Tax Type
Employer Income Tax Withholding
Description
Year-end bonuses; Alternative method
Topic
Withholding of Tax
Date Issued
02-21-1991
February 21, 1991
Re: Request for Ruling: Withholding Tax
Dear****************
This will reply to your letter dated June 27, 1990 in which you seek permission- to use an alternative method of computing Virginia withholding tax on year-end bonuses paid by*********(the "taxpayer").
FACTS
The taxpayer is an S corporation with six employees who are also shareholders. The shareholders/employees are paid weekly salaries and year-end bonuses by the taxpayer.
You wish to know whether state income tax withholding is required on the year-end bonuses. If withholding is required, you request permission to compute withholding tax on the year-end bonuses using an alternative method, which would take into account the estimated annual income tax liabilities of the bonus recipients. i.e.. liability for tax on income passed through from the S corporation, as well as from wages earned.
RULING
Va. Code § 58.1-462 provides that employers shall use withholding tables issued by the Department of Taxation, which approximate in the aggregate as closely as practicable the tax liability of the employee upon salary, wages or compensation for personal services of any kind for the employer. Therefore, the year-end bonuses are subject to withholding. Under Va. Code § 58.1-463, the Tax Commissioner has the authority to allow employers to use a method of withholding other than the statutory method prescribed under Va. Code § 58.1-462. However, any alternative method allowed must "withhold from each employee substantially the same amount of tax as would be withheld by use of the withholding tax tables."
As such, the method of withholding you describe is not allowable. However, the department's long-standing policy, set forth in Virginia Regulation (VR) 630-6-470(A), (copy enclosed) permits a taxpayer to claim additional withholding exemptions where the amount withheld under the withholding tables will result in a substantial overpayment of his income tax, provided authorization is first received from the department. If you wish to pursue this method of withholding. you may contact the department's Technical Services Section at P.O. Box 6-L. Richmond, VA 23202.
As an alternative approach. based upon the information that you have provided. it appears that the federal "cumulative withholding" method may result in withholding an amount of tax that will approximate the aggregate tax liability of an employee. (See Federal Publication 15. "Circular E. Employer's Tax Guide.) Accordingly, you may compute Virginia income tax withholding using "cumulative withholding" for those employees who request it, provided that it is done in a manner consistent with Internal Revenue Service Rev. Proc. 78-8.
I hope that the foregoing has answered your inquiries, however. if you need any further information. please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner