Final Regs Provide Rules for Reporting Nonpayroll Withheld Taxes

 [4830-01-u]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations relating to both the reporting and depositing of Federal employment taxes. The final regulations are intended to simplify the current reporting system by removing all "nonpayroll" withheld taxes from reporting on Form 941, Employer's Quarterly Federal Tax Return (or Form 941E, Quarterly Return of Withheld Federal Income Tax and Medicare Tax). The final regulations affect all taxpayers that have "nonpayroll" withheld tax liabilities currently reported quarterly on Form 941 (or 941E).

 DATES: These regulations are effective December 23, 1993. These regulations apply to payments made after December 31, 1993.

 FOR FURTHER INFORMATION CONTACT: Vincent G. Surabian, telephone (202) 622-6232 (not a toll-free number).

SUPPLEMENTARY INFORMATION

PAPERWORK REDUCTION ACT

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) under control number 1545-1413.

 The burden for the reporting requirement contained in section 31.6011(a)-4 is reflected in the burden of Form 945.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC. 20224, and to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503.

BACKGROUND

 On November 4, 1993, the IRS published a notice of proposed rulemaking in the Federal Register (58 FR 58820) proposing amendments to the Regulations on Employment Taxes and Collection of Income Tax at Source (26 CFR part 31) under sections 6011 and 6302 of the Internal Revenue Code.

 Written comments responding to the notice were received and a public hearing was held on December 2, 1993. After consideration of all comments regarding the proposed amendments, those amendments are adopted as revised by this Treasury decision.

EXPLANATION OF PROVISIONS

 Under existing rules, taxpayers use the same form -- Form 941 (or Form 941E) -- to report both nonpayroll taxes (such as amounts withheld on annuities) and payroll taxes. Reporting both types of taxes on the same form makes it difficult for taxpayers with separate departments for payroll disbursements and for other disbursements to reconcile amounts to be deposited. To eliminate this problem, the final regulations require both the separate reporting and depositing of the two types of taxes.

 Under the final regulations, taxes currently reported quarterly on Form 941 will continue to be reported on that form unless they are nonpayroll withheld taxes. Nonpayroll withheld taxes, however, will be reported annually on new Form 945, Annual Return of Withheld Federal Income Tax. The final regulations define nonpayroll withheld taxes as amounts withheld under (1) section 3402(q), relating to withholding on certain gambling winnings, (2) section 3402 with respect to amounts paid as retirement pay for service in the Armed Forces of the United States, (3) section 3402(o)(1)(B), relating to withholding on certain annuities, (4) section 3405, relating to withholding on pensions, annuities, IRAs, and certain other deferred income, and (5) section 3406, relating to backup withholding with respect to reportable payments.

 A taxpayer will not be required to file its first Form 945 until the first calendar year the taxpayer incurs a nonpayroll tax liability. One commentator suggested that no annual Form 945 be required for any year during which no withholding of nonpayroll taxes occurs. This suggestion is not being adopted at this time because the IRS cannot assume that no tax is due simply because no return has been filed. However, the IRS welcomes and will consider any further comments regarding this suggestion. Accordingly, the final regulations require any taxpayer required to file a Form 945 for one calendar year, to continue filing a Form 945 for each subsequent year, whether or not there is a liability for the subsequent year, until the taxpayer files a final return in accordance with the regulations. Thus, a taxpayer should continue to file the Form 945 and should not file a final return if it is reasonably foreseeable that the taxpayer will have a nonpayroll tax liability in any subsequent calendar year. This annual filing requirement helps preserve the integrity of the tax system for nonpayroll withheld taxes. This is consistent with the requirement that a Form 941 be filed for each quarter, whether or not there is a liability for that quarter.

 The final regulations also amend the Federal employment tax deposit rules to reflect the change in reporting. Under the final regulations, taxes reported on Form 945 are deposited separately from taxes reported on Form 941. Form 8109, Federal Tax Deposit Coupon, has been revised to reflect these changes.

 Deposits of taxes reported on Form 945 will be made in accordance with rules that generally parallel the existing employment tax deposit regulations. Under the final regulations, deposits of taxes reported on Form 945 are made under either a monthly or a semi- weekly rule. For calendar years 1994 and 1995, a taxpayer's status as a monthly or semi-weekly depositor for taxes reported on Form 945 will generally be the same as the taxpayer's depositor status on January 1, 1994, for taxes reported on Form 941. One commentator suggested that all deposits of nonpayroll withheld taxes be made on a monthly basis. This suggestion was not adopted in order to retain as much consistency as possible in the deposit rules for taxes reported on Form 941 and on Form 945.

