[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 1998 Edition]
[From the U.S. Government Printing Office]


[[Page i]]

          26



          Internal Revenue




          PARTS 30 TO 39

                         Revised as of April 1, 1998

          CONTAINING
          A CODIFICATION OF DOCUMENTS
          OF GENERAL APPLICABILITY
          AND FUTURE EFFECT
          AS OF APRIL 1, 1998

          With Ancillaries
          Published by
          the Office of the Federal Register
          National Archives and Records
          Administration
          as a Special Edition of
          the Federal Register



[[Page ii]]

                                      




                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 1998



               For sale by U.S. Government Printing Office
 Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328



[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
    Chapter I--Internal Revenue Service, Department of the 
        Treasury (Continued)..................................       3
  Finding Aids:
    Table of CFR Titles and Chapters..........................     491
    Alphabetical List of Agencies Appearing in the CFR........     507
    Table of OMB control numbers..............................     517
    List of CFR Sections Affected.............................     533



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------------------------------------------------------------------

   Cite this Code:  CFR

   To cite the regulations in this volume use title, part and
   section number. Thus,  26 CFR 31.0-1 refers to title 26, part
   31, section 0-1.

------------------------------------------------------------------


[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 1998), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 1986, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, or 1973-1985, published in seven separate volumes. For 
the period beginning January 1, 1986, a ``List of CFR Sections 
Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I), and Acts Requiring Publication 
in the Federal Register (Table II). A list of CFR titles, chapters, and 
parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-523-5227 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408 or e-mail 
[email protected]

SALES

    The Government Printing Office (GPO) processes all sales and 
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ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, The United States 
Government Manual, the Federal Register, Public Laws, Weekly Compilation 
of Presidential Documents and the Privacy Act Compilation are available 
in electronic format at www.access.gpo.gov/nara (``GPO Access''). For 
more information, contact Electronic Information Dissemination Services, 
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(toll-free). E-mail, [email protected]

[[Page vii]]

    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.nara.gov/fedreg. The NARA 
site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

April 1, 1998.



[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of nineteen volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
1998. The first twelve volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Secs. 1.0-1-1.60; 
Secs. 1.61-1.169; Secs. 1.170-1.300; Secs. 1.301-1.400; Secs. 1.401-
1.440; Secs. 1.441-1.500; Secs. 1.501-1.640; Secs. 1.641-1.850; 
Secs. 1.851-1.907; Secs. 1.908-1.1000; Secs. 1.1001-1.1400 and 
Sec. 1.1401 to end. The thirteenth volume containing parts 2-29, 
includes the remainder of subchapter A and all of Subchapter B--Estate 
and Gift Taxes. The last six volumes contain parts 30-39 (Subchapter C--
Employment Taxes and Collection of Income Tax at Source); parts 40-49; 
parts 50-299 (Subchapter D--Miscellaneous Excise Taxes); parts 300-499 
(Subchapter F--Procedure and Administration); parts 500-599 (Subchapter 
G--Regulations under Tax Conventions); and part 600 to end (Subchapter 
H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec. 602.101 of this 
chapter. For the convenience of the user, Sec. 602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Gwendolyn J. Henderson was Chief Editor. The Code 
of Federal Regulations publication program is under the direction of 
Frances D. McDonald, assisted by Alomha S. Morris.

[[Page x]]




[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




                   (This book contains parts 30 to 39)

----------------------------------------------------------------------
                                                                    Part

Chapter i--Internal Revenue Service, Department of the 
  Treasury (continued)......................................          31

[[Page 3]]



CHAPTER I--INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY--(Continued)




                            (Parts 30 to 39)

----------------------------------------------------------------------


  Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980, 
deleting statutory sections from their regulations. In Chapter I, cross 
references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, March 31, 1980.

  SUBCHAPTER C--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Part                                                                Page
31              Employment taxes and collection of income 
                    tax at source...........................           5
32              Temporary employment tax regulations under 
                    the Act of December 29, 1981 (Pub. L. 
                    97-123).................................         363
34

[Reserved]

35              Temporary employment tax and collection of 
                    income tax at source regulations under 
                    the Tax Equity and Fiscal Responsibility 
                    Act of 1982.............................         370
35a             Temporary employment tax regulations under 
                    the Interest and Dividend Tax Compliance 
                    Act of 1983.............................         395
36              Contract coverage of employees of foreign 
                    subsidiaries............................         476
37

[Reserved]

39

[Reserved]

[[Page 5]]



  SUBCHAPTER C--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE





PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE--Table of Contents




                         Subpart A--Introduction

Sec.
31.0-1  Introduction.
31.0-2  General definitions and use of terms.
31.0-3  Scope of regulations.
31.0-4  Extent to which the regulations in this part supersede prior 
          regulations.

