Publication 505 (2/2008), Tax Withholding and Estimated Tax

IRS Resources

1. Tax Withholding for 2008

Table of Contents

What's New for 2008

Poker winnings of more than $5,000. . Payments of more than $5,000 made to winners of poker tournaments on or after March 4, 2008, will be subject to income tax withholding. See Gambling Winnings, later in this chapter.

Introduction

This chapter discusses income tax withholding on:

Salaries and wages,
Tips,
Taxable fringe benefits,
Sick pay,
Pensions and annuities,
Gambling winnings,
Unemployment compensation, and
Certain federal payments.

This chapter explains in detail the rules for withholding tax from each of these types of income. The discussion of salaries and wages includes an explanation of how to complete Form W-4.

This chapter also covers backup withholding on interest, dividends, and other payments.

Useful Items - You may want to see:

Publication

919 How Do I Adjust My Tax Withholding?

Form (and Instructions)

W-4
Employee's Withholding Allowance Certificate
W-4P
Withholding Certificate for Pension or Annuity Payments
W-4S
Request for Federal Income Tax Withholding From Sick Pay
W-4V
Voluntary Withholding Request

See chapter 5 of this publication for information about getting these publications and forms.

Salaries and Wages

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. See Supplemental Wages on page 13 for definitions of accountable and nonaccountable plans.

If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. This is explained under Exemption From Withholding starting on page 12.

Military retirees. Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes.

Household workers. If you are a household worker, you can ask your employer to withhold income tax from your pay. A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.

Tax is withheld only if you want it withheld and your employer agrees to withhold it. If you do not have enough income tax withheld, you may have to pay estimated tax, as discussed in chapter 2.

Farmworkers. Generally, income tax is withheld from your cash wages for work on a farm unless your employer both:

Pays you cash wages of less than $150 during the year, and
Has expenditures for agricultural labor totaling less than $2,500 during the year.

You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. If your employer does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed in chapter 2.

Determining Amount of Tax Withheld Using Form W-4

The amount of income tax your employer withholds from your regular pay depends on two things.

The amount you earn.
The information you give your employer on Form W-4.

Form W-4 includes three types of information that your employer will use to figure your withholding.

Whether to withhold at the single rate or at the lower married rate.
How many withholding allowances you claim (each allowance reduces the amount withheld).
Whether you want an additional amount withheld.

Note.

You must specify a filing status and a number of withholding allowances on Form W-4. You cannot specify only a dollar amount of withholding.

New Job

When you start a new job, you must fill out a Form W-4 and give it to your employer. Your employer should have copies of the form. If you need to change the information later, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid overwithholding if your employer agrees to use the part-year method, explained on page 8.

Employee also receiving pension income. If you receive pension or annuity income and begin a new job, you will need to file Form W-4 with your new employer. However, you can choose to split your withholding allowances between your pension and job in any manner. See Publication 919 for more information.

Changing Your Withholding

Events during the year may change your marital status or the exemptions, adjustments, deductions, or credits you expect to claim on your tax return. When this happens, you may need to give your employer a new Form W-4 to change your withholding status or number of allowances.

If the event changes your withholding status or the number of allowances you are claiming, you must give your employer a new Form W-4 within 10 days after either of the following.

Your divorce, if you have been claiming married status.
Any event that decreases the number of withholding allowances you can claim.

Events that will decrease the number of withholding allowances you can claim include the following.

You have been claiming an allowance for your spouse, but you get divorced or your spouse begins claiming his or her own allowance on a separate Form W-4.
You have been claiming an allowance for a dependent who is a qualifying relative, but you no longer expect to provide more than half the dependent's support for the year.
You have been claiming an allowance for your qualifying child, but you now find that he or she will provide more than half of his or her own support during the year.
You have been claiming allowances for your expected deductions, but you now find they will be less than expected.
You filed for bankruptcy under Chapter 11 of the Bankruptcy Code and you may not be entitled to the same number of allowances or the estate may be taxed at a higher rate.

Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason.

If you change the number of your withholding allowances, you can request that your employer withhold using the cumulative wage method, explained on page 8.

Changing your withholding for 2009. If events in 2008 will decrease the number of your withholding allowances for 2009, you must give your employer a new Form W-4 by December 1, 2008. If an event occurs in December 2008, submit a new Form W-4 within 10 days. Events that will decrease the number of your allowances include the following.

You claimed allowances for 2008 based on child care expenses, moving expenses, or large medical expenses, but you will not have these expenses in 2009.
You have been claiming an allowance for your spouse, but he or she died in 2008.