 Beginning with calendar year 1996, however, a taxpayer's depositor status for taxes reported on Form 945 will be determined annually based on a lookback to the amount of taxes reported on Form 945 for the second preceding calendar year (the lookback period). For example, for calendar year 1996 a taxpayer's depositor status will depend on the amount of taxes reported on Form 945 for calendar year 1994. If the taxpayer reported nonpayroll withheld tax liabilities of $50,000 or less on the Form 945 for the lookback period, the taxpayer is a monthly depositor for the calendar year. If the taxpayer reported nonpayroll withheld tax liabilities in excess of $50,000 on Form 945 for the lookback period, the taxpayer is a semi-weekly depositor for the calendar year. New taxpayers are considered to have a nonpayroll withheld tax liability of zero for any calendar year in which the taxpayer did not exist.

 For calendar year 1994 and all subsequent years, if the amount of accumulated nonpayroll withheld taxes equals or exceeds $100,000 for any day within a deposit period (monthly or semi-weekly), the taxpayer is subject to the One-Day rule of section 31.6302-1(c)(3) of the regulations for such amount. A taxpayer that is a monthly depositor when the taxpayer becomes subject to the One-Day rule immediately becomes a semi-weekly depositor for the remainder of that calendar year and for the succeeding calendar year.

EFFECTIVE DATE

 The final regulations are effective with respect to payments made after December 31, 1993.

SPECIAL ANALYSES

 It has been determined that these final regulations are not a significant regulatory action as defined in Executive Order 12866. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, a copy of the notice of proposed rulemaking was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

DRAFTING INFORMATION

 The principal author of these final regulations is Vincent G. Surabian, Office of the Assistant Chief Counsel (Income Tax & Accounting), Internal Revenue Service. However, other personnel from the IRS and Treasury Department have participated in their development.

LIST OF SUBJECTS

26 CFR part 31

 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation.

26 CFR part 602

 Reporting and recordkeeping requirements.

PROPOSED AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 31 and 602 are amended as follows:

Paragraph 1. The authority citation for part 31 is amended by adding entries to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 31.6011(a)-4 also issued under 26 U.S.C. 6011. * * * Section 31.6302-4 also issued under 26 U.S.C. 6302(a) and (c). * * *

Par. 2. Section 31.6011(a)-4 is amended as follows:

1. The heading for section 31.6011(a)-4 is revised.

2. The heading for paragraph (a) is revised.

3. Headings are added for paragraphs (a)(1) through (3).

4. The text of paragraph (a)(1) is revised.

5. Paragraph (b) is redesignated as paragraph (c).

6. New paragraph (b) is added.

7. The revised and added provisions read as follows:

SECTION 31.6011(A)-4 RETURNS OF INCOME TAX WITHHELD.

(a) WITHHELD FROM WAGES -- (1) IN GENERAL. Except as otherwise provided in paragraphs (a)(3) and (b) of this section, and in section 31.6011(a)-5, every person required to make a return of income tax withheld from wages pursuant to section 3402 shall make a return for the first calendar quarter in which the person is required to deduct and withhold such tax and for each subsequent calendar quarter, whether or not wages are paid therein, until the person has filed a final return in accordance with section 31.6011(a)-6. Except as otherwise provided in paragraphs (a)(2) and (3) and (b) of this section, and in section 31.6011(a)-8, Form 941 is the form prescribed for making the return required under this paragraph.

(2) WAGES PAID FOR DOMESTIC SERVICE. * * *

(3) WAGES PAID FOR AGRICULTURAL LABOR. * * *

(b) WITHHELD FROM NONPAYROLL PAYMENTS. Every person required to make a return of income tax withheld from nonpayroll payments for calendar year 1994 shall make a return for calendar year 1994 and for each subsequent calendar year (whether or not any such tax is required to be withheld therein) until a final return is made in accordance with section 31.6011(a)-6. Every person not required to make a return of income tax withheld from nonpayroll payments for calendar year 1994 shall make a return for the first calendar year thereafter in which the person is required to withhold such tax and for each subsequent calendar year until a final return is made in accordance with section 31.6011(a)-6. Form 945, Annual Return of Withheld Federal Income Tax, is the form prescribed for making the return required under this paragraph (b). Nonpayroll payments are--

(1) Certain gambling winnings subject to withholding under section 3402(q);

(2) Retirement pay for services in the Armed Forces of the United States subject to withholding under section 3402;

(3) Certain annuities as described in section 3402(o)(1)(B);

(4) Pensions, annuities, IRAs, and certain other deferred income subject to withholding under section 3405; and

(5) Reportable payments subject to backup withholding under section 3406.

* * * * *

Par. 3. The heading for paragraph (a) of section 31.6071(a)-1 is revised to read as set forth below.

SECTION 31.6071(a)-1 TIME FOR FILING RETURNS AND OTHER DOCUMENTS.

(a) FEDERAL INSURANCE CONTRIBUTIONS ACT AND INCOME TAX WITHHELD FROM WAGES AND FROM NONPAYROLL PAYMENTS -- * * *

* * * * *

Par. 4. Section 31.6302-1 is amended as follows:

1. Paragraphs (e)(1)(iii) and (iv) are revised.

2. The last sentence of paragraph (e)(2) is revised.

3. The revisions read as follows:

SECTION 31.6302-1 FEDERAL TAX DEPOSIT RULES FOR WITHHELD INCOME TAXES AND TAXES UNDER THE FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) ATTRIBUTABLE TO PAYMENTS MADE AFTER DECEMBER 31, 1992.

* * * * *

(e) * * *

(1) * * *

(iii) The income tax withheld under sections 3402 and 3405, except income tax withheld with respect to payments made after December 31, 1993, on the following --

(A) Certain gambling winnings under section 3402(q);

(B) Retirement pay for services in the Armed Forces of the United States under section 3402;

(C) Certain annuities described in section 3402(o)(1)(B); and

(D) Pensions, annuities, IRAs, and certain other deferred income under section 3405; and

(iv) The income tax withheld under section 3406, relating to backup withholding with respect to reportable payments made before January 1, 1994.

(2) * * * Also, see section 31.6302-3 concerning a taxpayer's option with respect to payments made before January 1, 1994, to treat backup withholding amounts under section 3406 separately.

* * * * *

Par. 5. In section 31.6302-3, paragraph (b) is revised to read as follows:

SECTION 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, AND BEFORE JANUARY 1, 1994.

* * * * *

(b) TREATMENT OF BACKUP WITHHOLDING AMOUNTS SEPARATELY. A taxpayer that withholds income tax under section 3406 with respect to reportable payments made after December 31, 1992, and before January 1, 1994, may, in accordance with the instructions provided with Form 941, deposit such tax under the rules of section 31.6302-1 without taking into account the other taxes described in paragraph (e) of section 31.6302-1 for purposes of determining when tax withheld under section 3406 must be deposited. A taxpayer that treats backup withholding amounts separately with respect to reportable payments made after December 31, 1992, and before January 1, 1994, shall not take tax withheld under section 3406 into account for purposes of determining when the other taxes described in paragraph (e) of section 31.6302-1 must otherwise be deposited under that section. See section 31.6302-4 for rules regarding the deposit of income tax withheld under section 3406 with respect to reportable payments made after December 31, 1993.

* * * * *

Par. 6. Section 31.6302-4 is added to read as follows:

SECTION 31.6302-4 FEDERAL TAX DEPOSIT RULES FOR WITHHELD INCOME TAXES ATTRIBUTABLE TO NONPAYROLL PAYMENTS MADE AFTER DECEMBER 31, 1993.

(a) GENERAL RULE. With respect to nonpayroll withheld taxes attributable to nonpayroll payments made after December 31, 1993, a taxpayer is either a monthly or a semi-weekly depositor based on an annual determination. Except as provided in this section, the rules of section 31.6302-1 shall apply to determine the time and manner of making deposits of nonpayroll withheld taxes as though they were employment taxes. Paragraph (b) of this section defines nonpayroll withheld taxes. Paragraph (c) of this section provides rules for determining whether a taxpayer is a monthly or a semi-weekly depositor.