  Subpart B--Federal Insurance Contributions Act (Chapter 21, Internal 
                          Revenue Code of 1954)

                            Tax on Employees

31.3101-1  Measure of employee tax.
31.3101-2  Rates and computation of employee tax.
31.3101-3  When employee tax attaches.
31.3102-1  Collection of, and liability for, employee tax; in general.
31.3102-2  Manner and time of payment of employee tax.
31.3102-3  Collection of, and liability for, employee tax on tips.

                            Tax on Employers

31.3111-1  Measure of employer tax.
31.3111-2  Rates and computation of employer tax.
31.3111-3  When employer tax attaches.
31.3111-4  Liability for employer tax.
31.3111-5  Manner and time of payment of employer tax.
31.3112-1  Instrumentalities of the United States specifically exempted 
          from the employer tax.

                           General Provisions

31.3121  (a)-1  Wages.
31.3121  (a)-1T  Question and answer relating to the definition of wages 
          in section 3121(a) (Temporary).
31.3121  (a)-2  Wages; when paid and received.
31.3121  (a)-3  Reimbursement and other expense allowance amounts.
31.3121  (a)(1)-1  Annual wage limitation.
31.3121  (a)(2)-1  Payments under employers' plans on account of 
          retirement, sickness or accident disability, medical or 
          hospitalization expenses, or death.
31.3121  (a)(3)-1  Retirement payments.
31.3121  (a)(4)-1  Payments on account of sickness or accident 
          disability, or medical or hospitalization expenses.
31.3121  (a)(5)-1  Payments from or to certain tax-exempt trusts, or 
          under or to certain annuity plans or bond purchase plans.
31.3121  (a)(6)-1  Payment by an employer of employee tax under section 
          3101 or employee contributions under a State law.
31.3121  (a)(7)-1  Payments for services not in the course of employer's 
          trade or business or for domestic service.
31.3121  (a)(8)-1  Payments for agricultural labor.
31.3121  (a)(9)-1  Payments to employees for nonwork periods.
31.3121  (a)(10)-1  Payments to certain home workers.
31.3121  (a)(11)-1  Moving expenses.
31.3121  (a)(12)-1  Tips.
31.3121  (a)(13)-1  Payments under certain employers' plans after 
          retirement, disability, or death.
31.3121  (a)(14)-1  Payments by employer to survivor or estate of former 
          employee.
31.3121  (a)(15)-1  Payments by employer to disabled former employee.
31.3121  (a)(18)-1  Payments or benefits under a qualified educational 
          assistance program.
31.3121  (b)-1  Employment; services to which the regulations in this 
          subpart apply.
31.3121  (b)-2  Employment; services performed before 1955.
31.3121  (b)-3  Employment; services performed after 1954.
31.3121  (b)-4  Employment; excepted services in general.
31.3121  (b)(1)-1  Certain services performed by foreign agricultural 
          workers, or performed before 1959 in connection with 
          oleoresinous products.
31.3121  (b)(2)-1  Domestic service performed by students for certain 
          college organizations.
31.3121  (b)(3)-1  Family employment.
31.3121  (b)(4)-1  Services performed on or in connection with a non-
          American vessel or aircraft.
31.3121  (b)(5)-1  Services in employ of an instrumentality of the 
          United States specifically exempted from the employer tax.
31.3121  (b)(6)-1  Services in employ of United States or 
          instrumentality thereof.
31.3121  (b)(7)-1  Services in employ of States or their political 
          subdivisions or instrumentalities.
31.3121  (b)(7)-2  Service by employees who are not members of a public 
          retirement system.

