual salary based on an 8-
hour, 5-day-a-week work schedule that includes paid holidays, vacations,
and sick time, the number of work-hours for one month is 174 (2088
hours/year /12 months).
(ii) The rule in paragraph (b)(3)(i) of this section is illustrated
by the following examples.
Example 1 A, an office worker, receives an annual salary that is
paid monthly. The salary is based on an 8-hour, Monday through Friday
work schedule. A is not paid for overtime hours. A is not expected to
work on holidays, during A's annual vacation, or during periods that A
is ill. The number of work-hours for one month is 174 (2088 hours/year /
12 months). This figure remains constant, even though some months have
more workdays than others.
Example 2 B is paid a stated amount for each day B works, regardless
of the number of hours worked. However, if B works more than 8 hours
during any day, B is paid overtime for each additional hour worked that
day. B is not paid for holidays, vacations, or sick time. During May, B
worked 6 hours on 4 days, 7 hours on 6 days, 8 hours on 6 days, and 9
hours on 5 days. Because B is paid a daily rate for up to 8 hours, 8
hours are comprehended in the daily rate. Therefore, the number of work-
hours for May is 173 (21 daysx8 hours/day+5 overtime hours), even though
B actually worked 159 hours.
(4) Conversion hours--(i) Compensation not based on time (hour, day,
month, etc.), such as compensation paid by the mile or by the piece,
must be converted into the number of hours represented by the
compensation paid. Thus, if an employee is paid by the mile, 1 work-hour
equals the number of miles constituting a workday, divided by 8 hours.
However, in the case of a collective bargaining agreement that specifies
a number of hours as constituting a workday, the number of hours
specified under the agreement may be used instead of 8.
(ii) The rule in paragraph (b)(4)(i) of this section is illustrated
by the following example.
Example. C's normal workday consists of 2 150-mile round trips that
together take 6 hours. C is paid by the mile. The collective bargaining
agreement does not specify the number of hours in a workday. Thus, the
number of work-hours for each day C works is 8, or 1 work-hour for each
37.5 miles (300 miles/day / 8 hours/day). If the applicable collective
bargaining agreement specifies that 6 hours constitute a workday, the
number of work-hours for each day C works would be 6.
(c) Calculation of work-hours--(1) An employer may calculate the
work-hours separately for each employee, as described in the examples in
this paragraph. If the employer chooses to calculate work-hours
separately for each employee, the employer must calculate the number of
regular hours, overtime hours, and conversion hours for each employee
for each month. In lieu of separate calculations, the employer may
calculate the work-hours for all the employer's employees using the safe
harbor formula described in paragraph (d) of this section.
(2) The rules in paragraph (c) of this section are illustrated by
the following examples.
Example 1. D worked 8 hours a day, Monday through Friday, during the
months of February and March 1992. D did not work on President's Day,
but was paid for the holiday. D's work-hours for February were 160 (19
days x 8 hours a day + 8 holiday hours). D's work-hours for March were
176 (22 days x 8 hours a day).
Example 2. E worked 7-hour shifts every Tuesday through Saturday
during the
[[Page 152]]
months of February and March 1992. E also worked 7 overtime hours during
February and 21 overtime hours during March. Also, E was paid for 7
hours on President's Day, even though E did not work on that day. The
number of work-hours for February was 161 (21 days x 7 hours a day + 7
overtime hours + 7 holiday hours). The number of work-hours for March
was 168 (21 days x 7 hours a day + 21 overtime hours). Because E
receives an hourly wage and was paid for the President's Day holiday,
the number of hours (7) for which E was paid are added to the hours E
actually worked. If E had worked on President's Day and had received
extra pay for working on a holiday and holiday pay for 7 hours, the
employer would include 14 hours in E's work-hours for that day, the 7
hours E actually worked and the 7 holiday hours for which E was paid.
Example 3. Employment beginning during month. F began employment on
March 16, a Monday, and worked 8 hours a day, Monday through Friday. The
employer calculates that F's hours for the month were 96, because F
worked 12 8-hour days during the month. If March 16 were on a Friday,
the employer would calculate 11 days, or 88 hours.
Example 4. Employment ending during month. G's last day of
employment was Friday, March 13. G worked 8 hours a day, Monday through
Friday, except for March 3, when G was ill. G was paid for 8 hours for
March 3. The employer calculates that G's work-hours for March were 80,
because G worked 9 8-hour days and was paid for an additional 8 hours.
(d) Safe harbor--(1) In general. In lieu of calculating work-hours
separately for each employee, an employer may use the safe harbor for
all employees. If the employer elects to use the safe harbor for a
calendar year, the employer must use the safe harbor for all employees
for the entire calendar year. If an employer uses the safe harbor for a
calendar year, the employer need not elect the safe harbor for the
following calendar year. An employer that elects the safe harbor for a
calendar year may not subsequently elect to separately calculate
employee work-hours for that calendar year.
(2) Method of calculation. The safe harbor treats each employee of
the employer as receiving monthly compensation for a number of hours
equal to the safe harbor number. To determine the number of work-hours
for a month, the employer multiplies the safe harbor number by the
number that equals the total number of employees to whom the employer
paid compensation during the month.
(i) Safe harbor number defined. The safe harbor number is the number
established in guidance of general applicability promulgated by the
Commissioner.
(ii) Employee defined. Solely for purposes of this paragraph, an
employee is any individual who is paid compensation, within the meaning
of Sec. 31.3231(e)-1, regardless of the amount, during the month. Thus,
for example, a part-time, temporary, or seasonal employee is counted as
an employee. A terminated employee is counted in the month of
termination (provided the terminated employee received compensation in
the month of termination), but not in any subsequent month in which the
employee does not perform service for the employer as an employee, even
if the terminated employee is paid compensation in a subsequent month.
Thus, for example, an employee who terminates employment during the
month, receives compensation during the month of termination, and
receives a final paycheck the following month is counted as an employee
of the employer for the month of termination but not for the following
month.
(3) Method of election. An employer makes the safe harbor election
for a calendar year on the employment tax return filed for the previous
calendar year.
(4) Additional rules. The Commissioner may, in revenue procedures,
revenue rulings, notices, or other guidance of general applicability,
revise the safe harbor number or provide additional safe harbors that
satisfy section 3221(c).
(e) Effective dates. This Sec. 31.3221-3 is effective for calendar
years beginning after December 31, 1992, except that paragraph (d) is
effective for calendar years beginning after December 31, 1993.
Taxpayers may apply the rules in paragraphs (a), (b), and (c) of this
section before January 1, 1993.
[T.D. 8525, 59 FR 9666, Mar. 1, 1994]
Sec. 31.3221-4 Exception from supplemental tax.
(a) General rule. Section 3221(d) provides an exception from the
excise tax imposed by section 3221(c). Under this
[[Page 153]]
exception, the excise tax imposed by section 3221(c) does not apply to
an employer with respect to employees who are covered by a supplemental
pension plan, as defined in paragraph (b) of this section, that is
established pursuant to an agreement reached through collective
bargaining between the employer and employees, within the meaning of
paragraph (c) of this section.
(b) Definition of supplemental pension plan--(1) In general. A plan
is a supplemental pension plan covered by the section 3221(d) exception
described in paragraph (a) of this section only if it meets the
requirements of paragraphs (b)(2) through (b)(4) of this section.
(2) Pension benefit requirement. A plan is a supplemental pension
plan within the meaning of this section only if the plan is a pension
plan within the meaning of Sec. 1.401-1(b)(1)(i) of this chapter. Thus,
a plan is a supplemental pension plan only if the plan provides for the
payment of definitely determinable benefits to employees over a period
of years, usually for life, after retirement. A plan need not be funded
through a qualified trust that meets the requirements of section 401(a)
or an annuity contract that meets the requirements of section 403(a) in
order to meet the requirements of this paragraph (b)(2). A plan that is
a profit-sharing plan within the meaning of Sec. 1.401-1(b)(1)(ii) of
this chapter or a stock bonus plan within the meaning of Sec. 1.401-
1(b)(1)(iii) of this chapter is not a supplemental pension plan within
the meaning of this paragraph (b).
(3) Railroad Retirement Board determination with respect to the
plan. A plan is a supplemental pension plan within the meaning of this
paragraph (b) with respect to an employee only during any period for
which the Railroad Retirement Board has made a determination under 20
CFR 216.42(d) that the plan is a private pension, the payments from
which will result in a reduction in the employee's supplemental annuity
payable under 45 U.S.C. 231a(b). A plan is not a supplemental pension
plan for any time period before the Railroad Retirement Board has made
such a determination, or after that determination is no longer in force.
(4) Other requirements. [Reserved]
(c) Collective bargaining agreement. A plan is established pursuant
to a collective bargaining agreement with respect to an employee only
if, in accordance with the rules of Sec. 1.410(b)-6(d)(2) of this
chapter, the employee is included in a unit of employees covered by an
agreement that the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and one or more
employers, provided that there is evidence that retirement benefits were
the subject of good faith bargaining between employee representatives
and the employer or employers.
(d) Substitute section 3221(d) excise tax. Section 3221(d) imposes
an excise tax on any employer who has been excepted from the excise tax
imposed under section 3221(c) by the application of section 3221(d) and
paragraph (a) of this section with respect to an employee. The excise
tax is equal to the amount of the supplemental annuity paid to that
employee under 45 U.S.C. 231a(b), plus a percentage thereof determined
by the Railroad Retirement Board to be sufficient to cover the
administrative costs attributable to such payments under 45 U.S.C.
231a(b).
(e) Effective date--(1) In general. Except as provided in paragraph
(e)(2) of this section, this section applies beginning on October 1,
1998.
(2) Delayed effective date for collective bargaining agreement
provisions. Paragraph (c) of this section applies beginning on January
1, 2000.
[T.D. 8832, 64 FR 42833, Aug. 6, 1999]
General Provisions
Sec. 31.3231(a)-1 Who are employers.
(a) Each of the following persons is an employer within the meaning
of the act:
(1) Any carrier, that is, any express carrier, sleeping car carrier,
or rail carrier providing transportation subject to subchapter I of
chapter 105 of title 49;
(2) Any company--
(i) Which is directly or indirectly owned or controlled by one or
more employers as defined in paragraph (a)(1) of this section, or under
common control therewith, and
[[Page 154]]
(ii) Which operates any equipment or facility or performs any
service (except trucking service, casual service, and the casual
operation of equipment or facilities) in connection with--
(a) The transportation of passengers or property by railroad, or
(b) The receipt, delivery, elevation, transfer in transit,
refrigeration or icing, storage, or handling of property transported by
railroad;
(3) Any receiver, trustee, or other individual or body, judicial or
otherwise, when in the possession of the property or operating all or
any part of the business of any employer as defined in paragraph (a)(1)
or (2) of this section;
(4) Any railroad association, traffic association, tariff bureau,
demurrage bureau, weighing and inspection bureau, collection agency, and
any other association, bureau, agency, or organization controlled and
maintained wholly or principally by two or more employers as defined in
paragraph (a)(1), (2) or (3) of this section and engaged in the
performance of services in connection with or incidental to railroad
transportation;
(5) Any railway labor organization, national in scope, which has
been or may be organized in accordance with the provisions of the
Railway Labor Act; and
(6) Any subordinate unit of a national railway-labor-organization
employer, that is, any State or National legislative committee, general
committee, insurance department, or local lodge or division, of an
employer as defined in paragraph (a)(5) of this section, established
pursuant to the constitution and bylaws of such employer.
(b) As used in paragraph (a)(2) of this section, the term
``controlled'' includes direct or indirect control, whether legally
enforceable and however exercisable or exercised. The control may be by
means of stock ownership, or by agreements, licenses, or any other
devices which insure that the operation of the company is in the
interest of one or more carriers. It is the reality of the control,
however, which is decisive, not its form nor the mode of its exercise.
(c) As used in paragraph (a)(2) of this section, the term casual
applies when the service rendered or the operation of equipment or
facilities by a controlled company or person in connection with the
transportation of passengers or property by railroad is so irregular or
infrequent as to afford no substantial basis for an inference that such
service or operation will be repeated, or whenever such service or
operation is insubstantial.
(d) The term ``employer'' does not include any street, interurban,
or suburban electric railway, unless such railway is operating as a part
of a general steam-railroad system of transportation, but shall not
exclude any part of the general steam-railroad system of transportation
which is operated by any other motive power.
(e) The term ``employer'' does not include any company by reason of
its being engaged in the mining of coal, the supplying of coal to an
employer where delivery is not beyond the mine tipple and the operation
of equipment or facilities for such mining or supplying of coal, or in
any of such activities.
(f) Any company that is described in paragraph (a)(2) of this
section is an employer under section 3231. In certain cases, based on
all the facts and circumstances, it may be appropriate to segregate
those businesses engaged in rail services and therefore subject to the
Railroad Retirement Tax Act from those businesses engaged exclusively in
nonrail services and therefore not subject to the Railroad Retirement
Tax Act. The factors considered are set forth in guidance published by
the Internal Revenue Service.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960; T.D.
8582, 59 FR 66191, Dec. 23, 1994]
Sec. 31.3231(b)-1 Who are employees.
(a) In general. (1) An individual who is in the service of one or
more employers for compensation is an employee within the meaning of the
act. (For definitions of the terms ``employer'', ``service'', and
``compensation'', see subsections (a), (d), and (e), respectively, of
section 3231.) An individual is in the service of an employer, with
respect to services rendered for compensation, if--
(i) He is subject to the continuing authority of the employer to
supervise
[[Page 155]]
and direct the manner in which he renders such services; or
(ii) He is rendering professional or technical services and is
integrated into the staff of the employer; or
(iii) He is rendering, on the property used in the employer's
operations, other personal services the rendition of which is integrated
into the employer's operations.
(2) In order that an individual may be in the service of an employer
within the meaning of paragraph (a)(1)(i) of this section, it is not
necessary that the employer actually direct or control the manner in
which the services are rendered; it is sufficient if the employer has
the right to do so. The right of an employer to discharge an individual
is also an important factor indicating that the individual is subject to
the continuing authority of the employer to supervise and direct the
manner of rendition of the services. Other factors indicating that an
individual is subject to the continuing authority of the employer to
supervise and direct the manner of rendition of the services are the
furnishing of tools and the furnishing of a place to work by the
employer to the individual who renders the services.
(3) In general, if an individual is subject to the control or
direction of an employer merely as to the result to be accomplished by
the work and not as to the means and methods for accomplishing the
result, he is an independent contractor. On individual performing
services as an independent contractor is not, as to such services, in
the service of an employer within the meaning of paragraph (a)(1)(i) of
this section. However, an individual performing services as an
independent contractor may be, as to such services, in the service of an
employer within the meaning of paragraph (a)(1) (ii) or (iii) of this
section.
(4) Whether or not an individual is an employee will be determined
upon an examination of the particular facts of the case.
(5) If an individual is an employee, it is of no consequence that he
is designated as a partner, coadventurer, agent, independent contractor,
or otherwise, or that he performs services on a part-time basis.
(6) No distinction is made between classes or grades of employees.
Thus, superintendents, managers, and other supervisory personnel are
employees within the meaning of the act. An officer of an employer is an
employee, but a director as such is not.
(7) In determining whether an individual is an employee with respect
to services rendered within the United States, the citizenship or
residence of the individual, or the place where the contract of service
was entered into is immaterial.
(8) If an individual performs services for an employer (other than a
local lodge or division or a general committee of a railway-labor-
organization employer) which does not conduct the principal part of its
business within the United States, such individual shall be deemed to be
in the service of such employer only to the extent that he performs
services for it in the United States. Thus, with respect to services
rendered for such employer outside the United States, such individual is
not in the service of an employer.
(9) If an individual performs services for an employer (other than a
local lodge or division or a general committee of a railway-labor-
organization employer) which conducts the principal part of its business
within the United States, he is in the service of such employer whether
his services are rendered within or without the United States. In the
case of an individual, not a citizen or resident of the United States,
rendering services in a place outside the United States to an employer
which is required under the laws applicable in such place to employ, in
whole or in part, citizens or residents thereof, such individual shall
not be deemed to be in the service of an employer with respect to
services so rendered.
(10) The term ``employee'' does not include any individual while he
is engaged in the physical operations consisting of the mining of coal,
the preparation of coal, the handling (other than movement by rail with
standard railroad locomotives) of coal not beyond the mine tipple, or
the loading of coal at the tipple.
[[Page 156]]
(b) Employees of local lodges or divisions of railway-labor-
organization employers. (1) An individual is in the service of a local
lodge or division of a railway-labor-organization employer (see
paragraph (a)(6) of Sec. 31.3231(a)-1) only if--
(i) All, or substantially all, the individuals constituting the
membership of such local lodge or division are employees of an employer
conducting the principal part of its business in the United States; or
(ii) The headquarters of such local lodge or division is located in
the United States.
(2) (i) An individual in the service of a local lodge or division is
not an employee within the meaning of the act unless he was, on or after
August 29, 1935, in the service of a carrier (see Sec. 31.3231(g) for
definition of carrier) or he was, on August 29, 1935, in the
``employment relation'' to a carrier.
(ii) An individual shall be deemed to have been in the employment
relation to a carrier on August 29, 1935, if (a) he was on that date on
leave of absence from his employment expressly granted to him by the
carrier by whom he was employed, or by a duly authorized representative
or such carrier, and the grant of such leave of absence was established
to the satisfaction of the Railroad Retirement Board before July 1947;
or (b) he was in the service of a carrier after August 29, 1935, and
before January 1946 in each of six calendar months whether or not
consecutive; or (c) before August 29, 1935, he did not retire and was
not retired or discharged from the service of the last carrier by whom
he was employed or its corporate or operating successor, but (1) solely
by reason of his physical or mental disability he ceased before August
29, 1935, to be in the service of such carrier and thereafter remained
continuously disabled until he attained age sixty-five or until August
1945, or (2) solely for such last stated reason a carrier by whom he was
employed before August 29, 1935, or a carrier who is its successor did
not on or after August 29, 1935, and before August 1945 call him to
return to service, or (3) if he was so called he was solely for such
reason unable to render service in six calendar months as provided in
(b) of this subdivision; or (d) he was on August 29, 1935, absent from
the service of a carrier by reason of a discharge which, within one year
after the effective date thereof, was protested, to an appropriate labor
representative or to the carrier, as wrongful, and which was followed
within 10 years of the effective date thereof by his reinstatement in
good faith to his former service with all his seniority rights. However,
an individual shall not be deemed to have been in the employment
relation to a carrier on August 29, 1935, if before that date he was
granted a pension or gratuity on the basis of which a pension was
awarded to him pursuant to section 6 of the Railroad Retirement Act of
1937 (45 U.S.C. 228f), or if during the last payroll period before
August 29, 1935, in which he rendered service to a carrier he was not,
with respect to any service in such payroll period, in the service of an
employer (see paragraph (a) of this section).
(c) Employees of general committees of railway-labor-organization
employers. An individual is in the service of a general committee of a
railway-labor-organization employer (see paragraph (a)(6) of Sec.
31.3231(a)-1) only if--
(1) He is representing a local lodge or division described in
paragraph (b)(1) of this section; or
(2) All, or substantially all, the individuals represented by such
general committee are employees of an employer conducting the principal
part of its business in the United States; or
(3) He acts in the capacity of a general chairman or an assistant
general chairman of a general committee which represents individuals
rendering service in the United States to an employer. In such case, if
his office or headquarters is not located in the United States and the
individuals represented by such general committee are employees of an
employer not conducting the principal part of its business in the United
States, only a part of his remuneration for such service shall be
regarded as compensation. The part of his remuneration regarded as
compensation shall be in the same proportion to his total remuneration
as the mileage in the United States under the jurisdiction of such
general committee bears to the total mileage under
[[Page 157]]
its jurisdiction, unless such mileage formula is inapplicable, in which
case such other formula as the Railroad Retirement Board may have
prescribed pursuant to section 1(c) of the Railroad Retirement Act of
1937 (45 U.S.C. 228a) shall be applicable. However, no part of his
remuneration for such service shall be regarded as compensation if the
application of such mileage formula, or such other formula as the
Railroad Retirement Board may have prescribed, would result in his
compensation for the service being less than 10 percent of his
remuneration for such service.
Sec. 31.3231(c)-1 Who are employee representatives.
(a) An employee representative within the meaning of the act is--
(1) Any officer or official representative of a railway labor
organization which is not included as an employer under section 3231(a)
who--
(i) Was in the service of an employer either before or after June
29, 1937, and
(ii) Is duly authorized and designated to represent employees in
accordance with the Railway Labor Act.
For railway labor organizations which are employers under section
3231(a), see paragraph (a) (5) and (6) of Sec. 31.3231(a)-1.
(2) Any individual who is regularly assigned to or regularly
employed by an employee representative, as defined in paragraph (a)(1)
of this section, in connection with the duties of such employee
representative's office.
(b) In determining whether an individual is an employee
representative, his citizenship or residence is material only insofar as
those factors may affect the determination of whether he was ``in the
service of an employer'' (see paragraph (a) of Sec. 31.3231(b)-1).
Sec. 31.3231(d)-1 Service.
See Sec. 31.3231(b)-1 for regulations relating to the term ``in the
service of an employer.''
Sec. 31.3231(e)-1 Compensation.
(a) Definition--(1) The term compensation has the same meaning as
the term wages in section 3121(a), determined without regard to section
3121(b)(9), except as specifically limited by the Railroad Retirement
Tax Act (chapter 22 of the Internal Revenue Code) or regulation. The
Commissioner may provide any additional guidance that may be necessary
or appropriate in applying the definitions of sections 3121(a) and
3231(e).
(2) A payment made by an employer to an individual through the
employer's payroll is presumed, in the absence of evidence to the
contrary, to be compensation for services rendered as an employee of the
employer. Likewise, a payment made by an employee organization to an
employee representative through the organization's payroll is presumed,
in the absence of evidence to the contrary, to be compensation for
services rendered by the employee representative as such. For rules
regarding the treatment of deductions by an employer from remuneration
of an employee, see Sec. 31.3123-1.
(3) The term compensation is not confined to amounts paid for active
service, but includes amounts paid for an identifiable period during
which the employee is absent from the active service of the employer
and, in the case of an employee representative, amounts paid for an
identifiable period during which the employee representative is absent
from the active service of the employee organization.
(4) Compensation includes amounts paid to an employee for loss of
earnings during an identifiable period as the result of the displacement
of the employee to a less remunerative position or occupation as well as
pay for time lost.
(5) For rules regarding the treatment of reimbursement and other
expense allowance amounts, see Sec. 31.3121(a)-3. For rules regarding
the inclusion of fringe benefits in compensation, see Sec. 31.3121(a)-
1T.
(6) Split-dollar life insurance arrangements. See Sec. Sec. 1.61-22
and 1.7872-15 of this chapter for rules relating to the treatment of
split-dollar life insurance arrangements.
(b) Special rules. (1) If the amount of compensation earned in any
calendar month by an individual as an employee in the service of a local
lodge or division of a railway-labor-organization employer is less than
$25, the amount is disregarded for purposes of determining the employee
tax under section
[[Page 158]]
3201 and the employer tax under section 3221.
(2) Compensation for service as a delegate to a national or
international convention of a railway-labor-organization employer is
disregarded for purposes of determining the employee tax under section
3201 and the employer tax under section 3221 if the individual rendering
the service has not previously rendered service, other than as a
delegate, which may be included in the individual's years of service for
purposes of the Railroad Retirement Act.
(3) For special provisions relating to the compensation of certain
general chairs or assistant general chairs of a general committee of a
railway-labor-organization employer, see paragraph (c)(3) of Sec.
31.3231(b)-1.
[T.D. 8582, 59 FR 66191, Dec. 23, 1994, as amended by T.D. 9092, 68 FR
54361, Sept. 17, 2003]
Sec. 31.3231(e)-2 Contribution base.
The term compensation does not include any remuneration paid during
any calendar year by an employer to an employee for services rendered in
excess of the applicable contribution base. For rules applying this
provision, see Sec. 31.3121(a)(1)-1.
[T.D. 8582, 59 FR 66191, Dec. 23, 1994]
Subpart D_Federal Unemployment Tax Act (Chapter 23, Internal Revenue
Code of 1954)
Sec. 31.3301-1 Persons liable for tax.
Every person who is an employer as defined in section 3306(a) (see
Sec. 31.3306(a)-1) is liable for the tax. Even if an employer is not
subject to any State unemployment compensation law, he is nevertheless
liable for the tax. However, if he is subject to such a State law, he
may be entitled to certain credits against the tax (see Sec. Sec.
31.3302(a)1 to 31.3302(c)-1, inclusive). For provisions relating to
payment of the tax, see Subpart G of the regulations in this part.
Sec. 31.3301-2 Measure of tax.
The tax for any calendar year is measured by the amount of wages
paid by the employer during such year with respect to employment after
December 31, 1938. (See Sec. 31.3306(b)-1, relating to wages, and
Sec. Sec. 31.3306(c)-1 to 31.3306(c)-3, inclusive, relating to
employment.)
[T.D. 6658, 28 FR 6632, June 27, 1963]
Sec. 31.3301-3 Rate and computation of tax.
(a) The rates of tax with respect to wages paid in calendar years
after 1954 are as follows:
Percent
In the calendar years 1955 to 1960, both inclusive........... 3
In the calendar year 1961.................................... 3.1
In the calendar year 1962.................................... 3.5
In the calendar year 1963.................................... 3.35
In the calendar year 1964 and subsequent calendar years...... 3.1
(b) The tax is computed by applying to the wages paid in a calendar
year, with respect to employment after December 31, 1938, the rate in
effect at the time the wages are paid.
[T.D. 6658, 28 FR 6632, June 27, 1963]
Sec. 31.3301-4 When wages are paid.
Wages are paid when actually or constructively paid. Wages are
constructively paid when they are credited to the account of or set
apart for an employee so that they may be drawn upon by him at any time
although not then actually reduced to possession. To constitute payment
in such a case the wages must be credited to or set apart for the
employee without any substantial limitation or restriction as to the
time or manner of payment or condition upon which payment is to be made,
and must be made available to him so that they may be drawn upon at any
time, and their payment brought within his own control and disposition.
See Sec. 31.6011(a)-3, relating to the return on which wages are to be
reported.
Sec. 31.3302(a)-1 Credit against tax for contributions paid.
(a) In general. Subject to the provision of paragraphs (b) and (c)
of this section and to the provisions of Sec. 31.3302(c)-1, the
taxpayer may credit against the tax for any taxable year the total
amount of contributions paid by him into an unemployment fund maintained
during such year under a
[[Page 159]]
State law which has been found by the Secretary of Labor to contain the
provisions specified in section 3304(a); Provided, however, That no
credit may be taken for contributions under a State law if such State
has not been duly certified for the calendar year to the Secretary of
the Treasury by the Secretary of Labor. The contributions may be
credited against the tax whether or not they are paid with respect to
employment as defined in section 3306(c). For provisions relating to
additional credit against the tax, see Sec. 31.3302(b)-1.
(b) Limitation on the taxable year with respect to which
contributions are allowable. In order to be allowable as credit against
the tax for any taxable year, the contributions must have been paid with
respect to such year.
Example 1. Under the unemployment compensation law of State X,
employer M is required to report in his contribution return for the
quarter ending December 31, 1955, all remuneration payable for services
rendered in such quarter. A portion of such remuneration is not paid to
his employees until February 1, 1956. On January 20, 1956, M pays to the
State the total amount of contributions due with respect to all
remuneration so required to be reported. Such contributions, including
those with respect to the remuneration paid on February 1, 1956, may be
included in computing the credit against the tax for the calendar year
1955. This is true even though the remuneration paid on February 1, 1956
(if it constitutes ``wages'') is required to be reported in the Federal
return for 1956 and not in the Federal return for 1955.
Example 2. Under the unemployment compensation law of State Y,
employer N is required to include in his contribution return for the
quarter ending December 31, 1955, certain remuneration paid on December
30, to 1955, to an employee for services to be rendered after December
31. On January 20, 1956, N pays to the State the total amount of
contributions due with respect to all remuneration required to be
reported on the contribution return. Such contributions, including those
with respect to the remuneration paid on December 30, 1955, may be
included in computing the credit against the tax for the calendar year
1955.
(c) Limitation on amount of credit allowable based on time when
contributions are paid--(1) In general. The amount of credit allowable
for contributions paid into a State unemployment fund depends in part on
the time of payment of such contributions. Although contributions paid
at any time may be credited against the tax (subject to the limitations
referred to in paragraphs (c)(2) and (3) of this section), no refund or
credit of the tax based on credit for contributions paid will be allowed
unless the contributions are paid prior to the expiration of the period
of limitations applicable to refund or credit of the tax. For general
provisions relating to the limitation period and to refunds, credits and
abatements of the tax, see respectively Sec. Sec. 301.6511(a)-1,
301.6402-2 and 301.6404-1 of this chapter (Regulations on Procedure and
Administration).
(2) Amount of credit allowable when contributions are paid on or
before last day for filing return. Contributions paid into a State
unemployment fund on or before the last day upon which the Federal
return for the taxable year is required to be filed may be credited
against the tax in an amount equal to such contributions, but not,
however, to exceed the total credits, determined pursuant to Sec.
31.3302(c)-1. For provisions relating to the time for filing the return,
see Sec. 31.6071(a)-1 in Subpart G of this part.
(3) Amount of credit allowable when contributions are paid after
last day for filing return. Contributions paid into a State unemployment
fund after the last day upon which the Federal return for the taxable
year is required to be filed may be credited against the tax in an
amount not to exceed 90 percent of the amount which would have been
allowable as credit on account of such contributions had they been paid
into a State unemployment fund on or before such last day. However, see
paragraph (c)(4) of this section relating to the payment of
contributions to the wrong State. For general provisions relating to
refunds, credits, and abatements of the tax, see Sec. Sec. 301.6402-2
and 301.6404-1 of this chapter (Regulations on Procedure and
Administration).
Example 1. The Federal return of the M Company for the calendar year
1961 discloses total wages of $400,000. The Federal tax, imposed at the
rate of 3.1 percent, is $12,400. The company is liable for total State
contributions of $8,000 for 1961. The due date of the Federal return is
January 31, 1962, no extension of time for filing the return having been
granted. The contributions are not paid until February 1, 1962. If the
contributions
[[Page 160]]
had been paid on or before January 31, 1962, the entire amount of $8,000
could have been credited against the tax. (Credits could not exceed 2.7
percent of the wages, or $10,800. See Sec. 31.3302(c)-1.) Since the
contributions were paid after January 31, 1962, the M Company is
entitled to a credit of 90 percent of the amount which would have been
allowable as credit had the contributions been paid on time (90 percent
of $8,000, or $7,200), the net liability for Federal tax being $5,200
($12,400 minus $7,200).
Example 2. The facts are the same as in example 1, except that the M
Company is liable for and pays total State contributions of $12,000,
instead of $8,000. If the contributions had been paid on or before
January 31, 1962, the amount allowable as credit would have been $10,800
(2.7 percent of wages of $400,000). Since the contributions were paid
after January 31, 1962, the M Company is entitled to a credit of 90
percent of $10,800, or $9,720, the net liability for Federal tax being
$2,680 ($12,400 minus $9,720).
Example 3. The Federal return of the R Company for the calendar year
1961 discloses a total tax of $3,100. The company is liable for total
State contributions of $2,700 for such year. The due date of the Federal
return is January 31, 1962, no extension of time for filing the return
having been granted. The R Company pays $1,700 of the total State
contributions on or before such date, and the remaining $1,000 on
February 1, 1962. If the $1,000 had been paid on or before January 31,
1962, that amount could have been credited against the tax (such amount
plus the $1,700 paid on or before January 31, 1962, not exceeding the
aggregate credit allowable). Since the $1,000 was paid after January 31,
1962, the R Company is entitled to a credit of 90 percent of this amount
or $900, plus the credit of $1,700 allowable for the contributions paid
on or before January 31, 1962. The net liability for Federal tax is thus
$500 ($3,100 minus $2,600).
(4) Amount of credit allowable when contributions are paid to wrong
State. Contributions for the taxable year paid into a State unemployment
fund which are required under the unemployment compensation law of that
State, but which are paid with respect to remuneration on the basis of
which the taxpayer had, prior to such payment, erroneously paid an
amount as contributions under another unemployment compensation law,
shall be deemed for purposes of the credit to have been paid at the time
of the erroneous payment. If, by reason of such other law, the taxpayer
was entitled to cease paying contributions for such taxable year with
respect to services subject to such other law, the payment into the
proper fund shall be deemed for purposes of credit to have been made on
the date the Federal return for such year was actually filed by the
taxpayer under Sec. 31.6011(a)-3.
Example. Employee N, whose Federal return for the calendar year 1961
discloses a total tax of $3,100, employs individuals in State X and
State Y during the calendar year 1961. N assumes in good faith that the
services of his employees are covered by the unemployment compensation
law of State Y, and pays as contributions to State Y the amount of
$2,700 based upon the remuneration of the employees. All of the services
were in fact covered by the unemployment compensation law of State X,
and none by the law of State Y. The payment to State Y was made on
January 31, 1962. When the error was discovered thereafter, N paid to
State X contributions in the amount of $2,700 based upon such
remuneration. Since the contributions were paid to State Y on January
31, 1962, the contributions to State X are, for purposes of the credit,
deemed to have been paid on such date. N is entitled to a credit of
$2,700 against the Federal tax of $3,100, the net liability for Federal
tax being $400 ($3,100 minus $2,700).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6632, June 27, 1963]
Sec. 31.3302(a)-2 Refund of State contributions.
If, subsequent to the filing of the return, a refund is made by a
State to the taxpayer of any part of his contribution credited against
the tax, the taxpayer is required to advise the district director of the
date and amount of such refund and the reason therefor, and to pay the
tax, if any, due as a result of such refund, together with interest from
the date when the tax was due.
Sec. 31.3302(a)-3 Proof of credit under section 3302(a).
Credit against the tax for any calendar year for contributions paid
into State unemployment funds shall not be allowed unless there is
submitted to the district director:
(a) A certificate of the proper officer of each State (the laws of
which required the contributions to be paid) showing, for the taxpayer:
(1) The total amount of contributions required to be paid under the
State law
[[Page 161]]
with respect to such calendar year (exclusive of penalties and interest)
which was actually paid on or before the date the Federal return is
required to be filed; and
(2) The amounts and dates of such required payments (exclusive of
penalties and interest) actually paid after the date the Federal return
is required to be filed.
(b) A statement by the taxpayer that no part of any payment made by
him into a State unemployment fund for such calendar year, which is
claimed as a credit against the tax, was deducted or is to be deducted
from the remuneration of individuals in his employ. Such statement shall
contain or be verified by a written declaration that it is made under
the penalties of perjury.
(c) Such other or additional proof as the Commissioner or the
district director may deem necessary to establish the right to the
credit provided for under section 3302(a).
Sec. 31.3302(b)-1 Additional credit against tax.
(a) In general. In addition to the credit against the tax allowable
for contributions actually paid to State unemployment funds (see Sec.
31.3302(a)-1), the taxpayer may be entitled to a credit under section
3302(b). This additional credit is allowable to the taxpayer with
respect to the amount of contributions which he is relieved from paying
to an unemployment fund under the provisions of a State law which have
been certified for the taxable year as provided in section 3303.
Generally, an additional credit is available to an employer, if under
the provisions of a State law which have been so certified he is
permitted to pay contributions to such State for the taxable year, or
portion thereof, at a rate which is both lower than the highest rate
applied under such law in such year and lower than 2.7 percent. No
additional credit is allowable except with respect to a State law
certified by the Secretary of Labor for the taxable year as provided in
section 3303 (or with respect to any provisions thereof so certified).
(b) Method of computing amount of additional credit allowable with
respect to a State law--(1) Certification of a State law as a whole. In
ascertaining the additional credit for any taxable year with respect to
a particular State law which the Secretary of Labor certifies as a whole
to the Secretary of the Treasury in accordance with the provisions of
section 3303, the taxpayer must first compute the following amounts:
(i) The amount of contributions (whether or not with respect to
employment as defined in section 3306(c)) which the taxpayer would have
been required to pay under the State law for such year if throughout the
year he had been subject to the highest rate applied under such law in
such year, or to a rate of 2.7 percent, whichever rate is lower.
(ii) The amount of contributions (whether or not with respect to
employment as defined in section 3306 (c)) he was required to pay under
the State law with respect to such year, whether or not paid.
The amount computed under paragraph (b)(1)(ii) of this section should
then be subtracted from the amount computed under paragraph (b)(1)(i) of
this section and the result will be the additional credit for the
taxable year with respect to the law of that State.
Example. A employs individuals only in State X during the calendar
year 1955. The unemployment compensation law of State X has been
certified in its entirety to the Secretary of the Treasury by the
Secretary of Labor for such year. The highest rate applied in such year
under such State law to any taxpayer is 3 percent. However, A has
obtained a rate of 1 percent under the law of such State and is required
to pay his entire year's contribution at that rate. The amount of
remuneration of A's employees subject to contributions under such State
law is $25,000. A's additional credit under section 3302(b) is $425,
computed as follows:
Remuneration subject to contributions......................... $25,000
=========
Contributions at 2.7 percent rate............................. 675
Less:
Contributions required to be paid at 1 percent rate......... 250
---------
Additional credit to A........................................ 425
Since the 2.7 percent rate is less than the highest rate applied (3
percent), the 2.7 percent rate is used in computing the amount ($675)
from which the amount of contributions required to be paid at the 1
percent rate ($250) is deducted in order to ascertain the additional
credit ($425).
[[Page 162]]
(2) Certification with respect to particular provisions of a State
law. If the Secretary of Labor makes a certification to the Secretary of
the Treasury with respect to particular provisions of a State law for
any taxable year pursuant to section 3303, the additional credit of the
taxpayer for such year with respect to such law shall be computed in
such manner as the Commissioner shall determine.
(c) Amount of additional credit allowable to taxpayer with respect
to more than one State law. If the taxpayer is entitled to additional
credit with respect to more than one State law in any taxable year, the
additional credit allowable with respect to each State law shall be
computed separately (in accordance with paragraph (b) of this section)
and the total additional credit allowable against the tax for such year
shall be the aggregate of the additional credits allowable with respect
to such State laws. For limitation on total credits, see Sec.
31.3302(c)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6632, June 27, 1963]
Sec. 31.3302(b)-2 Proof of additional credit under section 3302(b).
Additional credit under section 3302(b) shall not be allowed against
the tax for any calendar year unless there is submitted--
(a) To the Commissioner a certificate of the proper officer of each
State (with respect to the law of which the additional credit is
claimed) showing the highest rate of contributions applied under the
State law in such calendar year to any person having individuals in his
employ; and
(b) To the district director a certificate of the proper officer of
each State (with respect to the law of which the additional credit is
claimed) showing for the taxpayer--
(1) The total remuneration with respect to which contributions were
required to be paid by the taxpayer under the State law with respect to
such calendar year; and
(2) The rate of contributions applied to the taxpayer under the
State law with respect to such calendar year.
If under the law of such State different rates of contributions were
applied to the taxpayer during particular periods of such calendar year,
the certificate shall set forth the information called for in paragraphs
(b)(1) and (2) of this section with respect to each such period.
(c) Such other or additional proof as the Commissioner or the
district director may deem necessary to establish the right to the
additional credit provided for under section 3302(b).
Sec. 31.3302(c)-1 Limit on total credits.
(a) In general. Paragraph (b) of this section relates to the
limitation on the aggregate of the credits allowable under section 3302
(a) and (b). Paragraph (c) of this section relates to reductions, under
certain circumstances, of the total credits allowable after applying
section 3302 (a), (b), and (c)(1). In paragraphs (c)(1), (2), and (3) of
this section, relate, respectively, to reductions of credits in respect
of advances under title XII of the Social Security Act before September
13, 1960, advances under title XII of the Social Security Act after
September 12, 1960, and payments under the Temporary Unemployment
Compensation Act of 1958. A reduction of credit under paragraph (c)(1),
(2), or (3) of this section applies separately from, and in addition to,
a reduction under any other such subparagraph. See section 3302(d) and
Sec. 31.3302(d)-1 for definitions and special rules relating to section
3302(c), and for a provision that, in applying section 3302(c), the
Federal tax shall be computed at the rate of 3 percent.
(b) Limitation on aggregate credit. The aggregate of the credit
under section 3302(a) and the additional credit under section 3302(b)
shall not exceed 90 percent of the tax against which credit is taken,
computed as if the tax were imposed at the rate of 3 percent. Thus, the
aggregate of the credit which is allowable to an employer for any
taxable year shall not exceed 2.7 percent of the wages paid by the
employer during the year.
(c) Reductions of amount of credit otherwise allowable--(1) Advances
before September 13, 1960, under title XII of Social Security Act--(i)
Credit reductions for 1961 and 1962. Pursuant to section 3302(c)(2), as
applicable to credit allowable for any year ended before 1963, the
[[Page 163]]
total credits otherwise allowable under section 3302 to a taxpayer
subject to the unemployment compensation law of the State of--
(a) Alaska shall be reduced for the taxable year 1961 by an amount
equal to 0.15 percent of the wages paid by the taxpayer during 1961
which are attributable to Alaska, and shall be reduced for the taxable
year 1962 by an amount equal to 0.3 percent of the wages paid by the
taxpayer during 1962 which are attributable to Alaska; or
(b) Michigan shall be reduced for the taxable year 1962 by an amount
equal to 0.15 percent of the wages paid by the taxpayer during 1962
which are attributable to Michigan.
(ii) Credit reductions for 1963 and subsequent years. If any balance
of an advance or advances under title XII of the Social Security Act,
made before September 13, 1960, to the unemployment account of a State,
remains unpaid on January 1, 1963, or on January 1 of any succeeding
taxable year, the total credits otherwise allowable under section 3302
to a taxpayer subject to the unemployment compensation law of the State
shall be reduced for the taxable year unless--
(a) No balance of such advance or advances exists as of the
beginning of November 10 of the taxable year, or
(b) The State pays into the Federal unemployment account, before
November 10 of the taxable year, the amount certified by the Secretary
of Labor pursuant to section 3302(c)(2), and designates such payment as
being made for purposes of the last sentence of section 3302(c)(2).
The credit reduction for a taxable year shall be a percentage of the
wages paid by the taxpayer during that taxable year which are
attributable to the State. The percentage for the taxable year 1963, or
for any succeeding taxable year beginning before January 1, 1968, is
0.15 percent (that is, 5 percent of the Federal tax, computed as if
imposed at the rate of 3 percent of the wages). The percentage for any
taxable year beginning on or after January 1, 1968, is the percentage
reduction for the immediately preceding taxable year plus 0.15 percent.
Thus, for 1968 the percentage is 0.3 percent, for 1969 the percentage is
0.45 percent, and for 1970 the percentage is 0.6 percent.
(2) Advances after September 12, 1960, under title XII of Social
Security Act--(i) In general. If any balance of an advance or advances
under title XII of the Social Security Act, made after September 12,
1960, to the unemployment account of a State, remains unpaid on January
1 of two consecutive taxable years, the total credits otherwise
allowable under section 3302 to a taxpayer subject to the unemployment
compensation law of the State shall be reduced for the taxable year
beginning with the second consecutive January 1, unless prior to
November 10 of that taxable year the total amount of any such advance or
advances made to the account of the State has been fully repaid. The
reduction made pursuant to this subdivision in the total credits
otherwise allowable for the taxable year beginning with the second
consecutive January 1 shall be 0.3 percent of the wages paid by the
taxpayer during the taxable year which are attributable to the State
(that is, 10 percent of the Federal tax, computed as if imposed at the
rate of 3 percent of the wages). In the case of any succeeding taxable
year beginning with a consecutive January 1 on which there exists such a
balance of an unreturned advance or advances made after September 12,
1960, the total credits otherwise allowable shall be further reduced
unless prior to November 10 of that succeeding taxable year the total
amount of any such advance or advances made to the account of the State
has been fully repaid. The reduction for each such succeeding taxable
year beginning with a consecutive January 1 on which such a balance
exists shall be a percentage of the wages paid by the taxpayer during
that succeeding taxable year which are attributable to the State. The
percentage reduction for any such succeeding taxable year shall be the
aggregate of (a) the percentage reduction (without regard to paragraph
(c)(2)(ii) or (iii) of this section) for the immediately preceding
taxable year, (b) 0.3 percent of the wages paid by the taxpayer during
the taxable year which are attributable to the State, and (c) the
percentage, if any, described in
[[Page 164]]
paragraph (c)(2)(ii) or (iii) of this section.
(ii) Additional reduction if a balance of advances exists after
third or fourth consecutive January 1. If the credit reduction described
in subdivision (i) of this subparagraph is made for the third or fourth
consecutive taxable year, the total credits otherwise allowable under
section 3302 to a taxpayer subject to the unemployment compensation law
of the State shall be further reduced for the taxable year unless the
average employer contribution rate (see section 3302(d)(4)) for such
State for the calendar year preceding such taxable year is at least 2.7
percent. The percentage of reduction, if any, under this subdivision
shall be the percentage referred to in section 3302(c)(3)(B) which is
certified by the Secretary of Labor pursuant to section 3302(d)(7).
(iii) Additional reduction if a balance of advances exists after
fifth or any succeeding consecutive January 1. If the credit reduction
described in subdivision (i) of this subparagraph is made for the fifth
or any succeeding taxable year, the total credits otherwise allowable
under section 3302 to a taxpayer subject to the unemployment
compensation law of the State shall be further reduced for the taxable
year unless the average employer contribution rate (see section
3302(d)(4)) for the State for the calendar year preceding such taxable
year equals or exceeds the 5-year benefit cost rate (see section
3302(d)(5)) applicable to the State for the taxable year or 2.7 percent,
whichever is higher. The percentage of reduction, if any, under this
subdivision for a taxable year shall be the percentage referred to in
section 3302(c)(3)(C) which is certified by the Secretary of Labor
pursuant to section 3302(d)(7).
(3) Payments under the Temporary Unemployment Compensation Act of
1958. If any amount of temporary unemployment compensation was paid in a
State under the Temporary Unemployment Compensation Act of 1958, the
total credits otherwise allowable under section 3302 to a taxpayer with
respect to wages attributable to the State for the taxable year
beginning January 1, 1963, and for each taxable year thereafter, shall
be reduced unless prior to November 10 of the taxable year--
(i) There have been restored to the Treasury the amounts of
temporary unemployment compensation paid in the State (except amounts
paid to individuals who exhausted their unemployment compensation under
title XV of the Social Security Act and title IV of the Veterans'
Readjustment Assistance Act of 1952 prior to their making their first
claims under the Temporary Unemployment Compensation Act of 1958), the
amount of costs incurred in the administration of the Temporary
Unemployment Compensation Act of 1958); with respect to the State, and
the amount estimated by the Secretary of Labor as the State's
proportionate share of other costs incurred in the administration of
such Act, or
(ii) The State restores to the general fund of the Treasury the
amount certified by the Secretary of Labor pursuant to section 104 of
the Temporary Unemployment Compensation Act of 1958, and designates such
restoration as being made for purposes of the last sentence of such
section.
The credit reduction for a taxable year shall be a percentage of the
wages paid by the taxpayer during that year which are attributable to
the State. The percentage for the taxable year 1963 is 0.15 percent
(that is, 5 percent of the Federal tax, computed as if imposed at the
rate of 3 percent). The percentage for any succeeding year is 0.3
percent (that is, 10 percent of the Federal tax, computed as if imposed
at the rate of 3 percent).
(4) Example. The cumulative effect of the credit reductions
described in this paragraph may be illustrated by the following example:
Example. Advances to the unemployment account of State X were made
in 1957 and in 1961 under title XII of the Social Security Act. Payments
under the Temporary Unemployment Compensation Act of 1958 were made in
State X in 1958. No portion of the advances or payments is returned
before November 10, 1964. As a consequence:
(a) The credit reduction applicable under subparagraph (1) of this
paragraph is made for 1964 at the rate of 0.15 percent;
(b) The credit reduction described in subparagraph (2) of this
paragraph has been made for 1963 (the second successive year after 1961)
at the rate of 0.3 percent. The rate of credit reduction under
subparagraph (2)
[[Page 165]]
for 1964 is 1 percent (the aggregate of 0.6 percent under section
3302(c)(3)(A) and 0.4 percent (assumed for purposes of this example to
be the percentage referred to in section 3302(c)(3)(B) which is
certified by the Secretary of Labor), and
(c) The credit reduction described in subparagraph (3) of this
paragraph has been made for 1963 at the rate of 0.15 percent. The rate
of credit reduction for 1964 is 0.3 percent.
The cumulative rate of credit reduction applicable for 1964 to wages
attributable to State X is 1.45 percent, representing the aggregate of
the percentage reductions applicable under subparagraphs (1), (2), and
(3) of this paragraph (0.15 percent, 1 percent, and 0.3 percent,
respectively). In 1964 Employer A paid wages of $100,000, all of which
are subject to the unemployment compensation law of State X. The credit
which would be allowable (under section 3302 (a), (b), and (c)(1)) if
there were no credit reduction is $2,700. Employer A's tax is computed
as follows for 1964:
Total taxable wages (attributable to State X)... $100,000
=============
Gross Federal tax (3.1 percent of wages)........ 3,100
Less credit:
Gross credit.................................. $2,700
Credit reduction (1.45 percent of wages)...... 1,450
Net credit.................................... 1,250
-------------
Amount of Federal tax due....................... 1,850
[T.D. 6658, 28 FR 6633, June 27, 1963, as amended by T.D. 6708, 29 FR
3198, Mar. 10, 1964]
Sec. 31.3302(d)-1 Definitions and special rules relating to limit on
total credits.
(a) Rate of tax deemed to be 3 percent. In applying the provisions
of section 3302(c) relating to the limitation on total credits, and to
reductions of credits otherwise allowable, the tax imposed by section
3301 shall be computed at the rate of 3 percent in lieu of any other
rate prescribed in section 3301 (see Sec. 31.3301-3).
(b) Wages attributable to a particular State. For purposes of
section 3302(c) (2) or (3), wages are attributable to a particular State
if they are subject to the unemployment compensation law of the State.
If wages are not subject to the unemployment compensation law of any
State, the determination as to whether such wages, or any portion
thereof, are attributable to the particular State with respect to which
the reduction in total credits is imposed shall be made in accordance
with rules prescribed by the Commissioner.
(c) Employment Security Act of 1960. The Employment Security Act of
1960, referred to in section 3302(c)(2), means title V of the Social
Security Amendments of 1960.
[T.D. 6658, 28 FR 6635, June 27, 1963]
Sec. 31.3302(e)-1 Successor employer.
(a) In general. In addition to the credits against the tax allowable
under section 3302(a) and (b) for any taxable year after 1960, the
taxpayer may be entitled to an amount of credit under section 3302(e).
Credit under section 3302(e) is provided in the case of a taxpayer who
(1) acquires substantially all of the property used in a trade or
business, or in a separate unit of a trade or business, of another
person (referred to in this section as a predecessor) who is not an
employer (see Sec. 31.3306(a)-1) for the calendar year in which the
acquisition takes place, and (2) immediately after the acquisition
employs in his trade or business one or more individuals who immediately
prior to the acquisition were employed in the trade or business of the
predecessor.
(b) Method of computing credit under section 3302(e). (1) Except as
provided in paragraph (b)(2) of this section, the amount of credit to
which the taxpayer may be entitled under section 3302(e) is the amount
of credit to which the predecessor would be entitled under section 3302
(a), (b), and (e), without regard to the limits in section 3302(c), if
the predecessor were an employer.
(2) If, during the calendar year in which the acquisition takes
place, the predecessor pays remuneration, subject to contributions under
the unemployment compensation law of a State, to any employee other than
the individuals referred to in paragraph (a) of this section, the
taxpayer will be entitled only to a portion of the amount of credit
described in paragraph (b)(1) of this section. The portion is determined
by multiplying such amount by a fraction. The numerator of the fraction
is the total amount of remuneration, subject to such contributions, paid
by the predecessor during such year to the individuals referred to in
paragraph (a) of this section. The denominator of the
[[Page 166]]
fraction is the total amount of remuneration, subject to such
contributions, paid by the predecessor during such year to all employees
for services performed by them in the trade or business, or unit
thereof, acquired by the taxpayer.
Example. In April 1961 the X Partnership terminated after selling
all of its property to the Y Corporation. During 1961, the X Partnership
paid its employees and former employees a total of $1,000,000 as
remuneration subject to contributions under the employment compensation
law of a State. (Note that the X Partnership did not qualify as an
employer for 1961 for purposes of the Federal unemployment tax, because
it had employees during less than 20 weeks in 1961.) When the Y
Corporation acquired the property it concurrently employed all
individuals who were then in the employ of the X Partnership. Assume
that the X Partnership, if it had qualified as an employer for 1961,
would have been entitled to a total credit against the Federal tax of
$30,000 under section 3302 (a) and (b), without regard to the limits in
section 3302(c). Of the $1,000,000 remuneration paid by the X
Partnership in 1961, one-fifth (or $200,000) was paid to individuals who
were employed by the Y Corporation at the time it acquired the property
of the X Partnership. Under section 3302(e), therefore, the Y
Corporation is entitled to credit of $6,000, which is one-fifth of the
credit ($30,000) which would have been available to the X Partnership.
(3) The aggregate amount of credit allowable to the taxpayer under
section 3302 (a), (b), and (e) is subject to the limits in section
3302(c).
(c) Proof of credit under section 3302(e). Credit under section
3302(e) shall not be allowed against the tax for any taxable year unless
there is submitted to the district director (1) such information or
proof as may be called for in the return on which the credit is
reported, or in the instructions relating to the return, and (2) such
other or additional proof as the Commissioner or the district director
may deem necessary to establish the right to the credit provided for
under section 3302(e).
(d) Cross-references. See paragraph (b) of Sec. 31.3306(b)(1)-1 for
examples of the acquisition of property used in a trade or business, or
in a separate unit thereof.
[T.D. 6658, 28 FR 6635, June 27, 1963]
Sec. 31.3306(a)-1 Who are employers.
(a) Definition--(1) For calendar years 1956 through 1969, inclusive.
Every person who employs 4 or more employees in employment (within the
meaning of section 3306 (c) and (d)) on a total of 20 or more calendar
days during any calendar year after 1955 and before 1970, each such day
being in a different calendar week, is with respect to such year an
employer subject to the tax.
(1a) For 1970 and subsequent calendar years. Every person who
employs 4 or more employees in employment (within the meaning of section
3306 (c) and (d)) on a total of 20 or more calendar days during a
calendar year after 1969, or during the calendar year immediately
preceding such a calendar year, each such day being in a different
calendar week, is with respect to such year an employer subject to the
tax.
(2) For calendar year 1955. Every person who employs 8 or more
employees in employment (within the meaning of section 3306 (c) and (d))
on a total of 20 or more calendar days during the calendar year 1955,
each such day being in a different calendar week, is with respect to
such year an employer subject to the tax.
(3) General agents of the Secretary of Commerce. For provisions
relating to the circumstances under which an employee who performs
services as an officer or member of the crew of an American vessel (i)
which is owned by or bareboat chartered to the United States and (ii)
whose business is conducted by a general agent of the Secretary of
Commerce shall be deemed to be performing services for such general
agent rather than for the United States, see Sec. 31.3306 (N)-1.
(b) The several weeks in each of which occurs a day on which the
prescribed number of employees are employed need not be consecutive
weeks. It is not necessary that the employees so employed be the same
individuals; they may be different individuals on each day. Neither is
it necessary that the prescribed number of employees be employed at the
same moment of time or for any particular length of time or on any
particular basis of compensation. It is sufficient if the total number
of employees employed during the 24
[[Page 167]]
hours of a calendar day is 4 or more (8 or more for the calendar year
1955).
(c) In determining whether a person employs a sufficient number of
employees to be an employer subject to the tax, each employee is counted
with respect to services which constitute employment as defined in
section 3306(c) (see Sec. 31.3306(c)-2). No employee is counted with
respect to services which do not constitute employment as so defined.
See, however, paragraph (d) of this section.
(d) The provisions of paragraph (c) of this section are subject to
the provisions of section 3306(d), relating to services which do not
constitute employment but which are deemed to be employment, and
relating to services which constitute employment but which are deemed
not to be employment (see Sec. 31.3306(d)-1). For example, if the
services of an employee during a pay period are deemed to be employment
under section 3306(d), even though a portion thereof does not constitute
employment under section 3306(c), the employee is counted with respect
to all services during the pay period. On the other hand, if the
services of an employee during a pay period are deemed not to be
employment, even though a portion thereof constitutes employment, the
employee is not counted with respect to any services during the pay
period.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7037, 35 FR
6709, Apr. 28, 1970]
Sec. 31.3306(b)-1 Wages.
(a) Applicable law and regulations--(1) Remuneration paid after
1954. Whether remuneration paid after 1954 for employment performed
after 1938 constitutes wages is determined under section 3306(b).
Accordingly, only remuneration paid after 1954 for employment performed
after 1938 is covered by this section of the regulations and by the
sections relating to the statutory exclusions from wages (Sec. Sec.
31.3306(b)(1)-1 to 31.3306(b)(10)-1).
(2) Remuneration paid after 1939 and before 1955. Whether
remuneration paid after 1939 and before 1955 for employment performed
after 1938 constitutes wages shall be determined in accordance with the
applicable provisions of law and of 26 CFR (1939) Part 403 (Regulations
107).
(3) Remuneration paid in 1939. Whether remuneration paid in 1939 for
employment performed after 1938 constitutes wages shall be determined in
accordance with the applicable provisions of law and of 26 CFR (1939)
Part 400 (Regulations 90).
(b) The term ``wages'' means all remuneration for employment unless
specifically excepted under section 3306(b) (see Sec. Sec.
31.3306(b)(1)-1 to 31.3306(b)(10)-1, inclusive) or paragraph (j) of this
section.
(c) The name by which the remuneration for employment is designated
is immaterial. Thus, salaries, fees, bonuses, and commissions are wages
if paid as compensation for employment.
(d) The basis upon which the remuneration is paid is immaterial in
determining whether the remuneration constitutes wages. Thus, it may be
paid on the basis of piecework or a percentage of profits; and it may be
paid hourly, daily, weekly, monthly, or annually.
(e) Except in the case of remuneration paid for services not in the
course of the employer's trade or business (see Sec. 31.3306(b)(7)-1),
the medium in which the remuneration is paid is also immaterial. It may
be paid in cash or in something other than cash, as for example, goods,
lodging, food, or clothing. Remuneration paid in items other than cash
shall be computed on the basis of the fair value of such items at the
time of payments.
(f) Ordinarily, facilities or privileges (such as entertainment,
medical services, or so-called ``courtesy'' discounts on purchases),
furnished or offered by an employer to his employees generally, are not
considered as remuneration for employment if such facilities or
privileges are of relatively small value and are offered or furnished by
the employer merely as a means of promoting the health, good will,
contentment, or efficiency of his employees. The term ``facilities or
privileges'', however, does not ordinarily include the value of meals or
lodging furnished, for example, to restaurant or hotel employees, or to
seamen or other employees aboard vessels, since generally these items
constitute an appreciable
[[Page 168]]
part of the total remuneration of such employees.
(g) Amounts of so-called ``vacation allowances'' paid to an employee
constitute wages. Thus, the salary of an employee on vacation, paid
notwithstanding his absence from work, constitutes wages.
(h) Amounts paid specifically--either as advances or
reimbursements--for traveling or other bona fide ordinary and necessary
expenses incurred or reasonably expected to be incurred in the business
of the employer are not wages. Traveling and other reimbursed expenses
must be identified either by making a separate payment or by
specifically indicating the separate amounts where both wages and
expense allowances are combined in a single payment. For amounts that
are received by an employee on or after July 1, 1990, with respect to
expenses paid or incurred on or after July 1, 1990, see Sec.
31.3306(b)-2.
(i) Remuneration paid by an employer to an individual for
employment, unless such remuneration is specifically excepted under
section 3306(b), constitutes wages even though at the time paid the
individual is no longer an employee.
Example. A is employed by B, an employer, during the month of June
1955 in employment and is entitled to receive remuneration of $100 for
the services performed for B during the month. A leaves the employ of B
at the close of business on June 30, 1955. On July 15, 1955 (when A is
no longer an employee of B), B pays A the remuneration of $100 which was
earned for the services performed in June. The $100 is wages, and the
tax is payable with respect thereto.
(j) In addition to the exclusions specified in Sec. Sec.
31.3306(b)(1)-1 to 31.3306(b)(10)-1, inclusive, the following types of
payments are excluded from wages:
(1) Remuneration for services which do not constitute employment
under section 3306(c).
(2) Remuneration for services which are deemed not to be employment
under section 3306(d) (Sec. 31.3306(d)-1).
(3) Tips or gratuities paid directly to an employee by a customer of
an employer, and not accounted for by the employee to the employer.
(k) For provisions relating to the treatment of deductions from
remuneration as payments of remuneration, see Sec. 31.3307-1.
(l) Split-dollar life insurance arrangements. Except as otherwise
provided under section 3306(r), see Sec. Sec. 1.61-22 and 1.7872-15 of
this chapter for rules relating to the treatment of split-dollar life
insurance arrangements.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6636, June 27, 1963; T.D. 7375, 40 FR 42350, Sept. 12, 1975; T.D. 8276,
54 FR 51028, Dec. 12, 1989; T.D. 8324, 55 FR 51697, Dec. 17, 1990; T.D.
9092, 68 FR 54361, Sept. 17, 2003]
Sec. 31.3306(b)-1T Question and answer relating to the definition of
wages in section 3306(b) (Temporary).
The following question and answer relates to the definition of wages
in section 3306(b) of the Internal Revenue Code of 1954, as amended by
section 531(d)(3) of the Tax Reform Act of 1984 (98 Stat. 885):
Q-1: Are fringe benefits included in the definition of wages under
section 3306(b)?
A-1: Yes, unless specifically excluded from the definition of
``wages'' pursuant to section 3306(b) (1) through (16). For example, a
fringe benefit provided to or on behalf of an employee is excluded from
the definition of ``wages'' if at the time such benefit is provided it
is reasonable to believe that the employee will be able to exclude such
benefit from income under section 117 or 132.
[T.D. 8004, 50 FR 755, Jan. 7, 1985]
Sec. 31.3306(b)-2 Reimbursement and other expense allowance amounts.
(a) When excluded from wages. If a reimbursement or other expense
allowance arrangement meets the requirements of section 62(c) of the
Code and Sec. 1.62-2 and the expenses are substantiated within a
reasonable period of time, payments made under the arrangement that do
not exceed the substantiated expenses are treated as paid under an
accountable plan and are not wages. In addition, if both wages and the
reimbursement or other expense allowance are combined in a single
payment, the reimbursement or other expense allowance must be identified
either by making a separate payment or
[[Page 169]]
by specifically identifying the amount of the reimbursement or other
expense allowance.
(b) When included in wages--(1) Accountable plans--(i) General rule.
Except as provided in paragraph (b)(1)(ii) of this section, if a
reimbursement or other expense allowance arrangement satisfied the
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not
substantiated within a reasonable period of time or amounts in excess of
the substantiated expenses are not returned within a reasonable period
of time, the amount paid under the arrangement in excess of the
substantiated expenses is treated as paid under a nonaccountable plan,
is included in wages, and is subject to withholding and payment of
employment taxes no later than the first payroll period following the
end of the reasonable period.
(ii) Per diem or mileage allowances. If a reimbursement or other
expense allowance arrangement providing a per diem or mileage allowance
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the
allowance is paid at a rate for each day or mile of travel that exceeds
the amount of the employee's expenses deemed substantiated for a day or
mile of travel, the excess portion is treated as paid under a
nonaccountable plan and is included in wages. In the case of a per diem
or mileage allowance paid as a reimbursement, the excess portion is
subject to withholding and payment of employment taxes when paid. In the
case of a per diem or mileage allowance paid as an advance, the excess
portion is subject to withholding and payment of employment taxes no
later than the first payroll period following the payroll period in
which the expenses with respect to which the advance was paid (i.e., the
days or miles of travel) are substantiated. The Commissioner may, in his
discretion, prescribe special rules in pronouncements of general
applicability regarding the timing of withholding and payment of
employment taxes on per diem and mileage allowances.
(2) Nonaccountable plans. If a reimbursement or other expense
allowance arrangement does not satisfy the requirements of section 62(c)
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be
substantiated or require amounts in excess of the substantiated expenses
to be returned), all amounts paid under the arrangement are treated as
paid under a nonaccountable plan, are included in wages, and are subject
to withholding and payment of employment taxes when paid.
(c) Effective dates. This section generally applies to payments made
under reimbursement or other expense allowance arrangements received by
an employee on or after July 1, 1990, with respect to expenses paid or
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section
applies to payments made under reimbursement or other expense allowance
arrangements received by an employee on or after January 1, 1991, with
respect to expenses paid or incurred on or after January 1, 1991.
[T.D. 8324, 55 FR 51697, Dec. 17, 1990]
Sec. 31.3306(b)(1)-1 $3,000 limitation.
(a) In general. (1) the term ``wages'' does not include that part of
the remuneration paid within any calendar year by an employer to an
employee which exceeds the first $3,000 of remuneration (exclusive of
remuneration excepted from wages in accordance with paragraph (j) of
Sec. 31.3306(b)-1 or Sec. Sec. 31.3306(b)(2)-1 to 31.3306(b)(8)-1,
inclusive), paid within such calendar year by such employer to such
employee for employment performed for him at any time after 1938.
(2) The $3,000 limitation applies only if the remuneration paid
during any one calendar year by an employer to the same employee for
employment performed after 1938 exceeds $3,000. The limitation in such
case relates to the amount of remuneration paid during any one calendar
year for employment after 1938 and not to the amount of remuneration for
employment performed in any one calendar year.
Example. Employer B, in 1955, pays employee A $2,500 on account of
$3,000 due him for employment performed in 1955. In 1956 employer B pays
employee A the balance of $500 due him for employment performed in the
prior year (1955), and thereafter in 1956 also pays A $3,000 for
employment performed in 1956. The $2,500 paid in 1955 is subject to tax
in 1955. The balance of $500 paid in 1956 for employment during 1955 is
subject to tax in 1956, as is also the first $2,500 paid of the
[[Page 170]]
$3,000 for employment during 1956 (this $500 for 1955 employment added
to the first $2,500 paid for 1956 employment constitutes the maximum
wages subject to the tax which could be paid in 1956 by B to A). The
final $500 paid by B to A in 1956 is not included as wages and is not
subject to the tax.
(3) If during a calendar year an employee is paid remuneration by
more than one employer, the limitation of wages to the first $3,000 of
remuneration paid applies, not to the aggregate remuneration paid by all
employers with respect to employment performed after 1938, but instead
to the remuneration paid during such calendar year by each employer with
respect to employment performed after 1938. In such case the first
$3,000 paid during the calendar year by each employer constitutes wages
and is subject to the tax. In connection with the application of the
$3,000 limitation, see also paragraph (b) of this section relating to
the circumstances under which wages paid by a predecessor employer are
deemed to be paid by his successor. In connection with the annual wage
limitation in the case of remuneration after December 31, 1978 from two
or more related corporations that compensate an employee through a
common paymaster, see Sec. 31.3306(p)-1.
Example 1. During 1955 employer D pays to employee C a salary of
$600 a month for employment performed for D during the first seven
months of 1955, or total remuneration of $4,200. At the end of the fifth
month C has been paid $3,000 by employer D, and only that part of his
total remuneration from D constitutes wages subject to the tax. The $600
paid to employee C by employer D in the sixth month, and the like amount
paid in the seventh month, are not included as wages and are not subject
to the tax. At the end of the seventh month C leaves the employ of D and
enters the employ of E. Employer E pays to C remuneration of $600 a
month in each of the remaining five months of 1955, or total
remuneration of $3,000. The entire $3,000 paid by E to employee C
constitutes wages and is subject to the tax. Thus, the first $3,000 paid
by employer D and the entire $3,000 paid by employer E constitute wages.
Example 2. During the calendar year 1955 F is simultaneously an
officer (an employee) of the X Corporation, the Y Corporation, and the Z
Corporation, each such corporation being an employer for such year.
During such year F is paid a salary of $3,000 by each Corporation. Each
$3,000 paid to F by each of the corporations, X, Y, and Z (whether or
not such corporations are related), constitutes wages and is subject to
the tax.
(b) Wages paid by predecessor attributed to successor. (1) If an
employer (hereinafter referred to as a successor) during any calendar
year acquires substantially all the property used in a trade or business
of another employer (hereinafter referred to as a predecessor), or used
in a separate unit of a trade or business of a predecessor, and if
immediately after the acquisition the successor employs in his trade or
business an individual who immediately prior to the acquisition was
employed in the trade or business of such predecessor, then, for
purposes of the application of the $3,000 limitation set forth in
paragraph (a) of this section, any remuneration (exclusive of
remuneration excepted from wages in accordance with paragraph (j) of
Sec. 31.3306(b)-1 or Sec. Sec. 31.3306(b)(2)-1 to 31.3306(b)(8)-1,
inclusive), with respect to employment paid (or considered under this
provision as having been paid to such individual by such predecessor
during such calendar year and prior to such acquisition shall be
considered as having been paid by such successor. Wages paid by a
predecessor shall not be considered as having been paid by the successor
unless both the predecessor and the successor are employers as defined
in section 3306(a) for the calendar year in which the acquisition occurs
(see Sec. 31.3306(a)-1, relating to who are employers).
(2) The wages paid, or considered as having been paid, by a
predecessor to an employee shall, for purposes of the $3,000 limitation,
be treated as having been paid to such employee by a successor, if:
(i) The successor during a calendar year acquired substantially all
the property used in a trade or business, or used in a separate unit of
a trade or business, of the predecessor;
(ii) Such employee was employed in the trade or business of the
predecessor immediately prior to the acquisition and is employed by the
successor in his trade or business immediately after the acquisition;
and
(iii) Such wages were paid during the calendar year in which the
acquisition occurred and prior to such acquisition.
[[Page 171]]
(3) The method of acquisition by an employer of the property of
another employer is immaterial. The acquisition may occur as a
consequence of the incorporation of a business by a sole proprietor of a
partnership, the continuance without interruption of the business of a
previously existing partnership by a new partnership or by a sole
proprietor, or a purchase or any other transaction whereby substantially
all the property used in a trade or business, or used in a separate unit
of a trade or business, of one employer is acquired by another employer.
(4) Substantially all the property used in a separate unit of a
trade or business may consist of substantially all the property used in
the performance of an essential operation of the trade or business, or
it may consist of substantially all the property used in a relatively
self-sustaining entity which forms a part of the trade or business.
Example 1. The M Corporation which is engaged in the manufacture of
automobiles, including the manufacture of automobile engines,
discontinues the manufacture of the engines and transfers all the
property used in such manufacturing operations to the N Company. The N
Company is considered to have acquired a separate unit of the trade or
business of the M Corporation, namely, its engine manufacturing unit.
Example 2. The R Corporation which is engaged in the operation of a
chain of grocery stores transfers one of such stores to the S Company.
The S Company is considered to have acquired a separate unit of the
trade or business of the R Corporation.
(5) A successor may receive credit for wages paid to an employee by
a predecessor only if immediately prior to the acquisition the employee
was employed by the predecessor in his trade or business which was
acquired by the successor and if immediately after the acquisition such
employee is employed by the successor in his trade or business (whether
or not in the same trade or business in which the acquired property is
used). If the acquisition involves only a separate unit of a trade or
business of the predecessor, the employee need not have been employed by
the predecessor in that unit provided he was employed in the trade or
business of which the acquired unit was a part.
Example. The Y Corporation in 1955 acquires all the property of the
X Manufacturing Company and immediately after the acquisition employs in
its trade or business employee A, who, immediately prior to the
acquisition, was employed by the X Company. Both the Y Corporation and
the X Company are employers, as defined in the Act, for the calendar
year 1955. The X Company has in 1955 (the calendar year in which the
acquisition occurs) and prior to the acquisition paid $2,000 of wages to
A. The Y Corporation in 1955 pays to A remuneration with respect to
employment of $2,000. Only $1,000 of such remuneration is considered to
be wages. For purposes of the $3,000 limitation, the Y Corporation is
credited with the $2,000 paid to A by the X Company. If, in the same
calendar year, the property is acquired from the Y Corporation by the Z
Company, an employer for such year, and A immediately after the
acquisition is employed by the Z Company in its trade or business, no
part of the remuneration paid to A by the Z Company in the year of the
acquisition will be considered to be wages. The Z Company will be
credited with the remuneration paid to A by the Y Corporation and also
with the wages paid to A by the X Company (considered for purposes of
the application of the $3,000 limitation as having also been paid by the
Y Corporation).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6636, June 27, 1963; T.D. 7660, 44 FR 75142, Dec. 19, 1979]
Sec. 31.3306(b)(2)-1 Payments under employers' plans on account of
retirement, sickness or accident disability, medical or hospitalization
expenses, or death.
(a) The term ``wages'' does not include the amount of any payment
(including any amount paid by an employer for insurance or annuities, or
into a fund, to provide for any such payment) made to, or on behalf of,
an employee or any of his dependents under a plan or system established
by an employer which makes provision for his employees generally (or for
his employees generally and their dependents) or for a class or classes
of his employees (or for a class or classes of his employees and their
dependents), on account of:
(1) An employee's retirement,
(2) Sickness or accident disability of an employee or any of his
dependents,
(3) Medical or hospitalization expenses in connection with sickness
or accident disability of an employee or any of his dependents, or
[[Page 172]]
(4) Death of an employee or any of his dependents.
(b) The plan or system established by an employer need not provide
for payments on account of all of the specified items, but such plan or
system may provide for any one or more of such items. Payments for any
one or more of such items under a plan or system established by an
employer solely for the dependents of his employees are not within this
exclusion from wages.
(c) Dependents of an employee include the employee's husband or
wife, children, and any other members of the employee's immediate
family.
(d) It is immaterial for purposes of this exclusion whether the
amount or possibility of such benefit payments is taken into
consideration in fixing the amount of an employee's remuneration or
whether such payments are required, expressly or impliedly, by the
contract of service.
Sec. 31.3306(b)(3)-1 Retirement payments.
The term ``wages'' does not include any payment made by an employer
to an employee (including any amount paid by an employer for insurance
or annuities, or into a fund, to provide for any such payment) on
account of the employee's retirement. Thus payments made to an employee
on account of his retirement are excluded from wages under this
exception even though not made under a plan or system.
Sec. 31.3306(b)(4)-1 Payments on account of sickness or accident
disability, or medical or hospitalization expenses.
The term ``wages'' does not include any payment made by an employer
to, or on behalf of, an employee on account of the employee's sickness
or accident disability or the medical or hospitalization expenses in
connection with the employee's sickness or accident disability, if such
payment is made after the expiration of 6 calendar months following the
last calendar month in which such employee worked for such employer.
Such payments are excluded from wages under this exception even though
not made under a plan or system. If the employee does not actually
perform services for the employer during the requisite period, the
existence of the employer-employee relationship during that period is
immaterial.
Sec. 31.3306(b)(5)-1 Payments from or to certain tax-exempt trusts,
or under or to certain annuity plans or bond purchase plans.
(a) Payments from or to certain tax-exempt trusts. The term
``wages'' does not include any payment made--
(1) By an employer, on behalf of an employee or his beneficiary,
into a trust, or
(2) To, or on behalf of an employee or his beneficiary from a trust,
if at the time of such payment the trust is exempt from tax under
section 501(a) as an organization described in section 401(a). A payment
made to an employee of such a trust for services rendered as an employee
of the trust and not as a beneficiary thereof is not within this
exclusion from wages.
(b) Payments under or to certain annuity plans. (1) The term
``wages'' does not include any payment made after December 31, 1962--
(i) By an employer, on behalf of an employee or his beneficiary,
into an annuity plan, or
(ii) To, or on behalf of, an employee or his beneficiary under an
annuity plan, if at the time of such payment the annuity plan is a plan
described in section 403(a).
(2) The term ``wages'' does not include any payment made before
January 1, 1963--
(i) By an employer, on behalf of an employee or his beneficiary,
into an annuity plan, or
(ii) To, or on behalf of, an employee or his beneficiary under an
annuity plan, if at the time of such payment the annuity plan meets the
requirements of section 401(a) (3), (4), (5), and (6).
(c) Payments under or to certain bond purchase plans. The term
``wages'' does not include any payment made after December 31, 1962--
(1) By an employer, on behalf of an employee or his beneficiary,
into a bond purchase plan, or
(2) To, or on behalf of, an employee or his beneficiary under a bond
purchase plan,
[[Page 173]]
if at the time of such payment the plan is a qualified bond purchase
plan described in section 405(a).
[T.D. 6658, 28 FR 6636, June 27, 1963]
Sec. 31.3306(b)(6)-1 Payment by an employer of employee tax under
section 3101 or employee contributions under a State law.
The term ``wages'' does not include any payment by an employer
(without deduction from the remuneration of, or other reimbursement
from, the employee) of either (a) the employee tax imposed by section
3101 or the corresponding section of prior law, or (b) any payment
required from an employee under a State unemployment compensation law.
Sec. 31.3306(b)(7)-1 Payments other than in cash for service not in
the course of employer's trade or business.
The term ``wages'' does not include remuneration paid in any medium
other than cash for service not in the course of the employer's trade or
business. Cash remuneration includes checks and other monetary media of
exchange. Remuneration paid in any medium other than cash, such as
lodging, food, or other goods or commodities, for service not in the
course of the employer's trade or business does not constitute wages.
Remuneration paid in any medium other than cash for other types of
services does not come within this exclusion from wages. For provisions
relating to the circumstances under which service not in the course of
the employer's trade or business does not constitute employment, see
Sec. 31.3306(c)(3)-1.
Sec. 31.3306(b)(8)-1 Payments to employees for non-work periods.
The term ``wages'' does not include any payment (other than vacation
or sick pay) made by an employer to an employee after the calendar month
in which the employee attains age 65, if--
(a) Such employee does no work (other than being subject to call for
the performance of work) for such employer in the period for which such
payment is made; and
(b) The employer-employee relationship exists between the employer
and employee throughout the period for which such payment is made.
Vacation or sick pay is not within this exclusion from wages. If the
employee does any work for the employer in the period for which the
payment is made, no remuneration paid by such employer to such employee
with respect to such period is within this exclusion from wages. For
example, if employee A, who attained the age of 65 in January 1955, is
employed by the X Company on a stand-by basis and is paid $200 by the X
Company for being subject to call during the month of February 1955 and
an additional $25 for work performed for the X Company on one day in
February 1955, then none of the $225 is excluded from wages under this
exception.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6708, 29 FR
3199, Mar. 10, 1964]
Sec. 31.3306(b)(9)-1 Moving expenses.
(a) The term ``wages'' does not include remuneration paid on or
after November 1, 1964, to or on behalf of an employee, either as an
advance or a reimbursement, specifically for moving expenses incurred or
expected to be incurred, if (and to the extent that) at the time of
payment it is reasonable to believe that a corresponding deduction is or
will be allowable to the employee under section 217. The reasonable
belief contemplated by the statute may be based upon any evidence
reasonably sufficient to induce such belief, even though such evidence
may be insufficient upon closer examination by the district director or
the courts finally to establish that a deduction is allowable under
section 217. The reasonable belief shall be based upon the application
of section 217 and the regulations thereunder in Part 1 of this chapter
(Income Tax Regulations). When used in this section, the term ``moving
expenses'' has the same meaning as when used in section 217 and the
regulations thereunder.
(b) Except as otherwise provided in paragraph (a) of this section,
or in a numbered paragraph of section 3306(b),
[[Page 174]]
amounts paid to or on behalf of an employee for moving expenses are
wages for purposes of section 3306(b).
[T.D. 7375, 40 FR 42351, Sept. 12, 1975]
Sec. 31.3306(b)(10)-1 Payments under certain employers' plans after
retirement, disability, or death.
(a) In general. The term ``wages'' does not include the amount of
any payment or series of payments made after January 2, 1968, by an
employer to, or on behalf of, an employee or any of his dependents under
a plan established by the employer which makes provisions for his
employees generally (or for his employees generally and their
dependents) or for a class or classes of his employees (or for a class
or classes of his employees and their dependents), which is paid or
commences to be paid upon or within a reasonable time after the
termination of an employee's employment relationship because of the
employee's--
(1) Death,
(2) Retirement for disability, or
(3) Retirement after attaining an age specified in the plan
established by the employer or in a pension plan of the employer as the
age at which a person in the employee's circumstances is eligible for
retirement.
A payment or series of payments made under the circumstances described
in the preceding sentence is excluded from ``wages'' even if made
pursuant to an incentive compensation plan which also provides for the
making of other types of payments. However, any payment or series of
payments which would have been paid if the employee's relationship had
not been terminated is not excluded from ``wages'' under this section
and section 3306(b)(10). For example, lump-sum payments for unused
vacation time or a final paycheck received after retirement are payments
which the employee would have received whether or not he retired and
therefore are not excluded from ``wages.'' Further, if any payment is
made upon or after termination of employment for any reason other than
those set out in paragraphs (a)(1), (2), and (3) of this section such
payment is not excludable from ``wages'' by this section. For example,
if a pension plan provides for retirement upon disability, completion of
30 years of service, or attainment of age 65, and if an employee who is
not disabled retires at age 61 after 30 years of service, none of the
retirement payments made to the employee under the pension plan
(including any made after he is 65) is excludable from ``wages'' under
this section. However, if the pension plan had conditioned retirement
after 30 years of service upon attainment of age 60, all of the
retirement payments would have been excludable.
(b) Plan. The plan or system established by an employer need not
provide for payments because of termination of employment for all the
reasons set out in paragraphs (a)(1), (2), and (3) of this section, but
such plan or system may provide for payments because of termination for
any one or more of such reasons. Payments because of termination of
employment for any one or more of such reasons under a plan or system
established by an employer solely for the dependents of his employees
are not within this exclusion from wages.
(c) Dependents. Dependents of an employee include the employee's
husband or wife, children, and any other members of the employee's
immediate family.
(d) Benefit payments. It is immaterial for purposes of this
exclusion whether the amount or possibility of such benefit payments is
paid on account of services rendered or taken into consideration in
fixing the amount of an employee's remuneration or whether such payments
are required expressly or impliedly, by the contract of service.
(e) Example. The application of this section may be illustrated by
the following example:
Example. A, an employee, receives a salary of $1,500 a month,
payable on the 5th day of the month following the month for which the
salary is earned. A's employer has established an incentive compensation
plan for a class of his employees, including A, providing for the
payment of deferred compensation on termination of employment, including
termination upon an employee's death, retirement at age 65 (the
retirement age specified in the plan), or retirement for disability. On
March 1, 1973, A attains the age of 65 and retires. On March 5, 1973, A
receives $5,500 from his employer of which $1,500 represents A's salary
for services he performed in February 1973, and $4,000 represents
incentive compensation paid under
[[Page 175]]
the employer's plan. The amount of $4,000 is excluded from ``wages''
under this section. The amount of $1,500 is not excluded from ``wages''
under this section.
[T.D. 7374, 40 FR 30951, July 24, 1975]
Sec. 31.3306(b)(13)-1 Payments or benefits under a qualified
educational assistance program.
The term ``wages'' does not include any payment made, or benefit
furnished, to or for the benefit of an employee in a taxable year
beginning after December 31, 1978, if at the time of such payment or
furnishing it is reasonable to believe that the employee will be able to
exclude such payment or benefit from income under section 127.
[T.D. 7898, 48 FR 31019, July 6, 1983]
Sec. 31.3306(c)-1 Employment; services performed before 1955.
(a) Services performed after 1938 and before 1955 constitute
employment under section 3306(c) if such services were employment under
the law applicable to the period in which they were performed.
(b) The tax applies with respect to remuneration paid by an employer
after 1954 for services performed after 1938 and before 1955, as well as
for services performed after 1954, to the extent that the remuneration
and services constitute wages and employment. See Sec. Sec. 31.3306(b)-
1 to 31.3306(b)(8)-1, inclusive, relating to wages.
(c) Determination of whether services performed after 1938 and
before 1955 constitute employment shall be made in accordance with the
provisions of law applicable to the period in which they were performed
and of the regulations thereunder. The regulations applicable in
determining whether services performed after 1938 and before 1955
constitute employment are as follows:
(1) Services performed in 1939--26 CFR (1939) Part 400 (Regulations
90).
(2) Services performed after 1939 and before 1955--26 CFR (1939)
Part 403 (Regulations 107).
Sec. 31.3306(c)-2 Employment; services performed after 1954.
(a) In general. Whether services performed after 1954 constitute
employment is determined under subsections (c) and (n) of section 3306.
(b) Services performed within the United States. Services performed
after 1954 within the United States (see Sec. 31.3306(j)-1) by an
employee for the person employing him, unless specifically excepted
under section 3306(c), constitute employment. With respect to services
performed within the United States, the place where the contract of
service is entered into is immaterial. The citizenship or residence of
the employee or of the person employing him also is immaterial except to
the extent provided in any specific exception from employment. Thus, the
employee and the person employing him may be citizens and residents of a
foreign country and the contract of service may be entered into in a
foreign country, and yet, if the employee under such contract performs
services within the United States, there may be to that extent
employment.
(c) Services performed outside the United States--(1) In general.
Except as provided in subparagraph (2) of this paragraph, services
performed outside the United States (see Sec. 31.3306(j)-1) do not
constitute employment.
(2) On or in connection with an American vessel or American
aircraft. (i) This subparagraph relates to services performed after 1954
``on or in connection with'' an American vessel, and to services
performed after 1961 ``on or in connection with'' an American aircraft
to the extent that the remuneration for the latter services is paid
after 1961. Such services performed outside the United States by an
employee for the person employing him constitute employment if:
(a) The employee is also employed ``on and in connection with'' such
vessel or aircraft when outside the United States; and
(b) The services are performed under a contract of service, between
the employee and the person employing him, which is entered into within
the United States, or during the performance of the contract under which
the services are performed and while the employee is employed on the
vessel or aircraft it touches at a port within the United States; and
[[Page 176]]
(c) The services are not excepted under section 3306(c). (See
particularly Sec. 31.3306(c)(17)-1, relating to fishing.)
(ii) An employee performs services on and in connection with the
vessel or aircraft if he performs services on the vessel or aircraft
which are also in connection with the vessel or aircraft. Services
performed on the vessel by employees as officers or members of the crew,
or as employees of concessionaires, of the vessel, for example, are
performed under such circumstances, since the services are also
connected with the vessel. Similarly, services performed on the aircraft
by employees as officers or members of the crew of the aircraft are
performed on and in connection with such aircraft. Services may be
performed on the vessel or aircraft, however, which have no connection
with it, as in the case of services performed by an employee while on
the vessel or aircraft merely as a passenger in the general sense. For
example, the services of a buyer in the employ of a department store
while he is a passenger on a vessel are not in connection with the
vessel.
(iii) If services are performed by an employee ``on and in
connection with'' an American vessel or American aircraft when outside
the United States and the conditions in (b) and (c) of paragraph
(c)(2)(i) of this section are met, then the services of that employee
performed on or in connection with the vessel or aircraft constitute
employment. The expression ``on or in connection with'' refers not only
to services performed on the vessel or aircraft but also to services
connected with the vessel or aircraft which are not actually performed
on it (for example, shore services performed as officers or members of
the crew, or as employees of concessionaires, of the vessel).
(iv) Services performed by a member of the crew or other employee
whose contract of service is not entered into within the United States,
and during the performance of which and while the employee is employed
on the vessel or aircraft it does not touch at a port within the United
States, do not constitute employment, notwithstanding that service
performed by other members of the crew or other employees on or in
connection with the vessel or aircraft may constitute employment.
(v) A vessel includes every description of watercraft, or other
contrivance, used as a means of transportation on water. An aircraft
includes every description of craft, or other contrivance, used as a
means of transportation through the air. In the case of an aircraft, the
term ``port'' means an airport. An airport means an area on land or
water used regularly by aircraft for receiving or discharging passengers
or cargo. For definitions of ``American vessel'' and ``American
aircraft'', see Sec. 31.3306(m)-1.
(vi) With respect to services performed outside the United States on
or in connection with an American vessel or American aircraft, the
citizenship or residence of the employee is immaterial, and the
citizenship or residence of the employer is material only in case it has
a bearing in determining whether a vessel is an American vessel.
[T.D. 6658, 28 FR 6636, June 27, 1963]
Sec. 31.3306(c)-3 Employment; excepted services in general.
(a) Services performed by an employee for the person employing him
do not constitute employment for purposes of the tax if they are
specifically excepted from employment under any of the numbered
paragraphs of section 3306(c). Services so excepted do not constitute
employment for purposes of the tax even though they are performed within
the United States, or are performed outside the United States on or in
connection with an American vessel or American aircraft. If not
otherwise provided in the regulations relating to the numbered
paragraphs of section 3306(c), such regulations apply with respect to
services performed after 1954.
(b) The exception attaches to the services performed by the employee
and not to the employee as an individual; that is, the exception applies
only to the services rendered by the employee in an excepted class.
Example. A is an individual who is employed part time by B to
perform services which constitutes ``agricultural labor'' (see Sec.
31.3306 (k)-1). A is also employed by C part time to perform services as
a grocery clerk in a store owned by him. While A's services
[[Page 177]]
which constitute ``agricultural labor'' are expected, the exception does
not embrace the services performed by A as a grocery clerk in the employ
of C and the latter services are not excepted from employment.
(c) For provisions relating to the circumstances under which
services which are excepted are nevertheless deemed to be employment,
and relating to the circumstances under which services which are not
excepted are nevertheless deemed not to be employment, see Sec.
31.3306(d)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6637, June 27, 1963]
Sec. 31.3306(c)(1)-1 Agricultural labor.
Services performed by an employee for the person employing him which
constitute ``agricultural labor'' as defined in section 3306(k) are
excepted from employment. For provisions relating to the definition of
the term ``agricultural labor'', see Sec. 31.3306(k)-1.
Sec. 31.3306(c)(2)-1 Domestic service.
(a) In a private home. (1) Services of a household nature performed
by an employee in or about a private home of the person by whom he is
employed are excepted from employment. A private home is a fixed place
of abode of an individual or family. A separate and distinct dwelling
unit maintained by an individual in an apartment house, hotel, or other
similar establishment may constitute a private home. If a dwelling house
is used primarily as a boarding or lodging house for the purpose of
supplying board or lodging to the public as a business enterprise, it is
not a private home and the services performed therein are not excepted.
(2) In general, services of a household nature in or about a private
home include services performed by cooks, waiters, butlers,
housekeepers, governesses, maids, valets, baby sitters, janitors,
laundresses, furnacemen, caretakers, handymen, gardeners, footmen,
grooms, and chauffeurs of automobile for family use.
(b) In a local college club or local chapter of a college fraternity
or sorority. (1) Services of a household nature performed by an employee
in or about the club rooms or house of a local college club or of a
local chapter of a college fraternity or sorority by which he is
employed are excepted from employment. A local college club or local
chapter of a college fraternity or sorority does not include an alumni
club or chapter. If the club rooms or house of a local college club or
local chapter of a college fraternity or sorority is used primarily for
the purpose of supplying board or lodging to students or the public as a
business enterprise, the services performed therein are not within the
exception.
(2) In general, services of a household nature in or about the club
rooms or house of a local college club or local chapter of a college
fraternity or sorority include services rendered by cooks, waiters,
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners,
housekeepers, and housemothers.
(c) Services not excepted. Services not of a household nature, such
as services performed as a private secretary, tutor, or librarian, even
though performed in the employer's private home or in a local college
club or local chapter of a college fraternity or sorority, are not
within the exception. Services of a household nature are not within the
exception if performed in or about rooming or lodging houses, boarding
houses, clubs (except local college clubs), hotels, hospitals,
eleemosynary institutions, or commercial offices or establishments.
Sec. 31.3306(c)(3)-1 Services not in the course of employer's trade or
business.
(a) Services not in the course of the employer's trade or business
performed by an employe for an employer in a calendar quarter are
excepted from employment unless--
(1) The cash remuneration paid for such services performed by the
employee for the employer in the calendar quarter is $50 or more; and
(2) Such employee is regularly employed in the calendar quarter by
such employer to perform such services.
Unless the tests set forth in both paragraphs (a)(1) and (2) of this
section are met, the services are excepted from employment.
[[Page 178]]
(b) The term ``services not in the course of the employer's trade or
business'' includes services that do not promote or advance the trade or
business of the employer. Services performed for a corporation do not
come within the exception.
(c) The test relating to cash remuneration of $50 or more is based
on the remuneration earned during a calendar quarter rather than on the
remuneration paid in a calendar quarter. However, for purposes of
determining whether the test is met, it is also required that the
remuneration be paid, although it is immaterial when the remuneration is
paid. Furthermore, in determining whether $50 or more has been paid for
services not in the course of the employer's trade or business, only
cash remuneration for such services shall be taken into account. The
term ``cash remuneration'' includes checks and other monetary media of
exchange. Remuneration paid in any other medium, such as lodging, food,
or other goods or commodities, is disregarded in determining whether the
cash-remuneration test is met.
(d) For purposes of this exception, an individual is deemed to be
regularly employed by an employer during a calendar quarter only if--
(1) Such individual performs services not in the course of the
employer's trade or business for such employer for some portion of the
day on at least 24 days (whether or not consecutive) during such
calendar quarter; or
(2) Such individual was regularly employed (as determined under
paragraph (d)(1) of this section) by such employer in the performance of
services not in the course of the employer's trade or business during
the preceding calendar quarter (including the last calendar quarter of
1954).
(e) In determining whether an employee has performed services not in
the course of the employer's trade or business on at least 24 days
during a calendar quarter, there shall be counted as one day--
(1) Any day or portion thereof on which the employee actually
performs such services; and
(2) Any day or portion thereof on which the employee does not
perform services of the prescribed character but with respect to which
cash remuneration is paid or payable to the employee for such services,
such as a day on which the employee is sick or on vacation.
An employee who on a particular day reports for work and, at the
direction of his employer, holds himself in readiness to perform
services not in the course of the employer's trade or business shall be
considered to be engaged in the actual performance of such services on
that day. For purposes of this exception, a day is a period of 24 hours
commencing at midnight and ending at midnight.
(f) For provisions relating to the exclusion from wages of
remuneration paid in any medium other than cash for services not in the
course of the employer's trade or business, see Sec. 31.3306(b) (7)-1.
Sec. 31.3306(c)(4)-1 Services on or in connection with a non-American
vessel or aircraft.
(a) Services performed within the United States by an employee for
an employer ``on or in connection with'' a vessel not an American
vessel, or ``on or in connection with'' an aircraft not an American
aircraft, are excepted from employment if the employee is employed by
the employer ``on and in connection with'' the vessel or aircraft when
outside the United States.
(b) An employee performs services on and in connection with the
vessel or aircraft if he performs services on the vessel or aircraft
when outside the United States which are also in connection with the
vessel or aircraft. Services performed on the vessel outside the United
States by employees as officers or members of the crew, or by employees
of concessionaires, of the vessel, for example, are performed under such
circumstances, since such services are also connected with the vessel.
Similarly, services performed on the aircraft outside the United States
by employees as officers or members of the crew of the aircraft are
performed on and in connection with such aircraft. Services may be
performed on the vessel or aircraft, however, which have no connection
with it, as in the case of services performed by an employee while on
the vessel or aircraft
[[Page 179]]
merely as a passenger in the general sense. For example, the services of
a buyer in the employ of a department store while he is a passenger on a
vessel are not in connection with the vessel.
(c) The expression ``on or in connection with'' refers not only to
services performed on the vessel or aircraft but also to services
connected with the vessel or aircraft which are not actually performed
on it (for example, shore services performed as officers or members of
the crew, or as employees of concessionaires, of the vessel).
(d) The citizenship or residence of the employee and the place where
the contract of service is entered into are immaterial for purposes of
this exception, and the citizenship or residence of the person employing
him is material only in case it has a bearing in determining whether the
vessel is an American vessel. For definitions of the terms ``vessel''
and ``aircraft'', see paragraph (c)(2)(v) of Sec. 31.3306(c)-2. For
definitions of the terms ``American vessel'' and ``American aircraft'',
see Sec. 31.3306(m)-1.
(e) Since the only services performed outside the United States
which constitute employment are those described in section 3306(c) and
paragraph (c) of Sec. 31.3306(c)-2 (relating to services performed
outside the United States on or in connection with an American vessel or
American aircraft), services performed outside the United States on or
in connection with a vessel not an American vessel, or an aircraft not
an American aircraft, do not constitute employment in any event.
(f) The provisions of section 3306(c) (4) and of this section,
insofar as they relate to services performed on or in connection with an
aircraft not an American aircraft, apply only to services performed
after 1961 for which remuneration is paid after 1961.
[T.D. 6658, 28 FR 6637, June 27, 1963]
Sec. 31.3306(c)(5)-1 Family employment.
(a) Certain services are excepted from employment because of the
existence of a family relationship between the employee and the
individual employing him. The exceptions are as follows:
(1) Services performed by an individual in the employ of his or her
spouse;
(2) Services performed by a father or mother in the employ of his or
her son or daughter; and
(3) Services performed by a son or daughter under the age of 21 in
the employ of his or her father or mother.
(b) Under paragraph (a) (1) and (2) of this section, the exception
is conditioned solely upon the family relationship between the employee
and the individual employing him. Under paragraph (a)(3) of this
section, in addition to the family relationship, there is a further
requirement that the son or daughter shall be under the age of 21, and
the exception continues only during the time that such son or daughter
is under the age of 21.
(c) [Reserved] For further guidance, see Sec. 31.3306(c)(5)-1T(c).
(d) [Reserved] For further guidance, see Sec. 31.3306(c)(5)-1T(d).
(e) [Reserved] For further guidance, see Sec. 31.3306(c)(5)-1T(e).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9554, 76 FR 67365, Nov. 1, 2011]
Sec. 31.3306(c)(5)-1T Family employment (temporary).
(a) [Reserved] For further guidance, see Sec. 31.3306(c)(5)-1(a).
(b) [Reserved] For further guidance, see Sec. 31.3306(c)(5)-1(b)
(c) Services performed in the employ of a corporation are not within
the exception, except as provided in paragraph (d) of this section.
Services performed in the employ of a partnership are not within the
exception unless the requisite family relationship exists between the
employee and each of the partners comprising the partnership.
(d) A disregarded entity that is treated as a corporation under
Sec. 301.7701-2(c)(2)(iv)(B) of this chapter (Procedure and
Administration Regulations) shall not be treated as a corporation for
purposes of applying section 3306(c)(5). For purposes of applying
section 3306(c)(5), the owner of the disregarded entity will be treated
as the employer.
(e) Paragraphs (c) and (d) of this section apply with respect to
wages paid on or after November 1, 2011. However, taxpayers may apply
paragraphs (c)
[[Page 180]]
and (d) of this section to wages paid on or after January 1, 2009.
(f) Expiration date. The applicability of paragraphs (c) and (d) of
this section expires on or before [October 31, 2014].
[T.D. 9554, 76 FR 67365, Nov. 1, 2011]
Sec. 31.3306(c)(6)-1 Services in employ of United States or
instrumentality thereof.
(a) Services in employ of United States or wholly-owned
instrumentality thereof. Services performed in the employ of the United
States Government, except as provided in section 3306(n) (see Sec.
31.3306(n)-1), are excepted from employment. Services performed in the
employ of an instrumentality of the United States which is wholly owned
by the United States also are excepted from employment.
(b) Services in employ of instrumentality not wholly owned by United
States--(1) Services performed after 1961. Services performed after 1961
in the employ of an instrumentality of the United States which is
partially owned by the United States are excepted from employment, if
the remuneration for such service is paid after 1961. Services performed
after 1961 in the employ of an instrumentality of the United States
which is neither wholly owned nor partially owned by the United States
are excepted from employment if (i) the instrumentality is exempt from
the tax imposed by section 3301 by virtue of any provision of law which
specifically refers to section 3301 or the corresponding section of
prior law in granting exemption from such tax, and (ii) the remuneration
for such service is paid after 1961. For provisions which make general
exemptions from Federal taxation ineffectual as to the tax imposed by
section 3301, see Sec. 31.3308-1.
(2) Services performed before 1962. Services performed in the employ
of an instrumentality of the United States which is not wholly owned by
the United States are excepted from employment if the instrumentality is
exempt from the tax imposed by section 3301 by virtue of any other
provision of law, and (i) the services are performed before 1962 or (ii)
remuneration for the services is paid before 1962.
[T.D. 6658, 28 FR 6638, June 27, 1963]
Sec. 31.3306(c)(7)-1 Services in employ of States or their political
subdivisions or instrumentalities.
(a) Services performed in the employ of any State, or of any
political subdivision thereof, are excepted from employment. Services
performed in the employ of an instrumentality of one or more States or
political subdivisions thereof are excepted if the instrumentality is
wholly owned by one or more of the foregoing. Services performed in the
employ of an instrumentality of one or more of the several States or
political subdivisions thereof which is not wholly owned by one or more
of the foregoing are excepted only to the extent that the
instrumentality is with respect to such services immune under the
Constitution of the United States from the tax imposed by section 3301.
(b) For provisions relating to the term ``State'' see Sec.
31.3306(j)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6638, June 27, 1963]
Sec. 31.3306(c)(8)-1 Services in employ of religious, charitable,
educational, or certain other organizations exempt from income tax.
(a) Services performed after 1961. Services performed by an employee
after 1961 in the employ of a religious, charitable, educational, or
other organization described in section 501(c)(3) which is exempt from
income tax under section 501(a) are excepted from employment, if the
remuneration for such service is paid after 1961. For provisions
relating to exemption from income tax of an organization described in
section 501(c) (3), see Part 1 of this chapter (Income Tax Regulations).
(b) Services performed before 1962. (1) Services performed by an
employee in the employ of an organization described in section
3306(c)(8) as in effect before 1962, that is, a corporation, community
chest, fund, or foundation, organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary,
or educational purposes, or for the prevention of cruelty to children or
animals, no part of the net earnings of which inures to the benefit of
any private shareholder or individual, and no substantial
[[Page 181]]
part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation, are excepted from employment if
(i) the services are performed before 1962, or (ii) remuneration for the
services is paid before 1962.
(2) Any organization which is an organization of a type described in
section 501(c)(3) and which--
(i) Is exempt from income tax under section 501(a), or
(ii) Has been denied exemption from income tax under section 501(a)
by reason of the provisions of section 503 or 504, relating to
prohibited transactions and to accumulations out of income,
respectively,
is an organization of a type described in section 3306(c)(8) as in
effect before 1962. An organization which would be an organization of a
type described in section 501(c)(3) except for those provisions of
section 501(c)(3) which are not contained in section 3306(c)(8) as in
effect before 1962 (provisions relating to participation or intervention
in a political campaign on behalf of a candidate for public office) is
also an organization of a type described in section 3306(c)(8) as in
effect before 1962.
[T.D. 6658, 28 FR 6638, June 27, 1963]
Sec. 31.3306(c)(9)-1 Railroad industry; services performed by an
employee or an employee representative under the Railroad Unemployment
Insurance Act.
(a) Services performed by an individual as an ``employee'' or as an
``employee representative'', as those terms are defined in section 1 of
the Railroad Unemployment Insurance Act, as amended, are excepted from
employment.
(b) Section 1 of the Railroad Unemployment Insurance Act (45 U.S.C.
351), as amended, provides, in part, as follows:
For the purposes of this Act, except when used in amending the
provisions of other Acts--
(a) The term ``employer'' means any carrier (as defined in
subsection (b) of this section), and any company which is directly or
indirectly owned or controlled by one or more such carriers or under
common control therewith, and which operates any equipment or facility
or performs any service (except trucking service, casual service, and
the casual operation of equipment or facilities) in connection with the
transportation of passengers or property by railroad, or the receipt,
delivery elevation, transfer in transit, refrigeration or icing,
storage, or handling of property transported by railroad, and any
receiver, trustee, or other individual or body, judicial or otherwise,
when in the possession of the property or operating all or any part of
the business of any such employer: Provided, however, That the term
``employer'' shall not include any street, interurban, or suburban
electric railway, unless such railway is operating as a part of a
general steam-railroad system of transportation, but shall not exclude
any part of the general steam-railroad system of transportation now or
hereafter operated by any other motive power. The Interstate Commerce
Commission is hereby authorized and directed upon request of the Board,
or upon complaint of any party interested, to determine after hearing
whether any line operated by electric power falls within the terms of
this proviso. The term ``employer'' shall also include railroad
associations, traffic associations, tariff bureaus, demurrage bureaus,
weighing and inspection bureaus, collection agencies, and other
associations, bureaus, agencies, or organizations controlled and
maintained wholly or principally by two or more employers as
hereinbefore defined and engaged in the performance of services in
connection with or incidental to railroad transportation and railway
labor organizations, national in scope, which have been or may be
organized in accordance with the provisions of the Railway Labor Act,
and their State and National legislative committees and their general
committees and their insurance departments and their local lodges and
divisions, established pursuant to the constitution and bylaws of such
organizations. The term ``employer'' shall not include any company by
reason of its being engaged in the mining of coal, the supplying of coal
to an employer where delivery is not beyond the mine tipple, and the
operation of equipment or facilities therefor, or in any of such
activities.
(b) The term ``carrier'' means an express company, sleeping-car
company, or carrier by railroad, subject to part I of the Interstate
Commerce Act.
(c) The term ``company'' includes corporations, associations, and
joint-stock companies.