Note.

Because you can file a joint return for 2008, your spouse's death will not affect the number of your withholding allowances until 2009. You will have to change from married to single status for 2009, unless you can file as a qualifying widow or widower because you have a dependent child, or you remarry.

You must file a new Form W-4 showing single status by December 1 of the last year you are eligible to file as qualifying widow or widower.

Checking Your Withholding

After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. See Publication 919 on page 8. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding.

Note.

You cannot give your employer a payment to cover federal income tax withholding on salaries and wages for past pay periods or a payment for estimated tax.

Completing Form W-4 and Worksheets

When reading the following discussion, you may find it helpful to refer to the filled-in Form W-4 on pages 9 and 10.

Marital Status (Line 3 of Form W-4)

There is a lower withholding rate for people who qualify to check the “Married” box on line 3 of Form W-4. Everyone else must have tax withheld at the higher single rate.

Single. You must check the “Single” box if any of the following applies.

You are single. If you are divorced, or separated from your spouse under a court decree of separate maintenance, you are considered single.
You are married, but neither you nor your spouse is a citizen or resident of the United States.
You are married, either you or your spouse is a nonresident alien, and you have not chosen to have that person treated as a resident alien for tax purposes. For more information, see Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519.

Married. You qualify to check the “Married” box if any of the following applies.

You are married and neither you nor your spouse is a nonresident alien. You are considered married for the whole year even if your spouse died during the year.
You are married, either you or your spouse is a nonresident alien, and you have chosen to have that person treated as a resident alien for tax purposes. For more information, see Nonresident Spouse Treated as a Resident in chapter 1 of Publication 519.
You expect to be able to file your return as a qualifying widow or widower. You usually can use this filing status if your spouse died within the previous 2 years and you provide more than half the cost of keeping up a home that was the main home for you and your dependent child for the entire year. However, you must file a new Form W-4 showing your filing status as single by December 1 of the last year you are eligible to file as a qualifying widow or widower. For more information on this filing status, see Qualifying Widow(er) With Dependent Child under Filing Status in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Married, but withhold at higher single rate. Some married people find that they do not have enough tax withheld at the married rate. This can happen, for example, when both spouses work. To avoid this, you can check the “Married, but withhold at higher Single rate” box (even if you qualify for the married rate). Also, you may find that more tax is withheld if you fill out the Two-Earners/Multiple Jobs Worksheet, explained on page 7.

Withholding Allowances (Line 5 of Form W-4)

The more allowances you claim on Form W-4, the less income tax your employer will withhold. You will have the most tax withheld if you claim “0” allowances. The number of allowances you can claim depends on the following factors.

How many exemptions you can take on your tax return.
Whether you have income from more than one job.
What deductions, adjustments to income, and credits you expect to have for the year.
Whether you will file as head of household.

If you are married, it also depends on whether your spouse also works and claims any allowances on his or her own Form W-4.

Form W-4 worksheets. Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Do not give them to your employer.

Complete only one set of Form W-4 worksheets, no matter how many jobs you have. If you are married and will file a joint return, complete only one set of worksheets for you and your spouse, even if you both earn wages and must each give a Form W-4 to your employers. Complete separate sets of worksheets only if you and your spouse will file separate returns.

If you are not exempt from withholding (see Exemption From Withholding starting on page 12), complete the Personal Allowances Worksheet on page 1 of the form. Also, use the worksheets on page 2 of the form to adjust the number of your withholding allowances for itemized deductions and adjustments to income, and for two-earner or multiple-job situations. If you want to adjust the number of your withholding allowances for certain tax credits, use the Deductions and Adjustments Worksheet on page 2 of Form W-4, even if you do not have any deductions or adjustments.

Complete all worksheets that apply to your situation. The worksheets will help you figure the maximum number of withholding allowances you are entitled to claim so that the amount of income tax withheld from your wages will match, as closely as possible, the amount of income tax you will owe at the end of the year.

Multiple jobs. If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Then split your allowances between the Forms W-4 for each job. You cannot claim the same allowances with more than one employer at the same time. You can claim all your allowances with one employer and none with the other(s), or divide them any other way.

Married individuals. If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you cannot claim an allowance that your spouse also claims.

If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions, exemptions, and credits.

Alternative method of figuring withholding allowances. You do not have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding allowances.

The method you use must be based on withholding schedules, the tax rate schedules, and the 2008 Estimated Tax Worksheet in chapter 2. It must take into account only the items of income, adjustments to income, deductions, and tax credits that are taken into account on Form W-4.

