Generally, pension and annuity payments are subject to Federal income tax withholding. The withholding rules apply to the taxable part of payments from an employer pension annuity, profit-sharing, stock bonus, or other deferred compensation plan. The rules also apply to payments from an individual retirement arrangement (IRA), an annuity, endowment, or life insurance contract issued by a life insurance company. There is no withholding on any part of a distribution that is not expected to be includible in the recipient's gross income.
Generally, recipients of payments described above can choose not to have withholding apply to their pensions or annuities (however, refer to Mandatory Withholding on Payments Delivered Outside the United States below). The election remains in effect until the recipient revokes it. The payer must notify the recipient that this election is available.
Withholding on Periodic Payments
Generally, periodic payments are pension or annuity payments made for more than 1 year that are not eligible rollover distributions. Periodic payments include substantially equal payments made at least once a year over the life of the employee and/or beneficiaries or for 10 years or more. For wage withholding purposes, these payments are treated as if they are wages . You can figure withholding by using the recipient's Form W-4P, Withholding Certificate for Pension or Annuity Payments , and the income tax withholding tables and methods in Publication 15, Circular E, Employer's Tax Guide, or the alternative tables and methods in this publication.
Recipients of periodic payments can give you a Form W-4P to specify the number of withholding allowances and any additional amount they want withheld. They may also claim exemption from withholding on Form W-4P or revoke a previously claimed exemption. If they do not submit a Form W-4P, you must figure withholding by treating a recipient as married with three withholding allowances. Refer to Form W-4P for more information.
Unless you choose no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution, is 10% of the distribution. You can also ask the payer to withhold an additional amount using Form W-4P. The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule.
Mandatory Withholding on Payments Delivered Outside the United States
The election to be exempt from income tax withholding does not apply to any periodic or nonperiodic payment delivered outside the United States or its possessions to a U.S. citizen or resident alien. Refer to Form W-4P for more information.
A nonresident alien can elect exemption from withholding only if he or she certifies to the payer that he or she is not (1) a U.S. citizen or resident alien or (2) an individual to whom Internal Revenue Code section 877 applies (concerning expatriation to avoid tax). The certification must be made in a statement to the payer under penalties of perjury. However, nonresident aliens who choose such exemption will be subject to withholding under Internal Revenue Code section 1441. Refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and the Instructions for Form 1042-S. Refer to NRA Withholding and Pensions, Annuities, and Alimony (Income Code 15) in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Eligible Rollover Distributions
Withhold 20% of an eligible rollover distribution unless the recipient elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. With certain exceptions, an eligible rollover distribution is the taxable part of any distribution from a qualified plan, governmental Internal Revenue Code section 457(b) plan, tax-sheltered annuity, or IRA. For more information, refer to Chapter 8 in Publication 15-A, Employer’s Supplemental Tax Guide.
Depositing and Reporting Withheld Taxes
Report income tax withholding from pensions, annuities, and governmental Internal Revenue Code section 457(b) plans on Form 945, Annual Return of Withheld Federal Income Tax. Do not report these liabilities on Form 941. You must furnish the recipients and the IRS with Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Deposit withholding from pensions and annuities combined with any other nonpayroll withholding reported on Form 945 (e.g., backup withholding). Do not combine the Form 945 deposits with deposits for payroll taxes reported on Form 941 or NRA Withholding taxes reported on Form 1042. Circular E and the separate Instructions for Form 945 include information on the deposit rules for Form 945.
For information on withholding and reporting on pensions and annuities paid to foreign persons, refer to Pensions, Annuities, and Alimony (Income Code 15) in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.