Rules Issued for 2020 for Withholding Taxes on Pension and Annuity Payments
With the changes made to the Form W-4 for 2020, the IRS has issued Notice 2020-03[1] to give instructions on how to deal with withholding on periodic payments for pensions, annuities and certain other deferred income under IRC §3405(a).
The Notice explains the problem as follows:
Prior to the 2020 calendar year, information requested on Form W-4P regarding withholding from periodic payments generally paralleled the information requested on Form W-4 for withholding from wages. The Form W-4 for the 2020 calendar year (which has been renamed the Form W-4, Employee’s Withholding Certificate) has been redesigned to increase transparency and accuracy of the withholding system. Beginning in calendar year 2020, employers are required to use the redesigned form for all new employees and employees hired prior to 2020 who wish to adjust their withholding. As a result, information requested on the 2020 Form W-4 no longer parallels information requested on Form W-4P for withholding from periodic payments. Among other changes, the redesigned Form W-4 requests the employee’s filing status, rather than marital status, and no longer requests the number of withholding allowances the employee is claiming. The 2020 Form W-4 also includes a new method by which an employee may request withholding using higher withholding rate tables. Importantly, the Treasury Department and the IRS have designed the withholding tables and computational procedures in the 2020 Publication 15-T, Federal Income Tax Withholding Methods, to work with both a 2019 or earlier Form W-4 and the redesigned 2020 Form W-4. Therefore, for purposes of withholding from periodic payments under § 3405(a), the IRS plans to provide in the 2020 Publication 15-A, Employer’s Supplemental Tax Guide, that the 2020 Form W-4P will work with certain withholding tables and computational procedures in the 2020 Publication 15-T that are applicable to a 2019 or earlier Form W-4.[2]
As well, current Temporary Regulations provide that if no Form W-4P is filed by a recipient of such periodic payments, tax is to be withheld based on the rates for a married person claiming three withholding allowances.[3]
The information requested on the Form W-4P will continue to parallel that asked for on 2019 and earlier Forms W-4, rather than the information on the 2020 Form W-4.[4] The Notice explains:
Payees of periodic payments may use either the worksheets to Form W-4P or the Tax Withholding Estimator (www.irs.gov/W4App) to assist in determining their entries on the 2020 Form W-4P. As explained in Section II of this notice, certain withholding tables and computational procedures in the 2020 Publication 15-T that are applicable to a 2019 or earlier Form W-4 will also work with the 2020 Form W-4P.[5]
The Notice provides the following information on the computation of withholding amounts on such payments for 2020 payments:
For the 2020 calendar year, the rules for withholding from periodic payments under § 3405(a) when no withholding certificate has been furnished will continue to parallel the rules for prior years. Therefore, for 2020, the default rate of withholding from periodic payments under § 3405(a) will be based on treating the payee as a married individual claiming three withholding allowances and applying that status to the applicable withholding tables and related computational procedures in the 2020 Publication 15-T. The IRS plans to provide in the 2020 Publication 15-A that this default rate of withholding will work with certain withholding tables and computational procedures in the 2020 Publication 15-T that are applicable to a 2019 or earlier Form W-4.[6]
Treasury and the IRS indicate that they are considering what changes should be adopted for years after 2020, including whether the default rate for these withholdings should be changed in 2021 and later years.[7]