Tax Type
Withholding Taxes
Description
Alternative method of withholding income taxes
Topic
Withholding of Tax
Date Issued
08-16-2002
August 16, 2002
Re: Ruling Request: Withholding Tax
Dear *****:
This will reply to your letter requesting that the department consider an alternative method of withholding income taxes for the ***** (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, an employer registered to collect and remit Virginia withholding taxes, engages the services of several professionals who temporarily work within Virginia. These individuals include Virginia residents, Virginia nonresidents who are citizens of the United States, and Virginia nonresidents who are citizens of foreign countries. In most cases, the income earned by the nonresidents who work in Virginia does not exceed $4,000 for a two-week period.
Historically, the Taxpayer has annually remitted a significant amount of withholding tax payments for these professionals, 95% of which are nonresidents of Virginia. In most cases, the tax liability reported on the tax return is for less than the withholding tax calculated using the normal withholding rate. Absent some very unusual circumstances, a significant number of nonresident employees would owe no Virginia income tax but would be required to file a Virginia individual income tax return to recover the taxes withheld.
You also indicate that the nonresident individuals working in Virginia are paid once a year. Their actual tax liability, therefore, should be computed on an annual basis rather than a weekly, biweekly, semimonthly, monthly, or other basis. However, since an annual withholding table is not available, the department should consider allowing the Taxpayer to use an alternative method of computing withholding taxes that would more closely approximate the actual tax liability of these nonresident individuals.
The administrative burden on the Taxpayer is significant. Excessive paperwork is associated with the withholding of insubstantial amounts of tax for large numbers of temporary employees. There is an added burden to collect and remit these taxes to the department. You indicate that there is also a burden placed on the Department of Taxation to process excessive number of nonresident income tax returns, which potentially have no tax liability. Lastly, there is a burden placed on nonresident individuals who must have excessive taxes withheld when they have no other Virginia source income. You want to streamline the administrative burden placed on the Taxpayer and the Department by proposing an alternative withholding method that permits the Taxpayer to withhold income tax at a flat rate of 2% for nonresidents of Virginia who are residents of non-reciprocity states and who indicate that they have no other Virginia source income.
RULING
Code of Virginia § 58.1-463 provides that:
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- The Tax Commissioner may grant permission to employers who do not desire to use the withholding tax tables provided in accordance with § 58.1-462, to determine the amount of tax to be withheld by use of a method of withholding other than withholding tax tables, provided such method will withhold from each employee substantially the same amount of tax as would be withheld by use of the withholding tax tables. Employers who desire to determine the amount of tax to be withheld by a method other than by use of the withholding tax tables shall obtain permission from the Tax Commissioner before the beginning of a payroll period for which the employer desires to withhold the tax by such other method. Applications to use such other method must be accompanied by evidence establishing the need for the use of such method. (Emphasis added.)
As a result, the Tax Commissioner has the authority to permit employers to use a method of withholding other than prescribed in Code of Virginia § 58.1-462. Employers who desire to determine withholding by an alternative method must obtain permission from the Tax Commissioner. The permission will only be granted based on an established need to change.
Based on the evidence provided, you have demonstrated the administrative burden experienced by the Taxpayer in withholding substantial amounts of taxes that significantly exceed the nonresidents' actual income tax liabilities. Consequently, the department will accept the Taxpayer's proposal to submit withholding tax payments at a flat rate of 2% provided the following specific conditions are met:
1. Each employee must be a nonresident of Virginia who is a resident of a state with which the Commonwealth of Virginia does not practice reciprocity.
2. Each employee's compensation from the Taxpayer must not exceed $4,000.
3. Each employee must sign a statement indicating that he or she received no income from Virginia sources other than the income received from this Taxpayer, a copy of which must be maintained in the Taxpayer's records.
4. An annual return along with withholding tax statements must be filed pursuant to Code of Virginia § 58.1-478.
5. The annual return mentioned in Item 4 must include a list of the employees for which this agreement applies and a statement verifying that the Taxpayer has received signed certification from these nonresident employees indicating that they received no income from Virginia sources other than the income attributable to the Taxpayer.
6. If the employee leaves the Taxpayer during the applicable year, the Taxpayer remains responsible for remitting the withholding tax that has been collected.
7. The Taxpayer must file any withholding tax payment due prior to the period ended June 30, 2002, using the withholding tables. This agreement will be effective beginning on and after July 1, 2002, unless otherwise modified or terminated by the Tax Commissioner.
8. The withholding tax for any employee not included in this agreement or who does not comply with this agreement will be computed using the withholding tables provided by the department in accordance with Code of Virginia § 58.1-462.
9. The department reserves the right to withdraw or modify the forgoing authorization upon reasonable notice to the Taxpayer.
If the Taxpayer accepts the conditions of this agreement, the Taxpayer may commence filing the appropriate returns. Each nonresident individual having taxable income for a taxable year is required to file a Virginia nonresident return, unless the individual meets the filing exceptions described in Code of Virginia § 58.1-321. Failure to file an individual nonresident return may subject the nonresident individual to penalty and interest, which could not be mitigated by this agreement. Additionally, a nonresident with no actual tax liability with Virginia may only obtain a refund of the taxes withheld by filing the appropriate nonresident return. Copies of the Code of Virginia cited are included for reference purposes. These and other reference documents are also available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have additional questions, please contact ***** Office of Policy and Administration, Policy Development, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880. ***** may also be contacted at *****.
Sincerely,
Janie E. Bowen
Executive Tax Commissioner
Office of Policy and Administration
PD/39422N
Rulings of the Tax Commissioner