(d) The term ``employee'' (except when used in phrases establishing
a different meaning) means any individual who is or has been (i) in the
service of one or more employers for compensation, or (ii) an employee
representative. The term ``employee'' shall include an employee of a
local lodge or division defined as an employer in section 1 (a) only if
he was in the service of a carrier on or after August 29, 1935. The term
``employee'' includes an officer of an employer.
[[Page 182]]
The term ``employee'' shall not include any individual while such
individual is engaged in the physical operations consisting of the
mining of coal, the preparation of coal, the handling (other than
movement by rail with standard railroad locomotives) of coal not beyond
the mine tipple, or the loading of coal at the tipple.
(e) An individual is in the service of an employer whether his
service is rendered within or without the United States if (i) he is
subject to the continuing authority of the employer to supervise and
direct the manner of rendition of his service, or he is rendering
professional or technical services and is integrated into the staff of
the employer, or he is rendering, on the property used in the employer's
operations, other personal services the rendition of which is integrated
into the employer's operations, and (ii) he renders such service for
compensation: Provided, however, That an individual shall be deemed to
be in the service of an employer, other than a local lodge or division
or a general committee of a railway-labor-organization employer, not
conducting the principal part of its business in the United States only
when he is rendering service to it in the United States; and an
individual shall be deemed to be in the service of such a local lodge or
division only if (1) all, or substantially all, the individuals
constituting its membership are employees of an employer conducting the
principal part of its business in the United States; or (2) the
headquarters of such local lodge or division is located in the United
States; and an individual shall be deemed to be in the service of such a
general committee only if (1) he is representing a local lodge or
division described in clauses (1) or (2) immediately above; or (2) all,
or substantially all, the individuals represented by it are employees of
an employer conducting the principal part of its business in the United
States; or (3) he acts in the capacity of a general chairman or an
assistant general chairman of a general committee which represents
individuals rendering service in the United States to an employer, but
in such case if his office or headquarters is not located in the United
States and the individuals represented by such general committee are
employees of an employer not conducting the principal part of its
business in the United States, only such proportion of the remuneration
for such service shall be regarded as compensation as the proportion
which the mileage in the United States under the jurisdiction of such
general committee bears to the total mileage under its jurisdiction,
unless such mileage formula is inapplicable, in which case the Board may
prescribe such other formula as it finds to be equitable, and if the
application of such mileage formula, or such other formula as the Board
may prescribe, would result in the compensation of the individual being
less than 10 per centum of his remuneration for such service no part of
such remuneration shall be regarded as compensation: Provided further,
That an individual not a citizen or resident of the United States shall
not be deemed to be in the service of an employer when rendering service
outside the United States to an employer who is required under the laws
applicable in the place where the service is rendered to employ therein,
in whole or in part, citizens or residents thereof.
(f) The term ``employee representative'' means any officer or
official representative of a railway labor organization other than a
labor organization included in the term employer as defined in section
1(a) who before or after August 29, 1935, was in the service of an
employer as defined in section 1(a) and who is duly authorized and
designated to represent employees in accordance with the Railway Labor
Act, and any individual who is regularly assigned to or regularly
employed by such officer or official representative in connection with
the duties of his office.
* * * * *
(i) The term ``compensation'' means any form of money remuneration,
including pay for time lost but excluding tips, paid for services
rendered as an employee to one or more employers, or as an employee
representative: Provided, however, That in computing the compensation
paid to any employee, no part of any month's compensation in excess of
$300 for any month before July 1, 1954, or in excess of $350 for any
month after June 30, 1954, and before the calendar month next following
the month [May] in which this Act was amended in 1959, or in excess of
$400 for any month after the month [May] in which this Act was so
amended, shall be recognized. A payment made by an employer to an
individual through the employer's pay roll shall be presumed, in the
absence of evidence to the contrary, to be compensation for service
rendered by such individual as an employee of the employer in the period
with respect to which the payment is made. An employee shall be deemed
to be paid, ``for time lost'' the amount he is paid by an employer with
respect to an identifiable period of absence from the active service of
the employer, including absence on account of personal injury, and the
amount he is paid by the employer for loss of earnings resulting from
his displacement to a less remunerative position or occupation. If a
payment is made by an employer with respect to a personal injury and
includes pay for time lost, the total payment shall be deemed to be paid
for time lost unless, at the time of payment, a part of such payment is
specifically apportioned to factors other than time lost, in which event
only such part of the payment as is not so
[[Page 183]]
apportioned shall be deemed to be paid for time lost. Compensation
earned in any calendar month before 1947 shall be deemed paid in such
month regardless of whether or when payment will have been in fact made,
and compensation earned in any calendar year after 1946 but paid after
the end of such calendar year shall be deemed to be compensation paid in
the calendar year in which it will have been earned if it is so reported
by the employer before February 1 of the next succeeding calendar year
or, if the employee establishes, subject to the provisions of section 8,
the period during which such compensation will have been earned.
* * * * *
(r) The term ``Board'' means the Railroad Retirement Board.
(s) The term ``United States'', when used in a geographical sense,
means the States, Alaska, Hawaii, and the District of Columbia.
* * * * *
(Sec. 1, Railroad Unemployment Insurance Act, as amended by secs. 1 and
2, Act of June 20, 1939, 53 Stat. 845; secs. 1 and 3, Act of Aug. 13,
1940, 54 Stat. 785, 786; sec. 15, Act of Apr. 8, 1942, 56 Stat. 210;
secs. 1 and 2, Act of July 31, 1946, 60 Stat. 722; sec. 302, Act of Aug.
31, 1954, 68 Stat. 1040; sec. 301, Act of May 19, 1959, Pub. L. 86-28,
73 Stat. 30)
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR
6638, June 27, 1963]
Sec. 31.3306(c)(10)-1 Services in the employ of certain organizations
exempt from income tax.
(a) In general. (1) This section deals with the exception from
employment of certain services performed in the employ of any
organization exempt from income tax under section 501(a) (other than an
organization described in section 401(a)) or under section 521. (See the
provisions of Sec. Sec. 1.401-1, 1.501(a)-1, and 1.521-1 of this
chapter (Income Tax Regulations).) If the services meet the tests set
forth in paragraphs (b), (c), (d), or (e) of this section, the services
are excepted.
(2) See also Sec. 31.3306(c)(8)-1 for provisions relating to the
exception of services performed in the employ of religious, charitable,
educational, or certain other organizations exempt from income tax;
Sec. 31.3306(c)(10)-2 for provisions relating to the exception of
services performed by certain students in the employ of a school,
college, or university; and Sec. 31.3306(c)(10)-3 for provisions
relating to the exception of services performed before 1962 in the
employ of certain employees' beneficiary associations.
(b) Remuneration less than $50 for calendar quarter. Services
performed by an employee in a calendar quarter in the employ of an
organization exempt from income tax under section 501(a) (other than an
organization described in section 401(a)) or under section 521 are
excepted from employment, if the remuneration for the service is less
than $50. The test relating to remuneration of $50 is based on the
remuneration earned during a calendar quarter rather than on the
remuneration paid in a calendar quarter. The exception applies
separately with respect to each organization for which the employee
renders services in a calendar quarter. The type of services performed
by the employee and the place where the services are performed are
immaterial; the statutory tests are the character of the organization in
the employ of which the services are performed and the amount of the
remuneration for services performed by the employee in the calendar
quarter.
Example 1. X is a local lodge of a fraternal organization and is
exempt from income tax under section 501(a) as an organization of the
character described in section 501 (c)(8). X has a number of paid
employees, among them being A who serves exclusively as recording
secretary for the lodge, and B who performs services for the lodge as
janitor of its clubhouse. For services performed during the first
calendar quarter of 1955 (that is, January 1, 1955, through March 31,
1955, both dates inclusive) A earns a total of $30. For services
performed during the same calendar quarter B earns $180. Since the
remuneration for the services performed by A during such quarter is less
than $50, all of such services are excepted. Thus, A is not counted as
an employee in employment on any of the days during such quarter for
purposes of determining whether the X organization is an employer (see
Sec. 31.3306(a)-1). Even though it is subsequently determined that X is
an employer, A's remuneration of $30 for services performed during the
first calendar quarter of such year is not subject to tax. B's services,
however, are not excepted during such quarter since the remuneration
therefor is not less than $50. Thus, B is counted as an employee in
employment during all of such quarter for purposes of determining
whether
[[Page 184]]
the X organization is an employer. If it is determined that the X
organization is an employer, B's remuneration of $180 for services
performed during the first calendar quarter is included in computing the
tax.
Example 2. The facts are the same as in example 1, above, except
that on April 1, 1955, A's salary is increased and, for services
performed during the calendar quarter beginning on that date (that is,
April 1, 1955, through June 30, 1955, both dates inclusive), A earns
$60. Although all of the services performed by A during the first
quarter were excepted, none of A's services performed during the second
quarter are excepted since the remuneration for such services is not
less than $50. A, therefore, is counted as an employee in employment
during all of the second quarter for the purpose of determining whether
the X organization is an employer. If it is determined that the X
organization is an employer, A's remuneration of $60 for services
performed during the second calendar quarter is included in computing
the tax.
Example 3. The facts are the same as in example 1, above, except
that A earns $120 for services performed during the year 1955, and such
amount is paid to him in a lump sum at the end of the year. The services
performed by A in any calendar quarter during the year are excepted if
the portion of the $120 attributable to services performed in that
quarter is less than $50. In such case, A is not counted as an employee
in employment on any of the days during such quarter for purposes of
determining whether the X organization is an employer. If, however, the
portion of the $120 attributable to services performed in any calendar
quarter during the year is not less than $50, the services during that
quarter are not excepted. In the latter case, A is counted as an
employee in employment during all of such quarter and, if it is
determined that the X organization is an employer, that portion of the
$120 attributable to services performed in such quarter is included in
computing the tax.
(c) Collection of dues or premiums for fraternal beneficiary
societies, and ritualistic services in connection with such societies,
before 1962. The following services performed by an employee in the
employ of a fraternal beneficiary society, order, or association exempt
from income tax under section 501(a) are excepted from employment if the
services are performed before 1962 or if remuneration for the services
is paid before 1962:
(1) Services performed away from the home office of such a society,
order, or association in connection with the collection of dues or
premiums for such society, order, or association; and
(2) Ritualistic services (wherever performed) in connection with
such a society, order, or association.
For purposes of the paragraph the amount of the remuneration for
services performed by the employee in the calendar quarter is
immaterial; the tests are the character of the organization in whose
employ the services are performed, the type of services, and, in the
case of collection of dues or premiums, the place where the services are
performed.
(d) Students employed before 1962. (1) Services performed in the
employ of an organization exempt from income tax under section 501(a)
(other than an organization described in section 401(a)) or under
section 521 by a student who is enrolled and is regularly attending
classes at a school, college, or university, are excepted from
employment if the services are performed before 1962 or if remuneration
for the services is paid before 1962. For purposes of this paragraph,
the amount of remuneration for services performed by the employee in the
calendar quarter, the type of services, and the place where the services
are performed are immaterial; the tests are the character of the
organization in whose employ the services are performed and the status
of the employee as a student enrolled and regularly attending classes at
a school, college, or university.
(2) The term ``school, college, or university'' as used in this
paragraph is to be taken in its commonly or generally accepted sense.
For provisions relating to services performed before 1962 by a student
enrolled and regularly attending classes at a school, college, or
university not exempt from income tax in the employ of such school,
college, or university, see paragraph (b) of Sec. 31.3306(c)(10)-2. For
provisions relating to services performed after 1961 by a student
enrolled and regularly attending classes at a school, college, or
university in the employ of such school, college, or university, see
paragraph (a) or Sec. 31.3306(c)(10)-2.
(e) Services performed before 1962 in employ of agricultural or
horticultural organization exempt from income tax. (1) Services
performed by an employee in
[[Page 185]]
the employ of an agricultural or horticultural organization which is
described in section 501(c)(5) and the regulations thereunder and which
is exempt from income tax under section 501(a) are excepted from
employment if the services are performed before 1962 or if remuneration
for the services is paid before 1962.
(2) For purposes of this paragraph, the type of services performed
by the employee, the amount of remuneration for the services, and the
place where the services are performed are immaterial; the test is the
character of the organization in whose employ the services are
performed.
[T.D. 6658, 28 FR 6639, June 27, 1963]
Sec. 31.3306(c)(10)-2 Services of student in employ of school,
college, or university.
(a) Services performed after 1961. Services performed after 1961 in
the employ of a school, college, or university, by a student who is
enrolled and is regularly attending classes at the school, college, or
university, are excepted from employment (whether or not the school,
college, or university is exempt from income tax), if remuneration for
the services is paid after 1961.
(b) Services performed before 1962. Services performed in the employ
of a school, college, or university not exempt from income tax under
section 501(a), by a student who is enrolled and is regularly attending
classes at the school, college, or university, are excepted from
employment if the services are performed before 1962 or if remuneration
for the services is paid before 1962.
(c) General rule. (1) For purposes of this section, the tests are
the character of the organization in the employ of which the services
are performed and the status of the employee as a student enrolled and
regularly attending classes at the school, college, or university
described in paragraph (c)(2) of this section, in the employ of which
the employee performs the services. If an employee has the status of a
student within the meaning of paragraph (d) of this section, the type of
services performed by the employee, the place where the services are
performed, and the amount of remuneration for services performed by the
employee are not material.
(2) School, college, or university. An organization is a school,
college, or university within the meaning of section 3306(c)(10)(B) if
its primary function is the presentation of formal instruction, it
normally maintains a regular faculty and curriculum, and it normally has
a regularly enrolled body of students in attendance at the place where
its educational activities are regularly carried on. See section
170(b)(1)(A)(ii) and the regulations thereunder.
(d) Student Status--general rule. Whether an employee has the status
of a student within the meaning of section 3306(c)(10)(B) performing the
services shall be determined based on the relationship of the employee
with the organization for which the services are performed. In order to
have the status of a student within the meaning of section
3306(c)(10)(B), the employee must perform services in the employ of a
school, college, or university described in paragraph (c)(2) of this
section at which the employee is enrolled and regularly attending
classes in pursuit of a course of study within the meaning of paragraphs
(d)(1) and (2) of this section. In addition, the employee's services
must be incident to and for the purpose of pursuing a course of study at
such school, college, or university within the meaning of paragraph
(d)(3) of this section.
(1) Enrolled and regularly attending classes. An employee must be
enrolled and regularly attending classes at a school, college, or
university within the meaning of paragraph (c)(2) of this section at
which the employee is employed to have the status of a student within
the meaning of section 3306(c)(10)(B). An employee is enrolled within
the meaning of section 3306(c)(10)(B) if the employee is registered for
a course or courses creditable toward an educational credential
described in paragraph (d)(2) of this section. In addition, the employee
must be regularly attending classes to have the status of a student. For
purposes of this paragraph (d)(1), a class is an instructional activity
led by a faculty member or other qualified individual hired by the
school, college, or
[[Page 186]]
university within the meaning of paragraph (c)(2) of this section for
identified students following an established curriculum. The frequency
of these and similar activities determines whether an employee may be
considered to be regularly attending classes.
(2) Course of study. An employee must be pursuing a course of study
in order to have the status of a student within the meaning of section
3306(c)(10)(B). A course of study is one or more courses the completion
of which fulfills the requirements necessary to receive an educational
credential granted by a school, college, or university within the
meaning of paragraph (c)(2) of this section. For purposes of this
paragraph, an educational credential is a degree, certificate, or other
recognized educational credential granted by an organization described
in paragraph (c)(2) of this section. In addition, a course of study is
one or more courses at a school, college or university within the
meaning of paragraph (c)(2) of this section the completion of which
fulfills the requirements necessary for the employee to sit for an
examination required to receive certification by a recognized
organization in a field.
(3) Incident to and for the purpose of pursuing a course of study.
(i) General rule. An employee's services must be incident to and for the
purpose of pursuing a course of study in order for the employee to have
the status of a student. Whether an employee's services are incident to
and for the purpose of pursuing a course of study shall be determined on
the basis of the relationship of the employee with the organization for
which such services are performed as an employee. The educational aspect
of the relationship between the employer and the employee, as compared
to the service aspect of the relationship, must be predominant in order
for the employee's services to be incident to and for the purpose of
pursuing a course of study. The educational aspect of the relationship
is evaluated based on all the relevant facts and circumstances related
to the educational aspect of the relationship. The service aspect of the
relationship is evaluated based on all the relevant facts and
circumstances related to the employee's employment. The evaluation of
the service aspect of the relationship is not affected by the fact that
the services performed by the employee may have an educational,
instructional, or training aspect. Except as provided in paragraph
(d)(3)(iii) of this section, whether the educational aspect or the
service aspect of an employee's relationship with the employer is
predominant is determined by considering all the relevant facts and
circumstances. Relevant factors in evaluating the educational and
service aspects of an employee's relationship with the employer are
described in paragraphs (d)(3)(iv) and (v) of this section respectively.
There may be facts and circumstances that are relevant in evaluating the
educational and service aspects of the relationship in addition to those
described in paragraphs (d)(3)(iv) and (v) of this section.
(ii) Student status determined with respect to each academic term.
Whether an employee's services are incident to and for the purpose of
pursuing a course of study is determined separately with respect to each
academic term. If the relevant facts and circumstances with respect to
an employee's relationship with the employer change significantly during
an academic term, whether the employee's services are incident to and
for the purpose of pursuing a course of study is reevaluated with
respect to services performed during the remainder of the academic term.
(iii) Full-time employee. The services of a full-time employee are
not incident to and for the purpose of pursuing a course of study. The
determination of whether an employee is a full-time employee is based on
the employer's standards and practices, except regardless of the
employer's classification of the employee, an employee whose normal work
schedule is 40 hours or more per week is considered a full-time
employee. An employee's normal work schedule is not affected by
increases in hours worked caused by work demands unforeseen at the start
of an academic term. However, whether an employee is a full-time
employee is reevaluated for the remainder of the academic term if the
employee changes employment positions with the employer. An employee's
work schedule during academic breaks is not considered in determining
[[Page 187]]
whether the employee's normal work schedule is 40 hours or more per
week. The determination of the employee's normal work schedule is not
affected by the fact that the services performed by the individual may
have an educational, instructional, or training aspect.
(iv) Evaluating educational aspect. The educational aspect of an
employee's relationship with the employer is evaluated based on all the
relevant facts and circumstances related to the educational aspect of
the relationship. The educational aspect of an employee's relationship
with the employer is generally evaluated based on the employee's course
workload. Whether an employee's course workload is sufficient in order
for the employee's employment to be incident to and for the purpose of
pursuing a course of study depends on the particular facts and
circumstances. A relevant factor in evaluating an employee's course
workload is the employee's course workload relative to a full-time
course workload at the school, college or university within the meaning
of paragraph (c)(2) of this section at which the employee is enrolled
and regularly attending classes.
(v) Evaluating service aspect. The service aspect of an employee's
relationship with the employer is evaluated based on the facts and
circumstances related to the employee's employment. Services of an
employee with the status of a full-time employee within the meaning of
paragraph (d)(3)(iii) of this section are not incident to and for the
purpose of pursuing a course of study. Relevant factors in evaluating
the service aspect of an employee's relationship with the employer are
described in paragraphs (d)(3)(v)(A), (B), and (C) of this section.
(A) Normal work schedule and hours worked. If an employee is not a
full-time employee within the meaning of paragraph (d)(3)(iii) of this
section, then the employee's normal work schedule and number of hours
worked per week are relevant factors in evaluating the service aspect of
the employee's relationship with the employer. As an employee's normal
work schedule or actual number of hours worked approaches 40 hours per
week, it is more likely that the service aspect of the employee's
relationship with the employer is predominant. The determination of the
employee's normal work schedule and actual number of hours worked is not
affected by the fact that some of the services performed by the
individual may have an educational, instructional, or training aspect.
(B) Professional employee. (1) If an employee has the status of a
professional employee, then that suggests that the service aspect of the
employee's relationship with the employer is predominant. A professional
employee is an employee--
(i) Whose primary duty consists of the performance of work requiring
knowledge of an advanced type in a field of science or learning
customarily acquired by a prolonged course of specialized intellectual
instruction and study, as distinguished from a general academic
education, from an apprenticeship, and from training in the performance
of routine mental, manual, or physical processes;
(ii) Whose work requires the consistent exercise of discretion and
judgment in its performance; and
(iii) Whose work is predominantly intellectual and varied in
character (as opposed to routine mental, manual, mechanical, or physical
work) and is of such character that the output produced or the result
accomplished cannot be standardized in relation to a given period of
time.
(2) Licensed, professional employee. If an employee is a licensed,
professional employee, then that further suggests the service aspect of
the employee's relationship with the employer is predominant. An
employee is a licensed, professional employee if the employee is
required to be licensed under state or local law to work in the field in
which the employee performs services and the employee is a professional
employee within the meaning of paragraph (d)(3)(v)(B)(1) of this
section.
(C) Employment Benefits. Whether an employee is eligible to receive
employment benefits is a relevant factor in evaluating the service
aspect of an employee's relationship with the employer. For example,
eligibility to receive vacation, paid holiday, and paid sick leave
benefits; eligibility to participate in a retirement plan described
[[Page 188]]
in section 401(a); or eligibility to receive employment benefits such as
reduced tuition, or benefits under section 79 (life insurance), 127
(qualified educational assistance), 129 (dependent care assistance
programs), or 137 (adoption assistance) suggest that the service aspect
of an employee's relationship with the employer is predominant.
Eligibility to receive health insurance employment benefits is not
considered in determining whether the service aspect of an employee's
relationship with the employer is predominant. The weight to be given
the fact that an employee is eligible for a particular benefit may vary
depending on the type of employment benefit. For example, eligibility to
participate in a retirement plan is generally more significant than
eligibility to receive a dependent care employment benefit. Additional
weight is given to the fact that an employee is eligible to receive an
employment benefit if the benefit is generally provided by the employer
to employees in positions generally held by non-students.
(e) Effective date. Paragraphs (c) and (d) of this section apply to
services performed on or after April 1, 2005.
[T.D. 6658, 28 FR 6640, June 27, 1963, as amended by T.D. 9167, 69 FR
76410, Dec. 21, 2004]
Sec. 31.3306(c)(10)-3 Services before 1962 in employ of certain
employees' beneficiary associations.
(a) Voluntary employees' beneficiary associations. Services
performed by an employee in the employ of a voluntary employees'
beneficiary association providing for the payment of life, sick,
accident, or other benefits to the members of such association or their
dependents are excepted from employment if--
(1) No part of its net earnings inures (other than through such
payments) to the benefit of any private shareholder or individual,
(2) 85 percent or more of the income consists of amounts collected
from members for the sole purpose of making such payments and meeting
expenses, and
(3) The services are performed before 1962, or remuneration for the
services is paid before 1962.
(b) Federal employees' beneficiary associations. Services performed
by an employee in the employ of a voluntary employees' beneficiary
association providing for the payment of life, sick, accident, or other
benefits to the members of such association or their dependents or their
designated beneficiaries are excepted from employment if--
(1) Admission to membership in the association is limited to
individuals who are officers or employees of the United States
Government,
(2) No part of the net earnings of the association inures (other
than through such payments) to the benefit of any private shareholder or
individual, and
(3) The services are performed before 1962, or remuneration for the
services is paid before 1962.
(c) Application of tests. For purposes of this section, the type of
services performed by the employee, the amount of remuneration for the
services, and the place where the services are performed are immaterial;
the test is the character of the organization in whose employ the
services are performed.
[T.D. 6658, 28 FR 6640, June 27, 1963]
Sec. 31.3306(c)(11)-1 Services in employ of foreign government.
(a) Services performed by an employee in the employ of a foreign
government are excepted from employment. The exception includes not only
services performed by ambassadors, ministers, and other diplomatic
officers and employees but also services performed as a consular or
other officer or employee of a foreign government, or as a nondiplomatic
representative thereof.
(b) For purposes of this exception, the citizenship or residence of
the employee is immaterial. It is also immaterial whether the foreign
government grants an equivalent exemption with respect to similar
services performed in the foreign country by citizens of the United
States.
Sec. 31.3306(c)(12)-1 Services in employ of wholly owned
instrumentality of foreign government.
(a) Services performed by an employee in the employ of certain
instrumentalities of a foreign government
[[Page 189]]
are excepted from employment. The exception includes all services
performed in the employ of an instrumentality of the government of a
foreign country, if--
(1) The instrumentality is wholly owned by the foreign government;
(2) The services are of a character similar to those performed in
foreign countries by employees of the United States Government or of an
instrumentality thereof; and
(3) The Secretary of State certifies to the Secretary of the
Treasury that the foreign government, with respect to whose
instrumentality exemption is claimed, grants an equivalent exemption
with respect to services performed in the foreign country by employees
of the United States Government and of instrumentalities thereof.
(b) For purposes of this exception, the citizenship or residence of
the employee is immaterial.
Sec. 31.3306(c)(13)-1 Services of student nurse or hospital intern.
(a) Services performed as a student nurse in the employ of a
hospital or a nurses' training school are excepted from employment, if
the student nurse is enrolled and regularly attending classes in a
nurses' training school and such nurses' training school is chartered or
approved pursuant to State law.
(b) Services performed as an intern (as distinguished from a
resident doctor) in the employ of a hospital are excepted from
employment, if the intern has completed a 4 years' course in a medical
school chartered or approved pursuant to State law.
Sec. 31.3306(c)(14)-1 Services of insurance agent or solicitor.
(a) Services performed for a person by an employee as an insurance
agent or insurance solicitor are excepted from employment, if all such
services performed for such person by such individual are performed for
remuneration solely by way of commission.
(b) If all or any part of the remuneration of an employee for
services performed as an insurance agent or insurance solicitor for a
person is a salary, none of his services performed as an insurance agent
or insurance solicitor for such person are excepted from employment, and
his total remuneration (for example, salary, or salary and commissions)
for such services is included for purposes of computing the tax.
Sec. 31.3306(c)(15)-1 Services in delivery or distribution of
newspapers, shopping news, or magazines.
(a) Services of individuals under age 18. Services performed by an
employee under the age of 18 in the delivery or distribution of
newspapers or shopping news, not including delivery or distribution (as,
for example, by a regional distributor) to any point for subsequent
delivery or distribution, are excepted from employment. Thus, the
services performed by an employee under the age of 18 in making house-
to-house delivery or sale of newspapers or shopping news, including
handbills and other similar types of advertising material, are excepted.
The services are excepted irrespective of the form or method of
compensation. Incidental services by the employee who makes the house-
to-house delivery, such as services in assembling newspapers, are
considered to be within the exception. The exception continues only
during the time that the employee is under the age of 18.
(b) Services of individuals of any age. Services performed by an
employee in, and at the time of, the sale of newspapers or magazines to
ultimate consumers under an arrangement under which the newspapers or
magazines are to be sold by him at a fixed price, his compensation being
based on the retention of the excess of such price over the amount at
which the newspapers or magazines are charged to him, are excepted from
employment. The services are excepted whether or not the employee is
guaranteed a minimum amount of compensation for such services, or is
entitled to be credited with the unsold newspapers or magazines turned
back. Moreover, the services are excepted without regard to the age of
the employee. Services performed other than at the time of sale to the
ultimate consumer are not within the exception. Thus, the services of a
regional distributor which are antecedent to but not immediately part of
the sale to the ultimate consumer are
[[Page 190]]
not within the exception. However, incidental services by the employee
who makes the sale to the ultimate consumer, such as services in
assembling newspapers or in taking newspapers or magazines to the place
of sale, are considered to be within the exception.
Sec. 31.3306(c)(16)-1 Services in employ of international
organization.
(a) Subject to the provisions of section 1 of the International
Organizations Immunities Act (22 U.S.C. 228), services performed in the
employ of an international organization as defined in section
7701(a)(18) are excepted from employment.
(b) (1) Section 701(a)(18) provides as follows:
Sec. 7701. Definitions. (a) When used in this title, where not
otherwise distinctly expressed or manifestly incompatible with the
intent thereof--
* * * * *
(18) International organization. The term ``international
organization'' means a public international organization entitled to
enjoy privileges, exemptions, and immunities as an international
organization under the International Organizations Immunities Act (22
U.S.C. 288-288f).
(2) Section 1 of the International Organizations Immunities Act
provides as follows:
Sec. 1. [International Organizations Immunities Act.] For the
purposes of this title [International Organizations Immunities Act], the
term ``international organization'' means a public international
organization in which the United States participates pursuant to any
treaty or under the authority of any Act of Congress authorizing such
participation or making an appropriation for such participation, and
which shall have been designated by the President through appropriate
Executive order as being entitled to enjoy the privileges, exemptions,
and immunities herein provided. The President shall be authorized, in
the light of the functions performed by any such international
organization, by appropriate Executive order to withhold or withdraw
from any such organization or its officers or employees any of the
privileges, exemptions, and immunities provided for in this title
(including the amendments made by this title) or to condition or limit
the enjoyment by any such organization or its officers or employees of
any such privilege, exemption, or immunity. The President shall be
authorized, if in his judgment such action should be justified by reason
of the abuse by an international organization or its officers and
employees of the privileges, exemptions, and immunities herein provided
or for any other reason, at any time to revoke the designation of any
international organization under this section, whereupon the
international organization in question shall cease to be classed as an
international organization for the purposes of this title.
Sec. 31.3306(c)(17)-1 Fishing services.
(a) In general. Subject to the limitations prescribed in paragraphs
(b) and (c) of this section, services described in this paragraph are
excepted from employment. Services performed by an individual in the
catching, taking, harvesting, cultivating, or farming of any kind of
fish, shell-fish (for example, oysters, clams, and mussels), crustacea
(for example, lobsters, crabs, and shrimps), sponges, seaweeds, or other
aquatic forms of animal and vegetable life are excepted. The exception
extends to services performed as an officer or member of the crew of a
vessel while the vessel is engaged in any such activity whether or not
the officer or member of the crew is himself so engaged. In the case of
an individual who is engaged in any such activity in the employ of any
person, the services performed, by such individual in the employ of such
person, as an ordinary incident to any such activity are also excepted.
Similarly, for example, the shore services of an officer or member of
the crew of a vessel engaged in any such activity are excepted if such
services are an ordinary incident to any such activity. Services
performed as an ordinary incident to any such activity may include, for
example, services performed in such cleaning, icing, and packing of fish
as are necessary for the immediate preservation of the catch.
(b) Salmon and halibut fishing. Services performed in connection
with the catching or taking of salmon or halibut, for commercial
purposes, are not within the exception. Thus, neither the services of an
officer or member of the crew of a vessel (irrespective of its tonnage)
which is engaged in the catching or taking of salmon or halibut, for
commercial purposes, nor the services of any other individual in
connection with such activity, are within the exception.
[[Page 191]]
(c) Vessels of more than 10 net tons. Services described in
paragraph (a) of this section performed on or in connection with a
vessel of more than 10 net tons are not within the exception. For
purposes of the exception, the tonnage of the vessel shall be determined
in the manner provided for determining the register tonnage of merchant
vessels under the laws of the United States.
Sec. 31.3306(c)(18)-1 Services of certain nonresident aliens.
(a) (1) Services performed after 1961 by a nonresident alien
individual who is temporarily present in the United States as a
nonimmigrant under subparagraph (F) or (J) of section 101(a) (15) of the
Immigration and Nationality Act (8 U.S.C. 1101), as amended, are
excepted from employment if the services are performed to carry out a
purpose for which the individual was admitted. For purposes of this
section an alien individual who is temporarily present in the United
States as a nonimmigrant under such subparagraph (F) or (J) is deemed to
be a nonresident alien individual. The preceding sentence does not apply
to the extent it is inconsistent with section 7701(b) and the
regulations under that section. A nonresident alien individual who is
temporarily present in the United States as a nonimmigrant under such
subparagraph (J) includes an alien individual admitted to the United
States as an ``exchange visitor'' under section 201 of the United States
Information and Educational Exchange Act of 1948 (22 U.S.C. 1446).
(2) If services are performed by a nonresident alien individual's
alien spouse or minor child, who is temporarily present in the United
States as a nonimmigrant under subparagraph (F) or (J) of section
101(a)(15) of the Immigration and Nationality Act, as amended, the
services are not deemed for purposes of this section to be performed to
carry out a purpose for which such individual was admitted. The services
of such spouse or child are excepted from employment under this section
only if the spouse or child was admitted for a purpose specified in such
subparagraph (F) or (J) and if the services are performed to carry out
such purpose.
(b) Section 101 of the Immigration and Nationality Act (8 U.S.C.
1101), as amended, provides, in part, as follows:
Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat.
166)]
(a) As used in this chapter--* * *
(15) The term immigrant means every alien except an alien who is
within one of the following classes of nonimmigrant aliens--
* * * * *
(F) (i) An alien having a residence in a foreign country which he
has no intention of abandoning, who is a bona fide student qualified to
pursue a full course of study and who seeks to enter the United States
temporarily and solely for the purpose of pursuing such a course of
study at an established institution of learning or other recognized
place of study in the United States, particularly designated by him and
approved by the Attorney General after consultation with the Office of
Education of the United States, which institution or place of study
shall have agreed to report to the Attorney General the termination of
attendance of each nonimmigrant student, and if any such institution of
learning or place of study fails to make reports promptly the approval
shall be withdrawn, and (ii) the alien spouse and minor children of any
such alien if accompanying him or following to join him;
* * * * *
(J) An alien having a residence in a foreign country which he has no
intention of abandoning who is a bona fide student, scholar, trainee,
teacher, professor, research assistant, specialist, or leader in a field
of specialized knowledge or skill, or other person of similar
description, who is coming temporarily to the United States as a
participant in a program designated by the Secretary of State, for the
purpose of teaching, instructing or lecturing, studying, observing,
conducting research, consulting, demonstrating special skills, or
receiving training, and the alien spouse and minor children of any such
alien if accompanying him or following to join him.
* * * * *
(Sec. 101, Immigration and Nationality Act, as amended by sec. 101, Act
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75
Stat. 534)
[T.D. 6658, 28 FR 6640, June 27, 1963, as amended by T.D. 8411, 57 FR
15241, Apr. 27, 1992]
[[Page 192]]
Sec. 31.3306(d)-1 Included and excluded service.
(a) If a portion of the services performed by an employee for the
person employing him during a pay period constitutes employment, and the
remainder does not constitute employment, all the services of the
employee during the period shall for purposes of the tax be treated
alike, that is, either all as included or all as excluded. The time
during which the employee performs services which under section 3306(c)
constitute employment, and the time during which he performs services
which under such section do not constitute employment, within the pay
period, determine whether all the services during the pay period shall
be deemed to be included or excluded.
(b) If one-half or more of the employee's time in the employ of a
particular person in a pay period is spent in performing services which
constitute employment, then all the services of that employee for that
person in that pay period shall be deemed to be employment.
(c) If less than one-half of the employee's time in the employ of a
particular person in a pay period is spent in performing services which
constitute employment, then none of the services of that employee for
that person in that pay period shall be deemed to be employment.
(d) The application of the provisions of paragraphs (a), (b), and
(c) of this section may be illustrated by the following examples:
Example 1. Employer B, who operates a farm and a store, employs A to
perform services in connection with both operations. A's services on the
farm are such that they are excepted as agricultural labor and do not
constitute employment, and his services in the store constitute
employment. He is paid at the end of each month. During a particular
month A works 120 hours on the farm and 80 hours in the store. None of
A's services during the month are deemed to be employment, since less
than one-half of his services during the month constitutes employment.
During another month A works 75 hours on the farm and 120 hours in the
store. All of A's services during the month are deemed to be employment,
since one-half or more of his services during the month constitutes
employment.
Example 2. Employee C is employed as a maid by D, a medical doctor,
whose home and office are located in the same building. C's services in
the home are excepted as domestic service and do not constitute
employment, and her services in the office constitute employment. She is
paid each week. During a particular week C works 20 hours in the home
and 20 hours in the office. All of C's services during that week are
deemed to be employment, since one-half or more of her services during
the week constitutes employment. During another week C works 22 hours in
the home and 15 hours in the office. None of C's services during that
week are deemed to be employment, since less than one-half of her
services during the week constitutes employment.
(e) For purposes of this section, a ``pay period'' is the period (of
not more than 31 consecutive calendar days) for which a payment of
remuneration is ordinarily made to the employee by the person employing
him. Thus, if the periods for which payments of remuneration are made to
the employee by such person are of uniform duration, each such period
constitutes a ``pay period''. If, however, the periods occasionally vary
in duration, the ``pay period'' is the period for which a payment of
remuneration is ordinarily made to the employee by such person, even
though that period does not coincide with the actual period for which a
particular payment of remuneration is made. For example, if a person
ordinarily pays a particular employee for each calendar week at the end
of the week, but the employee receives a payment in the middle of the
week for the portion of the week already elapsed and receives the
remainder at the end of the week, the ``pay period'' is still the
calendar week; or if, instead, that employee is sent on a trip by such
person and receives at the end of the third week a single remuneration
payment for 3 weeks' services, the ``pay period'' is still the calendar
week.
(f) If there is only one period (and such period does not exceed 31
consecutive calendar days) for which a payment of remuneration is made
to the employee by the person employing him, such period is deemed to be
a ``pay period'' for purposes of this section.
(g) The rules set forth in this section do not apply (1) with
respect to any services performed by the employee for
[[Page 193]]
the person employing him if the periods for which such person makes
payments of remuneration to the employee vary to the extent that there
is no period ``for which a payment of remuneration is ordinarily made to
the employee,'' or (2) with respect to any services performed by the
employee for the person employing him if the period for which a payment
of remuneration is ordinarily made to the employee by such person
exceeds 31 consecutive calendar days, or (3) with respect to any service
performed by the employee for the person employing him during a pay
period if any of such service is excepted by section 3306(c) (9) (see
Sec. 31.3306(c) (9)-1).
(h) If during any period for which a person makes a payment of
remuneration to an employee only a portion of the employee's services
constitutes employment, but the rules prescribed in this section are not
applicable, the tax attaches with respect to such services as constitute
employment as defined in section 3306(c) (provided such person is an
employer as defined in section 3306(a) and Sec. 31.3306(a)-1).
Sec. 31.3306(i)-1 Who are employees.
(a) Every individual is an employee if the relationship between him
and the person for whom he performs services is the legal relationship
of employer and employee. (The word ``employer'' as used in this section
only, notwithstanding the provisions of Sec. 31.3306(a)-1, includes a
person who employs one or more employees.)
(b) Generally such relationship exists when the person for whom
services are performed has the right to control and direct the
individual who performs the services, not only as to the result to be
accomplished by the work but also as to the details and means by which
that result is accomplished. That is, an employee is subject to the will
and control of the employer not only as to what shall be done but how it
shall be done. In this connection, it is not necessary that the employer
actually direct or control the manner in which the services are
performed; it is sufficient if he has the right to do so. The right to
discharge is also an important factor indicating that the person
possessing that right is an employer. Other factors characteristic of an
employer, but not necessarily present in every case, are the furnishing
of tools and the furnishing of a place to work, to the individual who
performs the services. In general, if an individual is subject to the
control or direction of another merely as to the result to be
accomplished by the work and not as to the means and methods for
accomplishing the result, he is an independent contractor. An individual
performing services as an independent contractor is not as to such
services an employee. Individuals such as physicians, lawyers, dentists,
veterinarians, construction contractors, public stenographers, and
auctioneers, engaged in the pursuit of an independent trade, business,
or profession, in which they offer their services to the public, are
independent contractors and not employees.
(c) Whether the relationship of employer and employee exists will in
doubtful cases be determined upon an examination of the particular facts
of each case.
(d) If the relationship of employer and employee exists, the
designation or description of the relationship by the parties as
anything other than that of employer and employee is immaterial. Thus,
if such relationship exists, it is of no consequence that the employee
is designated as a partner, coadventurer, agent, independent contractor,
or the like.
(e) All classes or grades of employees are included within the
relationship of employer and employee. Thus, superintendents, managers,
and other supervisory personnel are employees. Generally, an officer of
a corporation is an employee of the corporation. However, an officer of
a corporation who as such does not perform any services or performs only
minor services and who neither receives nor is entitled to receive,
directly or indirectly, any remuneration is considered not to be an
employee of the corporation. A director of a corporation in his capacity
as such is not an employee of the corporation.
(f) Although an individual may be an employee under this section,
his services may be of such a nature, or performed under such
circumstances, as
[[Page 194]]
not to constitute employment (see Sec. 31.3306(c)-2).
Sec. 31.3306(j)-1 State, United States, and citizen.
(a) When used in the regulations in this subpart, the term ``State''
includes the District of Columbia, the Territories of Alaska and Hawaii
before their admission as States, and (when used with respect to
remuneration paid after 1960 for services performed after 1960) the
Commonwealth of Puerto Rico.
(b) When used in the regulations in this subpart, the term ``United
States'', when used in a geographical sense, means the several States
(including the Territories of Alaska and Hawaii before their admission
as States), and the District of Columbia. When used in the regulations
in this subpart with respect to remuneration paid after 1960 for
services performed after 1960, the term ``United States'' also includes
the Commonwealth of Puerto Rico when the term is used in a geographical
sense, and the term ``citizen of the United States'' includes a citizen
of the Commonwealth of Puerto Rico.
[T.D. 6658, 28 FR 6641, June 27, 1963]
Sec. 31.3306(k)-1 Agricultural labor.
(a) In general. (1) Services performed by an employee for the person
employing him which constitute ``agricultural labor'' as defined in
section 3306(k) are excepted from employment by reason of section
3306(c)(1). See Sec. 31.3306(c)(1)-1. The term ``agricultural labor''
as defined in section 3306(k) includes services of the character
described in paragraphs (b), (c), (d), and (e) of this section. In
general, however, the term does not include services performed in
connection with forestry, lumbering, or landscaping.
(2) The term ``farm'' as used in this subpart includes stock, dairy,
poultry, fruit, fur-bearing animal, and truck farms, plantations,
ranches, nurseries, ranges, orchards, and such greenhouses and other
similar structures as are used primarily for the raising of agricultural
or horticultural commodities. Greenhouses and other similar structures
used primarily for other purposes (for example, display, storage, and
fabrication of wreaths, corsages, and bouquets) do not constitute
``farms''.
(b) Services described in section 3306(k)(1). Services performed on
a farm by an employee of any person in connection with any of the
following activities constitute agricultural labor:
(1) The cultivation of the soil;
(2) The raising, shearing, feeding, caring for, training, or
management of livestock, bees, poultry, fur-bearing animals, or
wildlife; or
(3) The raising or harvesting of any other agricultural or
horticultural commodity.
(c) Services described in section 3306(k)(2). (1) The following
services performed by an employee in the employ of the owner or tenant
or other operator of one or more farms constitute agricultural labor, if
the major part of such services is performed on a farm:
(i) Services performed in connection with the operation, management,
conservation, improvement, or maintenance of any such farms or its tools
or equipment; or
(ii) Services performed in salvaging timber, or clearing land of
brush and other debris, left by a hurricane.
(2) The services described in paragraph (c)(1)(i) of this section
may include, for example, services performed by carpenters, painters,
mechanics, farm supervisors, irrigation engineers, bookkeepers, and
other skilled or semiskilled workers, which contribute in any way to the
conduct of the farm or farms, as such, operated by the person employing
them, as distinguished from any other enterprise in which such person
may be engaged.
(3) Since the services described in this paragraph must be performed
in the employ of the owner or tenant or other operator of the farm,
services performed by employees of a commercial painting concern, for
example, which contracts with a farmer to renovate his farm properties,
do not constitute agricultural labor.
(d) Services described in section 3306(k)(3). Services performed by
an employee in the employ of any person in connection with any of the
following operations constitute agricultural labor without regard to the
place where such services are performed:
[[Page 195]]
(1) The ginning of cotton;
(2) The hatching of poultry;
(3) The raising or harvesting of mushrooms;
(4) The operation or maintenance of ditches, canals, reservoirs, or
waterways used exclusively for supplying or storing water for farming
purposes;
(5) The production or harvesting of maple sap or the processing of
maple sap into maple sirup or maple sugar (but not the subsequent
blending or other processing of such sirup or sugar with other
products); or
(6) The production or harvesting of crude gum (oleoresin) from a
living tree or the processing of such crude gum into gum spirits of
turpentine and gum rosin provided such processing is carried on by the
original producer of such crude gum.
(e) Services described in section 3306(k)(4). (1)(i) Services
performed by an employee in the employ of a farmer or a farmers'
cooperative organization or group in the handling, planting, drying,
packing, packaging, processing, freezing, grading, storing, or
delivering to storage or to market or to a carrier for transportation to
market, of any agricultural or horticultural commodity, other than
fruits and vegetables (see paragraph (e)(2) of this section), produced
by such farmer or farmer-members of such organization or group of
farmers constitute agricultural labor, if such services are performed as
an incident to ordinary farming operations.
(ii) Generally services are performed ``as an incident to ordinary
farming operations'' within the meaning of this paragraph if they are
services of the character ordinarily performed by the employees of a
farmer or of a farmers' cooperative organization or group as a
prerequisite to the marketing, in its unmanufactured state, of any
agricultural or horticultural commodity produced by such farmer or by
the members of such farmers' organization or group. Services performed
by employees of such farmer or farmers' organization or group in the
handling, planting, drying, packing, packaging, processing, freezing,
grading, storing, or delivering to storage or to market or to a carrier
for transportation to market, of commodities produced by persons other
than such farmer or members of such farmers' organization or group are
not performed ``as an incident to ordinary farming operations''.
(2) Services performed by an employee in the employ of any person in
the handling, planting, drying, packing, packaging, processing,
freezing, grading, storing, or delivering to storage or to market or to
a carrier for transportation to market, of fruits and vegetables,
whether or not of a perishable nature, constitute agricultural labor, if
such services are performed as an incident to the preparation of such
fruits and vegetables for market. For example, if services in the
sorting, grading, or storing of fruits, or in the cleaning of beans, are
performed as an incident to their preparation for market, such services
may constitute agricultural labor, whether performed in the employ of a
farmer, a farmers' cooperative, or a commercial handler of such
commodities.
(3) The services described in paragraphs (e)(1) and (2) of this
section do not include services performed in connection with commercial
canning or commercial freezing or in connection with any commodity after
its delivery to a terminal market for distribution for consumption.
Moreover, since the services described in such subparagraphs must be
rendered in the actual handling, planting, drying, packing, packaging,
processing, freezing, grading, storing, or delivering to storage or to
market or to a carrier for transportation to market, of the commodity,
such services do not, for example, include services performed as
stenographers, bookkeepers, clerks, and other office employees, even
though such services may be in connection with such activities. However,
to the extent that the services of such individuals are performed in the
employ of the owner or tenant or other operator of a farm and are
rendered in major part on a farm, they may be within the provisions of
paragraph (c) of this section.
Sec. 31.3306(m)-1 American vessel and aircraft.
(a) The term ``American vessel'' means any vessel which is
documented (that is, registered, enrolled, or licensed) or numbered in
conformity
[[Page 196]]
with the laws of the United States. It also includes any vessel which is
neither documented nor numbered under the laws of the United States, nor
documented under the laws of any foreign country, if the crew of such
vessel is employed solely by one or more citizens or residents of the
United States or corporations organized under the laws of the United
States or of any State. (For provisions relating to the terms ``State''
and ``citizen'', see Sec. 31.3306(j)-1.)
(b) The term ``American aircraft'' means any aircraft registered
under the laws of the United States.
(c) For provisions relating to services performed outside the United
States on or in connection with an American vessel or American aircraft,
see paragraph (c) of Sec. 31.3306(c)-2.
[T.D. 6658, 28 FR 6641, June 27, 1963]
Sec. 31.3306(n)-1 Services on American vessel whose business is
conducted by general agent of Secretary of Commerce.
(a) Section 3306(n) and this section of the regulations apply with
respect only to services performed by an officer or member of the crew
of an American vessel (1) which is owned by or bareboat chartered to the
United States, and (2) whose business is conducted by a general agent of
the Secretary of Commerce. Whether services performed by such an officer
or member of a crew under the above conditions constitute employment is
determined under section 3306(c) and (n), but without regard to section
3306(c)(6). See Sec. 31.3306(c)(6)-1, relating to services performed in
the employ of the United States and instrumentalities thereof. If,
without regard to section 3306(c)(6), such services constitute
employment, they are not excepted from employment by reason of the fact
that they are performed on or in connection with an American vessel
which is owned by or bareboat chartered to the United States and whose
business is conducted by a general agent of the Secretary of Commerce,
that is, such services are not excepted from employment by section
3306(c)(6). For provisions relating to services performed within the
United States and services performed outside the United States which
constitute employment, see Sec. 31.3306(c)-2.
(b) The expression ``officer or member of the crew'' includes the
master or officer in charge of the vessel, however designated, and every
individual, subject to his authority, serving on board and contributing
in any way to the operation and welfare of the vessel. Thus, the
expression includes, for example, the master, mates, pilots, pursers,
surgeons, stewards, engineers, firemen, cooks, clerks, carpenters, and
deck hands.
(c) An employee of the United States who performs services as an
officer or member of the crew of an American vessel which is owned by or
bareboat chartered to the United States and whose business is conducted
by a general agent of the Secretary of Commerce shall be deemed, under
section 3306(n), to be performing services for such general agent rather
than for the United States. Any such general agent of the Secretary of
Commerce is considered a legal entity in his capacity as such general
agent, separate and distinct from his identity as a person employing
individuals on his own account. Each such general agent who in his
capacity as such qualifies as an employer under section 3306(a) is with
respect to each calendar year for which he so qualifies subject to the
tax imposed by section 3301, and to all the requirements imposed upon an
employer as defined in section 3306(a) by the regulations in this part,
with respect to services which constitute employment by reason of
section 3306(n) and this section of the regulations.
Sec. 31.3306(p)-1 Employees of related corporations.
(a) In general. For purposes of sections 3301, 3302, and 3306(b)(1),
when two or more related corporations concurrently employ the same
individual and compensate that individual through a common paymaster
which is one of the related corporations for which the individual
performs services, each of the corporations is considered to have paid
only the remuneration it actually disburses to that individual (unless
the disbursing corporation fails to remit the taxes due). Paragraphs (b)
and (c) of Sec. 31.3121(s)-1 contain rules defining
[[Page 197]]
related corporations, common paymasters, and concurrent employment, and
rules for determining the liability of the other related corporations
for employment taxes if the common paymaster fails to remit the taxes
pursuant to sections 3102 and 3111, and for allocating these taxes among
the related corporations. Those rules also apply to the tax under
section 3301. For purposes of applying those rules to this section,
references in those rules to section 3111 are considered references to
sections 3301 and 3302, and references to section 3121 are considered
references to section 3306.
(b) Allocation of credit for contributions to State unemployment
funds. A special rule for applying the rules of Sec. 31.3121(s)-1 to
this section applies if it is necessary to determine the ultimate
liability of each related corporation for which services are performed
in the event the common paymaster fails to remit the tax to the Internal
Revenue Service. In determining the ultimate liability of a corporation,
the credit for contributions to State unemployment funds that the
corporation may claim under section 3302 is calculated as if each
corporation were a separate employer.
(c) Effective date. This section is effective with respect to wages
paid after December 31, 1978.
[T.D. 7660, 44 FR 75142, Dec. 19, 1979]
Sec. 31.3306(r)(2)-1 Treatment of amounts deferred under certain
nonqualified deferred compensation plans.
(a) In general. Section 3306(r)(2) provides a special timing rule
for the tax imposed by section 3301 with respect to any amount deferred
under a nonqualified deferred compensation plan. Section 31.3121(v)(2)-1
contains rules relating to when amounts deferred under certain
nonqualified deferred compensation plans are wages for purposes of
sections 3121(v)(2), 3101, and 3111. The rules in Sec. 31.3121(v)(2)-1
also apply to the special timing rule of section 3306(r)(2). For
purposes of applying the rules in Sec. 31.3121(v)(2)-1 to section
3306(r)(2) and this paragraph (a), references to the Federal Insurance
Contributions Act are considered references to the Federal Unemployment
Tax Act (26 U.S.C. 3301 et seq.), references to FICA are considered
references to FUTA, references to section 3101 or 3111 are considered
references to section 3301, references to section 3121(v)(2) are
considered references to section 3306(r)(2), references to section
3121(a), (a)(5), and (a)(13) are considered references to section
3306(b), (b)(5), and (b)(10), respectively, and references to Sec.
31.3121(a)-2(a) are considered references to Sec. 31.3301-4.
(b) Effective dates and transition rules. Except as otherwise
provided, section 3306(r)(2) applies to remuneration paid after December
31, 1984. Section 31.3121(v)(2)-2 contains effective date rules for
certain remuneration paid after December 31, 1983, for purposes of
section 3121(v)(2). The rules in Sec. 31.3121(v)(2)-2 also apply to
section 3306(r)(2). For purposes of applying the rules in Sec.