(b) NONPAYROLL WITHHELD TAXES DEFINED. For purposes of this section, effective with respect to payments made after December 31, 1993, NONPAYROLL WITHHELD TAXES means --

(1) Amounts withheld under section 3402(q), relating to withholding on certain gambling winnings;

(2) Amounts withheld under section 3402 with respect to amounts paid as retirement pay for service in the Armed Forces of the United States;

(3) Amounts withheld under section 3402(o)(1)(B), relating to certain annuities;

(4) Amounts withheld under section 3405, relating to withholding on pensions, annuities, IRAs, and certain other deferred income; and

(5) Amounts withheld under section 3406, relating to backup withholding with respect to reportable payments.

(c) DETERMINATION OF DEPOSIT STATUS -- (1) RULES FOR CALENDAR YEARS 1994 AND 1995. On January 1, 1994, a taxpayer's depositor status for nonpayroll withheld taxes is the same as the taxpayer's status on January 1, 1994, for taxes reported on Form 941 under section 31.6302-1. A taxpayer generally retains that depositor status for nonpayroll withheld taxes for all of calendar years 1994 and 1995. However, a taxpayer that under this paragraph (c) is a monthly depositor for 1994 and 1995 will immediately lose that status and become a semi-weekly depositor of nonpayroll withheld taxes if the One-Day rule of section 31.6302-1(c)(3) is triggered with respect to nonpayroll withheld taxes. See paragraph (d) of this section for a special rule regarding the application of the One-Day rule of section 31.6302-1(c)(3) to nonpayroll withheld taxes.

(2) RULES FOR CALENDAR YEARS AFTER 1995 -- (i) IN GENERAL. For calendar years after 1995, the determination of whether a taxpayer is a monthly or a semi-weekly depositor for a calendar year is based on an annual determination and generally depends on the aggregate amount of nonpayroll withheld taxes reported by the taxpayer for the lookback period as defined in paragraph (c)(2)(iv) of this section.

(ii) MONTHLY DEPOSITOR. A taxpayer is a monthly depositor of nonpayroll withheld taxes for a calendar year if the amount of nonpayroll withheld taxes accumulated in the lookback period (as defined in paragraph (c)(2)(iv) of this section) is $50,000 or less. A taxpayer ceases to be a monthly depositor of nonpayroll withheld taxes on the first day after the taxpayer is subject to the One-Day rule in section 31.6302-1(c)(3) with respect to nonpayroll withheld taxes. At that time, the taxpayer immediately becomes a semi-weekly depositor of nonpayroll withheld taxes for the remainder of the calendar year and the succeeding calendar year. See paragraph (d) of this section for a special rule regarding the application of the One- Day rule of section 31.6302-1(c)(3) to nonpayroll withheld taxes.

(iii) SEMI-WEEKLY DEPOSITOR. A taxpayer is a semi-weekly depositor of nonpayroll withheld taxes for a calendar year if the amount of nonpayroll withheld taxes accumulated in the lookback period (as defined in paragraph (c)(2)(iv) of this section) exceeds $50,000.

(iv) LOOKBACK PERIOD. For purposes of this section, the lookback period for nonpayroll withheld taxes is the second calendar year preceding the current calendar year. For example, the lookback period for calendar year 1996 is calendar year 1994. A new taxpayer is treated as having nonpayroll withheld taxes of zero for any calendar year in which the taxpayer did not exist.

(d) SPECIAL RULES. A taxpayer must treat nonpayroll withheld taxes, which are reported on Form 945, Annual Return of Withheld Federal Income Tax, separately from taxes reportable on Form 941, Employer's Quarterly Federal Tax Return. Taxes reported on Form 945 and taxes reported on Form 941 are not combined for purposes of determining whether a deposit of either is due, whether the One-Day rule of section 31.6302-1(c)(3) applies, or whether any safe harbor is applicable. In addition, separate Federal tax deposit coupons must be used to deposit taxes reported on Form 945 and taxes reported on Form 941. (See paragraph (b) of section 31.6302-1 for rules for determining an employer's deposit status for taxes reported on Form 941.) A deposit of taxes reported on Form 945 for one calendar year must be made separately from a deposit of taxes reported on Form 945 for another calendar year.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 7. The authority citation for part 602 continues to read as follows:

Authority: 26 USC 7805.

Par. 8. Section 602.101(c) is amended by revising the entry for section 31.6011(a)-4 and by adding entries in numerical order in the table to read as follows:

SECTION 602.101 OMB CONTROL NUMBERS.

* * * * *

(c) * * *

 CFR part or section where                            Current OMB