You can use the number of withholding allowances determined under an alternative method rather than the number determined using the Form W-4 worksheets. You must still give your employer a Form W-4 claiming your withholding allowances.

Employees who are not citizens or residents. If you are neither a citizen nor a resident of the United States, you usually can claim only one withholding allowance. However, this rule does not apply if you are a resident of Canada or Mexico, or if you are a U.S. national. It also does not apply if your spouse is a U.S. citizen or resident and you have chosen to be treated as a resident of the United States. Special rules apply to residents of Korea and India. For more information, see Withholding From Compensation in chapter 8 of Publication 519.

Personal Allowances Worksheet

Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances based on all of the following that apply.

Exemptions.
Only one job.
Head of household filing status.
Child and dependent care credit.
Child tax credit.

Exemptions (worksheet lines A, C, and D). You can claim one withholding allowance for each exemption you expect to claim on your tax return.

Self. You can claim an allowance for your exemption on line A unless another person can claim an exemption for you on his or her tax return. If another person is entitled to claim an exemption for you, you cannot claim an allowance for your exemption even if the other person will not claim your exemption or the exemption will be reduced.

Spouse. You can claim an allowance for your spouse's exemption on line C unless your spouse is claiming his or her own exemption or another person can claim an exemption for your spouse. Do not claim this allowance if you and your spouse expect to file separate returns.

Dependents. You can claim one allowance on line D for each exemption you will claim for a dependent on your tax return.

Reduction of personal allowances. For 2008, your deduction for personal exemptions on your tax return is reduced if your adjusted gross income (AGI) is more than the AGI shown below for your filing status.

Single	$159,950
Married filing jointly or qualifying widow(er)	$239,950
Married filing separately	$119,975
Head of household	$199,950

If you expect your AGI to be more than that amount, use Worksheet 1-1 below to figure your reduced number of personal allowances on lines A, C, and D of the Personal Allowances Worksheet.

Worksheet 1-1. Personal Allowances Worksheet (Form W-4) Reduction of Personal Allowances if AGI Above Phaseout Threshold


1.	Enter the total number of allowances on lines A, C, and D of the Personal Allowances Worksheet without regard to the phaseout rule		1.

2.	Enter your expected AGI	2.
3.	Enter:
	$159,950 if single
	$239,950 if married filing jointly or qualifying widow(er)
	$119,975 if married filing separately
	$199,950 if head of household	3.
4.	Subtract line 3 from line 2	4.
5.	Divide line 4 by $125,000 ($62,500 if married filing separately). Enter the result as a decimal		5.	.
6.	Multiply line 1 by line 5. If the result is not a whole number, increase it to the next higher whole number		6.
7.	Divide line 6 by 3.0		7.
8.	Subtract line 7 from line 1. The total of the numbers you enter on lines A, C, and D of the Personal Allowances Worksheet cannot be more than this amount		8.

Only one job (worksheet line B). You can claim an additional withholding allowance if any of the following apply for 2008.

You are single, and you have only one job at a time.
You are married, you have only one job at a time, and your spouse does not work.
Your wages from a second job or your spouse's wages (or the total of both) are $1,500 or less.

If you qualify for this allowance, enter “1” on line B of the worksheet.

Head of household filing status (worksheet line E). You can file as head of household if you are unmarried and pay more than half the cost of keeping up a home that:

Was the main home for all of 2008 of your parent whom you can claim as a dependent, or
You lived in for more than half the year with your qualifying child or any other person you can claim as a dependent.

For more information, see Publication 501.

If you expect to file as head of household on your 2008 tax return, enter “1” on line E of the worksheet.

Child and dependent care credit (worksheet line F). Enter “1” on line F if you expect to claim a credit for at least $1,500 of qualifying child or dependent care expenses on your 2008 return. Generally, qualifying expenses are those you pay for the care of your dependent who is your qualifying child under age 13 or for your spouse or dependent who is not able to care for himself or herself so that you can work or look for work. For more information, get Publication 503.

Instead of using line F, you can choose to take the credit into account on line 5 of the Deductions and Adjustments Worksheet, as explained under Tax credits on page 7.

Child tax credit (worksheet line G). If your total income will be less than $58,000 ($86,000 if married), enter “2” on line G for each eligible child.

If your total income will be between $58,000 and $84,000 ($86,000 and $119,000 if married), enter “1” on line G for each eligible child plus “1” additional if you have four or more eligible children.