31.3121(v)(2)-2 to section 3306(r)(2) and this paragraph (b), references
to section 3121(v)(2) are considered references to section 3306(r)(2),
and references to section 3121(a)(2), (a)(3), or (a)(13) are considered
references to section 3306(b)(2), (b)(3), or (b)(10), respectively. In
addition, references to Sec. 31.3121(v)(2)-1 are considered references
to paragraph (a) of this section. For purposes of applying the rules of
Sec. 31.3121(v)(2)-2 to this paragraph (b)--
(1) References to ``December 31, 1983'' are considered references to
``December 31, 1984'';
(2) References to ``before 1984'' are considered references to
``before 1985'';
(3) References to ``Federal Insurance Contributions Act'' are
considered references to ``Federal Unemployment Tax Act''; and
(4) References to ``FICA'' are considered references to ``FUTA''.
[64 FR 4541, Jan. 29, 1999]
Sec. 31.3307-1 Deductions by an employer from remuneration of an
employee.
Any amount deducted by an employer from the remuneration of an
employee is considered to be a part of the employee's remuneration and
is considered to be paid to the employee as remuneration at the time
that the deduction is made. It is immaterial that any act of Congress or
the law of any State requires or permits such deductions and the payment
of the amount thereof to the United States, a
[[Page 198]]
State, or any political subdivision thereof.
Sec. 31.3308-1 Instrumentalities of the United States specifically
exempted from tax imposed by section 3301.
Section 3308 makes ineffectual as to the tax imposed by section 3301
(with respect to remuneration paid after 1961 for services performed
after 1961) those provisions of law which grant to an instrumentality of
the United States an exemption from taxation, unless such provisions
grant a specific exemption from the tax imposed by section 3301 by an
express reference to such section or the corresponding section of prior
law. Thus, the general exceptions from Federal taxation granted by
various statutes to certain instrumentalities of the United States
without specific reference to the tax imposed by section 3301 or the
corresponding section of prior law are rendered inoperative insofar as
such exemptions relate to the tax imposed by section 3301. For
provisions relating to the exception from employment of services
performed in the employ of an instrumentality of the United States
specifically exempted from the tax imposed by section 3301, see Sec.
31.3306(c)(6)-1.
[T.D. 6658, 28 FR 6641, June 27, 1963]
Subpart E_Collection of Income Tax at Source
Sec. 31.3401(a)-1 Wages.
(a) In general. (1) The term ``wages'' means all remuneration for
services performed by an employee for his employer unless specifically
excepted under section 3401(a) or excepted under section 3402(e).
(2) The name by which the remuneration for services is designated is
immaterial. Thus, salaries, fees, bonuses, commissions on sales or on
insurance premiums, pensions, and retired pay are wages within the
meaning of the statute if paid as compensation for services performed by
the employee for his employer.
(3) The basis upon which the remuneration is paid is immaterial in
determining whether the remuneration constitutes wages. Thus, it may be
paid on the basis of piecework, or a percentage of profits; and may be
paid hourly, daily, weekly, monthly, or annually.
(4) Generally the medium in which remuneration is paid is also
immaterial. It may be paid in cash or in something other than cash, as
for example, stocks, bonds, or other forms of property. (See, however,
Sec. 31.3401(a)(11)-1, relating to the exclusion from wages of
remuneration paid in any medium other than cash for services not in the
course of the employer's trade or business, and Sec. 31.3401(a)(16)-1,
relating to the exclusion from wages of tips paid in any medium other
than cash.) If services are paid for in a medium other than cash, the
fair market value of the thing taken in payment is the amount to be
included as wages. If the services were rendered at a stipulated price,
in the absence of evidence to the contrary, such price will be presumed
to be the fair value of the remuneration received. If a corporation
transfers to its employees its own stock as remuneration for services
rendered by the employee, the amount of such remuneration is the fair
market value of the stock at the time of the transfer.
(5) Remuneration for services, unless such remuneration is
specifically excepted by the statute, constitutes wages even though at
the time paid the relationship of employer and employee no longer exists
between the person in whose employ the services were performed and the
individual who performed them.
Example. A is employed by R during the month of January 1955 and is
entitled to receive remuneration of $100 for the services performed for
R, the employer, during the month. A leaves the employ of R at the close
of business on January 31, 1955. On February 15, 1955 (when A is no
longer an employee of R), R pays A the remuneration of $100 which was
earned for the services performed in January. The $100 is wages within
the meaning of the statute.
(b) Certain specific items--(1) Pensions and retirement pay. (i) In
general, pensions and retired pay are wages subject to withholding.
However, no withholding is required with respect to amounts paid to an
employee upon retirement which are taxable as annuities under the
provisions of section 72 or 403. So-called pensions awarded by
[[Page 199]]
one to whom no services have been rendered are mere gifts or gratuities
and do not constitute wages. Those payments of pensions or other
benefits by the Federal Government under title 38 of the United States
Code which are excluded from gross income are not wages subject to
withholding.
(ii) Amounts received as retirement pay for service in the Armed
Forces of the United States, the Coast and Geodetic Survey, or the
Public Health Service or as a disability annuity paid under the
provisions of section 831 of the Foreign Service Act of 1946, as amended
(22) U.S.C. 1081; 60 Stat. 1021), are subject to withholding unless such
pay or disability annuity is excluded from gross income under section
104(a)(4), or is taxable as an annuity under the provisions of section
72. Where such retirement pay or disability annuity (not excluded from
gross income under section 104(a)(4) and not taxable as an annuity under
the provisions of section 72) is paid to a nonresident alien individual,
withholding is required only in the case of such amounts paid to a
nonresident alien individual who is a resident of Puerto Rico.
(2) Traveling and other expenses. Amounts paid specifically--either
as advances or reimbursements--for traveling or other bona fide ordinary
and necessary expenses incurred or reasonably expected to be incurred in
the business of the employer are not wages and are not subject to
withholding. Traveling and other reimbursed expenses must be identified
either by making a separate payment or by specifically indicating the
separate amounts where both wages and expense allowances are combined in
a single payment. For amounts that are received by an employee on or
after July 1, 1990, with respect to expenses paid or incurred on or
after July 1, 1990, see Sec. 31.3401 (a)-4.
(3) Vacation allowances. Amounts of so-called ``vacation
allowances'' paid to an employee constitute wages. Thus, the salary of
an employee on vacation, paid notwithstanding his absence from work,
constitutes wages.
(4) Dismissal payments. Any payments made by an employer to an
employee on account of dismissal, that is, involuntary separation from
the service of the employer, constitute wages regardless of whether the
employer is legally bound by contract, statute, or otherwise to make
such payments.
(5) Deductions by employer from remuneration of an employee. Any
amount deducted by an employer from the remuneration of an employee is
considered to be a part of the employee's remuneration and is considered
to be paid to the employee as remuneration at the time that the
deduction is made. It is immaterial that any act of Congress, or the law
of any State or of Puerto Rico, requires or permits such deductions and
the payment of the amounts thereof to the United States, a State, a
Territory, Puerto Rico, or the District of Columbia, or any political
subdivision of any one or more of the foregoing.
(6) Payment by an employer of employee's tax, or employee's
contributions under a State law. The term ``wages'' includes the amount
paid by an employer on behalf of an employee (without deduction from the
remuneration of, or other reimbursement from, the employee) on account
of any payment required from an employee under a State unemployment
compensation law, or on account of any tax imposed upon the employee by
any taxing authority, including the taxes imposed by sections 3101 and
3201.
(7) Remuneration for services as employee of nonresident alien
individual or foreign entity. The term ``wages'' includes remuneration
for services performed by a citizen or resident (including, in regard to
wages paid after February 28, 1979, an individual treated as a resident
under section 6013 (g) or (h)) of the United States as an employee of a
nonresident alien individual, foreign partnership, or foreign
corporation whether or not such alien individual or foreign entity is
engaged in trade or business within the United States. Any person paying
wages on behalf of a nonresident alien individual, foreign partnership,
or foreign corporation, not engaged in trade or business within the
United States (including Puerto Rico as if a part of the United States),
is subject to all the provisions of law and regulations applicable with
respect to an employer. See Sec. 31.3401(d)-1, relating
[[Page 200]]
to the term ``employer'', and Sec. 31.3401(a)(8)(C)-1, relating to
remuneration paid for services performed by a citizen of the United
States in Puerto Rico.
(8) Amounts paid under accident or health plans--(i) Amounts paid in
taxable years beginning on or after January 1, 1977--(a) In general.
Withholding is required on all payments of amounts includible in gross
income under section 105(a) and Sec. 1.105-1 (relating to amounts
attributable to employer contributions), made in taxable years beginning
on or after January 1, 1977, to an employee under an accident or health
plan for a period of absence from work on account of personal injuries
or sickness. Payments on which withholding is required by this
subdivision are wages as defined in section 3401(a), and the employer
shall deduct and withhold in accordance with the requirements of chapter
24 of subtitle C of the Code. Third party payments of sick pay, as
defined in section 3402(o) and the regulations thereunder, are not wages
for purposes of this section.
(b) Payments made by an agent of the employer. (1) Payments are
considered made by the employer if a third party makes the payments as
an agent of the employer. The determining factor as to whether a third
party is an agent of the employer is whether the third party bears any
insurance risk. If the third party bears no insurance risk and is
reimbursed on a cost plus fee basis, the third party is an agent of the
employer even if the third party is responsible for making
determinations of the eligibility of individual employees of the
employer for sick pay payments. If the third party is paid an insurance
premium and not reimbursed on a cost plus fee basis, the third party is
not an agent of the employer, but the third party is a payor of third
party sick pay for purposes of voluntary withholding from sick pay under
sections 3402(o) and 6051(f) and the regulations thereunder. If a third
party and an employer enter into an agency agreement as provided in
paragraph (c) of Sec. 31.6051-3 (relating to statements required in
case of sick pay paid by third parties), that agency agreement does not
make the third party an agent of the employer for purposes of this
paragraph.
(2) Payments made by agents subject to this paragraph are
supplemental wages as defined in Sec. 31.3402(g)-1, and are therefore
subject to the rules regarding withholding tax on supplemental wages
provided in Sec. 31.3402(g)-1. For purposes of those rules, unless the
agent is also an agent for purposes of withholding tax from the
employee's regular wages, the agent may deem tax to have been withheld
from regular wages paid to the employee during the calendar year.
(3) This paragraph is only applicable to amounts paid on or after
May 25, 1983 unless the agent actually withheld taxes before that date.
(c) Exceptions to withholding. (1) Withholding is not required on
payments that are specifically excepted under the numbered paragraphs of
section 3401(a) (relating to the definition of wages), under section
3402(e) (relating to included and excluded wages), or under section
3402(n) (relating to employees incurring no income tax liability).
(2) Withholding is not required on disability payments to the extent
that the payments are excludable from gross income under section 105(d).
In determining the excludable portion of the disability payments, the
employer may assume that payments that the employer makes to the
employee are the employee's sole source of income. This exception
applies only if the employee furnishes the employer with adequate
verification of disability. A certificate from a qualified physician
attesting that the employee is permanently and totally disabled (within
the meaning of section 105(d)) shall be deemed to constitute adequate
verification. This exception does not affect the requirement that a
statement (which includes any amount paid under section 105(d)) be
furnished under either section 6041 (relating to information at source)
or section 6051 (relating to receipts for employees) and the regulations
thereunder.
(ii) Amounts paid after December 31, 1955 and before January 1,
1977--(a) In general. The term ``wage continuation payment'', as used in
this subdivision, means any payment to an employee which is made after
December 31, 1955, and before January 1, 1977 under a wage
[[Page 201]]
continuation plan (as defined in paragraph (a)(2)(i) of Sec. 1.105-4
and Sec. 1.105-5 of Part 1 of this chapter (Income Tax Regulations))
for a period of absence from work on account of personal injuries or
sickness, to the extent such payment is attributable to contributions
made by the employer which were not includable in the employee's gross
income or is paid by the employer. Any such payment, whether or not
excluded from the gross income of the employee under section 105(d),
constitutes ``wages'' (unless specifically excepted under any of the
numbered paragraphs of section 3401(a) or under section 3402(e) and
withholding thereon is required except as provided in paragraphs
(b)(8)(ii) (b), (c), and (d) of this section.
(b) Amounts paid before January 1, 1977, by employer for whom
services are performed for period of absence beginning after December
31, 1963. (1) Withholding is not required upon the amount of any wage
continuation payment for a period of absence beginning after December
31, 1963, paid before January 1, 1977, to an employee directly by the
employer for whom he performs services to the extent that such payment
is excludable from the gross income of the employee under the provisions
of section 105(d) in effect with respect to such payments, provided the
records maintained by the employer--
(i) Separately show the amount of each such payment and the
excludable portion thereof, and
(ii) Contain data substantiating the employee's entitlement to the
exclusion provided in section 105(d) with respect to such amount, either
by a written statement from the employee specifying whether his absence
from work during the period for which the payment was made was due to a
personal injury or to sickness and whether he was hospitalized for at
least one day during this period; or by any other information which the
employer reasonably believes establishes the employee's entitlement to
the exclusion under section 105(d). Employers shall not be required to
ascertain the accuracy of any written statement submitted by an employee
in accordance with this subdivision (b)(1)(ii).
For purposes of this subdivision (b)(1), wage continuation payments
reasonably expected by the employer to be made on behalf of the employer
by another person shall be taken into account in determining whether the
75 percent test contained in section 105(d) is met and in computing the
amount of any wage continuation payment made directly by the employer
for whom services are performed by the employee which is within the $75
or $100 weekly rate of exclusion from the gross income of the employee
provided in section 105(d). In making this latter computation, the
amount excludable under section 105(d) shall be applied first against
payments reasonably expected to be made on behalf of the employer by the
other person and then, to the extent any part of the exclusion remains,
against the payments made directly by the employer. In a case in which
wage continuation payments are not paid at a constant rate for the first
30 calendar days of the period of absence, the determination of whether
the 75 percent test contained in section 105(d) is met shall be based
upon the length of the employee's absence as of the end of the period
for which the payment by the employer is made, without regard to the
effect which any further extension of such absence may have upon the
excludability of the payment.
(2) The computation of the amount of any wage continuation payment
with repect to which the employer may refrain from withholding may be
illustrated by the following examples:
Example 1. A, an employee of B, normally works Monday through Friday
and has a regular weekly rate of wages of $100. On Monday, November 5,
1974, A becomes ill, and as a result is absent from work for two weeks,
returing to work on Monday, November 19, 1974. A is not hospitalized.
Under B's noncontributory wage continuation plan, A receives no benefits
for the first three working days of absence and is paid benefits
directly by B at the rate of $85 a week thereafter ($34 for the last two
days of the first week of absence and $85 for the second week of
absence). No wage continuation payment is made by any other person.
Since the benefits are entirely attributable to contributions to the
plan by B, such benefits are wage continuation payments in their
entirety. The wage continuation payments for the first seven calendar
days of absence are not excludable from A's gross income because A was
not hospitalized for at least one day during his period of absence, and
therefore B
[[Page 202]]
must withhold with respect to such payments. Under section 105(a), the
wage continuation payments attributable to absence after the first seven
calendar days of absence are excludable to the extent that they do not
exceed a rate of $75 a week. Under the principles stated in paragraph
(e)(6)(iv) of Sec. 1.105-4 of this chapter (Income Tax Regulations),
the wage continuation payments in this case are at a rate not in excess
of 75 percent (\119/200\ or 59.5 percent) of A's regular weekly rate of
wages. Accordingly, B may refrain from withholding with respect to $75
of the wage continuation payment attributable to the second week of
absence.
Example 2. Assume the facts in example 1 except that A is unable to
return to work until Monday, February 11, 1975, and that, of the $85 a
week of wage continuation payments $35 is paid directly by B and $50 is
reasonably expected by B to be paid by C, an insurance company, on
behalf of B. In such a case, both the $50 and the $35 payments
constitute wage continuation payments and the amount of such payments
which is attributable to the first 30 calendar days of absence is at a
rate not in excess of 75 percent (\323/440\ or 73.4 percent) of A's
regular weekly rate of wages. Therefore, under section 105(d), the
portion of such payments which is attributable to absence after the
first seven calendar days of absence is excludable to the extent that it
does not exceed a rate of $75 a week for the eighth through the
thirtieth calendar day of absence and does not exceed a rate of $100 a
week thereafter. B may refrain from withholding with repect to $25 a
week (the amount by which the $75 maximum excludable amount exceeds the
$50 reasonably expected by B to be paid by C) of his direct payments for
the eighth through the thirtieth calendar day of absence. Thereafter, B
may refrain from withholding with respect to the entire $35 paid
directly by him since the maximum excludable amount ($100 a week)
exceeds the total of payments made by B and payments which B reasonably
expects will be made by C.
(c) Amounts paid by employer for whom services are performed for
period of absence beginning before January 1, 1964. Withholding is not
required upon the amount of any wage continuation payment for a period
of absence beginning before January 1, 1964, made to an employee
directly by the employer for whom he performs services to the extent
that such payment is excludable from the gross income of the employee
under the provisions of section 105(d) in effect with respect to such
payments, provided the records maintained by the employer--
(1) Separately show the amount of each such payment and the
excludable portion thereof, and
(2) Contain data substantiating the employee's entitlement to the
exclusion provided in section 105(d) with respect to such amount, either
by a written statement from the employee specifying whether his absence
from work during the period for which the payment was made was due to a
personal injury or whether such absence was due to sickness, and, if the
latter, whether he was hospitalized for at least one day during this
period; or by any other information which the employer reasonably
believes establishes the employee's entitlement to the exclusion under
section 105(d). Employers shall not be required to ascertain the
accuracy of the information contained in any written statement submitted
by an employee in accordance with this paragraph (b)(8)(ii)(c)(2). For
purposes of this paragraph (b)(8)(ii)(c), the computation of the amount
excludable form the gross income of the employee under section 105(d)
may be made either on the basis of the wage continuation payments which
are made directly by the employer for whom the employee performs
services, or on the basis of such payments in conjunction with any wage
continuation payments made on behalf of the employer by a person who is
regarded as an employer under section 3401(d)(1).
(d) Amounts paid before January 1, 1977 by person other than the
employer for whom services are performed. No tax shall be withheld upon
any wage continuation payment made to an employee by or on behalf of a
person who is not the employer for whom the employee performs services
but who is regarded as an employer under section 3401(d)(1). For
example, no tax shall be withheld with respect to wage continuation
payments made on behalf of an employer by an insurance company under an
accident or health policy, by a separate trust under an accident or
health plan, or by a State agency from a sickness and disability fund
maintained under State law.
(e) Cross references. See sections 6001 and 6051 and the regulations
thereunder for rules with respect to the records which must be
maintained in
[[Page 203]]
connection with wage continuation payments and for rules with respect to
the statements which must be furnished an employee in connection with
wage continuation payments, respectively. See also section 105 and Sec.
1.105-4 of this chapter (Income Tax Regulations).
(9) Value of meals and lodging. The value of any meals or lodging
furnished to an employee by his employer is not subject to withholding
if the value of the meals or lodging is excludable from the gross income
of the employee. See Sec. 1.119-1 of this chapter (Income Tax
Regulations).
(10) Facilities or privileges. Ordinarily, facilities or privileges
(such as entertainment, medical services, or so-called ``courtesy''
discounts on purchases), furnished or offered by an employer to his
employees generally, are not considered as wages subject to withholding
if such facilities or privileges are of relatively small value and are
offered or furnished by the employer merely as a means of promoting the
health, good will, contentment, or efficiency of his employees.
(11) Tips or gratuities. Tips or gratuities paid, prior to January
1, 1966, directly to an employee by a customer of an employer, and not
accounted for by the employee to the employer are not subject to
withholding. For provisions relating to the treatment of tips received
by an employee after December 31, 1965, as wages, see Sec. Sec.
31.3401(f)-1 and 31.3402(k)-1.
(12) Remuneration for services performed by permanent resident of
Virgin Islands--(i) Exemption from withholding. No tax shall be withheld
for the United States under chapter 24 from a payment of wages by an
employer, including the United States or any agency thereof, to an
employee if at the time of payment it is reasonable to believe that the
employee will be required to satisfy his income tax obligations with
respect to such wages under section 28(a) of the Revised Organic Act of
the Virgin Islands (68 Stat. 508). That section provides that all
persons whose permanent residence is in the Virgin Islands ``shall
satisfy their income tax obligations under applicable taxing statutes of
the United States by paying their tax on income derived from all sources
both within and outside the Virgin Islands into the treasury of the
Virgin Islands''.
(ii) Claiming exemption. If the employee furnishes to the employer a
statement in duplicate that he expects to satisfy his income tax
obligations under section 28(a) of the Revised Organic Act of the Virgin
Islands with respect to all wages subsequently to be paid to him by the
employer during the taxable year to which the statement relates, the
employer may, in the absence of information to the contrary, rely on
such statement as establishing reasonable belief that the employee will
so satisfy his income tax obligations. The employee's statement shall
identify the taxable year to which it relates, and both the original and
the duplicate copy thereof shall be signed and dated by the employee.
(iii) Disposition of statement. The original of the statement shall
be retained by the employer. The duplicate copy of the statement shall
be sent by the employer to the Director of International Operations,
Washington, D.C. 20225, on or before the last day of the calendar year
in which the employer receives the statement from the employee.
(iv) Applicability of subparagraph. This subparagraph has no
application with respect to any payment of remuneration which is not
subject to withholding by reason of any other provision of the
regulations in this subpart.
(13) Federal employees resident in Puerto Rico. Except as provided
in paragraph (d) of Sec. 31.3401(a)(6)-1, the term ``wages'' includes
remuneration for services performed by a nonresident alien individual
who is a resident of Puerto Rico if such services are performed as an
employee of the United States or any agency thereof. The place where the
services are performed is immaterial for purposes of this subparagraph.
(14) Supplemental unemployment compensation benefits. (i)
Supplemental unemployment compensation benefits paid to an individual
after December 31, 1970, shall be treated (for purposes of the
provisions of Subparts E, F, and G of this part which relate to
withholding of income tax) as if they were wages, to the extent such
benefits are
[[Page 204]]
includible in the gross income of such individual.
(ii) For purposes of this subparagraph, the term ``supplemental
unemployment compensation benefits'' means amounts which are paid to an
employee, pursuant to a plan to which the employer is a party, because
of the employee's involuntary separation from the employment of the
employer, whether or not such separation is temporary, but only when
such separation is one resulting directly from a reduction in force, the
discontinuance of a plant or operation, or other similar conditions.
(iii) For the meanings of the terms ``involuntary separation from
the employment of the employer'' and ``other similar conditions'', see
subparagraphs (3) and (4) of Sec. 1.501(c)(17)-1(b) of this chapter
(Income Tax Regulations).
(iv) As used in this subparagraph, the term ``employee'' means an
employee within the meaning of paragraph (a) of Sec. 31.3401(c)-1, the
term ``employer'' means an employer within the meaning of paragraph (a)
of Sec. 31.3401(d)-1, and the term ``employment'' means employment as
defined under the usual common law rules.
(v) References in this chapter to wages as defined in section
3401(a) shall be deemed to refer also to supplemental unemployment
compensation benefits which are treated under this subparagraph as if
they were wages.
(15) Split-dollar life insurance arrangements. See Sec. 1.61-22 of
this chapter for rules relating to the treatment of split-dollar life
insurance arrangements.
(c) Geographical definitions. For definition of the term ``United
States'' and for other geographical definitions relating to the
Continental Shelf see section 638 and Sec. 1.638-1 of this chapter.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR
5251, May 28, 1963; T.D. 6908, 31 FR 16775, Dec. 31, 1966; T.D. 7001, 34
FR 1000, Jan. 23, 1969; T.D. 7068, 35 FR 17328, Nov. 11, 1970; T.D.
7277, 38 FR 12742, May 15, 1973; T.D. 7493, 42 FR 33728, July 1, 1977;
T.D. 7670, 45 FR 6932, Jan. 31, 1980; T.D. 7888, 48 FR 17587, Apr. 25,
1983; T.D. 8276, 54 FR 51028, Dec. 12, 1989; T.D. 8324, 55 FR 51697,
Dec. 17, 1990; T.D. 9092, 68 FR 54361, Sept. 17, 2003; T.D. 9276, 71 FR
42054, July 25, 2006]
Sec. 31.3401(a)-1T Question and answer relating to the definition of
wages in section 3401(a) (Temporary).
The following question and answer relates to the definition of wages
in section 3401(a) of the Internal Revenue Code of 1954, as amended by
section 531(d)(4) of the Tax Reform Act of 1984 (98 Stat. 886):
Q-1: Are fringe benefits included in the definition of ``wages''
under section 3401(a)?
A-1: Yes, unless specifically excluded from the definition of
``wages'' pursuant to section 3401(a) (1) through (20). For example, a
fringe benefit provided to or on behalf of an employee is excluded from
the definition of ``wages'' if at the time such benefit is provided it
is reasonable to believe that the employee will be able to exclude such
benefit from income under section 117 or 132.
[T.D. 8004, 50 FR 756, Jan. 7, 1985]
Sec. 31.3401(a)-2 Exclusions from wages.
(a) In general. (1) The term ``wages'' does not include any
remuneration for services performed by an employee for his employer
which is specifically excepted from wages under section 3401(a).
(2) The exception attaches to the remuneration for services
performed by an employee and not to the employee as an individual; that
is, the exception applies only to the remuneration in an excepted
category.
Example. A is an individual who is employed part time by B to
perform domestic service in his home (see Sec. 31.3401(a)(3)-1). A is
also employed by C part time to perform services as a clerk in a
department store owned by him. While no withholding is required with
respect to A's remuneration for services performed in the employ of B
(the remuneration being excluded from wages), the exception does not
embrace the remuneration for services performed by A in the employ of C
and withholding is required with respect to the wages for such services.
(3) For provisions relating to the circumstances under which
remuneration which is excepted is nevertheless deemed to be wages, and
relating to the circumstances under which remuneration which is not
excepted is nevertheless deemed not to be wages, see Sec. 31.3402(e)-1.
[[Page 205]]
(4) For provisions relating to payments with respect to which a
voluntary withholding agreement is in effect, which are not defined as
wages in section 3401(a) but which are nevertheless deemed to be wages,
see Sec. Sec. 31.3401(a)-3 and 31.3402(p)-1.
(b) Fees paid a public official. (1) Authorized fees paid to public
officials such as notaries public, clerks of courts, sheriffs, etc., for
services rendered in the performance of their official duties are
excepted from wages and hence are not subject to withholding. However,
salaries paid such officials by the Government, or by a Government
agency or instrumentality, are subject to withholding.
(2) Amounts paid to precinct workers for services performed at
election booths in State, county, and municipal elections and fees paid
to jurors and witnesses are in the nature of fees paid to public
officials and therefore are not subject to withholding.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR
5251, May 28, 1963; T.D. 7096, 36 FR 5216, Mar. 18, 1971]
Sec. 31.3401(a)-3 Amounts deemed wages under voluntary withholding
agreements.
(a) In general. Notwithstanding the exceptions to the definition of
wages specified in section 3401(a) and the regulations thereunder, the
term ``wages'' includes the amounts described in paragraph (b)(1) of
this section with respect to which there is a voluntary withholding
agreement in effect under section 3402(p). References in this chapter to
the definition of wages contained in section 3401(a) shall be deemed to
refer also to this section (Sec. 31.3401(a)-3).
(b) Remuneration for services. (1) Except as provided in
subparagraph (2) of this paragraph, the amounts referred to in paragraph
(a) of this section include any remuneration for services performed by
an employee for an employer which, without regard to this section, does
not constitute wages under section 3401(a). For example, remuneration
for services performed by an agricultural worker or a domestic worker in
a private home (amounts which are specifically excluded from the
definition of wages by section 3401(a) (2) and (3), respectively) are
amounts with respect to which a voluntary withholding agreement may be
entered into under section 3402(p). See Sec. Sec. 31.3401(c)-1 and
31.3401(d)-1 for the definitions of ``employee'' and ``employer''.
(2) For purposes of this paragraph, remuneration for services shall
not include amounts not subject to withholding under Sec. 31.3401(a)-
1(b)(12) (relating to remuneration for services performed by a permanent
resident of the Virgin Islands), Sec. 31.3401(a)-2(b) (relating to fees
paid to a public official), section 3401(a)(5) (relating to remuneration
for services for foreign government or international organization),
section 3401(a)(8)(B) (relating to remuneration for services performed
in a possession of the United States (other than Puerto Rico) by
citizens of the United States), section 3401(a)(8)(C) (relating to
remuneration for services performed in Puerto Rico by citizens of the
United States), section 3401(a)(11) (relating to remuneration other than
in cash for service not in the course of employer's trade or business),
section 3401(a)(12) (relating to payments from or to certain tax-exempt
trusts, or under or to certain annuity plans or bond purchase plans),
section 3401(a)(14) (relating to group-term life insurance), section
3401(a)(15) (relating to moving expenses), or section 3401(a)(16)(A)
(relating to tips paid in any medium other than cash).
[T.D. 7096, 36 FR 5216, Mar. 18, 1971]
Sec. 31.3401(a)-4 Reimbursements and other expense allowance amounts.
(a) When excluded from wages. If a reimbursement or other expense
allowance arrangement meets the requirements of section 62(c) of the
Code and Sec. 1.62-2 and the expenses are substantiated within a
reasonable period of time, payments made under the arrangement that do
not exceed the substantiated expenses are treated as paid under an
accountable plan and are not wages. In addition, if both wages and the
reimbursement or other expense allowance are combined in a single
payment, the reimbursement or other expense allowance must be identified
either by making a separate payment or by specifically identifying the
amount
[[Page 206]]
of the reimbursement or other expense allowance.
(b) When included in wages--(1) Accountable plans--(i) General rule.
Except as provided in paragraph (b)(1)(ii) of this section, if a
reimbursement or other expense allowance arrangement satisfies the
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not
substantiated within a reasonable period of time or amounts in excess of
the substantiated expenses are not returned within a reasonable period
of time, the amount paid under the arrangement in excess of the
substantiated expenses is treated as paid under a nonaccountable plan,
is included in wages, and is subject to withholding and payment of
employment taxes no later than the first payroll period following the
end of the reasonable period.
(ii) Per diem or mileage allowances. If a reimbursement or other
expense allowance arrangement providing a per diem or mileage allowance
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the
allowance is paid at a rate for each day or mile of travel that exceeds
the amount of the employee's expenses deemed substantiated for a day or
mile of travel, the excess portion is treated as paid under a
nonaccountable plan and is included in wages. In the case of a per diem
or mileage allowance paid as a reimbursement, the excess portion is
subject to withholding and payment of employment taxes when paid. In the
case of a per diem or mileage allowance paid as an advance, the excess
portion is subject to withholding and payment of employment taxes no
later than the first payroll period following the payroll period in
which the expenses with respect to which the advance was paid (i.e., the
days or miles of travel) are substantiated. The Commissioner may, in his
discretion, prescribe special rules in pronouncements of general
applicability regarding the timing of withholding and payment of
employment taxes on per diem and mileage allowances.
(2) Nonaccountable plans. If a reimbursement or other expense
allowance arrangement does not satisfy the requirements of section 62(c)
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be
substantiated or require amounts in excess of the substantiated expenses
to be returned), all amounts paid under the arrangement are treated as
paid under a nonaccountable plan, are included in wages, and are subject
to withholding and payment of employment taxes when paid.
(c) Withholding rate. Payments made under reimbursement or other
expense allowance arrangements that are subject to income tax
withholding are supplemental wages as defined in Sec. 31.3402(g)-1.
Accordingly, withholding on such supplemental wages is calculated under
the rules provided with respect to supplemental wages in Sec.
31.3402(g)-1.
(d) Effective dates. This section generally applies to payments made
under reimbursement or other expense allowance arrangements received by
an employee on or after July 1, 1990, with respect to expenses paid or
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section
applies to payments made under reimbursement or other expense allowance
arrangements received by an employee on or after January 1, 1991, with
respect to expenses paid or incurred on or after January 1, 1991.
[T.D. 8324, 55 FR 51698, Dec. 17, 1990, as amended by T.D. 9276, 71 FR
42054, July 25, 2006]
Sec. 31.3401(a)(1)-1 Remuneration of members of the Armed Forces of
the United States for active service in combat zone or while
hospitalized as a result of such service.
Remuneration paid for active service as a member of the Armed Forces
of the United States performed in a month during any part of which such
member served in a combat zone (as determined under section 112) or is
hospitalized at any place as a result of wounds, disease, or injury
incurred while serving in such a combat zone is excepted from wages and
is, therefore, not subject to withholding. The exception with respect to
hospitalization is applicable, however, only if during all of such month
there are combatant activities in some combat zone (as determined under
section 112). See Sec. 1.112-1 of this chapter (Income Tax
Regulations).
[[Page 207]]
Sec. 31.3401(a)(2)-1 Agricultural labor.
The term ``wages'' does not include remuneration for services which
constitute agricultural labor as defined in section 3121(g). For
regulations relating to the definition of the term ``agricultural
labor'', see Sec. 31.3121(g)-1.
Sec. 31.3401(a)(3)-1 Remuneration for domestic service.
(a) In a private home. (1) Remuneration paid for services of a
household nature performed by an employee in or about a private home of
the person by whom he is employed is excepted from wages and hence is
not subject to withholding. A private home is a fixed place of abode of
an individual or family. A separate and distinct dwelling unit
maintained by an individual in an apartment house, hotel, or other
similar establishment may constitute a private home. If a dwelling house
is used primarily as a boarding or lodging house for the purpose of
supplying board or lodging to the public as a business enterprise, it is
not a private home, and the remuneration paid for services performed
therein is not within the exception.
(2) In general, services of a household nature in or about a private
home include services performed by cooks, waiters, butlers,
housekeepers, governesses, maids, valets, baby sitters, janitors,
laundresses, furnacemen, caretakers, handymen, gardeners, footmen,
grooms, and chauffeurs of automobiles for family use.
(b) In a local college club or local chapter of a college fraternity
or sorority. (1) Remuneration paid for services of a household nature
performed by an employee in or about the club rooms or house of a local
college club or of a local chapter of a college fraternity or sorority
by which he is employed is excepted from wages and hence is not subject
to withholding. A local college club or local chapter of a college
fraternity or sorority does not include an alumni club or chapter. If
the club rooms or house of a local college club or local chapter of a
college fraternity or sorority is used primarily for the purpose of
supplying board or lodging to students or the public as a business
enterprise, the remuneration paid for services performed therein is not
within the exception.
(2) In general, services of a household nature in or about the club
rooms or house of a local college club or local chapter of a college
fraternity or sorority include services rendered by cooks, waiters,
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners,
housekeepers, and housemothers.
(c) Remuneration not excepted. Remuneration paid for services not of
a household nature, such as services performed as a private secretary,
tutor, or librarian, even though performed in the employer's private
home or in a local college club or local chapter of a college fraternity
or sorority, is not within the exception. Remuneration paid for services
of a household nature is not within the exception if performed in or
about rooming, or lodging houses, boarding houses, clubs (except local
college clubs), hotels, hospitals, eleemosynary institutions, or
commercial offices or establishments.
Sec. 31.3401(a)(4)-1 Cash remuneration for service not in the course
of employer's trade or business.
(a) Cash remuneration paid for services not in the course of the
employer's trade or business performed by an employee for an employer in
a calendar quarter is excepted from wages and hence is not subject to
withholding unless--
(1) The cash remuneration paid for such services performed by the
employee for the employer in the calendar quarter is $50 or more; and
(2) Such employee is regularly employed in the calendar quarter by
such employer to perform such services.
Unless the tests set forth in both paragraphs (a)(1) and (2) of this
section are met, cash remuneration for service not in the course of the
employer's trade or business is excluded from wages. (For provisions
relating to the exclusion from wages of remuneration paid in any medium
other than cash for services not in the course of the employer's trade
or business, see Sec. 31.3401(a)(11)-1.)
(b) The term ``services not in the course of the employer's trade or
business'' includes services that do not promote or advance the trade or
business
[[Page 208]]
of the employer. As used in this section, the term does not include
service not in the course of the employer's trade or business performed
on a farm operated for profit or domestic service in a private home,
local college club, or local chapter of a college fraternity or
sorority. Accordingly, this exception does not apply with respect to
remuneration which is excepted from wages under section 3401(a)(2) or
section 3401(a)(3) (see Sec. Sec. 31.3401(a)(2)-1 and 31.3401(a)(3)-1,
respectively). Remuneration paid for service performed for a corporation
does not come within the exception.
(c) The test relating to cash remuneration of $50 or more is based
on the remuneration earned during a calendar quarter rather than on the
remuneration paid in a calendar quarter. However, for purposes of
determining whether the test is met, it is also required that the
remuneration be paid, although it is immaterial when the remuneration is
paid. Furthemore, in determining whether $50 or more has been paid for
service not in the course of the employer's trade or business, only cash
remuneration for such service shall be taken into account. The term
``cash remuneration'' includes checks and other monetary media of
exchange. Remuneration paid in any other medium, such as lodging, food,
or other goods or commodities, is disregarded in determining whether the
cash-remuneration test is met.
(d) For purposes of this exception, an individual is deemed to be
regularly employed by an employer during a calendar quarter only if--
(1) Such individual performs service not in the course of the
employer's trade or business for such employer for some portion of the
day on at least 24 days (whether or not consecutive) during such
calendar quarter; or
(2) Such individual was regularly employed (as determined under
paragraph (d)(1) of this section) by such employer in the performance of
service not in the course of the employer's trade or business during the
preceding calendar quarter.
(e) In determining whether an employee has performed service not in
the course of the employer's trade or business on at least 24 days
during a calendar quarter, there shall be counted as one day--
(1) Any day or portion thereof on which the employee actually
performs such service; and
(2) Any day or portion thereof on which the employee does not
perform service of the prescribed character but with respect to which
cash remuneration is paid or payable to the employee for such service,
such as a day on which the employee is sick or on vacation.
An employee who on a particular day reports for work and, at the
direction of his employer, holds himself in readiness to perform service
not in the course of the employer's trade or business shall be
considered to be engaged in the actual performance of such service on
that day. For purposes of this exception, a day is a continuous period
of 24 hours commencing at midnight and ending at midnight.
Sec. 31.3401(a)(5)-1 Remuneration for services for foreign government
or international organization.
(a) Services for foreign government. (1) Remuneration paid for
services performed as an employee of a foreign government is excepted
from wages and hence is not subject to withholding. The exception
includes not only remuneration paid for services performed by
ambassadors, ministers, and other diplomatic officers and employees but
also remuneration paid for services performed as a consular or other
officer or employee of a foreign government or as a nondiplomatic
representative of such a government. However, the exception does not
include remuneration for services performed for a corporation created or
organized in the United States or under the laws of the United States or
any State (including the District of Columbia or the Territory of Alaska
or Hawaii) or of Puerto Rico even though such corporation is wholly
owned by such a government.
(2) The citizenship or residence of the employee and the place where
the services are performed are immaterial for purposes of the exception.
(b) Services for international organization. (1) Subject to the
provisions of section 1 of the International Organizations Immunities
Act (22 U.S.C. 288),
[[Page 209]]
remuneration paid for services performed within or without the United
States by an employee for an international organization as defined in
section 7701(a)(18) is excepted from wages and hence is not subject to
withholding. The term ``employee'' as used in the preceding sentence
includes not only an employee who is a citizen or resident of the United
States but also an employee who is a nonresident alien individual. The
term ``employee'' also includes an officer. An organization designated
by the President through appropriate Executive order as entitled to
enjoy the privileges, exemptions, and immunities provided in the
International Organizations Immunities Act may enjoy the benefits of the
exclusion from wages with respect to remuneration paid for services
performed for such organization prior to the date of the issuance of
such Executive order, if (i) the Executive order does not provide
otherwise and (ii) the organization is a public international
organization in which the United States participates, pursuant to a
treaty or under the authority of an act of Congress authorizing such
participation or making an appropriation for such participation, at the
time such services are performed.
(2) Section 7701(a)(18) provides as follows:
Sec. 7701. Definitions. (a) When used in this title, where not
otherwise distinctly expressed or manifestly incompatible with the
intent thereof--
* * * * *
(18) International organization. The term ``international
organization'' means a public international organization entitled to
enjoy privileges, exemptions, and immunities as an international
organization under the International Organizations Immunities Act (22
U.S.C. 288-288f).
(3) Section 1 of the International Organizations Immunities Act
provides as follows:
Section 1. [International Organizations Immunities Act.] For the
purposes of this title [International Organizations Immunities Act], the
term ``international organization'' means a public international
organization in which the United States participates pursuant to any
treaty or under the authority of any Act of Congress authorizing such
participation or making an appropriation for such participation, and
which shall have been designated by the President through appropriate
Executive order as being entitled to enjoy the privileges, exemptions,
and immunities herein provided. The President shall be authorized, in
the light of the functions performed by any such international
organization, by appropriate Executive order to withhold or withdraw
from any such organization or its officers or employees any of the
privileges, exemption, and immunities provided for in this title
(including the amendments made by this title) or to condition or limit
the enjoyment by any such organization or its officers or employees of
any such privilege, exemption, or immunity. The President shall be
authorized, if in his judgment such action should be justified by reason
of the abuse by an international organization or its officers and
employees of the privileges, exemptions, and immunities herein provided
or for any other reason, at any time to revoke the designation of any
international organization under this section, whereupon the
international organization in question shall cease to be classed as an
international organization for the purposes of this title.
Sec. 31.3401(a)(6)-1 Remuneration for services of nonresident alien
individuals.
(a) In general. All remuneration paid after December 31, 1966, for
services performed by a nonresident alien individual, if such
remuneration otherwise constitutes wages within the meaning of Sec.
31.3401(a)-1 and if such remuneration is effectively connected with the
conduct of a trade or business within the United States, is subject to
withholding under section 3402 unless excepted from wages under this
section. In regard to wages paid under this section after February 28,
1979, the term ``nonresident alien individual'' does not include a
nonresident alien individual treated as a resident under section 6013
(g) or (h).
(b) Remuneration for services performed outside the United States.
Remuneration paid to a nonresident alien individual (other than a
resident of Puerto Rico) for services performed outside the United
States is excepted from wages and hence is not subject to withholding.
(c) Remuneration for services of residents of Canada or Mexico who
enter and
[[Page 210]]
leave the United States at frequent intervals--(1) Transportation
service. Remuneration paid to a nonresident alien individual who is a
resident of Canada or Mexico and who, in the performance of his duties
in transportation service between points in the United States and points
in such foreign country, enters and leaves the United States at frequent
intervals, is excepted from wages and hence is not subject to
withholding. This exception applies to personnel engaged in railroad,
bus, truck, ferry, steamboat, aircraft, or other transportation services
and applies whether the employer is a domestic or foreign entity. Thus,
the remuneration of a nonresident alien individual who is a resident of
Canada and an employee of a domestic railroad, for services as a member
of the crew of a train operating between points in Canada and points in
the United States, is not subject to withholding under section 3402.
(2) Service on international projects. Remuneration paid to a
nonresident alien individual who is a resident of Canada or Mexico and
who, in the performance of his duties in connection with the
construction, maintenance, or operation of a waterway, viaduct, dam, or
bridge traversed by, or traversing, the boundary between the United
States and Canada or the boundary between the United States and Mexico,
as the case may be, enters and leaves the United States at frequent
intervals, is excepted from wages and hence is not subject to
withholding. Thus, the remuneration of a nonresident alien individual
who is a resident of Canada, for services as an employee in connection
with the construction, maintenance, or operation of the Saint Lawrence
Seaway and who, in the performance of such services, enters and leaves
the United States at frequent intervals, is not subject to withholding
under section 3402.
(3) Limitation. The exceptions provided by this paragraph do not
apply to the remuneration of a resident of Canada or of Mexico who is
employed wholly within the United States as, for example, where such a
resident is employed to perform service at a fixed point or points in
the United States, such as a factory, store, office, or designated area
or areas within the United States, and who commutes from his home in
Canada or Mexico, in the pursuit of his employment within the United
States.
(4) Certificate required. In order for an exception provided by this
paragraph to apply for any taxable year, the nonresident alien employee
must furnish his employer a statement in duplicate for the taxable year
setting forth the employee's name, address, and taxpayer identifying
number, and certifying (i) that he is not a citizen or resident of the
United States, (ii) that he is a resident of Canada or Mexico, as the
case may be, and (iii) that he expects to meet the requirements of
paragraph (c)(1) or (2) of this section with respect to remuneration to
be paid during the taxable year in respect of which the statement is
filed. The statement shall be dated, shall identify the taxable year to
which it relates, shall be signed by the employee, and shall contain, or
be verified by, a written declaration that it is made under the
penalties of perjury. No particular form is prescribed for this
statement. The duplicate copy of each statement filed during any
calendar year pursuant to this paragraph shall be forwarded by the
employer with, and attached to, the Form 1042S required by paragraph (c)
of Sec. 1.1461-2 with respect to such remuneration for such calendar
year.
(d) Remuneration for services performed by residents of Puerto Rico.
(1) Remuneration paid for services performed in Puerto Rico by a
nonresident alien individual who is a resident of Puerto Rico for an
employer (other than the United States or any agency thereof) is
excepted from wages and hence is not subject to withholding.
(2) Remuneration paid for services performed outside the United
States but not in Puerto Rico by a nonresident alien individual who is a
resident of Puerto Rico for an employer (other than the United States or
any agency thereof) is excepted from wages and hence is not subject to
withholding if such individual does not expect to be a resident of
Puerto Rico during the entire taxable year. In order for the exception
provided by this subparagraph to apply for any taxable year, the
nonresident alien employee must furnish
[[Page 211]]
his employer a statement for the taxable year setting forth the
employee's name and address and certifying (i) that he is not a citizen
or resident of the United States and (ii) that he is a resident of
Puerto Rico but does not expect to be a resident of Puerto Rico during
the entire taxable year. The statement shall be dated, shall identify
the taxable year to which it relates, shall be signed by the employee,
and shall contain, or be verified by, a written declaration that it is
made under the penalties of perjury. No particular form is prescribed
for this statement.
(3) Remuneration paid for services performed outside the United
States by a nonresident alien individual who is a resident of Puerto
Rico as an employee of the United States or any agency thereof is
excepted from wages and hence is not subject to withholding if such
individual does not expect to be a resident of Puerto Rico during the
entire taxable year. In order for the exception provided by this
subparagraph to apply for any taxable year, the nonresident alien
employee must furnish his employer a statement for the taxable year
setting forth the employee's name and address and certifying (i) that he
is not a citizen or resident of the United States and (ii) that he is a
resident of Puerto Rico but does not expect to be a resident of Puerto
Rico during the entire taxable year. This statement shall be dated,
shall identify the taxable year to which it relates, shall be signed by
the employee, and shall contain, or be verified by, a written
declaration that it is made under the penalties of perjury. No
particular form is prescribed for this statement.
(e) Exemption from income tax for remuneration paid for services
performed before January 1, 2001. Remuneration paid for services
performed within the United States by a nonresident alien individual
before January 1, 2001, is excepted from wages and hence is not subject
to withholding if such remuneration is, or will be, exempt from income
tax imposed by chapter 1 of the Internal Revenue Code by reason of a
provision of the Internal Revenue Code or an income tax convention to
which the United States is a party. In order for the exception provided
by this paragraph to apply for any taxable year, the nonresident alien
employee must furnish his employer a statement in duplicate for the
taxable year setting forth the employee's name, address, and taxpayer
identifying number, and certifying (1) that he is not a citizen or
resident of the United States, (2) that the remuneration to be paid to
him during the taxable year is, or will be, exempt from the tax imposed
by chapter 1 of the Code, and (3) the reason why such remuneration is so
exempt from tax. If the remuneration is claimed to be exempt from tax by
reason of a provision of an income tax convention to which the United
States is a party, the statement shall also indicate the provision and
tax convention under which the exemption is claimed, the country of
which the employee is a resident, and sufficient facts to justify the
claim to exemption. The statement shall be dated, shall identify the
taxable year for which it is to apply and the remuneration to which it
relates, shall be signed by the employee, and shall contain, or be
verified by, a written declaration that it is made under the penalties
of perjury. No particular form is prescribed for this statement. The
duplicate copy of each statement filed during any calendar year pursuant
to this paragraph shall be forwarded by the employer with, and attached
to, the Form 1042S required by paragraph (c) of Sec. 1.1461-2 with
respect to such remuneration for such calendar year.
(f) Exemption from income tax for remuneration paid for services
performed after December 31, 2000. Remuneration paid for services
performed within the United States by a nonresident alien individual
after December 31, 2000, is excepted from wages and hence is not subject
to withholding if such remuneration is, or will be, exempt from the
income tax imposed by chapter 1 of the Internal Revenue Code by reason
of a provision of the Internal Revenue Code or an income tax convention
to which the United States is a party. An employer may rely on a claim
that the employee is entitled to an exemption from tax if it complies
with the requirements of Sec. 1.1441-1(e)(1)(ii) of this chapter (for a
claim based on a provision of the Internal Revenue Code) or Sec.
1.1441-4(b)(2) of this chapter (for a
[[Page 212]]
claim based on an income tax convention).
[T.D. 6908, 31 FR 16775, Dec. 31, 1966, as amended by T.D. 7670, 45 FR
6932, Jan. 31, 1980; T.D. 7977, 49 FR 36836, Sept. 20, 1984; T.D. 8734,
62 FR 53493, Oct. 14, 1997; T.D. 8804, 63 FR 72189, Dec. 31, 1998; T.D.
8856, 64 FR 73412, Dec. 30, 1999]
Sec. 31.3401(a)(6)-1A Remuneration for services of certain nonresident
alien individuals paid before January 1, 1967.
(a) Except in the case of certain nonresident alien individuals who
are residents of Canada, Mexico, or Puerto Rico or individuals who are
temporarily present in the United States as nonimmigrants under
subparagraph (F) or (J) of section 101(a)(15) of the Immigration and
Nationality Act (8 U.S.C. 1101), as amended, remuneration for services
performed by nonresident alien individuals does not constitute wages
subject to withholding under section 3402. For withholding of income tax
on remuneration paid for services performed within the United States in
the case of nonresident alien individuals generally, see Sec. 1.1441-1
and following of this chapter (Income Tax Regulations).
(b) Remuneration paid to nonresident aliens who are residents of a
contiguous country (Canada or Mexico) and who enter and leave the United
States at frequent intervals is not excepted from wages under section
3401(a)(6). See, however, Sec. 31.3401(a)(7)-1, relating to
remuneration paid to such nonresident alien individuals when engaged in
transportation service.
(c) Remuneration paid to a nonresident alien individual for services
performed in Puerto Rico for an employer (other than the United States
or any agency thereof) is excepted from wages and hence is not subject
to withholding, even though such alien individual is a resident of
Puerto Rico at the time when such services are performed. Wages paid for
services performed by a nonresident alien individual who is a resident
of Puerto Rico are subject to withholding if such services are performed
as an employee of the United States or any agency thereof. The place of
performance of such services is immaterial, provided such alien
individual is a resident of Puerto Rico at the time of performance of
the services. Wages representing retirement pay for services in the
Armed Forces of the United States, the Coast and Geodetic Survey, or the
Public Health Service, or a disability annuity paid under the provisions
of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C.
1081; 60 Stat. 1021), are subject to withholding, under the limitations
specified in paragraph (b)(1)(ii) of Sec. 31.3401(a)-1, in the case of
an alien resident of Puerto Rico.
(d) (1) Remuneration paid after 1961 to a nonresident alien
individual who is temporarily present in the United States as a
nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the
Immigration and Nationality Act (8 U.S.C. 1101), as amended, is not
excepted from wages under section 3401(a)(6) if the remuneration is
exempt from withholding under section 1441(a) by reason of section
1441(c)(4)(B) and is not exempt from taxation under section 872(b)(3).
See Sec. Sec. 1.872-2 and 1.1441-4 of this chapter (Income Tax
Regulations). A nonresident alien individual who is temporarily present
in the United States as a nonimmigrant under subparagraph (J) includes
an alien individual admitted to the United States as an ``exchange
visitor'' under section 201 of the United States Information and
Educational Exchange Act of 1948 (22 U.S.C. 1446).
(2) Section 101 of the Immigration and Nationality Act (8 U.S.C.
1101), as amended, provides in part, as follows:
Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat.
