Tax Type
Employer Income Tax Withholding
Description
Wages subject to withholding; Severance and incentive payments
Topic
Withholding of Tax
Date Issued
03-10-1997
March 10, 1997
Re: Request for Ruling: Withholding Tax
Dear*****************
This will reply to your letter of August 2, 1996, in which you request a ruling on behalf of *******(the "Taxpayer"), regarding the withholding requirements for certain payments to employees. I apologize for the delay in responding.
FACTS
The Taxpayer is an employer located in Virginia. The Taxpayer withholds Virginia income tax from severance and incentive payments made to former employees. The Taxpayer requests a ruling regarding withholding requirements on such severance and incentive payments made to employees who relocate outside of Virginia.
RULING
Code of Virginia § 58.1-460 defines "employer" as, “[T]he person, whether a resident or a nonresident of the Commonwealth, for whom an individual performs or performed any service as an employee ...." Further, this section defines "employee" as, "[A]n individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages ...." (Emphasis added)
In Code of Virginia § 58.1-460, the term "wages” corresponds to the definition under Internal Revenue Code (IRC) § 3401(a), as well as any other amounts from which federal income tax is withheld under the provisions of IRC §§ 3402 and 3405. Under the cited IRC sections, severance and incentive payments would be considered wages for withholding purposes.
Code of Virginia § 58.1-461 requires employers to withhold taxes from wages paid to its employees. Specifically, this section states:
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- Every employer making payment of wages shall deduct and withhold with respect to the wages of each employee for each payroll period an amount . . . which . . . would aggregate or approximate the income tax liability of such employee under this chapter ....
Consequently, an employer is required to withhold taxes on severance and incentive payments made to an employee to approximate the employee's income tax liability to the Commonwealth on such income. At issue here is whether a nonresident individual would be liable for Virginia taxes on this income.
Code of Virginia § 58.1-341 requires a nonresident individual to file a return if he has Virginia taxable income unless his Virginia adjusted gross income is below a certain threshold as described by § 58.1-321. As stated in Virginia Regulation (VR) 630-2-325:
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- [T]he Virginia taxable income of a nonresident individual . . . is Virginia taxable income computed as a resident multiplied by the ratio of net income, gain, loss and deductions from Virginia sources to net income, gain, loss and deductions from all sources . . . " Net income, gain, loss and deductions from Virginia sources" means that attributable to property within Virginia, or to the conduct of a trade, business, occupation or profession within Virginia. Net income . . . from Virginia sources includes salary, tips or wages ....
Pursuant to Code of Virginia § 58.1-301, terms used in the Virginia income tax statutes have the same meaning as used in the IRC. Thus, it is necessary to look to federal law to determine whether severance or incentive payments are considered wages for tax purposes.
IRC § 3402(o) states, "[S]upplemental unemployment compensation benefit[s] . . . shall be treated as if it were a payment of wages by an employer to an employee .... Further, this section states, "[T]he term "supplemental unemployment compensation benefits" means amounts which are paid to an employee . . . because of an employee's involuntary separation from employment (whether or not such separation is temporary) resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions ...." The definition of such compensation in IRC § 501(c) is analogous. Further, Internal Revenue Service Publications 15 and 17, assert that these payments should be included and reported with other salaries and wages.
Hence, supplemental compensation, such as severance or incentive payments, paid to an employee after involuntary separation from his employer constitutes wage income. Consequently, a nonresident individual receiving such payments from a Virginia source would generally be required to file and report such income on a Virginia nonresident return.
Accordingly, the Taxpayer would be required to withhold Virginia taxes from severance or incentive payments made to an employee who resides outside of Virginia. The recipient, however, may be able to claim an exemption from withholding if any of the following conditions apply: (1) He had no liability for Virginia income tax last year and does not expect to have any liability for this year; (2) He expects his Virginia adjusted gross income to be less than $5,000 (single), $8,000 (married, filing a joint or combined return), or $4,000 (married, filing a separate return); (3) He lives in Kentucky or the District of Columbia, and commutes on a daily basis to his place of employment in Virginia; or, (4) He is a domiciliary or legal resident of Maryland, Pennsylvania, or West Virginia whose only Virginia source income is from salaries and wages, and such salaries and wages are subject to income taxation by his state of domicile. In such cases, the employee should annually complete a Form VA-4 withholding exemption certificate.
If you have any further questions, please do not hesitate to contact ******of my staff at the Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880, or*********** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11519M
Rulings of the Tax Commissioner