An eligible child is any child:

Who is your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild),
Who was under age 17 at the end of 2008,
Who did not provide over half of his or her own support for 2008,
Who lived with you for more than half of 2008, and
Who was a U.S. citizen, U.S. national, or a resident of the United States.

For more information about the child tax credit, see the instructions in your Form 1040 or Form 1040A tax package.

Instead of using line G, you can choose to take the credit into account on line 5 of the Deductions and Adjustments Worksheet, as explained under Tax credits on page 7.

Total personal allowances (worksheet line H). Add lines A through G and enter the total on line H. If you do not use either of the worksheets on the back of Form W-4, enter the number from line H on line 5 of Form W-4.

Deductions and Adjustments Worksheet

Use the Deductions and Adjustments Worksheet on page 2 of Form W-4 only if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income on your 2008 tax return and you want to reduce your withholding. Also, complete this worksheet when you have changes to those items to see if you need to change your withholding.

Use the amount of each item you can reasonably expect to show on your return. However, do not use more than:

The amount shown for that item on your 2007 return (or your 2006 return if you have not yet filed your 2007 return), plus
Any additional amount related to a transaction or occurrence (such as the signing of an agreement or the sale of property) that you can prove has happened or will happen during 2007 or 2008.

Do not include any amount shown on your last tax return that has been disallowed by the IRS.

Example.

On June 29, 2007, you bought your first home. On your 2007 tax return, you claimed itemized deductions of $6,600, the total mortgage interest and real estate tax you paid during the 6 months you owned your home. Based on your mortgage payment schedule and your real estate tax assessment, you can reasonably expect to claim deductions of $13,200 for those items on your 2008 return. You can use $13,200 to figure the number of your withholding allowances for itemized deductions.

Not itemizing deductions. If you expect to claim the standard deduction on your tax return, skip lines 1 and 2, and enter “0” on line 3 of the worksheet.

Itemized deductions (worksheet line 1). Enter your estimated total itemized deductions on line 1 of the worksheet.

Legislation during 2008 may extend the state and local sales tax deduction. For more details, see www.irs.gov, Highlights of Recent Tax Changes.

Listed below are some of the deductions you can take into account when figuring additional withholding allowances for 2008. You normally claim these deductions on Schedule A of Form 1040.

Medical and dental expenses that are more than 7.5% of your 2008 AGI (defined under AGI on this page).
State and local income taxes and property taxes.
Deductible home mortgage interest.
Investment interest up to net investment income.
Charitable contributions.
Casualty and theft losses that are more than 10% of your AGI.
Fully deductible miscellaneous itemized deductions, including:
1. Impairment-related work expenses of persons with disabilities,
2. Federal estate tax on income in respect of a decedent,
3. Repayment of more than $3,000 of income held under a claim of right that you included in income in an earlier year because at the time you thought you had an unrestricted right to it,
4. Unrecovered investments in an annuity contract under which payments have ceased because of the annuitant's death,
5. Gambling losses up to the amount of gambling winnings reported on your return, and
6. Casualty and theft losses from income-producing property.
Other miscellaneous itemized deductions that are more than 2% of your AGI, including:
1. Unreimbursed employee business expenses, such as education expenses, work clothes and uniforms, union dues and fees, and the cost of work-related small tools and supplies,
2. Safe deposit box rental,
3. Tax counsel and assistance, and
4. Certain fees paid to an IRA trustee or custodian.

AGI. For the purpose of estimating your itemized deductions, your AGI is your estimated total income for 2008 minus any estimated adjustments to income (discussed later on this page) that you include on line 4 of the Deductions and Adjustments Worksheet.

Phaseout of itemized deductions. For 2008, your total itemized deductions may be phased out (reduced) if your AGI is more than $159,950 ($79,975 if married filing separately). If you expect your AGI to be more than that amount, use Worksheet 1-2 below to figure the amount to enter on line 1 of the Deductions and Adjustments Worksheet.