166)]
(a) As used in this chapter--* * *
(15) The term ``immigrant'' means every alien except an alien who is
within one of the following classes of nonimmigrant aliens--
* * * * *
(F) (i) An alien having a residence in a foreign country which he
has no intention of abandoning, who is a bona fide student qualified to
pursue a full course of study and who seeks to enter the United States
temporarily and solely for the purpose of pursuing such a course of
study at an established institution of learning or other recognized
place of study in the United States, particularly designated by him and
approved by the Attorney General after consultation with the Office of
Education of the United States, which institution or place of study
shall have agreed to
[[Page 213]]
report to the Attorney General the termination of attendance of each
nonimmigrant student, and if any such institution of learning or place
of study fails to make reports promptly the approval shall be withdrawn,
and (ii) the alien spouse and minor children of any such alien if
accompanying him or following to join him;
* * * * *
(J) An alien having a residence in a foreign country which he has no
intention of abandoning who is a bona fide student, scholar, trainee,
teacher, professor, research assistant, specialist, or leader in a field
of specialized knowledge or skill, or other person of similar
description, who is coming temporarily to the United States as a
participant in a program designated by the Secretary of State, for the
purpose of teaching, instructing or lecturing, studying, observing,
conducting research, consulting, demonstrating special skills, or
receiving training, and the alien spouse and minor children of any such
alien if accompanying him or following to join him.
(e) This section shall not apply with respect to remuneration paid
after December 31, 1966. For rules with respect to such remuneration see
Sec. 31.3401(a)(6)-1.
(Sec. 101. Immigration and Nationality Act, as amended by sec. 101, Act
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75
Stat. 534)
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR
5251, May 28, 1963; T.D. 6727, 29 FR 5869, May 5, 1964; T.D. 6908, 31 FR
16775, Dec. 31, 1966]
Sec. 31.3401(a)(7)-1 Remuneration paid before January 1, 1967, for
services performed by nonresident alien individuals who are residents
of a contiguous country and who enter and leave the United States at
frequent intervals.
(a) Transportation service. Remuneration paid to nonresident aliens
who are residents of a contiguous country (Canada or Mexico) and who, in
the performance of their duties in transportation service between points
in the United States and points in a contiguous country, enter and leave
the United States at frequent intervals, is excepted from wages and
hence is not subject to withholding. This exception applies to personnel
engaged in railroad, bus, ferry, steamboat, and aircraft services and
applies whether the employer is a domestic or foreign entity. Thus, the
remuneration of a nonresident alien individual who is a resident of
Canada and an employee of a domestic railroad, for services as a member
of the crew of a train operating between points in Canada and points in
the United States, is not subject to withholding under section 3402.
(b) Service on international projects. Remuneration paid to
nonresident aliens who are residents of a contiguous country (Canada or
Mexico) and who, in the performance of their duties in connection with
the construction, maintenance or operation of a waterway, viaduct, dam,
or bridge traversed by or traversing the boundary between the United
States and Canada or the boundary between the United States and Mexico,
as the case may be, enter and leave the United States at frequent
intervals, is excepted from wages and hence is not subject to
withholding. Thus, the remuneration of a nonresident alien individual
who is a resident of Canada, for services as an employee in connection
with the construction, maintenance, or operation of the Saint Lawrence
Seaway and who, in the performance of such services, enters and leaves
the United States at frequent intervals, is not subject to withholding
under section 3402.
(c) Limitation on application of section. The exception provided by
this section has no application to the remuneration of a resident of
Canada or of Mexico who is employed wholly within the United States as,
for example, where such a resident is employed to perform service at a
fixed point or points in the United States, such as a factory, store,
office, or designated area or areas within the United States, and who
commutes from his home in Canada or Mexico in the pursuit of his
employment within the United States.
(d) Certificate required. In order for the exception to apply, the
nonresident alien employee must furnish his employer a statement setting
forth the employee's name and address and certifying (1) that he is not
a citizen of the United States, (2) that he is a resident of Canada or
Mexico, as the case may be, and (3) the approximate period of time
during which he has had such status. Such statement shall be dated,
[[Page 214]]
shall be signed by the employee, and shall contain, or be verified by, a
written declaration that it is made under the penalties of perjury. No
particular form is prescribed for this statement.
(e) Effective date. This section shall not apply with respect to
remuneration paid after December 31, 1966. For rules with respect to
such remuneration see Sec. 31.3401(a)(6)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6908, 31 FR
16776, Dec. 31, 1966]
Sec. 31.3401(a)(8)(A)-1 Remuneration for services performed outside
the United States by citizens of the United States.
(a) Remuneration excluded from gross income under section 911. (1)
(i) Remuneration paid for services performed outside the United States
for an employer (other than the United States or any agency thereof) by
a citizen of the United States does not constitute wages and hence is
not subject to withholding, if at the time of payment it is reasonable
to believe that such remuneration will be excluded from gross income
under the provisions of section 911. The reasonable belief contemplated
by the statute may be based upon any evidence reasonably sufficient to
induce such belief, even though such evidence may be insufficient upon
closer examination by the district director or the courts finally to
establish that the remuneration is excludable from gross income under
the provisions of section 911. The reasonable belief shall be based upon
the application of section 911 and the regulations thereunder in Part 1
of this chapter (Income Tax Regulations).
(ii) Remuneration paid by an employer to an employee constitutes
wages, and hence is subject to withholding only to the extent that the
remuneration is expected to exceed the aggregate amount which is
excludable from the employee's gross income under section 911(a). For
amounts paid after December 31, 1984, the determination of the amount
subject to withholding shall be made by applying the excludable amount,
on a pro rata basis, to each payment of remuneration to the employee.
For this purpose, an employer is not required to ascertain information
with respect to amounts received by his employee from any other source;
but, if the employer has such information, he shall take it into account
in determining whether the earned income of the employee is in excess of
the applicable limitation. For purposes of section 911(d)(5) and Sec.
1.911-2(c), relating to an employee who states to the authorities of a
foreign country that he is not a resident of that country, the employer
is not required to ascertain whether such a statement has been made; but
if an employer knows that such a statement has been made, he shall
presume that the employee is not a bona fide resident of that country,
unless the employer also knows that the authorities of the foreign
country have determined, notwithstanding the statement that the employee
is a resident of that country. For purposes of section 911(d)(1) or
Sec. 1.911-2(a) relating to the definition of a qualified individual,
the reasonable belief contemplated by the statute may be based on a
presumption as set forth in subparagraph (2) or (3) of this paragraph.
For purposes of sections 911(a)(2) and 911(c)(2) and Sec. 1.911-4(b)
and (d)(1), relating to the housing cost amount exclusion and the
definition of housing expenses, the reasonable belief contemplated by
the statute may be based on the presumption set forth in subparagraph
(4) of this paragraph.
(2)(i) The employer may, in the absence of cause for a reasonable
belief to the contrary, presume that an employee will maintain a tax
home in a foreign country or countries and be a bona fide resident of a
foreign country or countries, within the meaning of section 911(d)(1),
for an uninterrupted period which includes each taxable year of the
employee, or applicable portion thereof, in respect of which the
employee properly executes and delivers to the employer a statement that
the employee meets or will meet the requirement of Sec. 1.911-2(a)
relating to maintaining a tax home and a bona fide residence in a
foreign country for the taxable year. This statement must set forth the
facts alleged as the basis for this determination and contain a
declaration by the employee that the statement is made under the
penalties
[[Page 215]]
of perjury. Sample forms of acceptable statements may be obtained by
writing to the Foreign Operations District, Internal Revenue Service,
Washington, D.C. 20225 (Form IO-673).
(ii) If the employer was entitled to presume for the two consecutive
taxable years immediately preceding an employee's current taxable year
that such employee was a bona fide resident of a foreign country or
countries for an uninterrupted period which includes such preceding
taxable years, he may, if such employee is residing in a foreign country
on the first day of such current taxable year, presume, in the absence
of cause for a reasonable belief to the contrary, and without obtaining
from the employee the statement prescribed in subdivision (i) of this
subparagraph, that the employee will be a bona fide resident of a
foreign country or countries in such current taxable year.
(3) The employer may, in the absence of cause for a reasonable
belief to the contrary, presume that an employee will maintain a tax
home in a foreign country or countries and be present in a foreign
country or countries during at least 330 full days during any period of
twelve consecutive months, within the meaning of section 911(d)(1), and
that such period includes each taxable year of the employee, or
applicable portion thereof, in respect of which the employee properly
executes and delivers to the employer a statement that the employee
meets or will meet the requirements of Sec. 1.911-2(a) relating to
maintaining a tax home and being physically present in a foreign country
for the taxable year. This statement must set forth the facts alleged as
the basis for this determination and contain a declaration by the
employee that the statement is made under the penalties of perjury.
Sample forms of acceptable statements may be obtained by writing to the
Foreign Operations District, Internal Revenue Service, Washington, D.C.
20225 (Form IO-673).
(4) The employer may, in the absence of cause for a reasonable
belief to the contrary, presume that an employee's housing cost amount
will be the amount shown on a statement properly executed and delivered
to the employer. This statement must set forth the employee's estimation
of the following items: housing expenses (as defined in Sec. 1.911-
4(b)), the housing cost amount exclusion (as defined in Sec. 1.911-
4(d)(1)), and the qualifying period (as defined in Sec. 1.911-2(a)).
The statement must contain a declaration by the employee that it is made
under the penalties of perjury. Sample forms of acceptable statements
may be obtained by writing to the Foreign Operations District, Internal
Revenue Service, Washington, D.C. 20225 (IO-673). The employer may not
rely on a statement from an employee if the employer, based on his or
her knowledge of housing costs in the vicinity of the employee's tax
home (as defined in Sec. 1.911-2(b)), believes the employee's housing
expenses are lavish or extravagant under the circumstances.
(b) Remuneration subject to withholding of income tax under law of a
foreign country or a possession of the United States. (1) Remuneration
paid for services performed in a foreign country or in a possession of
the United States for an employer (other than the United States or any
agency thereof) by a citizen of the United States does not constitute
wages and hence is not subject to withholding, if at the time of the
payment of such remuneration the employer is required by the law of any
foreign country or of any possession of the United States to withhold
income tax upon such remuneration. This paragraph, insofar as it relates
to remuneration paid for services performed in a possession of the
United States, applies only with respect to remuneration paid on or
after August 9, 1955.
(2) Remuneration is not exempt from withholding under this paragraph
if the employer is not required by the law of a foreign country or of a
possession of the United States to withhold income tax upon such
remuneration. Mere agreements between the employer and the employee
whereby the estimated income tax of a foreign country or of a possession
of the United States is withheld from the remuneration in anticipation
of actual liability under the law of such country or possession will not
suffice.
(3) The exemption from withholding provided by this paragraph does
not
[[Page 216]]
apply by reason of withholding of income tax pursuant to the law of a
territory of the United States, of a political subdivision of a
possession of the United States, or of a political subdivision of a
foreign state.
(4) For provisions relating to remuneration for services performed
by a permanent resident of the Virgin Islands, see paragraph (b)(12) of
Sec. 31.3401(a)-1.
(c) Limitation on application of section. This section has no
application to the remuneration paid to a citizen of the United States
for services performed outside the United States as an employee of the
United States or any agency thereof.
(Approved by the Office of Management and Budget under control number
1545-0067)
(Sec. 911, 95 Stat. 194; 26 U.S.C. 911), sec. 7805 (68A Stat. 917; 26
U.S.C. 7805) of the Internal Revenue Code of 1954)
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6697, 28 FR
13745, Dec. 17, 1963; T.D. 8006, 50 FR 2977, Jan. 23, 1985]
Sec. 31.3401(a)(8)(B)-1 Remuneration for services performed in
possession of the United States (other than Puerto Rico) by citizen
of the United States.
(a) Remuneration paid for services for an employer (other than the
United States or any agency thereof) performed by a citizen of the
United States within a possession of the United States (other than
Puerto Rico) does not constitute wages and hence is not subject to
withholding, if it is reasonable to believe that at least 80 percent of
the remuneration to be paid to the employee by such employer during the
calendar year will be for such services. The reasonable belief
contemplated by section 3401(a)(8)(B) may be based upon any evidence
reasonably sufficient to induce such belief, even though such evidence
may be insufficient upon closer examination by the district director or
the courts finally to establish that at least 80 percent of the
remuneration paid by the employer to the employee during the calendar
year was for services performed within such a possession of the United
States.
(b) This section has no application to remuneration paid to a
citizen of the United States for services performed in any possession of
the United States as an employee of the United States or any agency
thereof.
(c) For provisions relating to remuneration for services performed
by a permanent resident of the Virgin Islands, see paragraph (b)(12) of
Sec. 31.3401(a)-1.
Sec. 31.3401(a)(8)(C)-1 Remuneration for services performed in Puerto
Rico by citizen of the United States.
(a) Remuneration paid for services performed within Puerto Rico for
an employer (other than the United States or any agency thereof) by a
citizen of the United States does not constitute wages and hence is not
subject to withholding, if it is reasonable to believe that during the
entire calendar year the employee will be a bona fide resident of Puerto
Rico. The reasonable belief contemplated by section 3401(a)(8)(C) may be
based upon any evidence reasonably sufficient to induce such belief,
even though such evidence may be insufficient upon closer examination by
the district director or the courts finally to establish that the
employee was a bona fide resident of Puerto Rico for the entire calendar
year.
(b) The employer may, in the absence of cause for a reasonable
belief to the contrary, presume that an employee will be a bona fide
resident of Puerto Rico during the entire calendar year.
(1) Unless the employee is known by the employer to have maintained
his abode at a place outside Puerto Rico at some time during the current
or the preceding calendar year; or
(2) In any case where the employee files with the employer a
statement (containing a declaration under the penalties of perjury that
such statement is true to the best of the employee's knowledge and
belief) that such employee has at all times during the current calendar
year been a bona fide resident of Puerto Rico and that he intends to
remain a bona fide resident of Puerto Rico during the entire remaining
portion of such current calendar year.
(c) This section has no application to remuneration paid to a
citizen of the United States for services performed in
[[Page 217]]
Puerto Rico as an employee of the United States or any agency thereof.
Sec. 31.3401(a)(9)-1 Remuneration for services performed by a minister
of a church or a member of a religious order.
(a) In general. Remuneration paid for services performed by a duly
ordained, commissioned, or licensed minister of a church in the exercise
of his ministry, or by a member of a religious order in the exercise of
duties required by such order, is excepted from wages and hence is not
subject to withholding.
(b) Service by a minister in the exercise of his ministry. Except as
provided in paragraph (c)(3) of this section, service performed by a
minister in the exercise of his ministry includes the ministration of
sacerdotal functions and the conduct of religious worship, and the
control, conduct, and maintenance of religious organizations (including
the religious boards, societies, and other integral agencies of such
organizations), under the authority of a religious body constituting a
church or church denomination. The following rules are applicable in
determining whether services performed by a minister are performed in
the exercise of his ministry:
(1) Whether service performed by a minister constitutes the conduct
of religious worship or the ministration of sacerdotal functions depends
on the tenents and practices of the particular religious body
constituting his church or church denomination.
(2) Service performed by a minister in the control, conduct, and
maintenance of a religious organization relates to directing, managing,
or promoting the activities of such organization. Any religious
organization is deemed to be under the authority of a religious body
constituting a church or church denomination if it is organized and
dedicated to carrying out the tenents and principles of a faith in
accordance with either the requirements or sanctions governing the
creation of institutions of the faith. The term ``religious
organization'' has the same meaning and application as is given to the
term for income tax purposes.
(3) (i) If a minister is performing service in the conduct of
religious worship or the ministration of sacerdotal functions, such
service is in the exercise of his ministry whether or not it is
performed for a religious organization.
(ii) The rule in paragraph (b)(3)(i) of this section may be
illustrated by the following example:
Example. M, a duly ordained minister, is engaged to perform service
as chaplain at N University. M devotes his entire time to performing his
duties as chaplain which include the conduct of religious worship,
offering spiritual counsel to the university students, and teaching a
class in religion. M is performing service in the exercise of his
ministry.
(4) (i) If a minister is performing service for an organization
which is operated as an integral agency of a religious organization
under the authority of a religious body constituting a church or church
denomination, all service performed by the minister in the conduct of
religious worship, in the ministration of sacerdotal functions, or in
the control, conduct, and maintenance of such organization (see
paragraph (b)(2) of this section) is in the exercise of his ministry.
(ii) The rule in paragraph (b)(4)(i) of this section may be
illustrated by the following example:
Example. M, a duly ordained minister, is engaged by the N Religious
Board to serve as director of one of its departments. He performs no
other service. The N Religious Board is an integral agency of O, a
religious organization operating under the authority of a religious body
constituting a church denomination. M is performing service in the
exercise of his ministry.
(5) (i) If a minister, pursuant to an assignment or designation by a
religious body constituting his church, performs service for an
organization which is neither a religious organization nor operated as
an integral agency of a religious organization, all service performed by
him, even though such service may not involve the conduct of religious
worship or the ministration of sacerdotal functions, is in the exercise
of his ministry.
(ii) The rule in subdivision (i) of this subparagraph may be
illustrated by the following example:
Example. M, a duly ordained minister, is assigned by X, the
religious body constituting his church, to perform advisory service to Y
[[Page 218]]
Company in connection with the publication of a book dealing with the
history of M's church denomination. Y is neither a religious
organization nor operated as an integral agency of a religious
organization. M performs no other service for X or Y. M is performing
service in the exercise of his ministry.
(c) Service by a minister not in the exercise of his ministry. (1)
Section 3401(a)(9) does not except from wages remuneration for service
performed by a duly ordained, commissioned, or licensed minister of a
church which is not in the exercise of his ministry.
(2) (i) If a minister is performing service for an organization
which is neither a religious organization nor operated as an integral
agency of a religious organization and the service is not performed
pursuant to an assignment or designation by his ecclesiastical
superiors, then only the service performed by him in the conduct of
religious worship or the ministration of sacerdotal functions is in the
exercise of his ministry. See, however, paragraph (b)(3) of this
section.
(ii) The rule in subdivision (i) of this subparagraph may be
illustrated by the following example:
Example. M, a duly ordained minister, is engaged by N University to
teach history and mathematics. He performs no other service for N
although from time to time he performs marriages and conducts funerals
for relatives and friends. N University is neither a religious
organization nor operated as an integral agency of a religious
organization. M is not performing the service for N pursuant to an
assignment or designation by his ecclesiastical superiors. The service
performed by M for N University is not in the exercise of his ministry.
However, service performed by M in performing marriages and conducting
funerals is in the exercise of his ministry.
(3) Service performed by a duly ordained, commissioned, or licensed
minister of a church as an employee of the United States, or a State,
Territory, or possession of the United States, or the District of
Columbia, or a foreign government, or a political subdivision of any of
the foregoing, is not considered to be in the exercise of his ministry
for purposes of the collection of income tax at source on wages, even
though such service may involve the ministration of sacerdotal functions
or the conduct of religious worship. Thus, for example, service
performed by an individual as a chaplain in the Armed Forces of the
United States is considered to be performed by a commissioned officer in
his capacity as such, and not by a minister in the exercise of his
ministry. Similarly, service performed by an employee of a State as a
chaplain in a State prison is considered to be performed by a civil
servant of the State and not by a minister in the exercise of his
ministry.
(d) Service in the exercise of duties required by a religious order.
Service performed by a member of a religious order in the exercise of
duties required by such order includes all duties required of the member
by the order. The nature or extent of such service is immaterial so long
as it is a service which he is directed or required to perform by his
ecclesiastical superiors.
Sec. 31.3401(a)(10)-1 Remuneration for services in delivery or
distribution of newspapers, shopping news, or magazines.
(a) Services of individuals under age 18. Remuneration for services
performed by an employee under the age of 18 in the delivery or
distribution of newspapers, or shopping news, not including delivery or
distribution (as, for example, by a regional distributor) to any point
for subsequent delivery or distribution, is excepted from wages and
hence is not subject to withholding. Thus, remuneration for services
performed by an employee under the age of 18 in making house-to-house
delivery or sale of newspapers or shopping news, including handbills and
other similar types of advertising material, is excepted from wages. The
remuneration is excepted irrespective of the form or method thereof.
Remuneration for incidental services by the employee who makes the
house-to-house delivery, such as services in assembling newspapers, is
considered to be within the exception. The exception continues only
during the time that the employee is under the age of 18.
(b) Services of individuals of any age. Remuneration for services
performed by an employee in, and at the time of, the sale of newspapers
or magazines to
[[Page 219]]
ultimate consumers under an arrangement under which the newspapers or
magazines are to be sold by him at a fixed price, his remuneration being
based on the retention of the excess of such price over the amount at
which the newspapers or magazines are charged to him, is excepted from
wages and hence is not subject to withholding. The remuneration is
excepted whether or not the employee is guaranteed a minimum amount or
remuneration, or is entitled to be credited with the unsold newspapers
or magazines turned back. Moreover, the remuneration is excepted without
regard to the age of the employee. Remuneration for services performed
other than at the time of sale to the ultimate consumer is not within
the exception. Thus, remuneration for services of a regional distributor
which are antecedent to but not immediately part of the sale to the
ultimate consumer is not within the exception. However, remuneration for
incidental services by the employee who makes the sale to the ultimate
consumer, such as services in assembling newspapers or in taking
newspapers or magazines to the place of sale, is considered to be within
the exception.
Sec. 31.3401(a)(11)-1 Remuneration other than in cash for service not
in the course of employer's trade or business.
(a) Remuneration paid in any medium other than cash for services not
in the course of the employer's trade or business is excepted from wages
and hence is not subject to withholding. Cash remuneration includes
checks and other monetary media of exchange. Remuneration paid in any
medium other than cash, such as lodging, food, or other goods or
commodities, for services not in the course of the employer's trade or
business does not constitute wages. Remuneration paid in any medium
other than cash for other types of services does not come within this
exception from wages. For provisions relating to cash remuneration for
service not in the course of employer's trade or business, see Sec.
31.3401(a)(4)-1.
(b) As used in this section, the term ``services not in the course
of the employer's trade or business'' has the same meaning as when used
in Sec. 31.3401(a)(4)-1.
Sec. 31.3401(a)(12)-1 Payments from or to certain tax-exempt trusts,
or under or to certain annuity plans or bond purchase plans, or to
individual retirement plans.
(a) Payments from or to certain taxexempt trusts. The term ``wages''
does not include any payment made--
(1) By an employer, on behalf of an employee or his beneficiary,
into a trust, or
(2) To, or on behalf of, an employee or his beneficiary from a
trust,
if at the time of such payment the trust is exempt from tax under
section 501(a) as an organization described in section 401(a). A payment
made to an employee of such a trust for services rendered as an employee
of the trust and not as a beneficiary thereof is not within this
exclusion from wages. Also, since supplemental unemployment compensation
benefits are treated under paragraph (b) (14) of Sec. 31.3401 (a)-1 as
if they were wages for purposes of this chapter, this section does not
apply to such benefits.
(b) Payments under or to certain annuity plans. (1) The term
``wages'' does not include any payment made after December 31, 1962--
(i) By an employer, on behalf of an employee or his beneficiary,
into an annuity plan, or
(ii) To, or on behalf of, an employee or his beneficiary under an
annuity plan, if at the time of such payment the annuity plan is a plan
described in section 403(a).
(2) The term ``wages'' does not include any payment made before
January 1, 1963--
(i) By an employer, on behalf of an employee or his beneficiary,
into an annuity plan, or
(ii) To, or on behalf of, an employee or his beneficiary under an
annuity plan, if at the time of such payment the annuity plan meets the
requirements of section 401 (a) (3), (4), (5), and (6).
(c) Payments under or to certain bond purchase plans. The term
``wages'' does not include any payment made after December 31, 1962--
[[Page 220]]
(1) By an employer, on behalf of an employee or his beneficiary,
into a bond purchase plan, or
(2) To, or on behalf of, an employee or his beneficiary under a bond
purchase plan,
if at the time of such payment the plan is a qualified bond purchase
plan described in section 405(a).
(d) Payment to individual retirement plans. (1) The term ``wages''
does not include any payment to an individual retirement plan described
in section 7701(a)(37) by an employer after December 31, 1974, on behalf
of an employee, if, at the time of such payment, it is reasonable for
the employer to believe that the employee will be entitled to a
deduction for such payment under section 219(a).
(2) The term ``wages'' does not include any payment to an individual
retirement plan described in section 7701(a)(37) by an employer after
December 31, 1976, on behalf of an employee, if, at the time of such
payment, it is reasonable for the employer to believe that the employee
on whose behalf the payment is made will be entitled to a deduction for
such payment under section 220(a).
(3) The term ``wages'' does not include any payment to a simplified
employee pension arrangement described in section 408(k) by an employer
after December 31, 1978, on behalf of an employee, if, at the time of
such payment, it is reasonable for the employer to believe that the
employee on whose behalf the payment is made will be entitled to a
deduction for such payment under section 219(a).
[T.D. 6654, 28 FR 5252, May 28, 1963, as amended by T.D. 7068, 35 FR
17329, Nov. 11, 1970; T.D. 7730, 45 FR 72652, Nov. 3, 1980]
Sec. 31.3401(a)(13)-1 Remuneration for services performed by Peace
Corps volunteers.
(a) Remuneration paid after September 22, 1961, for services
performed as a volunteer or volunteer leader within the meaning of the
Peace Corps Act (22 U.S.C. 2501) is excepted from wages, and hence is
not subject to withholding, unless the remuneration is paid pursuant to
section 5(c) or section 6(1) of the Peace Corps Act.
(b) Sections 5 and 6 of the Peace Corps Act (22 U.S.C. 2504, 2505)
provide, in part, as follows:
Sec. 5 Peace Corps Volunteers [Peace Corps Act (75 Stat. 613); as
amended by sec. 2(b), Act of December 13, 1963 (P.L. 88-200, 77 Stat.
359); sec. 2(a), Act of August 24, 1965, (P.L. 89-134, 79 Stat. 549);
sec. 3(a), Act of July 24, 1970 (P.L. 91-352, 84 Stat. 464)]
* * * * *
(c) Readjustment allowances. Volunteers shall be entitled to receive
a readjustment allowance at a rate not to exceed $75 for each month of
satisfactory service as determined by the President; except that, in the
cases of volunteers who have one or more minor children at the time of
their entering a period of pre-enrollment training, one parent shall be
entitled to receive a readjustment allowance at a rate not to exceed
$125 for each month of satisfactory service as determined by the
President. The readjustment allowance of each volunteer shall be payable
on his return to the United States: Provided, however, That, under such
circumstances as the President may determine, the accrued readjustment
allowance, or any part thereof, may be paid to the volunteer, members of
his family or others, during the period of his service, or prior to his
return to the United States. In the event of the volunteer's death
during the period of his service, the amount of any unpaid readjustment
allowance shall be paid in accordance with the provisions of section
5582(b) of title 5. For purposes of the Internal Revenue Code of 1954, a
volunteer shall be deemed to be paid and to receive each amount of a
readjustment allowance to which he is entitled after December 31, 1964,
when such amount is transferred from funds made available under this
chapter to the fund from which such readjustment allowance is payable.
* * * * *
Sec. 6 Peace Corps Volunteer Leaders; number; applicability of
chapter; benefits [Peace Corps Act (75 Stat. 615), as amended by sec. 3,
Act of December 13, 1963 (P.L. 88-200, 77 Stat. 360)] The President may
enroll in the Peace Corps qualified citizens or nationals of the United
States whose services are required for supervisory or other special
duties or responsibilities in connection with programs under this
chapter (referred to in this Act as ``volunteer leaders''). The ratio of
the total number of volunteer leaders to the total number of volunteers
in service at any one time shall not exceed one to twenty-five. Except
as otherwise provided in this Act, all of the provisions of this Act
applicable to volunteers shall be applicable to volunteer
[[Page 221]]
leaders, and the term ``volunteers'' shall include ``volunteer
leaders'': Provided, however, That--
(1) Volunteer leaders shall be entitled to receive a readjustment
allowance at a rate not to exceed $125 for each month of satisfactory
service as determined by the President;
[T.D. 6654, 28 FR 5252, May 28, 1963, as amended by T.D. 7493, 42 FR
33729, July 1, 1977]
Sec. 31.3401(a)(14)-1 Group-term life insurance.
(a) The cost of group-term life insurance on the life of an employee
is excepted from wages, and hence is not subject to withholding. For
provisions relating generally to such remuneration, and for reporting
requirements with respect to such remuneration, see sections 79 and
6052, respectively, and the regulations thereunder in Part 1 of this
chapter (Income Tax Regulations).
(b) The cost of group-term life insurance on the life of an
employee's spouse or children is not subject to withholding if it is
excludable from the employee's gross income because it is merely
incidental. See paragraph (d)(2)(ii)(b) of Sec. 1.61-2 in Part 1 of
this chapter (Income Tax Regulations).
[T.D. 7493, 42 FR 33730, July 1, 1977]
Sec. 31.3401(a)(15)-1 Moving expenses.
(a) An amount paid to or on behalf of an employee after March 4,
1964, either as an advance or a reimbusement, specifically for moving
expenses incurred or expected to be incurred is excepted from wages, and
hence is not subject to withholding, if (and to the extent that) at the
time of payment it is reasonable to believe that a corresponding
deduction is or will be allowable to the employee under section 217. The
reasonable belief contemplated by the statute may be based upon any
evidence reasonably sufficient to induce such belief, even though such
evidence may be insufficient upon closer examination by the district
director or the courts finally to establish that a deduction is
allowable under section 217. The reasonable belief shall be based upon
the application of section 217 and the regulations thereunder in Part 1
of this chapter (Income Tax Regulations). When used in this section, the
term ``moving expenses'' has the same meaning as when used in section
217. See Sec. 1.6041-2(a) in Part 1 of this chapter (Income Tax
Regulations), relating to return of information as to payments to
employees, and Sec. 31.6051-1(e), relating to the reporting of
reimbursements of or payments of certain moving expenses.
(b) Except as otherwise provided in paragraph (a) of this section,
or in a numbered paragraph of section 3401(a), amounts paid to or on
behalf of an employee for moving expenses constitute wages subject to
withholding.
[T.D. 7493, 42 FR 33730, July 1, 1977]
Sec. 31.3401(a)(16)-1 Tips.
Tips paid to an employee are excepted from wages and hence not
subject to withholding if--
(a) The tips are paid in any medium other than cash, or
(b) The cash tips received by an employee in any calendar month in
the course of his employment by an employer are less than $20.
However, if the cash tips received by an employee in a calendar month in
the course of his employment by an employer amount to $20 or more, none
of the cash tips received by the employee in such calendar month are
excepted from wages under this section. The cash tips to which this
section applies include checks and other monetary media of exchange.
Tips received by an employee in any medium other than cash, such as
passes, tickets, or other goods or commodities do not constitute wages.
If an employee in any calendar month performs services for two or more
employers and receives tips in the course of his employment by each
employer, the $20 test is to be applied separately with respect to the
cash tips received by the employee in respect of his services for each
employer and not to the total cash tips received by the employee during
the month. As to the time tips are deemed paid, see Sec. 31.3401(f)-1.
For provisions relating to the treatment of tips received by an employee
prior to 1966, see paragraph (b)(11) of Sec. 31.3401(a)-1.
[T.D. 7001, 34 FR 1001, Jan. 23, 1969]
[[Page 222]]
Sec. 31.3401(a)(17)-1 Remuneration for services performed on a boat
engaged in catching fish.
(a) Remuneration for services performed on or after December 31,
1954, by an individual on a boat engaged in catching fish or other forms
of aquatic animal life (hereinafter ``fish'') is excepted from wages and
hence is not subject to withholding if--
(1) The individual receives a share of the boat's (or boats' for a
fishing operation involved more than one boat) catch of fish or a share
of the proceeds from the sale of the catch,
(2) The amount of the individual's share depends solely on the
amount of the boat's (or boats' for a fishing operation involving more
than one boat) catch of fish,
(3) The individual does not receive, and is not entitled to receive,
any cash remuneration, other than remuneration that is described in
subparagraph (1) of this paragraph, and
(4) The crew of the boat (or of each boat from which the individual
receives a share of the catch) normally is made up of fewer than 10
individuals.
(b) The requirement of paragraph (a)(2) of this section is not
satisfied if there exists an agreement with the boat's (or boats') owner
or operator by which the individual's remuneration is determined
partially or fully by a factor not dependent on the size of the catch.
For example, if a boat is operated under a remuneration arrangement,
e.g., a union contract, which specifies that crew members, in addition
to receiving a share of the catch, are entitled to an hourly wage for
repairing nets, regardless of whether this wage is actually paid, then
all the crew members covered by the arrangement are entitled to receive
cash remuneration other than as a share of the catch and are not
excepted from employment by section 3121(b)(20).
(c) The operating crew of a boat includes all persons on the boat
(including the captain) who receive any form of remuneration in exchange
for services rendered while on a boat engaged in catching fish. See
Sec. 1.6050A-1 for reporting requirements for the operator of a boat
engaged in catching fish with respect to individuals performing services
described in this section.
(d) During the same return period, service performed by a crew
member may be excepted from employment by section 3121(b)(20) and this
section for one voyage and not so excepted on a subsequent voyage on the
same or on a different boat.
[T.D. 7716, 45 FR 57124, Aug. 27, 1980]
Sec. 31.3401(a)(18)-1 Payments or benefits under a qualified
educational assistance program.
A payment made, or benefit furnished, to or for the benefit of an
employee in a taxable year beginning after December 31, 1978, does not
constitute wages and hence is not subject to withholding if, at the time
of such payment or furnishing, it is reasonable to believe that the
employee will be able to exclude such payment or benefit from income
under section 127.
[T.D. 7898, 48 FR 31019, July 6, 1983]
Sec. 31.3401(a)(19)-1 Reimbursements under a self-insured medical
reimbursement plan.
Amounts reimbursed to or on behalf of an employee after December 31,
1979, as a medical care reimbursement under a self-insured medical
reimbursement plan (within the meaning of section 105(h)(6)) do not
constitute wages and hence are not subject to withholding even though
such reimbursement is includible in the gross income of an employee. For
rules with respect to self-insured medical reimbursement plans, see
section 105(h) and Sec. 1.105-11 of this Chapter (Income Tax
Regulations).
(Secs. 105(h) and 7805 Internal Revenue Code of 1954; 94 Stat. 2855, 68A
Stat. 917 (26 U.S.C. 105(h) and 7805))
[T.D. 7754, 46 FR 3509, Jan. 15, 1981. Redesignated by T.D. 7898, 48 FR
31019, July 6, 1983]
Sec. 31.3401(b)-1 Payroll period.
(a) The term payroll period means the period of service for which a
payment of wages is ordinarily made to an employee by his employer. It
is immaterial that the wages are not always paid at regular intervals.
For example, if an employer ordinarily pays a particular employee for
each calendar week at the end of the week, but if for some reason the
employee in a given week receives a payment in the middle of the week
[[Page 223]]
for the portion of the week already elapsed and receives the remainder
at the end of the week, the payroll period is still the calendar week;
or if, instead, that employee is sent on a 3-week trip by his employer
and receives at the end of the trip a single wage payment for three
weeks' services, the payroll period is still the calendar week, and the
wage payment shall be treated as though it were three separate weekly
wage payments.
(b) For the purpose of section 3402, an employee can have but one
payroll period with respect to wages paid by any one employer. Thus, if
an employee is paid a regular wage for a weekly payroll period and in
addition thereto is paid supplemental wages (for example, bonuses)
determined with respect to a different period, the payroll period is the
weekly payroll period. For computation of tax on supplemental wage
payments, see Sec. 31.3402(g)-1.
(c) The term payroll period also means the period of accrual of
supplemental unemployment compensation benefits for which a payment of
such benefits is ordinarily made. Thus if benefits are ordinarily
accrued and paid on a monthly basis, the payroll period is deemed to be
monthly.
(d) The term miscellaneous payroll period means a payroll period
other than a daily, weekly, biweekly, semi-monthly, monthly, quarterly,
semiannual, or annual payroll period.
[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR
17329, Nov. 11, 1970]
Sec. 31.3401(c)-1 Employee.
(a) The term employee includes every individual performing services
if the relationship between him and the person for whom he performs such
services is the legal relationship of employer and employee. The term
includes officers and employees, whether elected or appointed, of the
United States, a State, Territory, Puerto Rico, or any political
subdivision thereof, or the District of Columbia, or any agency or
instrumentality of any one or more of the foregoing.
(b) Generally the relationship of employer and employee exists when
the person for whom services are performed has the right to control and
direct the individual who performs the services, not only as to the
result to be accomplished by the work but also as to the details and
means by which that result is accomplished. That is, an employee is
subject to the will and control of the employer not only as to what
shall be done but how it shall be done. In this connection, it is not
necessary that the employer actually direct or control the manner in
which the services are performed; it is sufficient if he has the right
to do so. The right to discharge is also an important factor indicating
that the person possessing that right is an employer. Other factors
characteristic of an employer, but not necessarily present in every
case, are the furnishing of tools and the furnishing of a place to work
to the individual who performs the services. In general, if an
individual is subject to the control or direction of another merely as
to the result to be accomplished by the work and not as to the means and
methods for accomplishing the result, he is not an employee.
(c) Generally, physicians, lawyers, dentists, veterinarians,
contractors, subcontractors, public stenographers, auctioneers, and
others who follow an independent trade, business, or profession, in
which they offer their services to the public, are not employees.
(d) Whether the relationship of employer and employee exists will in
doubtful cases be determined upon an examination of the particular facts
of each case.
(e) If the relationship of employer and employee exists, the
designation or description of the relationship by the parties as
anything other than that of employer and employee is immaterial. Thus,
if such relationship exists, it is of no consequence that the employee
is designated as a partner, coadventurer, agent, independent contractor,
or the like.
(f) All classes or grades of employees are included within the
relationship of employer and employee. Thus, superintendents, managers
and other supervisory personnel are employees. Generally, an officer of
a corporation is an employee of the corporation. However, an officer of
a corporation who as such
[[Page 224]]
does not perform any services or performs only minor services and who
neither receives nor is entitled to receive, directly or indirectly, any
remuneration is not considered to be an employee of the corporation. A
director of a corporation in his capacity as such is not an employee of
the corporation.
(g) The term employee includes every individual who receives a
supplemental unemployment compensation benefit which is treated under
paragraph (b)(14) of Sec. 31.3401(a)-1 as if it were wages.
(h) Although an individual may be an employee under this section,
his services may be of such a nature, or performed under such
circumstances, that the remuneration paid for such services does not
constitute wages within the meaning of section 3401(a).
[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR
17329, Nov. 11, 1970]
Sec. 31.3401(d)-1 Employer.
(a) The term employer means any person for whom an individual
performs or performed any service, of whatever nature, as the employee
of such person.
(b) It is not necessary that the services be continuing at the time
the wages are paid in order that the status of employer exist. Thus, for
purposes of withholding, a person for whom an individual has performed
past services for which he is still receiving wages from such person is
an employer.
(c) An employer may be an individual, a corporation, a partnership,
a trust, an estate, a joint-stock company, an association, or a
syndicate, group, pool, joint venture, or other unincorporated
organization, group or entity. A trust or estate, rather than the
fiduciary acting for or on behalf of the trust or estate, is generally
the employer.
(d) The term employer embraces not only individuals and
organizations engaged in trade or business, but organizations exempt
from income tax, such as religious and charitable organizations,
educational institutions, clubs, social organizations and societies, as
well as the governments of the United States, the States, Territories,
Puerto Rico, and the District of Columbia, including their agencies,
instrumentalities, and political subdivisions.
(e) The term employer also means (except for the purpose of the
definition of wages) any person paying wages on behalf of a nonresident
alien individual, foreign partnership, or foreign corporation, not
engaged in trade or business within the United States (including Puerto
Rico as if a part of the United States).
(f) If the person for whom the services are or were performed does
not have legal control of the payment of the wages for such services,
the term employer means (except for the purpose of the definition of
wages) the person having such control. For example, where wages, such as
certain types of pensions or retired pay, are paid by a trust and the
person for whom the services were performed has no legal control over
the payment of such wages, the trust is the employer.
(g) The term employer also means a person making a payment of a
supplemental unemployment compensation benefit which is treated under
paragraph (b)(14) of Sec. 31.3401(a)-1 as if it were wages. For
example, if supplemental unemployment compensation benefits are paid
from a trust which was created under the terms of a collective
bargaining agreement, the trust shall generally be deemed to be the
employer. However, if the person making such payment is acting solely as
an agent for another person, the term employer shall mean such other
person and not the person actually making the payment.
(h) It is a basic purpose to centralize in the employer the
responsibility for withholding, returning, and paying the tax, and for
furnishing the statements required under section 6051 and Sec. 31.6051-
1. The special definitions of the term employer in paragraphs (e), (f),
and (g) of this section are designed solely to meet special or unusual
situations. They are not intended as a departure from the basic purpose.
[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR
17329, Nov. 11, 1970]
[[Page 225]]
Sec. 31.3401(e)-1 Number of withholding exemptions claimed.
(a) The term number of withholding exemptions claimed means the
number of withholding exemptions claimed in a withholding exemption
certificate in effect under section 3402(f) of the Internal Revenue Code
of 1954 or in effect under section 1622(h) of the Internal Revenue Code
of 1939. If no such certificate is in effect, the number of withholding
exemptions claimed shall be considered to be zero. The number of
withholding exemptions claimed must be taken into account in determining
the amount of tax to be deducted and withheld under section 3402,
whether the employer computes the tax in accordance with the provisions
of subsection (a) or subsection (c) of section 3402.
(b) The employer is not required to ascertain whether or not the
number of withholding exemptions claimed is greater than the number of
withholding exemptions to which the employee is entitled. For rules
relating to invalid withholding exemption certificates, see Sec.
31.3402(f)(2)-1(e), and for rules relating to required submission of
copies of certain withholding exemption certificates to the Internal
Revenue Service, see Sec. 31.3402(f)(2)-1(g).
(c) As to the number of withholding exemptions to which an employee
is entitled, see Sec. 31.3402(f)(1)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7423, 41 FR
26217, June 23, 1976; T.D. 7682, 45 FR 15526, Mar. 11, 1980; T.D. 7803,
47 FR 3547, Jan. 26, 1982]
Sec. 31.3401(f)-1 Tips.
(a) Tips considered wages. Tips received after 1965 by an employee
in the course of his employment are considered to be wages, and thus
subject to withholding of income tax at source. For an exception to the
rule that tips constitute wages, see Sec. Sec. 31.3401(a)(16) and
31.3401(a)(16)-1, relating to tips paid in a medium other than cash and
cash tips of less than $20. For definition of the term ``employee,'' see
Sec. Sec. 31.3401(c) and 31.3401(c)-1.
(b) When tips deemed paid. Tips reported by an employee to his
employer in a written statement furnished to the employer pursuant to
section 6053(a) (see Sec. 31.6053-1) shall be deemed to be paid to the
employee at the time the written statement is furnished to the employer.
Tips received by an employee which are not reported to his employer in a
written statement furnished pursuant to section 6053(a) shall be deemed
to be paid to the employee at the time the tips are actually received by
the employee.
[T.D. 7001, 34 FR 1001, Jan. 23, 1969]
Sec. 31.3402(a)-1 Requirement of withholding.
(a) Section 3402 provides alternative methods, at the election of
the employer, for use in computing the amount of income tax to be
collected at source on wages. Under the percentage method of withholding
(see Sec. 31.3402(b)-1), the employer is required to deduct and
withhold a tax computed in accordance with the provisions of section
3402(a). Under the wage bracket method of withholding (see Sec.
31.3402(c)-1), the employer is required to deduct and withhold a tax
determined in accordance with the provisions of section 3402(c). The
employer may elect to use the percentage method, the wage bracket
method, or certain other methods (see Sec. 31.3402(h) (4)-1). Different
methods may be used by the employer with respect to different groups of
employees.
(b) The employer is required to collect the tax by deducting and
withholding the amount thereof from the employee's wages as and when
paid, either actually or constructively. Wages are constructively paid
when they are credited to the account of or set apart for an employee so
that they may be drawn upon by him at any time although not then
actually reduced to possession. To constitute payment in such a case,
the wages must be credited to or set apart for the employee without any
substantial limitation or restriction as to the time or manner of
payment or condition upon which payment is to be made, and must be made
available to him so that they may be drawn upon at any time, and their
payment brought within his own control and disposition.
(c) Except as provided in sections 3402 (j) and (k) (see Sec. Sec.
31.3402(j)-1 and 31.3402(k)-1, relating to noncash remuneration paid to
retail commission
[[Page 226]]
salesman and to tips received by an employee in the course of his
employment, respectively), an employer is required to deduct and
withhold the tax notwithstanding the wages are paid in something other
than money (for example, wages paid in stocks or bonds; see Sec.
31.3401 (a)-1) and to pay over the tax in money. If wages are paid in
property other than money, the employer should make necessary
arrangements to insure that the amount of the tax required to be
withheld is available for payment in money.
(d) For provisions relating to the circumstances under which tax is
required to be deducted and withheld from certain amounts received under
accident and health plans, see paragraph (b)(8) of Sec. 31.3401(a)-1.
(e) As a matter of business administration, certain of the
mechanical details of the withholding process may be handled by
representatives of the employer. Thus, in the case of an employer having
branch offices, the branch manager or other representative may actually,
as a matter of internal administration, withhold the tax or prepare the
statements required under section 6051. Nevertheless, the legal
responsibility for withholding, paying, and returning the tax and
furnishing such statements rests with the employer. For provisions
relating to statements under section 6051, see Sec. 31.6051-1.
(f) The amount of any tax withheld and collected by the employer is
a special fund in trust for the United States. See section 7501.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7001, 34 FR
1001, Jan. 23, 1969; T.D. 7115, 36 FR 9209, May 21, 1971; T.D. 7888, 48
FR 17588, Apr. 25, 1983]
Sec. 31.3402(b)-1 Percentage method of withholding.
With respect to wages paid after April 30, 1975, the amount of tax
to be deducted and withheld under the percentage method of withholding
shall be determined under the applicable percentage method withholding
table contained in Circular E (Employer's Tax Guide) according to the
instructions contained therein.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7915, 48 FR 44073, Sept. 27, 1983]
Sec. 31.3402(c)-1 Wage bracket withholding.
(a) In general. (1) The employer may elect to use the wage bracket
method provided in section 3402(c) instead of the percentage method with
respect to any employee. The tax computed under the wage bracket method
shall be in lieu of the tax required to be deducted and withheld under
section 3402(a). With respect to wages paid after July 13, 1968, the
correct amount of withholding shall be determined under the applicable
wage bracket withholding table contained in the Circular E (Employer's
Tax Guide) issued for use with respect to the period in which such wages
are paid.
(2) For provisions relating to the treatment of wages paid under
accident and health plans and wages paid other than in cash to retail
commission salesmen, see paragraph (b)(8) of Sec. 31.3401(a)-1 and
Sec. 31.3402(j)-1, respectively.
(b) Established payroll periods, other than daily or miscellaneous,
covered by wage bracket withholding tables. The wage bracket withholding
tables contained in Circular E for established periods other than daily
or miscellaneous should be used in determining the tax to be withheld
for any such period without reference to the time the employee is
actually engaged in the performance of services during such payroll
period.
Example 1. On June 30, 1971, employee A is paid wages for a
semimonthly payroll period. A has in effect a withholding exemption
certificate indicating that he claims two withholding exemptions and
that he is married. A's wages are determined at the rate of $2 per hour.
During a certain payroll period he works only 24 hours and earns $48.
Although A worked only 24 hours during the semimonthly payroll period,
the applicable wage bracket withholding table contained in Circular E
for a semimonthly payroll period for an employee who is married should
be used in determining the tax to be withheld. Under
[[Page 227]]
this table it will be found that no tax is required to be withheld from
a wage payment of $48 when two withholding exemptions are claimed.
Example 2. On May 14, 1971, employee B is paid wages for a weekly
payroll period. B has in effect a withholding exemption certification
indicating that he claims one withholding exemption and that he is
single. B's wages are determined at the rate of $2 per hour. During a
certain payroll period B works 18 hours and earns $36. Although B worked
only 18 hours during the weekly payroll period the applicable wage
bracket withholding table for a weekly payroll period for an employee
who is single should be used in determining the tax to be withheld.
Under this table it will be found that $0.50 is the amount of tax to be
withheld from a wage payment of $36 when one withholding exemption is
claimed.
(c) Periods to which the tables for a daily or miscellaneous payroll
period are applicable--(1) In general. The tables applicable to a daily
or miscellaneous payroll period show the tax for employees who are to be
withheld from as single persons and for employees who are to be withheld
from as married persons on the amount of wages for one day. Where the
withholding is computed under the rules applicable to a miscellaneous
payroll period, the wages and the amounts shown in the applicable table
must be placed on a comparable basis. This may be accomplished by
reducing the wages paid for the period to a daily basis by dividing the
total wages by the number of days (including Sundays and holidays) in
the period. The amount of the tax shown in the applicable table as the
tax required to be withheld from the wages, as so reduced to a daily
basis, should then be multiplied by the number of days (including
Sundays and holidays) in the period.
(2) Period not a payroll period. If wages are paid for a period
which is not a payroll period, the amount to be deducted and withheld
under the wage bracket method shall be the amount applicable in the case
of a miscellaneous payroll period containing a number of days (including
Sundays and holidays) equal to the number of days (including Sundays and
holidays) in the period with respect to which such wages are paid.
Example. An individual performs services for a contractor in
connection with a construction project. He has in effect a withholding
exemption certificate indicating that he claims two withholding
exemptions and that he is married. Wages have been fixed at the rate of
$36 per day, to be paid upon completion of the project. The project is
completed before July 1, 1971, in 12 consecutive days, at the end of
which period the individual is paid wages of $360 for 10 days' services
performed during the period. Under the wage bracket method the amount to
be deducted and withheld from such wages is determined by dividing the
amount of the wages ($360) by the number of days in the period (12), the
result being $30. The amount of tax required to be withheld is
determined under the appropriate table applicable to a miscellaneous
payroll period for an employee who is married. Under this table the tax
required to be withheld is $47.40 (12 x $3.95).
(3) Wages paid without regard to any period. If wages are paid to an
employee without regard to any particular period, as, for example,
commissions paid to a salesman upon consummation of a sale, the amount
of tax to be deducted and withheld shall be determined in the same
manner as in the case of a miscellaneous payroll period containing a
number of days (including Sundays and holidays) equal to the number of
days (including Sundays and holidays) which have elapsed, beginning with
the latest of the following days:
(i) The first day after the last payment of wages to such employee
by such employer in the calendar year, or
(ii) The date on which such individual's employment with such
employer began in the calendar year, or
(iii) January 1 of such calendar year, and ending with (and
including) the date on which such wages are paid.
Example. On April 2, 1971, C is employed by the X Real Estate
Company to sell real estate on a commission basis, commissions to be
paid only upon consummation of sales. C has in effect a withholding
exemption certificate indicating that he claims one withholding
exemption and that he is not married. On May 22, 1971, C receives a
commission of $300, his first commission since April 2, 1971. Again on
June 19, 1971, C receives a commission of $420. Under the wage bracket
method, the amount of tax to be deducted and withheld in respect of the
commission paid on May 22, is $10, which amount is obtained by
multiplying $0.20 (tax per day under the appropriate wage bracket table
applicable to a daily or miscellaneous payroll period for an employee
who is not married where wages are at least $6 but less than
[[Page 228]]
$6.25 a day) by 50 (number of days elapsed); and the amount of tax to be
withheld with respect to the commission paid on June 19 is $54.60, which
amount is obtained by multiplying $1.95 (tax under the appropriate wage
bracket table for a daily or miscellaneous payroll period where wages
are at least $15 but less than $15.50 a day) by 28 (number of days
elapsed).
(d) Period or elapsed time less than 1 week. (1) It is the general
rule that if wages are paid for a payroll period or other period of less
than 1 week, the tax to be deducted and withheld under the wage bracket
method shall be the amount computed for a daily payroll period, or for a
miscellaneous payroll period containing the same number of days
(including Sundays and holidays) as the payroll period, or other period,
for which such wages are paid. In the case of wages paid without regard
to any period, if the elapsed time computed as provided in paragraph (c)
of this section is less than 1 week, the same rule is applicable.
Example 1. On May 14, 1971, an employee who has a daily payroll
period is paid wages of $15 per day. The employee has in effect a
withholding exemption certificate indicating that he claims one
withholding exemption and that he is not married. Under the applicable
table for a daily payroll period for an employee who is not married, the
amount of tax to be deducted and withheld from each such payment of
wages is $1.95.
Example 2. An employee works for a certain employer on 4 consecutive
days for which he is paid wages totalling $60 on July 25, 1971. The
employee has in effect a withholding exemption certificate claiming two
withholding exemptions and indicating that he is married. The amount of
tax to be deducted and withheld under the wage bracket method is $5.60
(4x$1.40).
(2) If the payroll period, other period or elapsed time where wages
are paid without regard to any period, is less than one week, the
employer may, under certain conditions, elect to deduct and withhold the
tax determined by the application of the wage table for a weekly payroll
period to the aggregate of the wages paid to the employee during the
calendar week. The election to use the weekly wage table in such cases
is subject to the limitations and conditions prescribed in Circular E
with respect to employers using the percentage method in similar cases.
(3) As used in this paragraph the term ``calendar week'' means a
period of seven consecutive days beginning with Sunday and ending with
Saturday.
(e) Rounding off of wage payment. In determining the amount to be
deducted and withheld under the wage bracket method the wages may, at
the election of the employer, be computed to the nearest dollar,
provided such wages are in excess of the highest wage bracket of the
applicable table. For the purpose of the computation to the nearest
dollar, the payment of a fractional part of a dollar shall be
disregarded unless it amounts to one-half dollar or more, in which case
it shall be increased to $1.00. Thus, if the payroll period of an
employee is weekly and the wage payment of such employee is $255.49, the
employer may compute the tax on the excess over $200 as if the excess
were $55 instead of $55.49. If the weekly wage payment is $255.50, the
employer may, in computing the tax, consider the excess over $200 to be
$56 instead of $55.50.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6860, 30 FR
13942, Nov. 4, 1965; T.D. 7115, 36 FR 9215, May 21, 1971; T.D. 7888, 48
FR 17588, Apr. 25, 1983; T.D. 7915, 48 FR 44073, Sept. 27, 1983]
Sec. 31.3402(d)-1 Failure to withhold.
If the employer in violation of the provisions of section 3402 fails
to deduct and withhold the tax, and thereafter the income tax against
which the tax under section 3402 may be credited is paid, the tax under
section 3402 shall not be collected from the employer. Such payment does
not, however, operate to relieve the employer from liability for
penalties or additions to the tax applicable in respect of such failure
to deduct and withhold. The employer will not be relieved of his
liability for payment of the tax required to be withheld unless he can
show that the tax against which the tax under section 3402 may be
credited has been paid. See Sec. 31.3403-1, relating to liability for
tax.
[[Page 229]]
Sec. 31.3402(e)-1 Included and excluded wages.
(a) If a portion of the remuneration paid by an employer to his
employee for services performed during a payroll period of not more than
31 consecutive days constitutes wages, and the remainder does not
constitute wages, all the remuneration paid the employee for services
performed during such period shall for purposes of withholding be
treated alike, that is, either all included as wages or all excluded.
The time during which the employee performs services, the remuneration
for which under section 3401(a) constitutes wages, and the time during
which he performs services, the remuneration for which under such
section does not constitute wages, determine whether all the
remuneration for services performed during the payroll period shall be
deemed to be included or excluded.
(b) If one-half or more of the employee's time in the employ of a
particular employer in a payroll period is spent in performing services
the remuneration for which consititutes wages, then all the remuneration
paid the employee for services performed in that payroll period shall be
deemed to be wages.
(c) If less than one-half of the employee's time in the employ of a
particular employer in a payroll period is spent in performing services
the remuneration for which constitutes wages, then none of the
remuneration paid the employee for services performed in that payroll
period shall be deemed to be wages.
(d) The application of the provisions of paragraphs (a), (b), and
(c) of this section may be illustrated by the following examples:
Example 1. Employer B, who operates a store and a farm, employs A to
perform services in connection with both operations. The remuneration
paid A for services on the farm is excepted as remuneration for
agricultural labor, and the remuneration for services performed in the
store constitutes wages. Employee A is paid on a monthly basis. During a
particular month, A works 120 hours on the farm and 80 hours in the
store. None of the remuneration paid by B to A for services performed
during the month is deemed to be wages, since the remuneration paid for
less than one-half of the services performed during the month
constitutes wages. During another month A works 75 hours on the farm and
120 hours in the store. All of the remuneration paid by B to A for
services performed during the month is deemed to be wages since the
remuneration paid for one-half or more of the services performed during
the month constitutes wages.
Example 2. Employee C is employed as a maid by D, a physician, whose
home and office are located in the same building. The remuneration paid
C for services in the home is excepted as remuneration for domestic
service, and the remuneration paid for her services in the office
constitutes wages. C is paid on a weekly basis. During a particular week
C works 20 hours in the home and 20 hours in the office. All of the
remuneration paid by D to C for services performed during that week is
deemed to be wages, since the remuneration paid for one-half or more of
the services performed during the week constitutes wages. During another
week C works 22 hours in the home and 15 hours in the office. None of
the remuneration paid by D to C for services performed during that week
is deemed to be wages, since the remuneration paid for less than one-
half of the services performed during the week constitutes wages.
(e) The rules set forth in this section do not apply (1) with
respect to any remuneration paid for services performed by an employee
for his employer if the periods for which remuneration is paid by the
employer vary to the extent that there is no period which constitutes a
payroll period within the meaning of section 3401(b) (see Sec.
31.3401(b)-1), or (2) with respect to any remuneration paid for services
performed by an employee for his employer if the payroll period for
which remuneration is paid exceeds 31 consecutive days. In any such case
withholding is required with respect to that portion of such
remuneration which constitutes wages.
Sec. 31.3402(f)(1)-1 Withholding exemptions.
(a) In general. (1) Except as otherwise provided in section
3402(f)(6) (see Sec. 31.3402(f)(6)-1), an employee receiving wages
shall on any day be entitled to withholding exemptions as provided in
section 3402(f)(1). In order to receive the benefit of such exemptions,
the employee must file with his employer a withholding exemption
certificate as provided in section 3402(f)(2). See Sec. 31.3402(f)(2)-
1.
(2) The number of exemptions to which an employee is entitled on any
[[Page 230]]
day depends upon his status as single or married, upon his status as to
old age and blindness, upon the number of his dependents, upon the
number of exemptions claimed by his spouse (if he is married), and upon
the number of withholding allowances to which he is entitled under
section 3402(m).
(b) Withholding exemptions to which an employee is entitled in
respect of himself. An employee is entitled to one withholding exemption
for himself. An employee shall on any day be entitled to an additional
withholding exemption for himself if he will have attained the age of 65
before the close of his taxable year which begins in, or with, the
calendar year in which such day falls. If the employee is blind, he may
claim an additional withholding exemption for blindness. For purposes of
claiming a withholding exemption for blindness, an individual shall be
considered blind only if his central visual acuity does not exceed 20/
200 in the better eye with correcting lenses or if his visual acuity is
greater than 20/200 but is accompanied by a limitation in the fields of
vision such that the widest diameter of the visual field subtends an
angle no greater than 20 degrees. For definition of the term
``blindness'', see section 151(d)(3). An employee may also be entitled
under section 3402(m) to withholding exemptions with respect to
withholding allowances (see Sec. 31.3402(m)-1).
(c) Withholding exemptions to which an employee is entitled in
respect to his spouse. (1) A married employee, whose spouse is an
employee receiving wages, is entitled to claim any withholding exemption
to which his spouse is entitled under paragraph (b) of this section,
unless the spouse has in effect a withholding exemption certificate
claiming such withholding exemption. A married employee, whose spouse is
not an employee receiving wages, is entitled to claim any withholding
exemption to which his spouse would be entitled under paragraph (b) of
this section if the spouse were an employee receiving wages.
Example 1. Assume that both the husband and wife have attained the
age of 65 and are employees receiving wages. Each spouse is entitled
under paragraph (b) of this section to claim 2 withholding exemptions in
respect of himself or herself. Either spouse may claim, in addition to
the withholding exemptions to which he or she is entitled in respect of
himself or herself, any withholding exemption to which the other spouse
is entitled under such paragraph (b) of this section but does not claim
on a withholding exemption certificate.
Example 2. Assume the same facts as in Example 1 except that only
the husband is an employee receiving wages. The husband is entitled to
claim 4 withholding exemptions, that is, the 2 withholding exemptions to
which he is entitled in respect of himself and the 2 withholding
exemptions to which his spouse would be entitled under paragraph (b) of
this section if she were an employee receiving wages.
(2) In determining the number of withholding exemptions to which an
employee is entitled for himself and his spouse on any day, the
employee's status as a single person or a married person and, if
married, whether a withholding exemption is claimed by his spouse, shall
be determined as of such day. However, in the case of an employee whose
spouse dies in the taxable year of the employee which begins in, or
with, the calendar year in which the spouse dies, any withholding
exemption which would be allowable to the employee in respect of such
spouse, if living and not an employee receiving wages, may be claimed by
the employee for that portion of the calendar year which occurs after
his spouse's death. For provisions applicable in the case of an employee
whose taxable year is not a calendar year, and whose spouse dies in that
portion of the calendar year which precedes the first day of the taxable
year of the employee which begins in the calendar year, see paragraph
(b) of Sec. 31.3402(f)(2)-1. An employee legally separated from his
spouse under a decree of divorce or of separate maintenance or an
employee who is a surviving spouse (as defined in section 2 and the
regulations thereunder) shall not be entitled to any withholding
exemptions in respect of his spouse.
(d) Withholding exemptions to which an employee is entitled in
respect of dependents. Subject to the limitations stated in this
paragraph, an employee shall be entitled on any day to a withholding
exemption for each individual who may reasonably be expected to be his
dependent for his taxable year beginning
[[Page 231]]
in, or with, the calendar year in which such day falls. For purposes of
the withholding exemption for an individual who may reasonably be
expected to be a dependent, the following rules shall apply:
(1) The determination that an individual may or may not reasonably
be expected to be a dependent shall be made on the basis of facts
existing at the beginning of the day for which a withholding exemption
for such individual is to be claimed. The individual in respect of whom
an exemption is claimed by an employee must, on the day in question, be
in existence and be within one of the categories listed in section
152(a), which defines the term ``dependent''. However, a withholding
exemption for a dependent who dies continues for the portion of the
calendar year which occurs after the dependent's death, except that, in
the case of an employee whose taxable year is not a calendar year, the
withholding exemption does not continue for a dependent, within the
meaning of section 152(a) (9) or (10), whose death occurs before the
first day of the employee's taxable year beginning in the calendar year
of death.
(2) The determination that an individual may or may not reasonably
be expected to be a dependent shall be made for the taxable year of the
employee in respect of which amounts deducted and withheld in the
calendar year in which the day in question falls are allowed as a
credit. In general, amounts deducted and withheld during any calendar
year are allowed as a credit against the tax imposed by chapter 1 of the
Code for the taxable year which begins in, or with, such calendar year.
Thus, in order for an employee to be able to claim for a calendar year a
withholding exemption with respect to a particular individual as a
dependent there must be a reasonable expectation that the employee will
be allowed an exemption with respect to such individual under section
151(e) for his taxable year which begins in, or with, such calendar
year.
(3) For the employee to be entitled on any day of the calendar year
to a withholding exemption for an individual as a dependent, such
individual must on such day--
(i) Be an individual referred to in one of the numbered paragraphs
in section 152(a),
(ii) Reasonably be expected to receive over one-half of his support,
within the meaning of section 152, from the employee in the calendar
year, and
(iii) Either (a) reasonably be expected to have gross income of less
than the amount determined pursuant to Sec. 1.151-2 of this chapter
(Income Tax Regulations) applicable to the calendar year in which the
taxable year of the taxpayer begins, or (b) be a child (son, stepson,
daughter, stepdaughter, adopted son, or adopted daughter) of the
employee who (1) will not have attained the age of 19 at the close of
the calendar year or (2) is a student as defined in section 151.
(4) An employee is not entitled to claim a withholding exemption for
an individual otherwise reasonably expected to be a dependent of the
employee if such individual is not a citizen of the United States,
unless such individual (i) is at any time during the calendar year a
resident of the United States (including, in regard to wages paid after
February 28, 1979, and individual treated as a resident under section
6013 (g) or (h)) Canada, Mexico, the Canal Zone, or the Republic of
Panama, or (ii) is a child of the employee born to him, or legally
adopted by him, in the Philippine Islands before January 1, 1956, and
the child is a resident of the Republic of the Philippines, and the
employee was a member of the Armed Forces of the United States at the
time the child was born to him or legally adopted by him.
(e) Additional withholding exemption to which an employee is
entitled in respect of the standard deduction. After November 30, 1986,
an employee is entitled to one additional withholding exemption unless:
(1) The employee is married (as determined under section 143) and
the employee's spouse is an employee receiving wages subject to
withholding, or
(2) The employee has withholding exemption certificates in effect
with respect to more than one employer.
These restrictions do not apply if the combined wages of the employee
and the spouse (if any) from other than one
[[Page 232]]
employer is less than the amount specified in the instructions to Form
W-4 or W-4A (Employee's Withholding Allowance Certificate).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR
5252, May 28, 1963; T.D. 7065, 35 FR 16539, Oct. 23, 1970; T.D. 7114, 36
FR 9020, May 18, 1971; T.D. 7115, 36 FR 9234, May 21, 1971; T.D. 7670,
45 FR 6932, Jan. 31, 1980; T.D. 7915, 48 FR 44073, Sept. 27, 1983; T.D.
8164, 52 FR 45633, Dec. 1, 1987]
Sec. 31.3402(f)(2)-1 Withholding exemption certificates.
(a) On commencement of employment. On or before the date on which an
individual commences employment with an employer, the individual shall
furnish the employer with a signed withholding exemption certificate
relating to his marital status and the number of withholding exemptions
which he claims, which number shall in no event exceed the number to
which he is entitled, or, if the statements described in Sec.
31.3402(n)-1 are true with respect to an individual, he may furnish his
employer with a signed withholding exemption certificate which contains
such statements. For form and contents of such certificates, see Sec.
31.3402(f)(5)-1. The employer is required to request a withholding
exemption certificate from each employee, but if the employee fails to
furnish such certificate, such employee shall be considered as a single
person claiming no withholding exemptions.
(b) Change in status which affects calendar year. (1) If, on any day
during the calendar year, the number of withholding exemptions to which
the employee is entitled is less than the number of withholding
exemptions claimed by him on the withholding exemption certificate then
in effect, the employee must within 10 days after the change occurs
furnish the employer with a new withholding exemption certificate
relating to the number of withholding exemptions which the employee then
claims, which must in no event exceed the number to which he is entitled
on such day. The number of withholding exemptions to which an employee
is entitled decreases, for example, for any one of the following
reasons:
(i) The employee's wife (or husband) for whom the employee has been
claiming a withholding exemption (a) is divorced or legally separated
from the employee, or (b) claims her (or his) own withholding exemption
on a separate certificate.
(ii) In the case of an employee whose taxable year is not a calendar
year, the employee's wife (or husband) for whom the employee has been
claiming a withholding exemption dies in that portion of the calendar
year which precedes the first day of the taxable year of the employee
which begins in the calendar year in which the spouse dies.
(iii) The employee finds that no exemption for his taxable year
which begins in, or with, the current calendar year will be allowable to
him under section 151(e) in respect of an individual claimed as a
dependent on the employee's withholding exemption certificate.
(iv) It becomes unreasonable for the employee to believe that his
wages for an estimation year will not be more, or that the determinable
additional amounts for each item under Sec. 31.3402(m)-1 for an
estimation year will not be less, than the corresponding figure used in
connection with a claim by him under section 3402 (m) of a withholding
allowance to such an extent that the employee would no longer be
entitled to such withholding allowance.
(v) It becomes unreasonable for an employee who has in effect a
withholding exemption certificate on which he claims a withholding
allowance under section 3402(m), computed on the basis of the preceding
taxable year, to believe that his wages and the determinable additional
amounts for each item under Sec. 31.3402(m)-1 in such preceding taxable
year or in his present taxable year will entitle him to such withholding
allowance in the present taxable year.
(2) If, on any day during the calendar year, the number of
withholding exemptions to which the employee is entitled is more than
the number of withholding exemptions claimed by him on the withholding
exemption certificate then in effect, the employee may furnish the
employer with a new withholding exemption certificate on which the
employee must in no event claim more than the number of withholding
[[Page 233]]
exemptions to which he is entitled on such day.
(3) If, on any day during the calendar year, the statements
described in Sec. 31.3402(n)-1 are true with respect to an employee,
such employee may furnish his employer with a withholding exemption
certificate which contains such statements.
(4) If, on any day during the calendar year, it is not reasonable
for an employee, who has furnished his employer with a withholding
exemption certificate which contains the statements described in Sec.
31.3402(n)-1, to anticipate that he will incur no liability for income
tax imposed under subtitle A (as defined in Sec. 31.3402(n)-1) for his
current taxable year, the employee must within 10 days after such day
furnish the employer with a new withholding exemption certificate which
does not contain such statements. If, on any day during the calendar
year, it is not reasonable for such an employee whose liability for
income tax imposed under subtitle A is determined on a basis other than
the calendar year to so anticipate with respect to his taxable year
following his current taxable year, the employee must furnish the
employer with a new withholding exemption certificate which does not
contain such statements within 10 days after such day or on or before
the first day of the last month of his current taxable year, whichever
is later.
(c) Change in status which affects next calendar year. (1) If, on
any day during the calendar year, the number of exemptions to which the
employee will be, or may reasonably be expected to be, entitled under
sections 151 and 3402(m) for his taxable year which begins in, or with,
the next calendar year is different from the number to which the
employee is entitled on such day, the following rules shall be
applicable:
(i) If such number is less than the number of withholding exemptions
claimed by the employee on a withholding exemption certificate in effect
in such day, the employee must, on or before December 1 of the year in
which the change occurs, unless such change occurs in December, furnish
his employer with a new withholding exemption certificate reflecting the
decrease in the number of withholding exemptions. If the change occurs
in December, the new certificate must be furnished within 10 days after
the change occurs. The number of exemptions to which an employee is
entitled for his taxable year which begins in, or with, the next
calendar year decreases, for example, for any of the following reasons:
(a) The spouse or a dependent of the employee dies.
(b) The employee finds that is not reasonable to expect that an
individual claimed as a dependent on the employee's withholding
exemption certificate will qualify as a dependent of the employee for
such taxable year.
(c) It becomes unreasonable for an employee who has in effect a
withholding exemption certificate on which he claims a withholding
allowance under section 3402(m) to believe that his wages and the
determinable additional amounts for each item under Sec. 31.3402(m)-1
for his taxable year which begins in, or with, the next calendar year
will entitle him to such withholding allowance for such taxable year.
(ii) If such number is greater than the number of withholding
exemptions claimed by the employee on a withholding exemption
certificate in effect on such day, the employee may, on or before
December 1 of the year in which such change occurs, unless such change
occurs in December, furnish his employer with a new withholding
exemption certificate reflecting the increase in the number of
withholding exemptions. If the change occurs in December, the
certificate may be furnished on or after the date on which the change
occurs.
(2) If, on any day during the calendar year, it is not reasonable
for an employee, who has furnished his employer with a withholding
exemption certificate which contains the statements described in Sec.
31.3402(n)-1 and whose liability for such tax is determined on a
calendar-year basis, to anticipate that he will incur no liability for
income tax imposed under subtitle A (as defined in Sec. 3l.3402(n)-1)
for his taxable year which begins with the next calendar year, the
employee must furnish his employer with a new withholding exemption
certificate which does not
[[Page 234]]
contain such statements, on or before December 1 of the first-mentioned
calendar year. If it first becomes unreasonable for the employee to so
anticipate in December, the new certificate must be furnished within 10
days after the day on which it first becomes unreasonable for the
employee to so anticipate.
(3) Before December 1 of each year, every employer should request
each of his employees to file a new withholding exemption certificate
for the ensuing calendar year, in the event of change in the employee's
exemption status since the filing of his latest certificate.
(d) Inclusion of account number on withholding exemption
certificate. Every individual to whom an account number has been
assigned shall include such number of any withholding exemption
certificate filed with an employer. For provisions relating to the
obtaining of an account number, see Sec. 31.6011 (b)-2.
(e) Invalid withholding exemption certificates. Any alteration of or
unauthorized addition to a withholding exemption certificate shall cause
such certificate to be invalid; see paragraph (b) of Sec.
31.3402(f)(5)-1 for the definitions of alteration and unauthorized
addition. Any withholding exemption certificate which the employee
clearly indicates to be false by an oral statement or by a written
statement (other than one made on the withholding exemption certificate
itself) made by him to the employer on or before the date on which the
employee furnishes such certificate is also invalid. For purposes of the
preceding sentence, the term ``employer'' includes any individual
authorized by the employer either to receive withholding exemption
certificates, to make withholding computations, or to make payroll
distributions. If an employer receives an invalid withholding exemption
certificate, he shall consider it a nullity for purposes of computing
withholding; he shall inform the employee who submitted the certificate
that it is invalid, and shall request another withholding exemption
certificate from the employee. If the employee who submitted the invalid
certificate fails to comply with the employer's request, the employer
shall withhold from the employee as from a single person claiming no
exemptions (see Sec. 31.3402 (f)(2)-1(a)); if, however, a prior
certificate is in effect with respect to the employee, the employer
shall continue to withhold in accordance with the prior certificate.
(f) Applicability of withholding exemption certificate to qualified
State individual income taxes. The withholding exemption certificate
shall be use for purposes of withholding with respect to qualified State
individual income taxes as well as Federal tax. For provisions relating
to the withholding exemption certificate with respect to such State
taxes, see paragraph (d)(3)(i) of Sec. 301.6361-1 of this chapter
(Regulation on Procedure and Administration).
(g) Submission of certain withholding exemption certificates and
notice of the maximum number of withholding exemptions permitted--(1)
Submission of certain withholding exemption certificates--(i) In
general. An employer must submit to the Internal Revenue Service (IRS) a
copy of any currently effective withholding exemption certificate as
directed in a written notice to the employer from the IRS or as directed
in published guidance.
(A) Notice to submit withholding exemption certificates. A notice to
the employer to submit withholding exemption certificates may relate
either to one or more named employees, to one or more reasonably
segregable units of the employer, or to withholding exemption
certificates under certain specified criteria. The notice will designate
the IRS office where the copies of the withholding exemption
certificates must be submitted. Alternatively, upon notice from the IRS,
the employer must make available for inspection by an IRS employee
withholding exemption certificates received from one or more named
employees, from one or more reasonably segregable units of the employer,
or from employees who have furnished withholding exemption certificates
under certain specified criteria.
(B) Published guidance. Employers may also be required to submit
copies of withholding exemption certificates under certain specified
criteria when directed to do so by the IRS in published guidance. For
purposes of the preceding sentence, the term published guidance means a
revenue procedure or
[[Page 235]]
notice published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter).
(ii) Withholding after submission of withholding exemption
certificate. After a copy of a withholding exemption certificate has
been submitted to the IRS under this paragraph (g)(1), the employer must
withhold tax on the basis of the withholding exemption certificate, if
the withholding exemption certificate meets the requirements of Sec.
31.3402(f)(5)-1. However, the employer may not withhold on the basis of
the withholding exemption certificate if the certificate must be
disregarded based on a notice of the maximum number of withholding
exemptions permitted under the provisions of paragraph (g)(2) of this
section.
(2) Notice of the maximum number of withholding exemptions
permitted--(i) Notice to employer. The IRS may notify the employer in
writing that the employee is not entitled to claim a complete exemption
from withholding or more than the maximum number of withholding
exemptions specified by the IRS in the written notice. The notice will
also specify the applicable marital status for purposes of calculating
the required amount of withholding. The notice will specify the IRS
office to be contacted for further information. The notice of maximum
number of withholding exemptions permitted may be issued if--
(A) The IRS determines that a copy of a withholding exemption
certificate submitted under paragraph (g)(1) of this section or
otherwise provided to the IRS contains a materially incorrect statement
or determines, after a request to the employee for verification of the
statements on the certificate, that the IRS lacks sufficient information
to determine if the certificate is correct.
(B) The IRS otherwise determines that the employee is not entitled
to claim a complete exemption from withholding and is not entitled to
claim more than a specified number of withholding exemptions.
(ii) Notice to employee. If the IRS provides a notice to the
employer under this paragraph (g)(2), the IRS will also provide the
employer with a similar notice for the employee (employee notice) that
identifies the maximum number of withholding exemptions permitted and
specifies the marital status to be used for calculating the required
amount of withholding. The employee notice will also indicate the
process by which the employee can provide additional information to the
IRS for purposes of determining the appropriate number of withholding
exemptions and/or modifying the specified marital status. The IRS will
also mail a similar notice to the employee's last known address. For
further guidance regarding the definition of last known address, see
Sec. 301.6212-2 of this chapter. If the IRS is unable to determine a
last known address for the employee, the IRS will use other available
information as appropriate to mail the notice to the employee.
(iii) Requirement to furnish. If the employee is employed by the
employer as of the date of the notice, the employer must furnish the
employee notice to the employee within 10 business days of receipt. The
employer may follow any reasonable business practice to furnish the copy
of the notice to the employee. For purposes of this paragraph
(g)(2)(iii), the determination of whether an employee is employed as of
the date of the notice is based on all the facts and circumstances,
including whether the employer has treated the employment relationship
as terminated for other purposes. An employee that is not performing
services for the employer as of the date of the notice is employed by
the employer as of the date of the notice for purposes of this paragraph
(g)(2)(iii) if--
(A) The employer pays wages with respect to prior employment to the
employee subject to income tax withholding on or after the date
specified in the notice;
(B) The employer reasonably expects the employee to resume the
performance of services for the employer within twelve months of the
date of the notice; or
(C) The employee is on a bona fide leave of absence if the period of
such leave does not exceed twelve months or the employee retains a right
to reemployment with the employer under an applicable statute or by
contract.
[[Page 236]]
(iv) Requirement to notify the IRS. If the employer is not required
to furnish the notice to the employee under paragraph (g)(2)(iii) of
this section, the employer must send a written response to the IRS
office designated in the notice indicating that the employee is not
employed by the employer.
(v) Requirement to withhold based on the notice. If the employer is
required to furnish the employee notice to the employee under paragraph
(g)(2)(iii), then the employer must withhold tax on the basis of the
maximum number of withholding exemptions and the marital status
specified in the notice for any wages paid after the date specified in
the notice, except as provided in paragraphs (g)(2)(vi), (vii), (viii),
(ix), and (x) of this section. The employer must withhold tax in
accordance with the notice as of the date specified in the notice, which
shall be no earlier than 45 calendar days after the date of the notice.
(vi) Employment resumes after twelve months. If the employer is
required to furnish the employee notice to the employee only pursuant to
paragraph (g)(2)(iii)(B) of this section and the employee resumes the
performance of services for the employer more than 12 months after the
date of the notice, then the employer is not required to withhold based
on the notice.
(vii) Requirement to withhold based on an existing Form W-4. If a
withholding exemption certificate is in effect with respect to the
employee before the employer receives a notice of the maximum number of
withholding exemptions permitted under this paragraph (g)(2), the
employer must continue to withhold tax in accordance with the existing
withholding exemption certificate, rather than on the basis of the
notice, if the existing withholding exemption certificate does not claim
complete exemption from withholding and claims a marital status, a
number of withholding exemptions, and any additional withholding that
results in more withholding than would result from applying the marital
status and number of withholding exemptions specified in the notice.
(viii) Modification notice. After issuing the notice specifying the
maximum number of withholding exemptions permitted and the marital
status, the IRS may issue a subsequent notice that modifies the original
notice (modification notice). The modification notice may change the
marital status and/or the number of withholding exemptions permitted.
The employer must withhold based on the modification notice as of the
date specified in the modification notice.
(ix) Requirement to withhold after termination of employment. If the
employee is employed as of the date of the notice under paragraph
(g)(2)(iii) of this section but the employer or employee terminates the
employment relationship after the date of the notice, the employer must
continue to withhold based on the maximum number of withholding
exemptions and the marital status specified in the notice or a
modification notice if any wages subject to income tax withholding are
paid with respect to the prior employment after such date. Furthermore,
the employer must withhold based on the notice or modification notice if
the employee resumes an employment relationship with the employer within
12 months after the termination of the employment relationship. Whether
the employment relationship is terminated is based on all the facts and
circumstances.
(x) Requirement to withhold based on new Form W-4. The employee may
furnish a new withholding exemption certificate after the employer
receives a notice or modification notice from the IRS of the maximum
number of withholding exemptions permitted under this paragraph (g)(2).
(A) Employee requests more withholding. If the employee furnishes a
new withholding exemption certificate after the employer receives the
notice or modification notice, the employer must withhold tax on the
basis of that new certificate only if the new certificate does not claim
complete exemption from withholding and claims a marital status, a
number of withholding exemptions, and any additional withholding that
results in more withholding than would result under the notice or
modification notice.
(B) Employee requests less withholding. If the employee furnishes a
new withholding exemption certificate after the
[[Page 237]]
employer receives the notice or modification notice, the employer must
disregard the new certificate and withhold on the basis of the notice or
modification notice if the employee claims complete exemption from
withholding or claims a marital status, a number of withholding
exemptions, and any additional withholding that results in less
withholding than would result under the notice or modification notice.
If the employee wants to put a new certificate into effect that results
in less withholding than that required under the notice or modification
notice, the employee must contact the IRS. The employer must withhold on
the basis of the notice or modification notice unless the IRS
subsequently notifies the employer to withhold based on the new
certificate.
(3) Definition of employer. For purposes of this paragraph (g), the
term employer includes any person authorized by the employer to receive
withholding exemption certificates, to make withholding computations, or
to make payroll distributions.
(4) Examples. The following examples illustrate the rules of this
section.
Example 1. Employer U receives a notice from the IRS that identifies
the maximum number of withholding exemptions permitted and specifies the
marital status for Employee A. Employee A is not currently performing
any services for Employer U. However, Employer U is continuing to make
certain wage payments to Employee A. Employer U must furnish the
employee notice to Employee A within 10 business days of receipt and
must withhold based on the notice on any wages paid to Employee A on or
after the date specified in the notice.
Example 2. Employer V receives a notice in October of Year 1 from
the IRS that identifies the maximum number of withholding exemptions
permitted and specifies the marital status for Employee B. Employee B
has not performed services for Employer V since August of Year 1.
However, since Employee B has performed services for Employer V for
several years on a seasonal basis, Employer V reasonably expects
Employee B to resume the performance of services for Employer V in June
of Year 2, a date that is within 12 months of the date of the notice.
Employer V is required to furnish the notice to Employee B within 10
business days of receipt. Employee B does not resume the performance of
services until June of Year 3. Employer V is not required to withhold
based on the notice.
Example 3. Employer W receives a notice from the IRS that identifies
the maximum number of withholding exemptions permitted and specifies the
marital status for Employee C. Employee C began a 4-month unpaid
maternity leave of absence three weeks before Employer W received the
notice. Employer W must furnish the employee notice to Employee C within
10 business days of receipt. When Employee C resumes performing services
when her maternity leave ends, Employer W must withhold based on the
notice.
Example 4. Employer X receives a notice from the IRS in Year 1 that
identifies the maximum number of withholding exemptions permitted and
specifies the marital status for Employee D. Employer X must furnish the
employee notice to Employee D within 10 business days of receipt and
withhold based on the notice. In Year 2, Employee D terminates the
employment relationship. Employee D applies for a different position
with Employer X and resumes employment 10 months after having left her
previous position with Employer X. Since Employer X rehired Employee D
within 12 months after the termination of employment, Employer X must
withhold based on the notice.
Example 5. Employer Y receives a notice from the IRS that identifies
the maximum number of withholding exemptions permitted and specifies the
marital status for Employee E. Employer Y must furnish the employee
notice to Employee E within 10 business days of receipt. After receipt
of this notice, Employee E contacts the IRS and establishes that he is
entitled to claim a higher number of withholding exemptions. Employer Y
receives a modification notice from the IRS that changes the maximum
number of withholding exemptions permitted for Employee E. Employer Y
must withhold tax based on the modification notice as of the date
specified in such notice.
Example 6. Employer Z pays remuneration to Employee F, a United
States citizen, for services performed in Country M. Employer Z receives
a notice from the IRS in Year 1 that identifies the maximum number of
withholding exemptions permitted and specifies the marital status for
Employee F. Employer Z must furnish the employee notice to Employee F
within 10 business days of receipt. Employer Z reasonably believes all
the remuneration paid to Employee F in Year 1 is excluded from Employee
F's gross income under section 911 of the Internal Revenue Code. Since
section 3401(a)(8)(B) excludes such remuneration from wages for income
tax withholding purposes, Employer X does not have to withhold on such
remuneration, notwithstanding the maximum number of exemptions permitted
and marital status specified in the notice. In Year 2, Employee F
returns to the United States to perform
[[Page 238]]
services. Employer Z does not reasonably believe any part of Employee
F's remuneration paid in Year 2 is excluded from Employee F's gross
income under section 911. Rather, Employer Z reasonably believes that
remuneration paid to Employee F in Year 2 is subject to income tax
withholding. Employer Z must withhold on the remuneration paid to
Employee F based on the notice.
(5) Effective/applicability date. Except as provided in this
paragraph (g)(5), paragraph (g) applies on April 14, 2005. Paragraphs
(g)(2)(iii)(A), (B), and (C) and paragraph (g)(2)(ix) apply on October
11, 2007, except taxpayers may rely on such paragraphs for notices
issued prior to such date.
(68A Stat. 731 (26 U.S.C. 6001); 68A Stat. 732 (26 U.S.C. 6011); 68A
Stat. 917 (26 U.S.C. 7805))
[T.D. 6516, 25 FR 13105, Dec. 20, 1960, as amended by T.D. 6654, 28 FR
5252, May 28, 1963; T.D. 7048, 35 FR 10291, June 24, 1970; T.D. 7065, 35
FR 16539, Oct. 23, 1970; T.D. 7577, 43 FR 59359, Dec. 20, 1978; T.D.
7598, 44 FR 14552, Mar. 13, 1979; T.D. 7682, 45 FR 15526, Mar. 11, 1980;
T.D. 7772, 46 FR 17548, Mar. 19, 1981; T.D. 7803, 47 FR 3547, Jan. 26,
1982; T.D. 7915, 48 FR 44073, Sept. 27, 1983; T.D. 8164, 52 FR 45633,
Dec. 1, 1987; T.D. 9196, 70 FR 19696, Apr. 14, 2005; T.D. 9337, 72 FR
38481, July 13, 2007]
Sec. 31.3402(f)(3)-1 When withholding exemption certificate takes
effect.
(a) A withholding exemption certificate furnished the employer in
any case in which no previous withholding exemption certificate is in
effect with such employer, shall take effect as of the beginning of the
first payroll period ending, or the first payment of wages made without
regard to a payroll period, on or after the date on which such
certificate is so furnished.
(b) A withholding exemption certificate furnished the employer in
any case in which a previous withholding exemption certificate is in
effect with such employer shall, except as hereinafter provided, take
effect with respect to the first payment of wages made on or after the
first status determination date which occurs at least 30 days after the
date on which such certificate is so furnished. However, at the election
of the employer, except as hereinafter provided, such certificate may be
made effective with respect to any payment of wages made on or after the
date on which such certificate is so furnished and before such status
determination date.
(c) A withholding exemption certificate furnished the employer
pursuant to section 3402(f)(2)(C) (see paragraph (c) of Sec.
31.3402(f)(2)-1 or paragraph (b)(2)(ii) of Sec. 31.3402(1)-1) which
effects a change for the next calendar year, shall not take effect, and
may not be made effective, with respect to the calendar year in which
the certificate is furnished. A withholding exemption certificate
furnished the employer by an employee who determines his income tax
liability on a basis other than a calendar- year basis, as required by
paragraph (b)(4) of Sec. 31.3402(f)(2)-1, which effects a change for
the employee's next taxable year, shall not take effect, and may not be
made effective, with respect to the taxable year of the employee in
which the certificate is furnished.
(d) For purposes of this section, the term ``status determination
date'' means January 1, May 1, July 1, and October 1 of each year.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 6516, 25 FR 13106, Dec. 20, 1960, as amended by T.D. 7048, 35 FR
10291, June 24, 1970; T.D. 7065, 35 FR 16539, Oct. 23, 1970; T.D. 7115,
36 FR 9234, May 21, 1971; T.D. 7915, 48 FR 44073, Sept. 27, 1983]
Sec. 31.3402(f)(4)-1 Period during which withholding exemption
certificate remains in effect.
(a) In general. Except as provided in paragraphs (b) and (c) of this
section, a withholding exemption certificate which takes effect under
section 3402(f) of the Internal Revenue Code of 1954, or which on
December 31, 1954, was in effect under section 1622(h) of the Internal
Revenue Code of 1939, shall continue in effect with respect to the
employee until another withholding exemption certificate takes effect
under section 3402(f). Paragraphs (b) and (c) of this section are
applicable only for withholding exemption certificates furnished by the
employee to the employer before January 1, 1982. See Sec.
31.3402(f)(4)-2 for the rules applicable to withholding exemption
certificates furnished by the employee to the employer after December
31, 1981.
[[Page 239]]
(b) Withholding allowances under section 3402(m) for itemized
deductions. In no case shall the portion of a withholding exemption
certificate relating to withholding allowances under section 3402(m) for
itemized deductions be effective with respect to any payment of wages
made to an employee--
(1) In the case of an employee whose liability for tax under
subtitle A of the Code is determined on a calendar-year basis, after
April 30 of the calendar year immediately following the calendar year
which was his estimation year for purposes of determining the
withholding allowance or allowances claimed on such exemption
certificate, or
(2) In the case of an employee to whom paragraph (c)(1) of this
section does not apply, after the last day of the fourth month
immediately following his taxable year which was his estimation year for
purposes of determining the withholding allowance or allowances claimed
on such exemption certificate.
(c) Statements under section 3402(n) eliminating requirement of
withholding. The statements described in Sec. 31.3402(n)-1 made by an
employee with respect to his preceding taxable year and current taxable
year shall be deemed to have been made also with respect to his current
taxable year and his taxable year immediately thereafter, respectively,
until either a new withholding exemption certificate furnished by the
employee takes effect or the existing certificate which contains such
statements expires. In no case shall a withholding exemption certificate
which contains such statements be effective with respect to any payment
of wages made to an employee--
(1) In the case of an employee whose liability for tax under
subtitle A is determined on a calendar-year basis, after April 30 of the
calendar year immediately following the calendar year which was his
original current taxable year for purposes of such statements, or
(2) In the case of an employee to whom paragraph (c)(1) of this
section does not apply, after the last day of the fourth month
immediately following his original current taxable year for purposes of
such statements.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7048, 35 FR 10291, June 24, 1970, as amended by T.D. 7065, 35 FR
16539, Oct. 23, 1970; T.D. 7915, 48 FR 44073, Sept. 27, 1983]
Sec. 31.3402(f)(4)-2 Effective period of withholding exemption
certificate.
(a) In general. Except as provided in paragraphs (b) and (c) of this
section, a withholding exemption certificate that takes effect under
section 3402(f) of the Internal Revenue Code of 1954, or that on
December 31, 1954, was in effect under section 1622(h) of the Internal
Revenue Code of 1939, shall continue in effect with respect to the
employee until another withholding exemption certificate takes effect
under section 3402(f). Paragraphs (b) and (c) of this section are
applicable only for withholding exemption certificates furnished by the
employee to the employer after December 31, 1981. See Sec.
31.3402(f)(4)-1 for the rules applicable to withholding exemption
certificates furnished by the employee to the employer before January 1,
1982.
(b) Withholding allowances under section 3402(m). See paragraphs (b)
and (c) of Sec. 31.3402(f)(2)-1 (relating to withholding exemption
certificates) for information as to when an employee claiming
withholding allowances under section 3402(m) and the regulations
thereunder must file a new withholding exemption certificate with his
employer.
(c) Statements under section 3402(n) eliminating requirement of
withholding. The statements described in Sec. 31.3402(n)-1 made by an
employee with respect to his preceding taxable year and current taxable
year shall be effective until either a new withholding exemption
certificate furnished by the employee takes effect or the existing
certificate that contains such statements expires. In no case shall a
withholding exemption certificate that contains such statements be
effective with respect to any payment of wages made to an employee:
[[Page 240]]
(1) In the case of an employee whose liability for tax under
subtitle A is determined on a calendar year basis, after February 15 of
the calendar year following the estimation year, or
(2) In the case of an employee to whom paragraph (c)(1) of this
section does not apply, after the 15th day of the 2nd calendar month
following the last day of the estimation year.
(d) Estimation year. The estimation year is the taxable year
including the day on which the employee files the withholding exemption
certificate with his employer, except that if the employee files the
withholding exemption certificate with his employer and specifies on the
certificate that the certificate is not to take effect until a specified
future date, the estimation year shall be the taxable year including
that specified future date.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7915, 48 FR 44073, Sept. 27, 1983]
Sec. 31.3402(f)(5)-1 Form and contents of withholding exemption
certificates.
(a)(1) Form W-4. Form W-4, ``Employee's Withholding Allowance
Certificate,'' is the form prescribed for the withholding exemption
certificate required to be furnished under section 3402(f)(2). A
withholding exemption certificate must be prepared in accordance with
the instructions and regulations applicable thereto, and must set forth
fully and clearly the data that is called for therein. Blank copies of
paper Forms W-4 will be supplied to employers upon request to the
Internal Revenue Service (IRS). An employer may also download and print
Form W-4 from the IRS Internet site at www.irs.gov. In lieu of the
prescribed form, employers may prepare and use a form the provisions of
which are identical with those of the prescribed form, but only if
employers also provide employees with all the tables, instructions, and
worksheets contained in the Form W-4 in effect at that time, and only if
employers comply with all revenue procedures relating to substitute
forms in effect at that time.
(2) Employers are prohibited from accepting a substitute form
developed by an employee, and the employee submitting such form will be
treated as failing to furnish a withholding exemption certificate. For
further guidance regarding the employer's obligations when an employee
is treated as failing to furnish a withholding exemption certificate,
see Sec. 31.3402(f)(2)-1.
(3) Effective/applicability date. Paragraph (a)(1) applies on April
14, 2005. Paragraph (a)(2) applies to any substitute withholding
exemption certificate furnished to an employer on or after October 11,
2007.
(b) Invalid Form W-4. A Form W-4 does not meet the requirements of
section 3402(f)(5) or this section and is invalid if it contains an
alteration or unauthorized addition. For purposes of Sec.
31.3402(f)(2)-1(e) and this paragraph--
(1) An alteration of a withholding exemption certificate is any
deletion of the language of the jurat or other similar provision of such
certificate by which the employee certifies or affirms the correctness
of the completed certificate, or any material defacing of such
certificate;
(2) An unauthorized addition to a withholding exemption certificate
is any writing on such certificate other than the entries requested
(e.g., name, address, and number of exemptions claimed).
(c) Electronic Form W-4--(1) In general. An employer may establish a
system for its employees to file withholding exemption certificates
electronically.
(2) Requirements--(i) In general. The electronic system must ensure
that the information received is the information sent, and must document
all occasions of employee access that result in the filing of a Form W-
4. In addition, the design and operation of the electronic system,
including access procedures, must make it reasonably certain that the
person accessing the system and filing the Form W-4 is the employee
identified in the form.
(ii) Same information as paper Form W-4. The electronic filing must
provide the employer with exactly the same information as the paper Form
W-4.
(iii) Jurat and signature requirements. The electronic filing must
be signed by the employee under penalties of perjury.
[[Page 241]]
(A) Jurat. The jurat (perjury statement) must contain the language
that appears on the paper Form W-4. The electronic program must inform
the employee that he or she must make the declaration contained in the
jurat and that the declaration is made by signing the Form W-4. The
instructions and the language of the jurat must immediately follow the
employee's income tax withholding selections and immediately precede the
employee's electronic signature.
(B) Electronic signature. The electronic signature must identify the
employee filing the electronic Form W-4 and authenticate and verify the
filing. For this purpose, the terms ``authenticate'' and ``verify'' have
the same meanings as they do when applied to a written signature on a
paper Form W-4. An electronic signature can be in any form that
satisfies the foregoing requirements. The electronic signature must be
the final entry in the employee's Form W-4 submission.
(iv) Copies of electronic Forms W-4. Upon request by the Internal
Revenue Service, the employer must supply a hardcopy of the electronic
Form W-4 and a statement that, to the best of the employer's knowledge,
the electronic Form W-4 was filed by the named employee. The hardcopy of
the electronic Form W-4 must provide exactly the same information as,
but need not be a facsimile of, the paper Form W-4.
(3) Effective date--(i) In general. This paragraph applies to all
withholding exemption certificates filed electronically by employees on
or after January 2, 1997.
(ii) Special rule for certain Forms W-4. In the case of an
electronic system that precludes the filing of Forms W-4 required on
commencement of employment and Forms W-4 claiming more than 10
withholding exemptions or exemption from withholding, the requirements
of paragraph (c)(2)(iii) of this section will be treated as satisfied if
the Form W-4 is filed electronically before January 1, 1999.
[T.D. 7423, 41 FR 26217, June 25, 1976, as amended by T.D. 7915, 48 FR
44074, Sept. 27, 1983; T.D. 8706, 62 FR 24, Jan. 2, 1997; T.D. 9196, 70
FR 19696, Apr. 14, 2005; T.D. 9337, 72 FR 38483, July 13, 2007]
Sec. 31.3402(f)(6)-1 Withholding exemptions for nonresident alien
individuals.
A nonresident alien individual (other than, in regard to wages paid
after February 28, 1979, a nonresident alien individual treated as a
resident under section 6013(g) or (h)) subject to withholding under
section 3402 is on any 1 day entitled under section 3402(f)(1) and Sec.
31.3402(f)(1)-1 to the number of withholding exemptions corresponding to
the number of personal exemptions to which he is entitled on such day by
reason of the application of section 873(b)(3) or section 876, whichever
applies. Thus, a nonresident alien individual who is not a resident of
Canada or Mexico and who is not a resident of Puerto Rico during the
entire taxable year, is allowed under section 3402(f)(1) only one
withholding exemption.
[T.D. 6908, 31 FR 16776, Dec. 31, 1966, as amended by T.D. 7670, 45 FR
6932, Jan. 31, 1980]
Sec. 31.3402(g)-1 Supplemental wage payments.
(a) In general and withholding on supplemental wages in excess of
$1,000,000--(1) Determination of supplemental wages and regular wages--
(i) Supplemental wages. An employee's remuneration may consist of
regular wages and supplemental wages. Supplemental wages are all wages
paid by an employer that are not regular wages. Supplemental wages
include wage payments made without regard to an employee's payroll
period, but also may include payments made for a payroll period.
Examples of wage payments that are included in supplemental wages
include reported tips (except as provided in paragraph (a)(1)(v) of this
section), overtime pay (except as provided in paragraph (a)(1)(iv) of
this section), bonuses, back pay, commissions, wages paid under
reimbursement or other expense allowance arrangements, nonqualified
deferred compensation includible in wages, wages paid as noncash fringe
benefits, sick pay paid by a third party as an agent of the employer,
amounts that are includible in gross income under section 409A, income
recognized on the exercise of a nonstatutory stock option, wages from
imputed income for health coverage for a non-
[[Page 242]]
dependent, and wage income recognized on the lapse of a restriction on
restricted property transferred from an employer to an employee. Amounts
that are described as supplemental wages in this definition are
supplemental wages regardless of whether the employer has paid the
employee any regular wages during either the calendar year of the
payment or any prior calendar year. Thus, for example, if the only wages
that an employer has ever paid an employee are payments of noncash
fringe benefits and income recognized on the exercise of a nonstatutory
stock option, such payments are classified as supplemental wages.
(ii) Regular wages. As distinguished from supplemental wages,
regular wages are amounts that are paid at a regular hourly, daily, or
similar periodic rate (and not an overtime rate) for the current payroll
period or at a predetermined fixed determinable amount for the current
payroll period. Thus, among other things, wages that vary from payroll
period to payroll period (such as commissions, reported tips, bonuses,
or overtime pay) are not regular wages, except that an employer may
treat tips as regular wages under paragraph (a)(1)(v) of this section
and an employer may treat overtime pay as regular wages under paragraph
(a)(1)(iv) of this section.
(iii) Amounts that are not wages subject to income tax withholding.
If an amount of remuneration is not wages subject to income tax
withholding, it is neither regular wages nor supplemental wages. Thus,
for example, income from the disqualifying dispositions of shares of
stock acquired pursuant to the exercise of statutory stock options, as
described in section 421(b), is not included in regular wages or
supplemental wages.
(iv) Optional treatment of overtime pay as regular wages. Employers
may treat overtime pay as regular wages rather than supplemental wages.
For this purpose, overtime pay is defined as any pay required to be paid
pursuant to federal (Fair Labor Standards Act), state, or local
governmental laws at a rate higher than the normal wage rate of the
employee because the employee has worked hours in excess of the number
of hours deemed to constitute a normal work week or work day.
(v) Optional treatment of tips as regular wages. Employers may treat
tips as regular wages rather than supplemental wages. For this purpose,
tips are defined as including all tips which are reported to the
employer pursuant to section 6053.
(vi) Amount to be withheld. The calculation of the amount of the
income tax withholding with respect to supplemental wage payments is
provided for under paragraph (a)(2) through (a)(7) of this section.
(2) Mandatory flat rate withholding. If a supplemental wage payment,
when added to all supplemental wage payments previously made by one
employer (as defined in paragraph (a)(3) of this section) to an employee
during the calendar year, exceeds $1,000,000, the rate used in
determining the amount of withholding on the excess (including any
excess which is a portion of a supplemental wage payment) shall be equal
to the highest rate of tax applicable under section 1 for such taxable
years beginning in such calendar year. This flat rate shall be applied
without regard to whether income tax has been withheld from the
employee's regular wages, without allowance for the number of
withholding allowances claimed by the employee on Form W-4, ``Employee's
Withholding Allowance Certificate,'' without regard to whether the
employee has claimed exempt status on Form W-4, without regard to
whether the employee has requested additional withholding on Form W-4,
and without regard to the withholding method used by the employer.
Withholding under this paragraph (a)(2) is mandatory flat rate
withholding.
(3) Certain persons treated as one employer--(i) Persons under
common control. For purposes of paragraph (a)(2) of this section, all
persons treated as a single employer under subsection (a) or (b) of
section 52 shall be treated as one employer.
(ii) Agents. For purposes of paragraph (a)(2) of this section, any
payment made to an employee by a third party acting as an agent for the
employer (regardless of whether such person shall have been designated
as an agent
[[Page 243]]
pursuant to section 3504) shall be considered as made by the employer
except as provided in paragraph (a)(4)(iii) of this section.
(4) Treatment of certain items in determining applicability of
mandatory flat rate withholding--(i) Optional treatment of compensation
not subject to income tax withholding. For purposes of paragraph (a)(2)
of this section, employers may determine whether an employee has
received $1,000,000 of supplemental wages during a calendar year by
including in supplemental wages amounts includible in income but not
subject to withholding that are reported as wages, tips, other
compensation on Form W-2.
(ii) Allocation of salary reduction deferrals. In allocating salary
reduction deferral amounts excludable from wages for purposes of
determining whether the employer has paid $1,000,000 of supplemental
wages under paragraph (a)(2) of this section, employers must allocate
such salary reduction deferral amounts to the type of compensation
(i.e., gross amounts of regular wage payments or gross amounts of
supplemental wage payments) actually being deferred.
(iii) Optional de minimis exception for certain payments by agents.
For purposes of paragraph (a)(2) of this section, if an agent makes
total wage payments (including regular wages and supplemental wages) of
less than $100,000 to an individual during any calendar year, an
employer or other agent may disregard such payments in determining
whether the individual has received $1,000,000 of supplemental wages
during the calendar year, and such agent need not consider whether the
individual has received other supplemental wages in determining the
amount of income tax to be withheld from the payments. An employer may
not avail itself of this exception if the employer is making payments to
the employee using five or more agents and a principal effect of such
use of agents is to reduce the applicability of mandatory flat rate
withholding to the employee. For purposes of paragraph (a)(2) of this
section, if an agent makes total wage payments of $100,000 or more to an
individual during any calendar year, the entire amount of supplemental
wages paid by the agent during the calendar year to the employee must be
taken into account (by other agents of the employer that make total wage
payments to the employee of $100,000 or more, by the agent, and by the
employer for which the agent is acting) in determining whether the
employee has received $1,000,000 of supplemental wages.
(iv) Treatment of supplemental wage payment exceeding $1,000,000
cumulative threshold. In the case of a supplemental wage payment that,
when added to all supplemental wage payments previously made by the
employer to the employee in the calendar year, results in the employee
having received in excess of $1,000,000 supplemental wages for the
calendar year, the employer is required to impose withholding under
paragraph (a)(2) of this section only on the portion of the payment that
is in excess of $1,000,000 (taking into account all prior supplemental
wage payments during the year). However, an employer may subject the
entire amount of such supplemental wage payment to the withholding
imposed by paragraph (a)(2) of this section.
(5) Withholding on supplemental wages that are not subject to
mandatory flat rate withholding. To the extent that paragraph (a)(2) of
this section does not apply to a supplemental wage payment (or a portion
of a payment), the amount of the tax required to be withheld on the
supplemental wages when paid shall be determined under the rules
provided in paragraphs (a)(6) and (7) of this section.
(6) Aggregate procedure for withholding on supplemental wages--(i)
Applicability. The employer is required to determine withholding upon
supplemental wages under this paragraph (a)(6) if paragraph (a)(2) of
this section does not apply to the payment or portion of the payment and
if paragraph (a)(7) of this section may not be used with respect to the
payment. In addition, employers have the option of using this paragraph
(a)(6) to calculate withholding with respect to a supplemental wage
payment, if paragraph (a)(2) of this section does not apply to the
payment, but if paragraph (a)(7) of this section could be used with
respect to the payment.
(ii) Procedure. Provided this procedure applies under paragraph
(a)(6)(i) of
[[Page 244]]
this section, the supplemental wages, if paid concurrently with wages
for a payroll period, are aggregated with the wages paid for such
payroll period. If not paid concurrently, the supplemental wages are
aggregated with the wages paid or to be paid within the same calendar
year for the last preceding payroll period or for the current payroll
period, if any. The amount of tax to be withheld is determined as if the
aggregate of the supplemental wages and the regular wages constituted a
single wage payment for the regular payroll period. The withholding
method used by the employer with respect to regular wages would then be
used to calculate the withholding on this single wage payment and the
employer would take into consideration the Form W-4 submitted by the
employee. This procedure is the aggregate procedure for withholding on
supplemental wages.
(7) Optional flat rate withholding on supplemental wages--(i)
Applicability. The employer may determine withholding upon supplemental
wages under this paragraph (a)(7) if three conditions are met--
(A) Paragraph (a)(2) of this section does not apply to the payment
or the portion of the payment;
(B) The supplemental wages are either not paid concurrently with
regular wages or are separately stated on the payroll records of the
employer; and
(C) Income tax has been withheld from regular wages of the employee
during the calendar year of the payment or the preceding calendar year.
(ii) Procedure. The determination of the tax to be withheld under
paragraph (a)(7)(iii) of this section is made without reference to any
payment of regular wages, without allowance for the number of
withholding allowances claimed by the employee on Form W-4, and without
regard to whether the employee has requested additional withholding on
Form W-4. Withholding under this procedure is optional flat rate
withholding.
(iii) Rate applicable for purposes of optional flat rate
withholding. Provided the conditions of paragraph (a)(7)(i) of this
section have been met, the employer may determine the tax to be
withheld--
(A) From supplemental wages paid after April 30, 1966, and prior to
January 1, 1994, by using a flat percentage rate of 20 percent;
(B) From supplemental wages paid after December 31, 1993, and on or
before August 6, 2001, by using a flat percentage rate of 28 percent;
(C) From supplemental wages paid after August 6, 2001, and on or
before December 31, 2001, by using a flat percentage rate of 27.5
percent;
(D) From supplemental wages paid after December 31, 2001, and on or
before May 27, 2003, by using a flat percentage rate of 27 percent;
(E) From supplemental wages paid after May 27, 2003, and on or
before December 31, 2004, by using a flat percentage rate of 25 percent;
and
(F) From supplemental wages paid after December 31, 2004, by using a
flat percentage rate of 28 percent (or the corresponding rate in effect
under section 1(i)(2) for taxable years beginning in the calendar year
in which the payment is made).
(8) Examples. For purposes of these examples, it is assumed that the
rate for purposes of mandatory flat rate withholding for 2007 is 35
percent, and the rate for purposes of optional flat rate withholding for
2007 is 25 percent. The following examples illustrate this paragraph
(a):
Example 1. (i) Employee A is an employee of three entities (X, Y,
and Z) that are treated as a single employer under section 52(a) or (b).
In 2007, X pays regular wages to A on a monthly payroll period for
services performed for X, Y, and Z. The regular wages are paid on the
third business day of each month. Income tax is withheld from the
regular wages of A during the year. A receives only the following
supplemental wage payments during 2007 in addition to the regular wages
paid by X--
(A) A bonus of $600,000 from X on March 15, 2007;
(B) A bonus of $2,300,000 from Y on November 15, 2007; and
(C) A bonus of $10,000 from Z on December 31, 2007.
(ii) In this Example 1, the $600,000 bonus from X is a supplemental
wage payment. The withholding on the $600,000 payment from X could be
determined under either paragraph (a)(6) or (7) of this section because
income tax has been withheld from the regular wages of A. If X elects to
use the aggregate
[[Page 245]]
procedure under paragraph (a)(6) of this section, the amount of
withholding on the supplemental wages would be based on aggregating the
supplemental wages and the regular wages paid by X either for the
current or last payroll period and treating the total of the regular
wages paid by X and the $600,000 supplemental wages as a single wage
payment for a regular payroll period. The withholding method used by the
employer with respect to regular wages would then be used to calculate
the withholding on this single wage payment, and the employer would take
into consideration the Form W-4 furnished by the employee.
(iii) In this Example 1, the $2,300,000 bonus from Y is a
supplemental wage payment. To calculate the withholding on the
$2,300,000 supplemental wage payment from Y, the $600,000 of
supplemental wages X has already paid to A in 2007 must be taken into
account because X and Y are treated as the same employer under section
52(a) or (b). Thus, the withholding on the first $400,000 of the payment
(i.e., the cumulative supplemental wages not in excess of $1,000,000) is
computed separately from the withholding on the remaining $1,900,000 of
the payment (i.e., the amount of the cumulative supplemental wages in
excess of $1,000,000). With respect to the first $400,000, the
withholding could be computed under either paragraph (a)(6) or (a)(7) of
this section, because income tax has been withheld from the regular
wages of the employee. If Y elected to withhold income tax using
paragraph (a)(7) of this section, Y would withhold on the $400,000
component at 25 percent (pursuant to paragraph (a)(7)(iii)(F) of this
section), which would result in $100,000 tax withheld. The remaining
$1,900,000 of the bonus would be subject to mandatory flat rate
withholding at the maximum rate of tax in effect under section 1 for
2007 (35%) without regard to the Form W-4 submitted by A. The amount
withheld from the $1,900,000 would be $665,000. The withholding on the
first component and the withholding on the second component then would
be added together to determine the total income tax withholding on the
supplemental wage payment from Y. Alternatively, under paragraph
(a)(4)(iv) of this section, Y could treat the entire $2,300,000 bonus
payment as subject to mandatory flat rate withholding at the maximum
rate of tax (35%), in which case the amount to be withheld would be 35
percent of $2,300,000, or $805,000.
(iv) The $10,000 bonus paid from Z is also a supplemental wage
payment. To calculate the withholding on the $10,000 bonus, the
$2,900,000 in cumulative supplemental wages already paid to A in 2007 by
X and Y must be taken into account because X, Y, and Z are treated as a
single employer. The entire $10,000 bonus would be subject to mandatory
flat rate withholding at the maximum rate of tax in effect under section
1 for 2007. The income tax required to be withheld on this payment would
be 35 percent of $10,000 or $3,500.
Example 2. Employees B and C work for employer M. Each employee
receives a monthly salary of $3,000 in 2007. As a result of the
withholding allowances claimed by B, there has been no income tax
withholding on the regular wages M pays to B during either 2007 or 2006.
In contrast, M has withheld income tax from regular wages M pays to C
during 2007. Together with the monthly salary check paid in December
2007 to each employee, M includes a bonus of $2,000, which is the only
supplemental wage payment each employee receives from M in 2007. The
bonuses are separately stated on the payroll records of M. Because M has
withheld no income tax from B's regular wages during either the calendar
year of the $2,000 bonus or the preceding calendar year, M cannot use
optional flat rate withholding provided under paragraph (a)(7) of this
section to calculate the income tax withholding on B's $2,000 bonus.
Consequently, M must use the aggregate procedure set forth in paragraph
(a)(6) of this section to calculate the income tax withholding due on
the $2,000 bonus to B. With respect to the bonus paid to C, M has the
option of using either the aggregate procedure provided under paragraph
(a)(6) of this section or the optional flat rate withholding provided
under paragraph (a)(7) of this section to calculate the income tax
withholding due.
Example 3. (i) Employee D works as an employee of Corporation R.
Corporations R and T are treated as a single employer under section
52(a) or (b). R makes regular wage payments to Employee D of $200,000 on
a monthly basis in 2007, and income tax is withheld from those wages. R
pays D a bonus for his services as an employee equal to $3,000,000 on
June 30, 2007. Unrelated company U pays D sick pay as an agent of the
employer R and such sick pay is supplemental wages pursuant to Sec.
31.3401(a)-1(b)(8)(i)(b)(2). U pays D $50,000 of sick pay on October 31,
2007. Corporation T decides to award bonuses to all employees of R and
T, and pays a bonus of $100,000 to D on December 31, 2007. D received no
other payments from R, T, or U.
(ii) In chronological summary, D is paid the following wages other
than the regular monthly wages paid by R:
(A) June 30, 2007--$3,000,000 (bonus from R);
(B) October 31, 2007--$50,000 (sick pay from U); and
(C) December 31, 2007--$100,000 (bonus from T).
(iii) In this Example 3, each payment of wages other than the
regular monthly wage payments from R is considered to be supplemental
wages for purposes of withholding
[[Page 246]]
under Sec. 31.3402(g)-1(a)(2). The amount of regular wages from R is
irrelevant in determining when mandatory flat rate withholding on
supplemental wages must be applied.
(iv) Because income tax has been withheld on D's regular wages,
income tax may be withheld on $1,000,000 of the $3,000,000 bonus paid on
June 30, 2007, under either paragraph (a)(6) or (7) of this section. If
R elects to use optional flat rate withholding provided under paragraph
(a)(7)(iii)(F) of this section, withholding would be calculated at 25
percent of the $1,000,000 portion of the payment and would be $250,000.
(v) Income tax withheld on the following supplemental wage payments
(or portion of a payment) as follows is required to be calculated at the
maximum rate in effect under section 1, or 35 percent in 2007--
(A) $2,000,000 of the $3,000,000 bonus paid by R on June 30, 2007; and
(B) all of the $100,000 bonus paid by T on December 31, 2007.
(vi) Pursuant to paragraph (a)(4)(iii) of this section, because the
total wage payments made by U, an agent of the employer, to D are less
than $100,000, U is permitted to determine the amount of income tax to
be withheld without regard to other supplemental wage payments made to
the employee. Income tax withholding on the $50,000 in sick pay may be
determined under either paragraph (a)(6) or (7) of this section. If U
elects to withhold income tax at the flat rate provided under paragraph
(a)(7)(iii)(F) of this section, withholding on the $50,000 of sick pay
would be calculated at 25 percent of the $50,000 payment and would be
$12,500. Alternatively, U may choose to take account of the $3,000,000
in supplemental wages paid by the employer during 2007 prior to payment
of the $50,000 sick pay, and withholding on the $50,000 of sick pay
could be calculated applying the mandatory flat rate of 35 percent,
resulting in withholding of $17,500 on the $50,000 payment.
Example 4. (i) Employer J has decided it wants to grant its employee
B a $1,000,000 net bonus (after withholding) to be paid in 2007.
Employer J has withheld income tax from the regular wages of the
employee. Employer J has made no other supplemental wage payments to B
during the year.
(ii) This Example 4 requires grossing up the supplemental wage
payment to determine the gross wages necessary to result in a net
payment of $1,000,000. If the employer elected to use optional flat rate
withholding, the first $1,000,000 of the wages would be subject to 25
percent withholding. However, any wages above that, including amounts
representing gross-up payments, would be subject to mandatory 35 percent
withholding. The withholding applicable to the first $1,000,000 (i.e.,
$250,000) would thus be required to be grossed-up at a 35 percent rate
to determine the gross wage amount in excess of $1,000,000. Thus, the
wages in excess of $1,000,000 would be equal to $250,000 divided by .65
(computed by subtracting .35 from 1) or $384,615.38. Thus the total
supplemental wage payment, taking into account income tax withholding
only (and not Federal Insurance Contributions Act taxes), to B would be
$1,384,615.38, and the total withholding with respect to the payment if
Employer J elected optional flat rate withholding with respect to the
first $1,000,000, would be $384,615.38.
(9) Certain noncash payments to retail commission salesmen. For
provisions relating to the treatment of wages that are not subject to
paragraph (a)(2) of this section and that are paid other than in cash to
retail commission salesmen, see Sec. 31.3402(j)-1.
(10) Alternative methods. The Secretary may provide by publication
in the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this
chapter) for alternative withholding methods that will allow an employer
to meet its responsibility for the mandatory flat rate withholding
required by paragraph (a)(2) of this section.
(b) Special rule where aggregate withholding exemption exceeds wages
paid. (1) This rule does not apply to the extent that paragraph (a)(2)
of this section applies to the supplemental wage payment. If
supplemental wages are paid to an employee during a calendar year for a
period which involves two or more consecutive payroll periods, for which
other wages also are paid during such calendar year, and the aggregate
of such other wages is less than the aggregate of the amounts determined
under the table provided in section 3402(b) (1) as the withholding
exemptions applicable for such payroll periods, the amount of the tax
required to be withheld on the supplemental wages shall be computed as
follows:
Step 1. Determine an average wage for each of such payroll periods
by dividing the sum of the supplemental wages and the wages paid for
such payroll periods by the number of such payroll periods.
Step 2. Determine a tax for each payroll period as if the amount of
the average wage constituted the wages paid for such payroll period.
Step 3. From the sum of the amounts of tax determined in Step 2
subtract the total amount of tax withheld, or to be withheld, from the
wages, other than the supplemental
[[Page 247]]
wages, for such payroll periods. The remainder, if any shall constitute
the amount of the tax to be withheld upon the supplemental wages.
Example. An employee has a weekly payroll period ending on Saturday
of each week, the wages for which are paid on Friday of the succeeding
week. On the 10th day of each month he is paid a bonus based upon
production during the payroll periods for which wages were paid in the
preceding month. The employee is paid a weekly wage of $64 on each of
the five Fridays occurring in July 1966. On August 10, 1966, the
employee is paid a bonus of $125 based upon production during the five
payroll periods covered by the wages paid in July. On the date of
payment of the bonus, the employee, who is married and has three
children, has a withholding exemption certificate in effect indicating
that he is married and claiming five withholding exemptions. The amount
of the tax to be withheld from the bonus paid on August 10, 1966, is
computed as follows:
Wages paid in July 1966 for 5 payroll periods (5x$64)....... $320.00
Bonus paid August 10, 1966.................................. 125.00
-----------
Aggregate of wages and bonus............................... 445.00
===========
Average wage per payroll period ($445/5).................... 89.00
Computation of tax under percentage method: Withholding 67.50
exemptions (5x$13.50)......................................
-----------
Remainder subject to tax................................... 21.50
===========
Tax on average wage for 1 week under percentage method of 2.45
withholding (married person with weekly payroll period) 14
percent of $17.50 (excess over $4))........................
===========
Tax on average wage for 5 weeks............................. 12.25
Less: Tax previously withheld on weekly wage payments of $64 None
Tax to be withheld on supplemental wages.................. 12.25
===========
Computation of tax under wage bracket method: Tax on $89 12.50
wage under weekly wage table for married person ($2.50 per
week for 5 weeks)..........................................
Less: Tax previously withheld on weekly wage payments of $64 None
Tax to be withheld on supplemental wages.................... 12.50
(2) Applicability. The rules prescribed in this paragraph (b) shall,
at the election of the employer, be applied in lieu of the rules
prescribed in paragraph (a) of this section except that this paragraph
shall not be applicable in any case in which the payroll period of the
employee is less than one week or to the extent that paragraph (a)(2) of
this section applies to the supplemental wage payment.
(c) Vacation allowances. Amounts of so-called ``vacation
allowances'' shall be subject to withholding as though they were regular
wage payments made for the period covered by the vacation. If the
vacation allowance is paid in addition to the regular wage payment for
such period, the rules applicable with respect to supplemental wage
payments shall apply to such vacation allowance.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6860, 30 FR
13947, Nov. 4, 1965; T.D. 6882, 31 FR 5661, Apr. 12, 1966; T.D. 9276, 71
FR 42054, July 25, 2006; 71 FR 58276, Oct. 3, 2006; 71 FR 77612, Dec.
27, 2006; 72 FR 3734, Jan. 26, 2007]
Sec. 31.3402(g)-2 Wages paid for payroll period of more than one year.
If wages are paid to an employee for a payroll period of more than
one year, for the purpose of determining the amount of tax required to
be deducted and withheld in respect of such wages--
(a) Under the percentage method, the amount of the tax shall be
determined as if such payroll period constituted an annual payroll
period, and
(b) Under the wage bracket method, the amount of the tax shall be
determined as if such payroll period constituted a miscellaneous payroll
period of 365 days.
Sec. 31.3402(g)-3 Wages paid through an agent, fiduciary, or other
person on behalf of two or more employers.
(a) If a payment of wages is made to an employee by an employer
through an agent, fiduciary, or other person who also has the control,
receipt, custody, or disposal of, or pays the wages payable by another
employer to such employee, the amount of the tax required to be withheld
on each wage payment made through such agent, fiduciary, or person
shall, whether the wages are paid separately on behalf of each employer
or paid in a lump sum on behalf of all such employers, be determined
upon the aggregate amount of such wage payment or payments in the same
manner as if such aggregate amount had been paid by one employer. Hence,
under either the percentage method or the wage bracket method the tax
shall be determined upon the aggregate amount of the wage payment.
(b) In any such case, each employer shall be liable for the return
and payment of a pro rata portion of the tax so
[[Page 248]]
determined, such portion to be determined in the ratio which the amount
contributed by the particular employer bears to the aggregate of such
wages.
(c) For example, three companies maintain a central management
agency which carries on the administrative work of the several
companies. The central agency organization consists of a staff of
clerks, bookkeepers, stenographers, etc., who are the common employees
of the three companies. The expenses of the central agency, including
wages paid to the foregoing employees, are borne by the several
companies in certain agreed proportions. Company X pays 45 percent,
Company Y pays 35 percent and Company Z pays 20 percent of such
expenses. The amount of tax required to be withheld on the wages paid to
persons employed in the central agency should be determined in
accordance with the provisions of this section. In such event, Company X
is liable as an employer for the return and payment of 45 percent of the
tax required to be withheld, Company Y is liable for the return and
payment of 35 percent of the tax and Company Z is liable for the return
and payment of 20 percent of the tax. (See Sec. 31.3504-1, relating to
acts to be performed by agents.)
Sec. 31.3402(h)(1)-1 Withholding on basis of average wages.
(a) In general. An employer may determine the amount of tax to be
deducted and withheld upon a payment of wages to an employee on the
basis of the employee's average estimated wages, with necessary
adjustments, for any quarter. This paragraph applies only where the
method desired to be used includes wages other than tips (whether or not
tips are also included).
(b) Withholding on the basis of average estimated tips--(1) In
general. Subject to certain limitations and conditions, an employer may,
at his discretion, withhold the tax under section 3402 in respect of
tips reported by an employee to the employer on an estimated basis. An
employer who elects to make withholding of the tax on an estimated basis
shall:
(i) In respect of each employee, make an estimate of the amount of
tips that will be reported, pursuant to section 6053, by the employee to
the employer in a calendar quarter.
(ii) Determine the amount which must be deducted and withheld upon
each payment of wages (exclusive of tips) which are under the control of
the employer to be made during the quarter by the employer to the
employee. The total amount which must be deducted and withheld shall be
determined by assuming that the estimated tips for the quarter represent
the amount of wages to be paid to the employee in the form of tips in
the quarter and that such tips will be ratably (in terms of pay periods)
paid during the quarter.
(iii) Deduct and withhold from any payment of wages (exclusive of
tips) which are under the control of the employer, or from funds
referred to in section 3402(k) (see Sec. Sec. 31.3402(k) and
31.3402(k)-1), such amount as may be necessary to adjust the amount of
tax withheld on the estimated basis to conform to the amount required to
be withheld in respect of tips reported by the employee to the employer
during the calendar quarter in written statements furnished to the
employer pursuant to section 6053(a). If an adjustment is required, the
additional tax required to be withheld may be deducted upon any payment
of wages (exclusive of tips) which are under the control of the employer
during the quarter and within the first 30 days following the quarter or
from funds turned over by the employee to the employer for such purpose
within such period. For provisions relating to the repayment to an
employee, or other disposition, of amounts deducted from an employee's
remuneration in excess of the correct amount of tax, see Sec.
31.6413(a)-1.
(2) Estimating tips employee will report--(i) Initial estimate. The
initial estimate of the amount of tips that will be reported by a
particular employee in a calendar quarter shall be made on the basis of
the facts and circumstances surrounding the employment of that employee.
However, if a number of employees are employed under substantially the
same circumstances and
[[Page 249]]
working conditions, the initial estimate established for one such
employee may be used as the initial estimate for other employees in that
group.
(ii) Adjusting estimate. If the quarterly estimate of tips in
respect of a particular employee continues to differ substantially from
the amount of tips reported by the employee and there are no unusual
factors involved (for example, an extended absence from work due to
illness) the employer shall make an appropriate adjustment of his
estimate of the amount of tips that will be reported by the employee.
(iii) Reasonableness of estimate. The employer must be prepared,
upon request of the district director, to disclose the factors upon
which he relied in making the estimate, and his reasons for believing
that the estimate is reasonable.
[T.D. 7053, 35 FR 11626, July 21, 1970]
Sec. 31.3402(h)(2)-1 Withholding on basis of annualized wages.
An employer may determine the amount of tax to be deducted and
withheld upon a payment of wages to an employee by taking the following
steps:
Step 1. Multiply the amount of the employee's wages for the payroll
period by the number of such periods in the calendar year.
Step 2. Determine the amount of tax which would be required to be
deducted and withheld upon the amount determined in Step 1 if that
amount constituted the actual wages for the calendar year and the
payroll period of the employee were an annual payroll period.
Step 3. Divide the amount of tax determined in Step 2 by the number
of periods by which the employee's wages were multiplied in Step 1.
Example. On July 1, 1970, A, a single person who is on a weekly
payroll period and claims one exemption, receives wages of $100 from X
Co., his employer. X Co. multiplies the weekly wage of $100 by 52 weeks
to determine an annual wage of $5,200. It then subtracts $650 for A's
withholding exemption and arrives at a balance of $4,550. The applicable
table in section 3402(a) for annual payroll periods indicates that the
amount of tax to be withheld thereon is $376 plus $314.50 (17 percent of
excess over $2,700), or a total of $690.50. The annual tax of $690.50,
when divided by 52 to arrive at the portion thereof attributable to the
weekly payroll period, equals $13.28. X Co. may, if it chooses, withhold
$13.28 rather than the amount specified in section 3402 (a) or (c) for a
weekly payroll period.
[T.D. 7053, 35 FR 11627, July 21, 1970]
Sec. 31.3402(h)(3)-1 Withholding on basis of cumulative wages.
(a) In general. In the case of an employee who has in effect a
request that the amount of tax to be withheld from his wages be computed
on the basis of his cumulative wages, and whose wages since the
beginning of the current calendar year have been paid with respect to
the same category of payroll period (e.g., weekly or semimonthly), the
employer may determine the amount of tax to be deducted and withheld
upon a payment of wages made to the employee after December 31, 1969, by
taking the following steps:
Step 1. Add the amount of the wages to be paid the employee for the
payroll period to the total amount of wages paid by the employer to the
employee during the calendar year.
Step 2. Divide the aggregate amount of wages computed in Step 1 by
the number of payroll periods to which that amount relates.
Step 3. Compute the total amount of tax that would have been
required to be deducted and withheld under section 3402(a) if the
average amount of wages (as computed in Step 2) had been paid to the
employee for the number of payroll periods to which the aggregate amount
of wages (computed in Step 1) relates.
Step 4. Determine the excess, if any, of the amount of tax computed
in Step 3 over the total amount of tax already deducted and withheld by
the employer from wages paid to the employee during the calendar year.
Example. On July 1, 1970, Y Co. employs B, a single person claiming
one exemption. Y Co. pays B the following amounts of wages on the basis
of a biweekly payroll period on the following pay days:
July 20....................................................... $1,000
August 3...................................................... 300
August 17..................................................... 300
August 31..................................................... 300
September 14.................................................. 300
September 28.................................................. 300
On October 5, B requests that Y Co. withhold on the basis of his
cumulative wages with respect to his wages to be paid on October 12 and
thereafter. Y Co. adds the $300 in wages to be paid to B on October 12
to the payments of wages already made to B during the calendar year, and
determines that the aggregate amount of wages is $2,800. The average
amount of wages for the 7 biweekly payroll periods is $400. The total
amount of tax
[[Page 250]]
required to be deducted and withheld for payments of $400 for each of 7
biweekly payroll periods is $485.87 under section 3402(a). Since the
total amount of tax which has been deducted and withheld by Y Co.
through September 28 is $484.86, Y Co. may, if it chooses, deduct and
withhold $1.01 (the amount by which $485.87 exceeds the total amount
already withheld by Y Co.) from the payment of wages to B on October 12
rather than the amount specified in section 3402 (a) or (c).
(b) Employee's request and revocation of request. An employee's
request that his employer withhold on the basis of his cumulative wages
and a notice of revocation of such request shall be in writing and in
such form as the employer may prescribe. An employee's request furnished
to his employer pursuant to this section shall be effective, and may be
acted upon by his employer, after the furnishing of such request and
before a revocation thereof is effective. A revocation of such request
may be made at any time by the employee furnishing his employer with a
notice of revocation. The employer may give immediate effect to a
revocation, but, in any event, a revocation shall be effective with
respect to payments of wages made on or after the first ``status
determination date'' (see section 3402(f)(3)(B)) which occurs at least
30 days after the date on which such notice is furnished.
(c) Requests due to increases or decreases in allowances. An
employee may request pursuant to this section that his employer withhold
on the basis of the employee's cumulative wages when the employee is
entitled to claim an increased or decreased number of withholding
allowances under Sec. 31.3402(m)-1 during the estimation year (as
defined in Sec. 31.3402(m)-1(c)(1)).
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7053, 35 FR 11627, July 21, 1970, as amended by T.D. 7915, 48 FR
44074, Sept. 27, 1983]
Sec. 31.3402(h)(4)-1 Other methods.
(a) Maximum permissible deviations. An employer may use any other
method of withholding under which the employer will deduct and withhold
upon wages paid to an employee after December 31, 1969, for a payroll
period substantially the same amount as would be required to be deducted
and withheld by applying section 3402(a) with respect to the payroll
period. For purposes of section 3402(h)(4) and this section, an amount
is substantially the same as the amount required to be deducted and
withheld under section 3402(a) if its deviation from the latter amount
is not greater than the maximum permissible deviation prescribed in this
paragraph. The maximum permissible deviation under this paragraph is
determined by annualizing wages as provided in Step 1 of Sec.
31.3402(h)(2)-1 and applying the following table to the amount of tax
required to be deducted and withheld under section 3402(a) with respect
to such annualized wages, as determined under Step 2 of Sec.
31.3402(h)(2)-1:
If the tax required to be withheld under The maximum permissible
the annual percentage rate schedule is-- annual deviation is--
$10 to $100............................... $10, plus 10 percent of
excess over $10.
$100 to $1,000............................ $19, plus 3 percent of
excess over $100.
$1,000 or over............................ $46, plus 1 percent of
excess over $1,000.
In any case, an amount which is less than $10 more or less per year than
the amount required to be deducted and withheld under section 3402(a) is
substantially the same as the latter amount. If any method produces
results which are not greater than the prescribed maximum deviations
only with respect to some of his employees, the employer may use such
method only with respect to such employees. An employer should
thoroughly test any method which he contemplates using to ascertain
whether it meets the tolerances prescribed by this paragraph. An
employer may not use any method, one of the principal purposes of which
is to consistently produce amounts to be deducted and withheld which are
less (though substantially the same) than the amount required to be
deducted and withheld by applying section 3402(a).
(b) Combined FICA and income tax withholding. In addition to the
methods authorized by paragraph (a) of this section, an employer may
determine the
[[Page 251]]
amount of tax to be deducted and withheld under section 3402 upon a
payment of wages to an employee by using tables prescribed by the
Commissioner which combine the amounts of tax to be deducted under
sections 3102 and 3402. Such tables shall provide for the deduction of
the sum of such amounts, computed on the basis of the midpoints of the
wage brackets in the tables prescribed under section 3402(c). The
portion of such sum which is to be treated as the tax deducted and
withheld under section 3402 shall be the amount obtained by subtracting
from such sum the amount of tax required to be deducted by section 3102.
Such tables may be used only with respect to payments which are wages
under both sections 3121(a) and 3401(a).
(c) Part-year employment method of withholding--(1) In general. In
addition to the methods authorized by other paragraphs of this section,
in the case of part-year employment (as defined in subparagraph (4) of
this paragraph) of an employee who determines his liability for tax
under subtitle A of the Code on a calendar-year basis and who has in
effect a request that the amount of tax to be withheld from his wages be
computed according to the part-year employment method described in this
paragraph, the employer may determine the amount of tax to be deducted
and withheld upon a payment of wages made to the employee on or after
January 5, 1973, by taking the following steps:
Step 1. Add the amount of wages to be paid to the employee for the
current payroll period to the total amount of wages paid by the employer
to the employee for all preceding payroll periods included in the
current term of continuous employment (as defined in subparagraph (3) of
this paragraph) of the employee by the employer;
Step 2. Divide the aggregate amount of wages computed in Step 1 by
the total of the number of payroll periods to which that amount relates
plus the equivalent number of payroll periods (as defined in
subparagraph (2) of this paragraph) in the employee's term of continuous
unemployment immediately preceding the current term of continuous
employment, such term of continuous unemployment to be exclusive of any
days prior to the beginning of the current calendar year;
Step 3. Determine the total amount of tax that would have been
required to be deducted and withheld under section 3402 if the average
amount of wages (as computed in Step 2) had been paid to the employee
for the number of payroll periods determined in Step 2 (including the
equivalent number of payroll periods); and
Step 4. Determine the excess, if any, of the amount of tax computed
in Step 3 over the total amount of tax already deducted and withheld by
the employer from wages paid to the employee for all payroll periods
during the current term of continuous employment.
The use of the method described in this paragraph does not preclude the
employee from claiming additional withholding allowances pursuant to
section 3402(m) or the standard deduction allowance pursuant to section
3402(f)(1)(G).
(2) Equivalent number of payroll periods. For purposes of this
paragraph, the equivalent number of payroll periods shall be determined
by dividing the number of calendar days contained in the current payroll
period into the number of calendar days between the later of (i) the day
certified by the employee as his last day of employment prior to his
current term of continuous employment during the calendar year in which
such term commenced, or (ii) the last day of the calendar year
immediately preceding the current calendar year, and the first day of
the current term of continuous employment. For purposes of the preceding
sentence, the term ``calendar days'' includes holidays, Saturdays, and
Sundays. In determining the equivalent number of payroll periods, any
fraction obtained in the division described in the first sentence of
this subparagraph shall be disregarded. An employee paid for a
miscellaneous payroll period shall be considered to have a daily payroll
period for purposes of this subparagraph. In a case in which an employee
is paid for a daily or miscellaneous payroll period and the employer
elects under Circular E to compute the tax to be withheld as if the
aggregate of the wages paid to the employee during the calendar week
were paid for a weekly period, the employer shall determine the
equivalent number of payroll periods for purposes of the computation of
the tax to be withheld for the calendar week on the basis of a weekly
payroll period (notwithstanding the fact that a
[[Page 252]]
determination of the equivalent number of payroll periods for purposes
of the computation of the tax to be withheld upon wages paid for daily
or miscellaneous payroll periods within such calendar week has been made
on the basis of a daily or miscellaneous payroll period).
(3) Term of continuous employment. For purposes of this paragraph, a
term of employment is continuous if it is either a single term of
employment or two or more consecutive terms of employment with the same
employer. A term of continuous employment begins on the first day on
which any services are performed by the employee for the employer for
which compensation is paid or payable. Such term ends on the earlier of
(i) the last day during the current term of continuous employment on
which any services are performed by the employee for the employer, or
(ii) if the employee performs no services for the employer for a period
of more than 30 calendar days, the last day preceding such period on
which any services are performed by the employee for the employer. For
example, a professional athlete who signs a contract on December 31,
1973, to perform services from July 1 through December 31 for the
calendar years 1974, 1975, and 1976 has a new term of employment
beginning each July 1 and accordingly may qualify for use of the part-
year withholding method in each of such years. Likewise, a term of
continuous employment is not broken by a temporary layoff of no more
than 30 days. On the other hand, when an employment relationship is
actually terminated the term of continuous employment is ended even
though a new employment relationship is established with the same
employer within 30 days. A ``term of continuous employment'' includes
all days on which an employee performs any services for an employer and
includes days on which services are not performed because of illness or
vacation, or because such days are holidays or are regular days off
(such as Saturdays and Sundays, or days off in lieu of Saturdays and
Sundays), or other days for which the employee is not scheduled to work.
For example, an employee who is employed 2 days a week for the same
employer from March 1 through December 31 has a term of continuous
employment of 306 days.
(4) Part-year employment. For purposes of this paragraph, ``part-
year employment'' means one or more terms of continuous employment with
all employers which term or terms will not aggregate more than 245 days
within a calendar year. For example, A graduates from college in May and
was not employed from January through May. A accepts a permanent
position with X Co., beginning June 1. Since the total duration of A's
term of continuous employment will, during the current calendar year,
not exceed 245 days it does qualify as part-year employment for purposes
of this section.
If, however, A had also worked for Y Co. from December 15 of the
previous year through February 5 of the current calendar year, the total
duration of A's terms of continuous employment will, during the current
calendar year, exceed 245 days (36 days (January 1 through February 5)
plus 214 days (June 1 through December 31) equals 250 days). This year's
employment does not therefore qualify as part-year employment for
purposes of this section.
(5) Employee's request. (i) An employee's request that his employer
withhold according to the part-year employment method shall be in
writing and in such form as the employer may prescribe. Such request
shall be made under the penalties of perjury and shall contain the
following information--
(a) The last day of employment (if any) by any employer prior to the
current term of continuous employment during the calendar year in which
such term commenced.
(b) A statement that the employee reasonably anticipates that he
will be employed for an aggregate of no more than 245 days in all terms
of continuous employment during the current calendar year, and
(c) The employee uses a calendar-year accounting period.
An employee's request furnished to his employer pursuant to this section
shall be effective, and may be acted upon by his employer, with respect
to wages paid after the furnishing of such request, and shall cease to
be effective with respect to any wages paid on or
[[Page 253]]
after the beginning of the payroll period during which the current
calendar year will end.
(ii) If, on any day during the calendar year, any of the
anticipations stated by the employee in his statement provided pursuant
to subdivision (i)(b) of this subparagraph becomes unreasonable, the
employee shall revoke the request described in this subparagraph before
the end of the payroll period during which it becomes unreasonable. The
revocation shall be effective as of the beginning of the payroll period
during which it is made.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7053, 35 FR 11627, July 21, 1970, as amended by T.D. 7251, 38 FR
867, Jan. 5, 1973; T.D. 7915, 48 FR 44074, Sept. 27, 1983]
Sec. 31.3402(i)-1 Additional withholding.
(a) In addition to the tax required to be deducted and withheld in
accordance with the provisions of section 3402, the employer and
employee may agree that an additional amount shall be withheld from the
employee's wages. The agreement shall be in writing and shall be in such
form as the employer may prescribe. The agreement shall be effective for
such period as the employer and employee mutually agree upon. However,
unless the agreement provides for an earlier termination, either the
employer or the employee, by furnishing a written notice to the other,
may terminate the agreement effective with respect to the first payment
of wages made on or after the first ``status determination date'' (see
paragraph (d) of Sec. 31.3402(f)(3)-1) which occurs at least 30 days
after the date on which such notice if furnished.
(b) The amount deducted and withheld pursuant to an agreement
between the employer and employee shall be considered as tax required to
be deducted and withheld under section 3402. All provisions of law and
regulations applicable with respect to the tax required to be deducted
and withheld under section 3402 shall be applicable with respect to any
amount deducted and withheld pursuant to the agreement.
(c) This section is applicable only to agreements made before
October 1, 1981. Any such agreement shall remain in effect in accordance
with paragraph (a). See Sec. 31.3402 (i)-2 for rules relating to
increases in withholding after September 30, 1981.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 65l6, 25 FR 13108, Dec. 20, 1960, as amended by T.D. 7065, 35 FR
16540, Oct. 23, 1970; T.D. 7915, 48 FR 44074, Sept. 27, 1983]
Sec. 31.3402(i)-2 Increases or decreases in withholding.
(a) Increases in withholding--(1) In general. In addition to the tax
required to be deducted and withheld in accordance with the provisions
of section 3402, the employee may request, after September 30, 1981,
that the employer deduct and withhold an additional amount from the
employee's wages. The employer must comply with the employee's request,
except that the employer shall comply with the employee's request only
to the extent that the amount that the employee requests to be deducted
and withheld under this section does not exceed the amount that remains
after the employer has deducted and withheld all amounts otherwise
required to be deducted and withheld by Federal law (other than by
section 3402(i) and this section), State law, and local law (other than
by State or local law that provides for voluntary withholding). The
employer must comply with the employee's request in accordance with the
time limitations of Sec. 31.3402(f)(3)-1 (relating to when withholding
exemption certificate takes effect). The employee must make his request
on Form W-4 as provided in Sec. 31.3402(f)(5)-1 (relating to form and
contents of withholding exemption certificates), and this Form W-4 shall
take effect and remain effective in accordance with section 3402(f) and
the regulations thereunder.
(2) Amount deducted considered to be tax. The amount deducted and
withheld pursuant to paragraph (a)(1) of this section shall be
considered to be tax required to be deducted and withheld under section
3402. All provisions of
[[Page 254]]
law and regulations applicable with respect to the tax required to be
deducted and withheld under section 3402 shall be applicable with
respect to any amount deducted and withheld under paragraph (a)(1) of
this section.
(b) Decreases in withholding. [Reserved]
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7915, 48 FR 44074, Sept. 27, 1983]
Sec. 31.3402(j)-1 Remuneration other than in cash for service
performed by retail commission salesman.
(a) In general. (1) An employer, in computing the amount to be
deducted and withheld as tax in accordance with section 3402, may, at
his election, disregard any wages paid, after August 9, 1955, in a
medium other than cash for services performed for him by an employee if
(i) the noncash remuneration is paid for services performed by the
employee as a retail commission salesman and (ii) the employer
ordinarily pays the employee remuneration solely by way of cash
commissions for services performed by him as a retail commission
salesman.
(2) Section 3402(j) and this section are not applicable with respect
to wages paid to the employee that are subject to withholding under
Sec. 31.3402(g)-1(a)(2). Section 3402(j) and this section are not
applicable with respect to noncash wages paid to a retail commission
salesman for services performed by him in a capacity other than as such
a salesman. Such sections are not applicable with respect to noncash
wages paid by an employer to an employee for services performed as a
retail commission salesman if the employer ordinarily pays the employee
remuneration other than by way of cash commissions for such services.
Thus, noncash remuneration may not be disregarded in computing the
amount to be deducted and withheld in a case where the employee, for
services performed as a retail commission salesman, is paid both a
salary and cash commissions on sales, or is ordinarily paid in something
other than cash (stocks, bonds, or other forms of property)
notwithstanding that the amount of remuneration paid to the employee is
measured by sales.
(b) Retail commission salesman. For purposes of section 3402(j) and
this section, the term ``retail commission salesman'' includes an
employee who is engaged in the solicitation of orders at retail, that
is, from the ultimate consumer, for merchandise or other products
offered for sale by his employer. The term does not include an employee
salesman engaged in the solicitation on behalf of his employer of orders
from wholesalers, retailers, or others, for merchandise for resale.
However, if the salesman solicits orders for more than one principal, he
is not excluded from the term solely because he solicits orders from
wholesalers or retailers on behalf of one or more principals. In such
case the salesman may be a retail commission salesman with respect to
services performed for one or more principals and not with respect to
services performed for his other principals.
(c) Noncash remuneration. The term ``noncash remuneration'' includes
remuneration paid in any medium other than cash, such as goods or
commodities, stocks, bonds, or other forms of property. The term does
not include checks or other monetary media of exchange.
(d) Cross reference. For provisions relating to records required to
be kept and statements which must be furnished an employee with respect
to wage payments, see sections 6001 and 6051 and the regulations
thereunder in Subpart G of this part.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 9276, 71 FR 42057, July 25, 2006]
Sec. 31.3402(k)-1 Special rule for tips.
(a) Withholding of income tax in respect of tips--(1) In general.
Subject to the limitations set forth in paragraph (a)(2) of this
section, an employer is required to deduct and withhold from each of his
employees tax in respect of those tips received by the employee which
constitute wages. (For provisions relating to the treatment of tips as
wages, see Sec. Sec. 3401(a)(16) and 3401(f).) The employer shall make
the withholding by deducting or causing to be deducted the amount of the
tax from wages (exclusive of tips) which are under the
[[Page 255]]
control of the employer or other funds turned over by the employee to
the employer (see paragraph (a)(3) of this section). For purposes of
this section the terms ``wages (exclusive of tips) which are under the
control of the employer'' means, with respect to a payment of wages, an
amount equal to wages as defined in section 3401(a) except that tips and
noncash remuneration which are wages are not included, less the sum of--
(i) The tax under section 3101 required to be collected by the
employer in respect of wages as defined in section 3121(a) (exclusive of
tips);
(ii) The tax under section 3402 required to be collected by the
employer in respect of wages as defined in section 3401(a) (exclusive of
tips); and
(iii) The amount of taxes imposed on the remuneration of an employee
withheld by the employer pursuant to State and local law (including
amounts withheld under an agreement between the employer and the
employee pursuant to such law) except that the amount of taxes taken
into account in this subdivision shall not include any amount
attributable to tips.
(2) Limitations. An employer is required to deduct and withhold the
tax on tips which constitute wages only in respect of those tips which
are reported by the employee to the employer in a written statement
furnished to the employer pursuant to section 6053(a). The employer is
responsible for the collection of the tax on tips reported to him only
to the extent that the emloyer can, during the period beginning at the
time the written statement is submitted to him and ending at the close
of the calendar year in which the statement was submitted, collect the
tax by deducting it or causing it to be deducted as provided in
subparagraph (1) of this paragraph.
(3) Furnishing of funds to employer. If the amount of the tax in
respect of tips reported by the employee to the employer in a written
statement furnished pursuant to section 6053(a) exceeds the wages
(exclusive of tips) which are under the control of the employer from
which the employer is required to withhold the tax in respect of such
tips, the employee may furnish to the employer, within the period
specified in subparagraph (2) of this paragraph, an amount of money
equal to the amount of such excess.
(b) Less than $20 of tips. Notwithstanding the provisions of
paragraph (a) of this section, if an employee furnishes to his employer
a written statement--
(1) Covering a period of less than 1 month, and
(2) The statement is furnished to the employer prior to the close of
the 10th day of the month following the month in which the tips were
actually received by the employee, and
(3) The aggregate amount of tips reported in the statement and in
all other statements previously furnished by the employee covering
periods within the same month is less than $20, and such statements,
collectively, do not cover the entire month,
the employer may deduct amounts equivalent to the tax on such tips from
wages (exclusive of tips) which are under the control of the employer or
other funds turned over by the employee to the employer. For provisions
relating to the repayment to an employee, or other disposition, of
amounts deducted from an employee's remuneration in excess of the
correct amount of tax, see Sec. 31.6413(a)-1. (As to the exclusion from
wages of tips of less than $20, see Sec. 31.3401(a)(16)-1.)
(c) Priority of tax collection--(1) In general. In the case of a
payment of wages (exclusive of tips), the employer shall deduct or cause
to be deducted in the following order:
(i) The tax under section 3101 and the tax under section 3402 with
respect to such payment of wages.
(ii) Any tax under section 3101 which, at the time of payment of the
wages, the employer is required to collect--
(a) In respect of tips reported by the employee to the employer in a
written statement furnished to the employer pursuant to section 6053(a),
or
(b) By reason of the employer's election to make collection of the
tax under section 3101 in respect of tips on an estimated basis,
but which has not been collected by the employer and which cannot be
deducted from funds turned over by the
[[Page 256]]
employee to the employer for such purpose. (See Sec. 31.3102-3,
relating to collection of, and liability for, employee tax on tips.)
(iii) Any tax under section 3402 which, at the time of the payment
of the wages, the employer is required to collect--
(a) In respect of tips reported by the employee to the employer in a
written statement furnished to the employer pursuant to section 6053(a),
or
(b) By reason of the employer's election to make collection of the
tax under section 3402 in respect of tips on an estimated basis,
but which has not been collected by the employer and which cannot be
deducted from funds turned over by the employee to the employer for such
purpose. For provisions relating to the witholding of tax on the basis
of average estimated tips, see paragraph (b) of Sec. 31.3402(h)(1)-1.
(2) Examples. The application of paragraph (b)(1) of this section
may be illustrated by the following examples (The amounts used in the
following examples are intended for illustrative purposes and do not
necessarily reflect currently effective rates or amounts.):
Example 1. W is a waiter employed by R restaurant. W's principal
remuneration for his services is in the form of tips received from
patrons of R; however, he also receives a salary from R of $40 per week,
which is paid to him every Friday. W is a member of a labor union which
has a contract with R pursuant to which R is to collect dues for the
union by withholding from the wages of its employees at the rate of $1
per week. In addition to the taxes required to be withheld under the
Internal Revenue Code, W's wages are subject to withholding of a state
income tax imposed upon both his regular wage and his tips received and
reported to R.
On Monday of a given week W furnishes a written statement to R
pursuant to section 6053(a) in which he reports the receipt of $160 in
tips. The $40 wage to be paid to W on Friday of the same week is subject
to the following items of withholding:
------------------------------------------------------------------------
Taxes
with Taxes
respect with
to respect Total
regular to tips
wage
------------------------------------------------------------------------
Section 3101 (F.I.C.A.)................ $1.76 $7.04 $8.80
Section 3402 (income tax at source).... 5.65 28.30 33.95
State income tax....................... 1.20 4.80 6.00
Union dues............................. ......... ......... 1.00
----------
Total................................ ......... ......... 49.75
------------------------------------------------------------------------
W does not turn over any funds to R. R should satisfy the taxes imposed
by sections 3101 and 3402 out of W's $40 wage as follows: The taxes
imposed with respect to the regular wage (a total of $74l) should be
satisfied first. The taxes imposed with respect to tips are to be
withheld only out of ``wages (exclusive of tips) which are under the
control of the employer'' as that phrase is defined in Sec. Sec.
31.3102-3(a)(1) and 31.3402(k)-1(a)(1). The amount of such wages under
the control of employer in this example is $31.39, or $40, less the
amounts applied in satisfaction of the Federal and State withholding
taxes imposed with respect to the regular $40 wage ($8.61). This $31.39
is applied first in satisfaction of the tax under section 3101 with
respect to tips ($7.04) in the balance of $24.35 is applied in partial
satisfaction of the withholding of income tax at source under section
3402 with respect to tips. The amount of the tax with respect to tips
under section 3402 which remains unsatisfied ($3.95) should be withheld
from wages under the control of the employer the following week.
Example 2. During the week following the week dealt with in example
1, W furnishes a written statement to R pursuant to withholding:
------------------------------------------------------------------------
Taxes
with Taxes
respect with
to respect Total
regular to tips
wage
------------------------------------------------------------------------
Section 3101 (F.I.C.A.)................ $1.76 $5.72 $7.48
Section 3402 (Income tax at source):
Current week......................... 5.65 22.30 27.95
Carryover from prior week............ ......... 3.95 3.95
State income tax....................... 1.20 3.90 5.10
Union dues............................. ......... ......... 1.00
Garnishment............................ ......... ......... 10.00
----------
Total................................ ......... ......... 55.48
------------------------------------------------------------------------
As in example 1, the amount of ``wages (exclusive of tips) which are
under the control of the employer'' is $31.39. This amount is applied
first in satisfaction of the tax under section 3101 with respect to tips
($5.72) and the balance is applied in partial satisfaction of the
withholding of income tax at source under section 3402 with respect to
tips (a total of $26.25), including that portion of the amount required
to be withheld from the prior week's wages which remained
[[Page 257]]
unsatisfied. The amount of the tax with respect to tips under section
3402 which remains unsatisfied ($0.58) should be withheld from wages
under the control of the employer the following week.
[T.D. 7001, 34 FR 1002, Jan. 23, 1969, as amended by T.D. 7053, 35 FR
11628, July 21, 1970]
Sec. 31.3402(l)-1 Determination and disclosure of marital status.
(a) Determination of status by employer. An employer in computing
the tax to be deducted and withheld from an employee's wages paid after
April 30, 1966, shall apply the applicable percentage method or wage
bracket method withholding table (see section 3402 (a), (b), and (c) and
the regulations thereunder) for the pertinent payroll period which
relates to employees who are single persons, unless there is in effect
with respect to such payment of wages a withholding exemption
certificate furnished to the employer by the employee after March 15,
1966, indicating that the employee is married in which case the employer
shall apply the applicable table relating to employees who are married
persons.
(b) Disclosure of status by employee. (1) An employee shall be
entitled to furnish the employer with a withholding exemption
certificate indicating he is married only if, on the day of such
furnishing, he is married (determined by application of the rules in
paragraph (c) of this section). Thus, an employee who is contemplating
marriage may not, prior to the actual marriage, furnish the employer
with a withholding exemption certificate indicating that he is a married
person.
(2) (i) If, on any day during the calendar year, the marital status
(as determined by application of the rules in paragraph (c) of this
section) of an employee who has in effect a withholding exemption
certificate indicating that he is a married person, changes from married
to single, the employee must within 10 days after the change occurs
furnish the employer with a new withholding exemption certificate
indicating that the employee is a single person.
(ii) If an employee who has in effect a withholding exemption
certificate indicating that he is a married person, is considered
married solely because of the application of subparagraph (2)(ii) of
paragraph (c) of this section, and his spouse died during the taxable
year which precedes by 2 years the current taxable year, the employee
must, on or before December 1 of the current taxable year, furnish the
employer with a new withholding exemption certificate indicating that he
is a single person. Such certificate shall not, however become effective
until the next calendar year (see paragraph (c) of Sec. 31.3402(f)(3)-
1).
(3) If, on any day during the calendar year, the marital status (as
determined by application of the rules in paragraph (c) of this section)
of an employee who has in effect a withholding exemption certificate
indicating that he is a single person changes from single to married,
the employee may furnish the employer with a new withholding exemption
certificate indicating that the employee is a married person.
(c) Determination of marital status. For the purposes of section
3402(l)(2) and paragraph (b) of this section, the following rules shall
be applied in determining whether an employee is a married person or a
single person--
(1) An employee shall on any day be considered as a single person
if--
(i) He is legally separated from his spouse under a decree of
divorce or separate maintenance, or
(ii) Either he or his spouse is, or on any preceding day within the
same calendar year was, a nonresident alien.
(2) An employee shall on any day be considered as a married person
if--
(i) His spouse (other than a spouse referred to in paragraph (c)(1)
of this section) died within the portion of his taxable year which
precedes such day, or
(ii) His spouse died during one of the two taxable years immediately
preceding the current taxable year and, on the basis of facts existing
at the beginning of such day, he reasonably expects, at the close of his
taxable year, to be a surviving spouse as defined in section 2 and the
regulations thereunder.
[T.D. 7115, 36 FR 9234, May 21, 1971]
Sec. 31.3402(m)-1 Withholding allowances.
(a) General rule. An employee may claim, with respect to wages paid
after
[[Page 258]]
December 31, 1981, a number of withholding allowances determined in
accordance with this section. In order to receive the benefit of such
allowances, the employee must have in effect with his employer a
withholding exemption certificate claiming such allowances.
(b) Items that may be taken into account. The following items may be
taken into account in determining the number of withholding allowances
an employee may claim:
(1) Estimated itemized deductions allowable under chapter 1,
(2) The estimated tax credits allowable under Subpart A of Part IV
of Subchapter A of Chapter 1, except:
(i) For the credit for tax withheld on wages under section 31(a)
(relating to wage withholding),
(ii) For the credit for tax withheld at source on nonresident aliens
and foreign corporations and on tax-free covenant bonds under section
32,
(iii) That the employee may claim the credit for certain uses of
gasoline and special fuels under section 39 only to the extent the
employee has not filed for a quarterly tax refund of the credit on Form
843,
(iv) That the employee may claim the credit for earned income under
section 43 only to the extent the employee has not filed for advance
payments of the credit on Form W-5, and
(v) For the credit for overpayment of tax under section 45,
(3) The estimated trade and business deductions of employees
described in section 62 (2) and allowed by Part VI of Subchapter B of
Chapter 1,
(4) The estimated deduction for payments to pension, profit-sharing,
annuity, and bond purchase plans of self-employed individuals described
in section 62(7) and allowed by section 404 and section 405(c),
(5) The estimated deduction for penalties forfeited because of
premature withdrawal of funds from time savings accounts or deposits
described in section 62(12) and allowed by section 165,
(6) The estimated direct charitable deduction under section 170(i),
(7) The estimated deduction for net operating loss carryovers under
section 172,
(8) The estimated deduction for alimony, etc., payments under
section 215,
(9) The estimated deduction for moving expenses under section 217
but only to the extent that the amount of such deduction is not excluded
from the definition of wages by section 3401(a)(15),
(10) The estimated deduction for certain retirement savings under
section 219 but only to the extent that the amount of such deduction is
not excluded from the definition of wages by section 3401(a)(12)(D),
(11) The estimated deduction for two-earner married couples under
section 221,
(12) The estimated net losses from schedules C (Profit or (Loss)
From Business or Profession), D (Capital Gains and Losses), E
(Supplemental Income Schedule), and F (Farm Income and Expenses) of Form
1040 and from the last line of Part II of Form 4797 (Supplemental
Schedule of Gains and Losses),
(13) The estimated amount of decrease of tax due attributable to
income averaging under sections 1301 through 1305.
The employee must first use these items ((1) through (13) of this
paragraph (b)) to eliminate any payment of estimated tax (as defined in
section 6015(d)). Only amounts of these items remaining after the
employee has done this may be taken into account in determining the
number of withholding allowances the employee may claim.
(c) Definitions--(1) Estimated. The term ``estimated'' as used in
this section to modify the terms ``deduction'', ``deductions'',
``credits'', ``losses'', and ``amount of decrease'' means with respect
to an employee the aggregate dollar amount of a particular item that the
employee reasonably expects will be allowable to him for the estimation
year under the section of the Code specified for each item. In no event
shall that amount exceed the sum of:
(i) The amount shown for that particular item on the income tax
return that the employee has filed for the taxable year preceding the
estimation year (or, if such return has not yet been filed, then the
income tax return that the employee filed for the taxable year preceding
such year), which
[[Page 259]]
amount the employee also reasonably expects to show on the income tax
return for the estimation year, plus
(ii) The determinable additional amounts for each item for the
estimation year.
The determinable additional amounts are amounts that are not included in
paragraph (c)(1)(i) of this section and that are demonstrably
attributable to indentifiable events during the estimation year or the
preceding year. Amounts are demonstrably attributable to identifiable
events if they relate to payments already made during the estimation
year, to binding obligations to make payments (including the payment of
taxes) during the year, and to other transactions or occurrences, the
implementation of which has begun and is verifiable at the time the
employee files a withholding exemption certificate claiming withholding
allowances relating thereto. The estimation year is the taxable year
including the day on which the employee files the withholding exemption
certificate with his employer, except that if the employee files the
withholding exemption certificate with his employer and specifies on the
certificate that the certificate is not to take effect until a specified
future date, the estimation year shall be the taxable year including
that specified future date. It is not reasonable for an employee to
include in his or her withholding computation for the estimation year
any amount that is shown for a particular item on the income tax return
that the employee has filed for the taxable year preceding the
estimation year (or, if such return has not yet been filed, then the
income tax return that the employee filed for the taxable year preceding
such year) and that has been disallowed by the Service as part of a
proposed adjustment described in Sec. 601.103(b) (relating to
examination and determination of tax liability) and Sec. 601.105(b)
(relating to examination of returns).
(2) Amount of decrease of tax due. The term ``amount of decrease of
tax due'' as used in paragraph (b)(13) of this section means:
(i) The amount of tax that the taxpayer would owe on his taxable
income without using Schedule G (Form 1040), minus
(ii) The amount of tax that the taxpayer would owe on his taxable
income using Schedule G (Form 1040).
(3) Itemized deductions. The term ``itemized deductions'' as used in
paragraph (b)(1) of this section has the same meaning as ascribed
thereto by section 63(f) and the regulations thereunder.
(d) Computing allowances. (1) The employee shall compute the number
of allowances he may claim for the items specified in paragraph (b) of
this section in accordance with the tables and instructions on Form W-4.
(2) If the employee:
(i) Pays or accrues amounts demonstrably attributable to
identifiable events (as defined in paragraph (c)(1) of this section)
that are:
(A) Interest attributable to ownership of real property and
deductible under section 163(a), or
(B) Taxes deductible under section 164(a)(1), or
(C) Interest or taxes deductible under section 216(a), and
(ii) Is obligated to pay or accrue such amounts for at least 2 years
subsequent to the estimation year,
then the employee may compute the portion of estimated itemized
deductions attributable to such amounts for purposes of paragraph (b)(1)
of this section by multiplying the total of such amounts to be paid or
accrued in the estimation year by 12 and by then dividing that result by
the number of months from the 1st month in the estimation year in which
the employee pays or accrues such amounts through the last month of the
estimation year. If such amounts decrease during the term of obligation,
the employee must, at the beginning of each subsequent calendar year,
recompute the number of allowances being claimed as required by
paragraph (c)(1) of this section. If the employee uses the computation
described in this subparagraph (2), the employee may not request that
his employer withhold on the basis of the employee's cumulative wages as
provided in Sec. 31.3402 (h)(3)-1.
(e) Examples. The application of this section may be illustrated by
the following examples:
[[Page 260]]
Example 1. Employee A has an estimated net loss from a partnership
of $2,000 which would be reported on Schedule E. Employee A is not
required to make any payments of estimated tax. Employee A may take her
$2,000 partnership loss into consideration in determining the number of
withholding allowances to which she is entitled in accordance with the
tables and instructions on Form W-4.
Example 2. Employee B has an estimated net loss from a business of
$3,000 which would be reported on Schedule C. Employee B would also
otherwise be required to make payments of estimated tax on income of
$3,000. Employee B may not take his business loss into consideration in
determining the number of withholding allowances to which he is entitled
in accordance with the tables and instructions on Form W-4.
Example 3. Employee C has an estimated net loss from a farm of
$5,000 which would be reported on Schedule F. Employee C would also
otherwise be required to make payments of estimated tax on income of
$4,000. Employee C may only take her farm loss into consideration to the
extent of $1,000 ($5,000-4,000) in determining the number of withholding
allowances to which she is entitled in accordance with the tables and
instructions on Form W-4.
(f) Special rules--(1) Married individuals. (i) Except as provided
in subdivision (ii) of this subparagraph, a husband and wife shall
determine the number of withholding allowances to which they are
entitled under section 3402(m) on the basis of their combined wages and
allowable items. The withholding allowances to which a husband and wife
are entitled may be claimed by the husband, by the wife, or they may be
allocated between them. However, they may not both have withholding
exemption certificates in effect claiming the same withholding
allowance.
(ii) If a husband and wife filed separate income tax returns for the
taxable year preceding the estimation year and reasonably expect to file
separate returns for the estimation year, the husband and wife shall
determine the number of withholding exemptions to which they are
entitled under section 3402(m) on the basis of their individual wages
and allowable items, and they shall be considered to be single for
purposes of the tables on Form W-4.
(2) Only one certificate to be in effect. An employee who is
entitled to one or more withholding allowances under section 3402(m) and
who has, at the same time, two or more employers, may claim such
withholding allowance or allowances with only one of his employers.
(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat.
917))
[T.D. 7915, 48 FR 44075, Sept. 27, 1983]
Sec. 31.3402(n)-1 Employees incurring no income tax liability.
(a) In general. Notwithstanding any other provision of this subpart
(except to the extent a payment of wages is subject to withholding under
Sec. 31.3402(g)-1(a)(2)), an employer shall not deduct and withhold any
tax under chapter 24 upon a payment of wages made to an employee, if
there is in effect with respect to the payment a withholding exemption
certificate furnished to the employer by the employee which certifies
that--
(1) The employee incurred no liability for income tax imposed under
subtitle A of the Internal Revenue Code for his preceding taxable year;
and
(2) The employee anticipates that he will incur no liability for
income tax imposed under subtitle A for his current taxable year.
(b) Mandatory flat rate withholding. To the extent wages are subject
to income tax withholding under Sec. 31.3402(g)-1(a)(2), such wages are
subject to such income tax withholding regardless of whether a
withholding exemption certificate under section 3402(n) and the
regulations thereunder has been furnished to the employer.
(c) Rules about withholding exemption certificates. For rules
relating to invalid withholding exemption certificates, see Sec.
31.3402(f)(2)-1(e), and for rules relating to disregarding certain
withholding exemption certificates on which an employee claims a
complete exemption from withholding, see Sec. 31.3402(f)(2)-1T(g).
(d) Examples. The following examples illustrate this section:
Example 1. Employee A, an unmarried, calendar-year basis taxpayer,
files his income tax return for 2005 on April 10, 2006. A has adjusted
gross income of $5,000 and is not liable for any income tax. He had $180
of income tax withheld during 2005. A anticipates that
[[Page 261]]
his gross income for 2006 will be approximately the same amount, and
that he will not incur income tax liability for that year. On April 20,
2006, A commences employment and furnishes his employer a withholding
exemption certificate certifying that he incurred no liability for
income tax imposed under subtitle A for 2005, and that he anticipates
that he will incur no liability for income tax imposed under subtitle A
for 2006. A's employer shall not deduct and withhold on payments of
wages made to A on or after April 20, 2006. Under Sec. 31.3402(f)(4)-
2(c), unless A furnishes a new withholding exemption certificate
certifying the statements described in paragraph (a) of this section to
his employer, his employer is required to deduct and withhold upon
payments of wages to A made after February 15, 2007.
Example 2. Assume the facts are the same as in Example 1 except that
A had been employed by his employer prior to April 20, 2006, and had
furnished his employer a withholding exemption certificate prior to
furnishing the withholding exemption certificate certifying the
statements described in paragraph (a) of this section on April 20, 2006.
Under section 3402(f)(3)(B)(i), his employer would be required to give
effect to the new withholding exemption certificate no later than the
beginning of the first payroll period ending (or the first payment of
wages made without regard to a payroll period) on or after May 20, 2006.
However, under section 3402(f)(3)(B)(ii), his employer could, if it
chose, make the new withholding exemption certificate effective with
respect to any payment of wages made on or after April 20, 2006, and
before the effective date mandated by section 3402(f)(3)(B)(i). Under
Sec. 31.3402(f)(4)-2(c), unless A furnishes a new withholding exemption
certificate certifying the statements described in Sec. 31.3402(n)-1(a)
to his employer, his employer is required to deduct and withhold upon
payments of wages to A made after February 15, 2007.
Example 3. Assume the facts are the same as in Example 1 except that
for 2005 A has taxable income of $8,000, income tax liability of $839,
and income tax withheld of $1,195. Although A received a refund of $356
due to income tax withholding of $1,195, he may not certify on his
withholding exemption certificate that he incurred no liability for
income tax imposed by subtitle A for 2005.
[T.D. 9276, 71 FR 42057, July 25, 2006]
Sec. 31.3402(o)-1 Extension of withholding to supplemental
unemployment compensation benefits.
(a) In general. Withholding of income tax is required under section
3402(o) with respect to payments of supplemental unemployment
compensation benefits made after December 31, 1970, which are treated
under paragraph (b)(14) of Sec. 31.3401(a)-1 as if they were wages.
(b) Withholding exemption certificates. For purposes of section
3402(f) (2) and (3) and the regulations thereunder (relating to
withholding exemption certificates), in the case of supplemental
unemployment compensation benefits an employment relationship shall be
considered to commence with either the date on which such benefits begin
to accrue or January 1, 1971, whichever is later, and the withholding
exemption certificate furnished the employer with respect to such
commencement of employment shall be considered the first certificate
furnished the employer. The withholding exemption certificate furnished
by the employee to his former employer (with whom his employment has
been involuntarily terminated, within the meaning of paragraph
(b)(14)(ii) of Sec. 31.3401(a)-1) shall be treated as meeting the
requirements of section 3402(f)(2)(A) and the regulations thereunder if
such former employer furnishes such certificate to the employee's
current employer, as defined in paragraph (g) of Sec. 31.340(d)-1, or
if such former employer is the agent of such current employer with
respect to the employee's withholding exemption certificate. However,
the preceding sentence shall not be applicable if such employee
furnishes a new withholding exemption certificate to such current
employer (or his agent), provided that such withholding exemption
certificate meets the requirements of section 3402(f)(2)(A) and the
regulations thereunder. See the definitions of payroll period in
paragraph (c) of Sec. 31.3401(b)-1 and of employee in paragraph (g) of
Sec. 31.3401(c)-1.
[T.D. 7068, 35 FR 17329, Nov. 11, 1970, as amended by T.D. 7803, 47 FR
3546, Jan. 26, 1982]
Sec. 31.3402(o)-2 Extension of withholding to annuity payments if
requested by payee.
(a) In general. Under section 3402(o) of the Internal Revenue Code
of 1954 and this section, the payee (as defined in paragraph (g)(2) of
this section) of an annuity (as defined in paragraph (g)(1) of this
section) may request the payor (as defined in paragraph (g)(3) of this
[[Page 262]]
section) of the annuity to withhold income tax with respect to payments
of the annuity made after December 31, 1970. If such a request is made,
the payor shall deduct and withhold as requested.
(b) Manner of making request. A payee who wishes a payor to deduct
and withhold income tax from annuity payments shall file a request with
the payor to deduct and withhold a specific whole dollar amount from
each annuity payment. Such specific dollar amount requested shall be at
least $5 per month and shall not reduce the net amount of any annuity
payment received by the payee below $10. The request shall be made on
Form W-4P (annuitant's withholding exemption certificate and request) in
accordance with the instructions applicable thereto, and shall set forth
fully and clearly the data therein called for. In lieu of Form W-4P,
payors may prepare and use a form the provisions of which are identical
with those of Form W-4P.
For the requirements relating to Form W-4P with respect to qualified
State individual income taxes, see paragraph (d)(3)(i) of Sec.
301.6361-1 of this chapter (Regulations on Procedure and
Administration).
(c) When request takes effect. Upon receipt of a request under this
section the payor of the annuity with respect to which such request was
made shall deduct and withhold the amount specified in such request from
each annuity payment commencing with the first annuity payment made on
or after the date which occurs--
(1) In a case in which no previous request is in effect, 3 calendar
months after the date on which such request is furnished to such payor,
and
(2) In a case in which a previous request is in effect, the first
status determination date (see section 3402(f)(3)(B) and paragraph (d)
of Sec. 31.3402(f)(3)-1 of this chapter) which occurs at least 30 days
after the date on which such request is so furnished.
However, the payor may, at his election, commence to deduct and withhold
such specified amount with respect to an annuity payment which is made
prior to the annuity payment described in the preceding sentence with
respect to which the payor must commence to deduct and withhold.
(d) Duration and termination of request. A request under this
section shall continue in effect until terminated. The payee may
terminate the request by furnishing the payor a signed written notice of
termination. Such notice of termination shall, except as hereinafter
provided, take effect with respect to the first payment of an amount in
respect of which the request is in effect which is made on or after the
first status determination date (see section 3402(f)(3)(B) and paragraph
(d) of Sec. 31.3402(f)(3)-1 of this chapter) which occurs at least 30
days after the date on which such notice is so furnished. However, at
the election of such payor, such notice may be made effective with
respect to any payment of an amount in respect of which the request is
in effect which is made on or after the date on which such notice is so
furnished and before such status determination date.
(e) Special rules. For purposes of chapter 24 of subtitle C of the
Internal Revenue Code of 1954 (relating to collection of income tax at
source on wages) and of subtitle F of such Code (relating to procedure
and administration), and the regulations thereunder--
(1) An amount which is requested to be withheld pursuant to this
section shall be deemed a tax required to be deducted and withheld under
section 3402.
(2) An amount deducted and withheld pursuant to this section shall
be deemed an amount deducted and withheld under section 3402.
(3) The term ``wages'' includes the gross amount of an annuity
payment with respect to which there is in effect a request for
withholding under this section. However, references to the definition of
wages in section 3401(a) which are made in section 6014 (relating to
election by the taxpayor not to compute the tax on his annual return)
and section 6015(a) (relating to declaration of estimated tax by
individuals) shall not be deemed to include any portion of such an
annuity payment.
(4) The term ``employer'' includes a payor with respect to whom a
request for withholding is in effect under this section.
[[Page 263]]
(5) The term ``employee'' includes a payee with respect to whom a
request for withholding is in effect under this section.
(6) The term ``payroll period'' includes the period of accrual with
respect to which payments of an annuity which is subject to withholding
under this section are ordinarily made.
(f) Returns of income tax withheld and statements for payees. (1)
Form W-2P is to be used in lieu of Form W-2, which is required to be
furnished by an employer to an employee under Sec. 31.6051-1 of this
chapter and to the Social Security Administration under paragraph (a) of
Sec. 31.6051-2 of this chapter, with respect to an annuity subject to
withholding under this section. If an amount is required to be deducted
and withheld under this section from any or all of the payments made to
a payee under an annuity contract during a calendar year, all payments
with respect to that annuity contract are required to be reported on
Form W-2P, in lieu of Form 1099, as prescribed in Sec. Sec. 1.6041-1,
1.6041-2, and 1.6047-1 of this chapter; any other annuity payments made
by the same payor to the same payee may, at the option of the payor, be
reported on Form W-2P.
(2) Each statement on Form W-2P shall show the following:
(i) The gross amount of annuity payments made during the calendar
year, whether or not income tax withholding under this section was in
effect with respect to all such payments,
(ii) The total amount deducted and withheld as tax under section
3402 of this section, and
(iii) The information required to be shown by Form W-2P and the
instructions applicable thereto.
For the requirements relating to Form W-2P with respect to qualified
State individual income taxes, see paragraph (d)(3)(ii) of Sec.
301.6361-1 of this chapter (Regulations on Procedure and
Administration).
(3) The provisions of Sec. 1.9101-1 of this chapter (relating to
permission to submit information required by certain returns and
statements on magnetic tape) shall be applicable to the information
required to be furnished on Form W-2P.
(4) The provisions of Sec. 31.6109-1 of this chapter (relating to
supplying of identifying numbers) shall be applicable to Form W-2P and
to any payee of an annuity to whom a statement on Form W-2P is required
to be furnished.
(g) Definitions. For purposes of this section--
(1) The term ``annuity'' means periodic payments which are payable
over a period greater than 1 year and which are treated under section 72
as amounts received as an annuity, whether or not such periodic payments
are variable in amount. Also, periodic payments to an individual who is
retired before the normal retirement age for reasons of disability, to
which the provisions of section 105(d) apply, shall be deemed to be an
annuity for purposes of this section. A lump-sum payment (including a
total distribution under section 72(n)) is not an annuity.
(2) The term ``payee'' means an individual who is a citizen or
resident of the United States and who receives an annuity payment.
(3) The term ``payor'' means a person making an annuity payment
except that, if the person making the payment is acting soley as an
agent for another person, the term ``payor'' shall mean such other
person and not the person actually making the payment. For example, if a
bank makes an annuity payment only as agent for an employees' trust, the
trust shall be deemed to be the ``payor.'' Notwithstanding the preceding
two sentences, any person who, under section 3401(a) (5) or (8), would
not be required to deduct and withhold the tax under section 3402 if the
annuity payment were remuneration for services shall not be considered a
``payor.''
(Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805; 86 Stat. 944, 26 U.S.C. 6364;
68A Stat. 747, 26 U.S.C. 6051)
[T.D. 7056, 35 FR 13436, Aug. 22, 1970, as amended by T.D. 7577, 43 FR
59360, Dec. 20, 1978: T.D. 7580, 43 FR 60160, Dec. 26, 1978.
Redesignated by T.D. 7803, 47 FR 3546, Jan. 26, 1982]
Sec. 31.3402(o)-3 Extension of withholding to sick pay.
(a) In general. Under section 3402(o) of the Internal Revenue Code
of 1954 and this section, the payee (as defined in
[[Page 264]]
paragraph (h)(2) of this section) of sick pay (as defined in paragraph
(h)(1) of this section) may request the payor (as defined in paragraph
(h)(3) of this section) of the sick pay to withhold income tax with
respect to payments of sick pay made on or after May 1, 1981. If such a
request is made, the payor must deduct and withhold as requested.
(b) Manner of making request. A payee who wishes a payor to deduct
and withhold income tax from sick pay shall file a written request with
the payor to deduct and withhold a specific whole dollar amount (subject
to the limitations of paragraph (c) of this section) from each sick pay
payment. The request shall be made on Form W-4S in accordance with the
instructions applicable thereto, and shall set forth fully and clearly
the data therein called for. In lieu of Form W-4S, payors may prepare
and use a form the provisions of which are identical to those of Form W-
4S. The payee must include his social security account number in the
request.
(c) Amount requested to be withheld. The payee shall request that
the payor withhold a specific whole dollar amount. The specific whole
dollar amount shall be at least $20 per weekly payment of sick pay. If
the payee is paid sick pay computed on a daily basis, the specific whole
dollar amount shall be at least $4 per daily payment of sick pay. If the
payee is paid sick pay on a biweekly basis, the specific whole dollar
amount shall be at least $40 per 2 week payment of sick pay. If the
payee is paid sick pay on a semimonthly basis, the specific whole dollar
amount shall be at least $44 per semimonthly payment of sick pay. If the
payee is paid sick pay on a monthly basis, the specific whole dollar
amount shall be at least $88 per monthly payment of sick pay. If the
payee is paid sick pay on a basis other than weekly, daily, biweekly,
semi-monthly, or monthly, the specific whole dollar amount shall be the
equivalent of at least $4 per day, assuming a 5 day work week of 8 hours
per day (40 hours total) in each 7 day calendar week. In the case of a
payment which is greater or less than a full payment, the amount
withheld is to bear the same relation to the specific whole dollar
amount requested to be withheld as such payment bears to a full payment.
For example, assume an individual receives sick pay of $100 per week and
requests that $25 per week be withheld for taxes. After 4 full weeks of
absence, the individual returns to work on a Wednesday (having been
absent on sick leave Monday and Tuesday). For the week the individual
returns to work, the individual would be entitled to $40 of sick pay,
$10 of which would be withheld for taxes. The payor may, at his option,
permit the payee to request that the payor withhold a specific
percentage from each payment. The specific percentage shall be at least
10 percent. If the payor so opts, the payor must also accept requests
under the whole dollar method. If the amount requested to be withheld
under either the whole dollar method or the optional percentage method
reduces the net amount of a sick pay payment received by the payee to
below $10, no income tax shall be withheld from that payment by the
payor.
(d) When request takes effect. The payor must deduct and withhold
the amount specified in the request with respect to payments made more
than 7 days after the date on which the request is received by the
payor. At the election of the payor, the request may take effect before
this deadline.
(e) Duration and termination of request. A request under this
section shall continue in effect until changed or terminated. The payee
may change the request by filing a new written request that meets all of
the requirements of paragraphs (b) and (c) of this section. The new
request shall take effect as specified in paragraph (d) of this section
and the old request shall be deemed terminated when the new request
takes effect. The payee may terminate the request by furnishing the
payor a signed written notice of termination containing both a request
to terminate withholding and all the information contained in the
request to withhold. This written notice of termination shall take
effect with respect to payments made more than 7 days after the date on
which the notice of termination is received by the payor. At the
election of the payor, the request may take effect before this deadline.
[[Page 265]]
(f) Special rules. For purposes of chapter 24 on subtitle C of the
Internal Revenue Code of 1954 (relating to collection of income tax at
source on wages) and of subtitle F of the Code (relating to procedure
and administration), and the regulations thereunder--
(1) An amount which is requested to be withheld pursuant to this
section shall be deemed a tax required to be deducted and withheld under
section 3402.
(2) An amount deducted and withheld pursuant to this section shall
be deemed an amount deducted and withheld under section 3402.
(3) The term ``wages'' includes the gross amount of a sick pay
payment with respect to which there is in effect a request for
withholding under this section. However, references to the definition of
wages in section 3401(a) which are made in section 6014 (relating to
election by the taxpayer not to compute the tax on his annual return)
and section 6015(a) (relating to declaration of estimated tax by
individuals) shall not be deemed to include any portion of such a sick
pay payment.
(4) The term ``employer'' includes a payor with respect to whom a
request for withholding is in effect under this section.
(5) The term ``employee'' includes a payee with respect to whom a
request for withholding is in effect under this section.
(6) The term ``payroll period'' includes the period of accrual with
respect to which payments of sick pay which are subject to withholding
under this section are ordinarily made.
(g) Statements required to be furnished to payees. See section
6051(f) and the regulations thereunder for requirements relating to
statements required to be furnished to payees.
(h) Definitions. (1) (i) The term ``sick pay'' means any payment
made to an individual which does not constitute wages (determined
without regard to section 3402(o) and this section), which is paid to an
employee pursuant to a plan to which the employer is a party, and which
constitutes remuneration or a payment in lieu of remuneration for any
period during which the employee is temporarily absent from work on
account of personal injuries or sickness. The term ``personal injuries
or sickness'' shall have the same meaning as ascribed thereto by section
105(a) and the regulations thereunder. The term ``sick pay'' does not
include any amounts either excludable from gross income under section
104(a) (1), (2), (4) or (5) or section 105(b) or (c) or paid under
section 3402(o)(1)(B). The term ``sick pay'' does not include amounts
paid under a plan if all amounts paid under the plan are paid to
individuals who are described in the first sentence of section 105(d)(4)
(relating to the definition of permanent and total disability) and the
regulations thereunder. Amounts paid under any other plan shall be
deemed to be paid for a period during which the employee is temporarily
absent from work. For sick pay paid in 1981 only, however, the payor may
opt not to follow the rules of the two preceding sentences but to follow
instead the rule that an employee is temporarily absent if his absence
is not described in section 105(d)(4) (relating to the definition of
permanent and total disability) and the regulations thereunder. An
employer is not a party to the plan if the plan is a contract between
only employees and a third party payor or the employer makes no
contributions to provide sick pay benefits under the plan, even if the
employer withholds amounts from the employees' salaries and pays the
amounts over to the third party payor.
(ii) This paragraph (h)(1) may be illustrated by the following
examples:
Example 1. Employee A works for P Company and Employee B works for Q
Company. P Company has contracted with R Insurance Company for R to pay
P's employees the equivalent of their normal wages when they are
temporarily absent from work because of sickness or personal injury. Q
Company has neither entered into such a contract, nor will it make such
payments directly from it own funds. B consequently goes to S Insurance
Company and purchases directly an insurance policy which will pay him
the equivalent of his normal wages when he is unable to work because of
sickness or personal injury. Both A and B are subsequently temporarily
absent from work on account of sickness or personal injuries. A receives
payments from R and B receives payments from S. Neither the payments
made by R to A nor the payments made by S to B constitute wages
(determined without regard to section 3402(o) and this section). A may
request that R withhold income taxes under section
[[Page 266]]
3402(o) and this section from the payments he receives because the
payments are sick pay as defined in section 3402(o) and this section. B
may not request that S withhold income taxes under section 3402(o) and
this section from the payments he receives because the payments are not
paid pursuant to a plan to which Q Company is a party and thus are not
sick pay as defined in section 3402(o) and this section.
Example 2. Employees C and D both work for T Company , which has
contracted with U Insurance Company for U to pay T's employees for all
sickness or injury claims Employee C is sick and out from work for a
month. U pays C the equivalent of C's regular pay. Employee D loses his
arm in an accident and U pays D $10,000. C may request that U withhold
income taxes under section 3402(o) and this section from the payments he
receives because the payments constitute remuneration or a payment in
lieu of remuneration for any period during which the employee is
temporarily absent from work on account of sickness or personal
injuries. D may not request that U withhold income taxes from the
payments he receives because the payments do not constitute remuneration
or a payment in lieu of remuneration for any period during which the
employee is temporarily absent from work on account of sickness or
personal injuries.
(2) The term ``payee'' means an individual who is a citizen or
resident of the United States and who receives a sick pay payment.
(3) (i) The term ``payor'' means any person making a sick pay
payment who is not the employer (as defined in section 3401 and in Sec.
31.3401(d)-1 (except paragraph (f) thereof)) of the payee. If however
the person making the payment is acting solely as an agent for another
person, the term ``payor'' shall mean the other person and not the
person actually making the payment.
(ii) This paragraph (h)(3) may be illustrated by the following
examples:
Example 1. X Company contracts with Y Insurance Company for Y to pay
X's employees the equivalent of their normal wages when they are
temporarily absent from work because of sickness or personal injury. Y
computes the amount to be paid and determines the date payment is to be
made for each of X's employees. Y then instructs Z Bank to issue a check
for that amount on that date. Y reimburses Z for the amount of the check
plus Z's administrative costs. Under these circumstances, Z is the agent
of Y and Y is the payor under section 3402(o) and this section.
Example 2. V Company contracts with W Company for W to pay V's
employees the equivalent of their normal wages when they are temporarily
absent from work on account of sickness or personal injury. Under the
contractual arrangement, V advises W of the wages normally paid to each
of V's employees. V tells W when an employee of V is temporarily absent
from work on account of sickness or personal injury, and W computes the
amount to be paid the employee and makes payments of sick pay to the
employee during the period of the employee's absence. V subsequently
reimburses W for the amount of those payments and pays W a fee for W's
services. Under these circumstances, W is acting solely as the agent of
V, and a payee may not request under section 3402(o) and these
regulations that W withhold income taxes from his payments. However, see
section 3401 and the regulations thereunder for the obligation of V to
withhold income taxes from the payments that W makes as the agent of V,
which are not excluded from income under section 105 and the regulations
thereunder and which are wages under section 3401 and the regulations
thereunder. See also Sec. 31.3402(g)-1 (relating to supplemental wage
payments) for the conditions under which a flat percentage rate of
withholding may be used.
Example 3. Assume the same facts as in Example 2, except that the
consideration for W's services is a set insurance premium rather than
reimbursement for costs plus a fee. Under these circumstances W is the
payor and is not acting solely as the agent of V. An employee of V to
whom W makes payments under the agreement may request under section
3402(o) and the regulations thereunder that W withhold income taxes from
those payments.
(i) Special rules for sick pay paid pursuant to certain collective-
bargaining agreements. (1) Special rules (enumerated in subparagraph
(2)) apply to sick pay where all of the following tests are met.
(i) The sick pay must be paid pursuant to a collective-bargaining
agreement between employee representatives and one or more employers.
(ii) The agreement must contain a provision that section 3402(o)(5)
is to apply to sick pay paid pursuant to the agreement.
(iii) The agreement must contain a provision for determining the
amount to be deducted and withheld from each payment of sick pay.
(iv) The social security number of the payee must be furnished to
the payor. The agreement may provide that the employer will furnish this
or the payee
[[Page 267]]
may furnish his social security number directly to the payor.
(v) The payor must be furnished with information that is necessary
for the payor to determine whether the payment is pursuant to the
agreement and to determine the amount to be deducted and withheld. The
agreement may provide that the employer will furnish this information
directly to the payor.
(2) The following special rules apply to sick pay where all of the
tests of subparagraph (1) are met.
(i) The requirement of section 3402(o)(1)(c) and this section that a
request for withholding be in effect does not apply.
(ii) The amount to be deducted and withheld from the sick pay shall
be determined according to the provisions of the agreement and not
according to this section. This rule shall not however apply--
(A) To payments enumerated in section 3402(n) (relating to employees
incurring no income tax liability) and the regulations thereunder, or
(B) To payments made to a payee more than 7 days after the date that
the payor receives a statement from the payee that the payee expects to
claim an exclusion from gross income under section 105(d). Such
statement must include adequate verification of disability. A
certificate from a qualified physician attesting that the employee is
permanently and totally disabled (within the meaning of section 105(d))
shall be deemed to constitute adequate verification. If the payor
receives such a statement, the payor shall not withhold any income tax
from the payments made to the payee, regardless of the provisions of the
collective bargaining agreement. This exception from withholding does
not affect the requirements of Sec. 31.6051-3.
(Secs. 3402(o), 7805, Internal Revenue Code of 1954 (94 Stat. 3495, (26
U.S.C. 3402(o)); 68A Stat. 917 (26 U.S.C. 7805)))
[T.D. 7813, 47 FR 11277, Mar. 16, 1982, as amended by T.D. 7915, 48 FR
44076, Sept. 27, 1983]
Sec. 31.3402(p)-1 Voluntary withholding agreements.
(a) In general. An employee and his employer may enter into an
agreement under section 3402(b) to provide for the withholding of income
tax upon payments of amounts described in paragraph (b)(1) of Sec.
31.3401(a)-3, made after December 31, 1970. An agreement may be entered
into under this section only with respect to amounts which are
includible in the gross income of the employee under section 61, and
must be applicable to all such amounts paid by the employer to the
employee. The amount to be withheld pursuant to an agreement under
section 3402(p) shall be determined under the rules contained in section
3402 and the regulations thereunder. See Sec. 31.3405(c)-1, Q&A-3
concerning agreements to have more than 20-percent Federal income tax
withheld from eligible rollover distributions within the meaning of
section 402.
(b) Form and duration of agreement. (1)(i) Except as provided in
subdivision (ii) of this subparagraph, an employee who desires to enter
into an agreement under section 3402(p) shall furnish his employer with
Form W-4 (withholding exemption certificate) executed in accordance with
the provisions of section 3402(f) and the regulations thereunder. The
furnishing of such Form W-4 shall constitute a request for withholding.
(ii) In the case of an employee who desires to enter into an
agreement under section 3402(p) with his employer, if the employee
performs services (in addition to those to be the subject of the
agreement) the remuneration for which is subject to mandatory income tax
withholding by such employer, or if the employee wishes to specify that
the agreement terminate on a specific date, the employee shall furnish
the employer with a request for withholding which shall be signed by the
employee, and shall contain--
(a) The name, address, and social security number of the employee
making the request,
(b) The name and address of the employer,
(c) A statement that the employee desires withholding of Federal
income tax, and applicable, of qualified State individual income tax
(see paragraph (d)(3)(i) of Sec. 301.6361-1 of this chapter
(Regulations on Procedures and Administration)), and
[[Page 268]]
(d) If the employee desires that the agreement terminate on a
specific date, the date of termination of the agreement.
If accepted by the employer as provided in subdivision (iii) of this
subparagraph, the request shall be attached to, and constitute part of,
the employee's Form W-4. An employee who furnishes his employer a
request for withholding under this subdivision shall also furnish such
employer with Form W-4 if such employee does not already have a Form W-4
in effect with such employer.
(iii) No request for withholding under section 3402(p) shall be
effective as an agreement between an employer and an employee until the
employer accepts the request by commencing to withhold from the amounts
with respect to which the request was made.
(2) An agreement under section 3402 (p) shall be effective for such
period as the employer and employee mutually agree upon. However, either
the employer or the employee may terminate the agreement prior to the
end of such period by furnishing a signed written notice to the other.
Unless the employer and employee agree to an earlier termination date,
the notice shall be effective with respect to the first payment of an
amount in respect of which the agreement is in effect which is made on
or after the first ``status determination date'' (January 1, May 1, July
1, and October 1 of each year) that occurs at least 30 days after the
date on which the notice is furnished. If the employee executes a new
Form W-4, the request upon which an agreement under section 3402 (p) is
based shall be attached to, and constitute a part of, such new Form W-4.
(86 Stat. 944, 26 U.S.C. 6364; 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7096, 36 FR 5216, Mar. 18, 1971, as amended by T.D. 7577, 43 FR
59359, Dec. 20, 1978; T.D. 8619, 60 FR 49215, Sept. 22, 1995]
Sec. 31.3402(p)-1T Voluntary Withholding Agreements (temporary).
(a)-(b) [Reserved] For further guidance, see Sec. 31.3402(p)-1(a)
and (b).
(c) Other payments. The Secretary may issue guidance by publication
in the Internal Revenue Bulletin (IRB) (which will be available at
www.IRS.gov) describing other payments for which withholding under a
voluntary withholding agreement would be appropriate and authorizing
payors to agree to withhold income tax on such payments if requested by
the payee. Requirements regarding the form and duration of voluntary
withholding agreements authorized by this paragraph (c) will be provided
in the IRB guidance issued regarding specific types of payments.
(d) Effective/applicability date. (1) This section applies on and
after November 27, 2013.
(2) The applicability of this section expires on November 25, 2016.
[T.D. 9846, 78 FR 71476, Nov. 29, 2013]
Sec. 31.3402(q)-1 Extension of withholding to certain gambling winnings.
(a)(1) General rule. Every person, including the Government of the
United States, a State, or a political subdivision thereof, or any
instrumentality of any of the foregoing making any payment of ``winnings
subject to withholding'' (defined in paragraph (b) of the section) shall
deduct and withhold a tax in an amount equal to 20 percent of the
payment. The tax shall be deducted and withheld upon payment of the
winnings by the person making such payment (``payer''). See paragraph
(c)(5)(ii) of this section for a special rule relating to the time for
making deposits of withheld amounts and filing the return with respect
to those amounts. Any person receiving a payment of winnings subject to
withholding must furnish the payer a statement as required in paragraph
(e) of this section. Payers of winnings subject to withholding must file
a return as required in paragraph (f) of this section. With respect to
reporting requirements for certain payments of gambling winnings not
subject to withholding, see section 6041 and the regulations thereunder.
(2) Exceptions. The tax imposed under section 3402(q)(1) and this
section shall not apply (i) with respect to a payment
[[Page 269]]
of winnings which is made to a nonresident alien individual or foreign
corporation under the circumstances described in paragraph (c)(4) of
this section or (ii) with respect to a payment of winnings from a slot
machine play, or a keno or bingo game.
(b) Winnings subject to withholding. Winnings subject to withholding
means any payment from--
(1) A wager placed in a State-conducted lottery (defined in
paragraph (c)(2) of this section) but only if the proceeds from the
wager exceed $5,000;
(2) A wager placed in a sweepstakes, wagering pool, or lottery other
than a State-conducted lottery but only if the proceeds from the wager
exceed $1,000; or
(3) Any other wagering transaction (as defined in paragraph (c)(3)
of this section) but only if the proceeds from the wager (i) exceed
$1,000 and (ii) are at least 300 times as large as the amount of the
wager.
If proceeds from the wager qualify as winnings subject to withholding,
then the total proceeds from the wager, and not merely amounts in excess
of $1,000 (or $5,000 in the case of winnings from a State-conducted
lottery), are subject to withholding.
(c) Definitions; special rules--(1) Rules for determining amount of
proceeds from a wager. (i) The amount of ``proceeds from a wager'' is
the amount paid after January 2, 1977, with respect to the wager, less
the amount of the wager. However, for any wagering transaction in a
parimutuel pool with respect to horse races, dog races, or jai alai,
only amounts paid after April 30, 1977, are taken into account.
(ii) Amounts paid after December 31, 1983, with respect to identical
wagers are treated as paid with respect to a single wager for purposes
of calculating the amount of proceeds from a wager. For example, amounts
paid on two bets placed in a parimutuel pool on a particular horse to
win a particular race are treated as paid with respect to the same
wager. However, those two bets would not be identical were one ``to
win'' and the other ``to place'', or if the bets were placed in
different parimutuel pools, e.g., a pool conducted by the racetrack and
a separate pool conducted by an off-track betting establishment in which
the wagers are not pooled with those placed at the track. Tickets
purchased in a lottery generally are not identical wagers, because the
designation of each ticket as a winner generally would not be based on
the occurrence of the same event, e.g., the drawing of a particular
number. If the recipient makes the statement which may be required
pursuant to Sec. 1.6011-3, indicating whether or not the recipient (and
any other persons entitled to a portion of the winnings) is entitled to
winnings from identical wagers and indicating the amount of such
winnings, if any, then the payer may rely upon such statement in
determining the total amount of proceeds from the wager under paragraph
(c)(1) of this section attributable to identical wagers.
(iii) In determining the amount paid with respect to a wager,
proceeds which are not money shall be taken into account at the fair
market value.
(iv) Periodic payments, including installment payments or payments
which are to be made periodically for the life of a person, are
aggregated for purposes of determining the proceeds from a wager. The
aggregate amount of periodic payments to be made for a person's life
shall be based on that person's life expectancy. See Sec. Sec. 1.72-5
and 1.72-9 for rules used in computing the expected return on annuities.
For purposes of determining the amount subject to withholding, the first
periodic payment shall be reduced by the amount of the wager.
(2) Wager placed in a State-conducted lottery. The term ``wager
placed in a State-conducted lottery'' means a wager placed in a lottery
conducted by an agency of a State acting under authority of State law
provided that the wager is placed with the State agency conducting such
lottery or with its authorized employees or agents. This term includes
wagers placed in State-conducted lotteries in which the amount of
winnings is determined by a parimutuel system.
(3) Other wagering transaction. The term ``other wagering
transaction'' means any wagering transaction other than one in a
lottery, sweepstakes, or wagering pool. This term includes a wagering
transaction in a parimutuel
[[Page 270]]
pool with respect to horse races, dog races, or jai alai.
(4) Certain payments to nonresident aliens or foreign corporations.
A payment of winnings subject to withholding made to a nonresident alien
individual or a foreign corporation is not subject to the tax imposed by
section 3402(q) and this section if such payment is subject to
withholding of tax under section 1441(a) (relating to withholding on
nonresident aliens) or 1442(a) (relating to withholding on foreign
corporations) and the payer complies with the requirements of those
sections. For purposes of this section, a payment is treated as being
subject to tax under section 1441(a) or 1442(a) notwithstanding that the
rate of such tax is reduced (even to zero) as may be provided by an
applicable treaty with another country. However, a reduced or zero rate
of withholding of tax shall not be applied by the payer in lieu of the
rate imposed by sections 1441 and 1442 unless the person receiving the
winnings has completed, signed, and furnished the payer Form 1001 as
required by Sec. 1.1441-6. See sections 1441 and 1442 and the
regulations thereunder for rules regarding the withholding of tax on
nonresident aliens and foreign corporations.
(5) Gambling winnings treated as payments by employer to employee.
(i) Except as provided in subdivision (ii), for purposes of sections
3403 and 3404 and the regulations thereunder and for purposes of so much
of subtitle F (except section 7205) and the regulations thereunder as
relate to chapter 24, payments to any person of winnings subject to
withholding under this section shall be treated as if they are wages
paid by an employer to an employee.
(ii) Solely for purposes of applying the deposit rules under 6302(c)
and the return requirement of section 6011, the withholding from
winnings shall be deemed to have been made no earlier than at the time
the winner's identity is known to the payer. Thus, for example, winnings
from a State-conducted lottery are subject to withholding when actually
or constructively paid, whichever is earlier; however, the time for
depositing the withheld taxes and filing a return with respect thereto
shall be determined by reference to the date on which the winner's
identity is known to the State, if such date is later than the date on
which the winnings are actively or constructively paid. If a payer's
obligation to pay winnings terminates other than by payment, all
liabilities and requirements resulting from the requirement that the
payer deduct and withhold with respect to such winnings shall also
terminate.
(d) Examples. The provisions of this section may be illustrated by
the following examples:
Example 1. A purchases a lottery ticket for $1 in the State W
lottery from an authorized agent of State W. On February 1, 1977, the
drawing is held and A wins $5,001. Since the proceeds of the wager
($5,001--$1) are not greater than $5,000, State W is not required to
withhold or deduct any amount from A's winnings.
Example 2. Assume the same facts as in example 1 except that A
purchases two $1 tickets and that A wins $5,002 when one of the tickets
is drawn. State W must deduct and withhold tax at a rate of 20% from
$5,001 ($5,002 less the $1 wager), or $1,000.20.
Example 3. On January 1, 1984, B makes two $2 bets in a parimutuel
pool for a horse race. Each bet is on the same horse to win a particular
race. B wins a total of $1,300 on those bets. B cashes the tickets at
different cashier windows indicating on the statement demanded by each
cashier the amount of winnings from identical wagers. Although the
payment by each cashier ($650) is less than the $1,000 floor for the
withholding requirement on payments of winnings from horse race
parimutuel pools, each cashier is required to deduct and withhold tax
from B's winnings equal to $129.60 (($650-$2) x 20 percent = $129.60)
based on the information B submitted indicating that the aggregated
proceeds from the identical wagers ($1,300-$4=$1,296) exceed $1,000 and
the amount is at least 300 times as great as the amount wagered
($4x300=$1,200). Had B refused to make the statements, the payer would
have no basis provided by the payee upon which to rely in determining
whether the payment is subject to withholding. Under these
circumstances, the payer would be required to deduct and withhold tax
from the payment.
Example 4. C purchases a lottery ticket for $1. On June 1, 1979, the
lottery drawing is held and C wins the grand prize of $50,000, payable
$500 monthly. The payer must deduct and withhold tax at a rate of 20%
from each payment of winnings. Therefore, $99.80 must be withheld from
the first monthly payment to B ($500-$1)x20%=$99.80) and $100
[[Page 271]]
($500x20%) must be withheld from each monthly payment thereafter.
Example 5. Assume the same facts as in example 4, except that C wins
an automobille rather than the grand prize. The fair market value of the
automobile on the date on which it is made available to C is $10,000.
the payer must deduct and withhold a tax of $2,000 (($10,001-$1)x20%).
This may be accomplished, for example, if C pays $2,000 to the payer.
Alternatively, if the payer, as part of the prize, pays all taxes
required to be duducted and withheld, the payer must deduct and withhold
tax not only on the fair market value of the automobile less the wager,
but also on the taxes it pays that are required to be deducted and
withheld. This results in a pyramiding of taxes requiring the use of an
algebraic formula. Under this formula, the payer must deduct and
withhold a tax of 25 percent of the fair market value of the automobile
less the wager ($2,500) and, in addition, the payer must indicate on
Form W-2G the amount of such winnings as $12,501 ($10,001+25%($10,001-
$1)).
Example 6. D purchases a ticket for $1 in the State Y lottery from
an authorized agent of State Y On January 1, 1976, a drawing is held and
D wins $100 a month for the rest of D's life. It is actuarially
determined that, on January 3, 1977, D's life expectancy is 5 years.
Based on that determination, the proceeds from the wager paid to D on or
after January 3, 1977, will exceed $5,000. Therefore, State Y must
deduct and withhold $20 from each monthly payment made on or after
January 3, 1977. (None of such payments is reduced by the amount of the
wager because the amount of the wager was offset by the first payment of
winnings which was made before January 3, 1977)).
Example 7. Assume the same facts as in example 6 except that State Y
purchases in its own name, as owner, an annuity of $100 a month for D's
life from E Corporation, in order to fund its own obligation to make the
payments. Although State Y remains liable for the withholding of tax, E
Corporation as paying agent for State Y, making payments directly to D,
should deduct and withhold from each monthly payment in the manner
described in example 6.
Example 8. E purchases a sweepstakes ticket for $1 in a sweepstakes
conducted by W. E purchases the ticket on behalf of himself and on
behalf of F and G, who have contributed equal amounts toward the
purchase of the ticket and who have agreed to share equally in any
prizes won. The ticket which E purchases wins $1,002. Since the proceeds
of the wager ($1,002--$1) are greater than $1,000 W is required to
withhold and deduct 20 percent of such proceeds.
Example 9. On February 1, 1977, a drawing is held in the State X
lottery in which a winning ticket is selected. The person holding the
winning ticket is entitled to proceeds of $100,000 payable either as a
lump sum upon demand or $10,000 a year for 10 years. Under State law,
the winning ticket must be presented to an authorized agent of State X
before February 1, 1978. Until the ticket is presented, State X does not
know the identity of the winner. On December 1, 1977, H, the winner,
presents the winning ticket to an authorized agent of the State X
lottery. The winnings are constructively paid to H on February 1, 1977.
Since H, has the option of receiving the entire proceeds upon demand,
State X is required to deduct and withhold $20,000 ($100,000x20%) from
the proceeds of H's winnings on February 1, 1977; but for purposes of
determining the time at which the deposit and inclusion on Form 941 of
these taxes is to be made, the withholding shall be deemed to have beem
made on December 1, 1977.
Example 10. J purchases a subscription to N magazine, at the regular
subscription price. All new subscribers are automatically eligible for a
special drawing. The drawing is held and J wins $50,000. Since J has not
paid any more than the regular subscription price, J has not placed a
wager or entered a wagering transaction. Therefore, N is not required to
deduct and withhold J's winnings.
Example 11. C makes two $2 bets in the same parimutuel pool for a
horse race. One bet is an ``exacta'' in which C bets on horse M to win
and horse N to ``place''. The other bet is a ``trifecta''. C bets on
horse M to win, horse N to ``place'' and horse O to ``show''. C wins
both bets and is paid $600 with respect to the ``exacta'' and $900 with
respect to the ``trifecta''. The bets are not identical wagers, however,
and on these facts neither payment is subject to withholding.
(e) Statement by recipient. Each person who is to receive a payment
of winnings subject to withholding shall furnish the payer a statement
on Form W-2G or 5754 (whichever is applicable) made under the penalties
of perjury containing--
(1) The name, address, and taxpayer identification number of the
winner accompanied by a declaration that no other person is entitled to
any portion of such payment, or
(2) The name, address, and taxpayer identification number of the
recipient and of every person entitled to any portion of such payment.
If more than one payment of winnings subject to withholding is to be
made with respect to a single wager, for example in the case of an
annuity, the recipient is required by paragraph (e) of this section to
furnish the payer a statement with respect to the first
[[Page 272]]
such payment only, provided that such other payments are taken into
account in a return required by paragraph (f) of this section.
(f) Return of payer--(1) In general. Every person making payment of
winnings for which a statement is required under paragraph (e) of this
section shall file a return on Form W-2G with the Internal Revenue
Service Center serving the district in which is located the principal
place of business of the person making the return on or before February
28 (March 31 if filed electronically) of the calendar year following the
calendar year in which the payment of winnings is made. The return
required by this paragraph (f) of the section, need not include the
statement by the recipient required by paragraph (e) of this section
and, therefore, need not be signed by the recipient, provided such
statement is retained as long as the contents thereof may become
material in the administration of any internal revenue law. For payments
to more than one winner, a separate Form W-2G, which in no event need be
signed by the winner, shall be filed with respect to each such winner.
Each Form W-2G shall contain the following:
(i) The name, address, and employer identification number of the
payer;
(ii) The name, address, and social security account number of the
winner;
(iii) The date, amount of the payment, and amount withheld;
(iv) The type of wagering transaction;
(v) Except with respect to winnings from a wager placed in a State-
conducted lottery, a specific description of two types of
identification, e.g., driver's license number and issuing State, social
security account number of voter registration number and jurisdiction,
furnished the payer for verification of the recipient's name, address,
and social security account number; and
(vi) With respect to amounts paid after December 31, 1983, the
amount of winnings from identical wagers.
The return of the payer need not contain the information required by
subdivision (v) of this paragraph (f)(1) provided such information is
obtained with respect to the recipient of such winnings and retained as
long as the contents thereof may become material in the administration
of any internal revenue law.
(2) Transmittal form. Persons making payments of winnings subject to
withholding shall use Form W-3G to transmit Forms W-2G to the Internal
Revenue Service Centers.
(Secs. 6011 and 7805 of the Internal Revenue Code of 1954 (68A Stat.
732, 917; 26 U.S.C. 6011, 7805)
[T.D. 7787, 46 FR 46908, Sept. 23, 1981, as amended by T.D. 7919, 48 FR
46298, Oct. 12, 1983; 48 FR 55728, Dec. 15, 1983; T.D. 7943, 49 FR 5345,
Feb. 13, 1984; 49 FR 8437, Mar. 7, 1984; T.D. 8895, 65 FR 50408, Aug.
18, 2000]
Sec. 31.3402(r)-1 Withholding on distributions of Indian gaming
profits to tribal members.
(a) (1) General rule. Section 3402(r)(1) requires every person,
including an Indian tribe, making a payment to a member of an Indian
tribe from the net revenues of any class II or class III gaming
activity, as defined in 25 U.S.C. 2703, conducted or licensed by such
tribe to deduct and withhold from such payment a tax in an amount equal
to such payment's proportionate share of the annualized tax, as that
term is defined in section 3402(r)(3).
(2) Withholding tables. Except as provided in paragraph (a)(4) of
this section, the amount of a payment's proportionate share of the
annualized tax shall be determined under the applicable table provided
by the Commissioner.
(3) Annualized amount of payment. Section 3402(r)(5) provides that
payments shall be placed on an annualized basis under regulations
prescribed by the Secretary. A payment may be placed on an annualized
basis by multiplying the amount of the payment by the total number of
payments to be made in a calendar year. For example, a monthly payment
may be annualized by multiplying the amount of the payment by 12.
Similarly, a quarterly payment may be annualized by multiplying the
amount of the payment by 4.
(4) Alternate withholding procedures--(i) In general. Any procedure
for determining the amount to be deducted and withheld under section
3402(r) may be used, provided that the amount of tax
[[Page 273]]
deducted and withheld is substantially the same as it would be using the
tables provided by the Commissioner under paragraph (a)(2) of this
section. At the election of an Indian tribe, the amount to be deducted
and withheld under section 3402(r) shall be determined in accordance
with this alternate procedure.
(ii) Method of election. It is sufficient for purposes of making an
election under this paragraph (a)(4) that an Indian tribe evidence the
election in any reasonable way, including use of a particular method.
Thus, no written election is required.
(5) Additional withholding permitted. Consistent with the provisions
of section 3402(p), a tribal member and a tribe may enter into an
agreement to provide for the deduction and withholding of additional
amounts from payments in order to satisfy the anticipated tax liability
of the tribal member. The agreement may be made in a manner similar to
that described in Sec. 31.3402(p)-1 (with respect to voluntary
withholding agreements between employees and employers).
(b) Effective date. This section applies to payments made after
December 31, 1994.
[T.D. 8634, 60 FR 65238, Dec. 19, 1995]