Worksheet 1-2. Deductions and Adjustments Worksheet (Form W-4)—Line 1 Phaseout of Itemized Deductions


1.	Enter the estimated total of your itemized deductions		1.
2.	Enter the amount included in line 1 for medical and dental expenses, investment interest, casualty or theft losses, and gambling losses		2.
3.	Is the amount on line 2 less than the amount on line 1?
	□ No. Stop here. Your deduction is not limited. Enter the amount from line 1 above on line 1 of the Deductions and Adjustments Worksheet.
	□ Yes. Subtract line 2 from line 1		3.
4.	Multiply line 3 by 80% (.80)	4.
5.	Enter your expected AGI	5.
6.	Enter $159,950 ($79,975 if married filing separately)	6.
7.	Is the amount on line 6 less than the amount on line 5?
	□ No. Stop here. Your deduction is not limited. Enter the amount from line 1 above on line 1 of the Deductions and Adjustments Worksheet.
	□ Yes. Subtract line 6 from line 5	7.
8.	Multiply line 7 by 3% (.03)	8.
9.	Enter the smaller of line 4 or line 8		9.
10.	Divide line 9 by 1.5		10.
11.	Subtract line 10 from line 9		11.
12.	Subtract line 11 from line 1. Enter the result here and on line 1 of the Deductions and Adjustments Worksheet		12.

Adjustments to income (worksheet line 4). Enter your estimated total adjustments to income on line 4 of the Deductions and Adjustments Worksheet.

You can take the following adjustments to income into account when figuring additional withholding allowances for 2008. These adjustments appear on page 1 of your Form 1040 or 1040A.

Net losses from Schedules C, D, E, and F of Form 1040 and from Part II of Form 4797, line 18b.
Net operating loss carryovers.
Certain business expenses of reservists, performing artists, and fee-based government officials.
Health savings account or medical savings account deduction.
Certain moving expenses.
Deduction for one-half of self-employment tax.
Deduction for contributions to self-employed SEP, and qualified SIMPLE plans.
Self-employed health insurance deduction.
Penalty on early withdrawal of savings.
Alimony paid.
IRA deduction.
Student loan interest deduction.
Jury duty pay given to your employer.
Reforestation amortization and expenses.
Deductible expenses related to income reported on line 21 from the rental of personal property engaged in for profit.
Repayment of certain supplemental unemployment benefits.
Contributions to IRC 501(c)(18)(D) pension plans.
Attorney fees and court costs for certain unlawful discrimination claims.
Attorney fees and court costs for certain whistleblower awards.

Legislation during 2008 may extend the deductions for educator expenses and tuition and fees. For more details, see www.irs.gov, Highlights of Recent Tax Changes.

Tax credits (worksheet line 5). Although you can take most tax credits into account when figuring withholding allowances, the Personal Allowances Worksheet uses only the child and dependent care credit (line F) and the child tax credit (line G). But you can take these credits and others into account by adding an extra amount on line 5 of the Deductions and Adjustments Worksheet.

If you take the child and dependent care credit into account on line 5, do not use line F. If you take the child tax credit into account on line 5, do not use line G.

In addition to the child and dependent care credit and child tax credit, you can take into account the following credits.

Foreign tax credit, except any credit that applies to wages not subject to U.S. income tax withholding because they are subject to income tax withholding by a foreign country. See Publication 514, Foreign Tax Credit for Individuals.
Credit for the elderly or the disabled. See Publication 524, Credit for the Elderly or the Disabled.
Hope credit. See Publication 970, Tax Benefits for Education.
Lifetime learning credit. See Publication 970.
Retirement savings contributions credit (saver's credit). See Publication 590, Individual Retirement Arrangements (IRAs).
Adoption credit. See the instructions for Form 8839.
Mortgage interest credit. See Publication 530, Tax Information for First-Time Homeowners.
Credit for prior year minimum tax (both refundable and nonrefundable) if you paid alternative minimum tax in an earlier year. See the instructions for Form 8801.
General business credit. See Form 3800.
Earned income credit, unless you requested advance payment of the credit. See Publication 596, Earned Income Credit (EIC).
Alternative motor vehicle credit. See Form 8910, Part III.
Alternative fuel vehicle refueling property credit. See Form 8911, Part III.
Credits for clean renewable energy bonds and Gulf bonds. See Form 8912.
Qualified zone academy bond credit. See Form 8860.
Health coverage tax credit. See Form 8885.
Residential energy efficient property credit. See Form 5695.
Empowerment zone and renewal community employment credit. See Form 8844.
Credit for alcohol used as fuel. See Form 6478.
Renewable electricity, refined coal, and Indian coal production credit. See Form 8835, Section B.
Work opportunity credit. See Form 5884.
Credit for employer social security and Medicare taxes paid on certain employee tips. See Form 8846.
Carryforward from 2007 of New York Liberty Zone business employee credit. If you have a carryforward of this credit, see Form 5884.
Carryforward from 2007 of District of Columbia First-Time Homebuyer Credit. See Form 8859.

Figuring line 5 entry. </