[[Page 6]]

31.3121  (b)(8)-1  Services performed by a minister of a church or a 
          member of a religious order.
31.3121  (b)(8)-2  Services in employ of religious, charitable, 
          educational, or certain other organizations exempt from income 
          tax.
31.3121  (b)(9)-1  Railroad industry; services performed by an employee 
          or an employee representative as defined in section 3231.
31.3121  (b)(10)-1  Services for remuneration of less than $50 for 
          calendar quarter in the employ of certain organizations exempt 
          from income tax.
31.3121  (b)(10)-2  Services performed by certain students in the employ 
          of a school, college, or university, or of a nonprofit 
          organization auxiliary to a school, college, or university.
31.3121  (b)(11)-1  Services in the employ of a foreign government.
31.3121  (b)(12)-1  Services in employ of wholly owned instrumentality 
          of foreign government.
31.3121  (b)(13)-1  Services of student nurse or hospital intern.
31.3121  (b)(14)-1  Services in delivery or distribution of newspapers, 
          shopping news, or magazines.
31.3121  (b)(15)-1  Services in employ of international organization.
31.3121  (b)(16)-1  Services performed under share-farming arrangement.
31.3121  (b)(17)-1  Services in employ of Communist organization.
31.3121  (b)(18)-1  Services performed by a resident of the Republic of 
          the Philippines while temporarily in Guam.
31.3121  (b)(19)-1  Services of certain nonresident aliens.
31.3121  (b)(20)-1  Service performed on a boat engaged in catching 
          fish.
31.3121  (c)-1  Included and excluded services.
31.3121  (d)-1  Who are employees.
31.3121  (d)-2  Who are employers.
31.3121  (e)-1  State, United States, and citizen.
31.3121  (f)-1  American vessel and aircraft.
31.3121  (g)-1  Agricultural labor.
31.3121  (h)-1  American employer.
31.3121  (i)-1  Computation to nearest dollar of cash remuneration for 
          domestic service.
31.3121  (i)-2  Computation of remuneration for service performed by an 
          individual as a member of a uniformed service.
31.3121  (i)-3  Computation of remuneration for service performed by an 
          individual as a volunteer or volunteer leader within the 
          meaning of the Peace Corps Act.
31.3121  (i)-4  Computation of remuneration for service performed by 
          certain members of religious orders.
31.3121  (j)-1  Covered transportation service.
31.3121  (k)-1  Waiver of exemption from taxes.
31.3121  (k)-2  Waivers of exemption; original effective date changed 
          retroactively.
31.3121  (k)-3  Request for coverage of individual employed by exempt 
          organization before August 1, 1956.
31.3121  (k)-4  Constructive filing of waivers of exemption from social 
          security taxes by certain tax-exempt organizations.
31.3121  (l)-1  Agreements entered into by domestic corporations with 
          respect to foreign subsidiaries.
31.3121  (o)-1  Crew leader.
31.3121  (q)-1  Tips included for employee taxes.
31.3121  (r)-1  Election of coverage by religious orders.
31.3121  (s)-1  Concurrent employment by related corporations with 
          common paymaster.
31.3123-1  Deductions by an employer from remuneration of an employee.

  Subpart C--Railroad Retirement Tax Act (Chapter 22, Internal Revenue 
                              Code of 1954)

                            Tax on Employees

31.3201-1  Measure of employee tax.
31.3201-2  Rates and computation of employee tax.
31.3202-1  Collection of, and liability for, employee tax.

                     Tax on Employee Representatives

31.3211-1  Measure of employee representative tax.
31.3211-2  Rates and computation of employee representative tax.
31.3211-3  Employee representative supplemental tax.
31.3212-1  Determination of compensation.

                            Tax on Employers

31.3221-1  Measure of employer tax.
31.3221-2  Rates and computation of employer tax.
31.3221-3  Supplemental tax.

                           General Provisions

31.3231  (a)-1  Who are employers.
31.3231  (b)-1  Who are employees.
31.3231  (c)-1  Who are employee representatives.
31.3231  (d)-1  Service.
31.3231  (e)-1  Compensation.
31.3231  (e)-2  Contribution base.

 Subpart D--Federal Unemployment Tax Act (Chapter 23, Internal Revenue 
                              Code of 1954)

31.3301-1  Persons liable for tax.
31.3301-2  Measure of tax.
31.3301-3  Rate and computation of tax.

[[Page 7]]

31.3301-4  When wages are paid.
31.3302  (a)-1  Credit against tax for contributions paid.
31.3302  (a)-2  Refund of State contributions.
31.3302  (a)-3  Proof of credit under section 3302(a).
31.3302  (b)-1  Additional credit against tax.
31.3302  (b)-2  Proof of additional credit under section 3302(b).
31.3302  (c)-1  Limit on total credits.
31.3302  (d)-1  Definitions and special rules relating to limit on total 
          credits.
31.3302  (e)-1  Successor employer.
31.3306  (a)-1  Who are employers.
31.3306  (b)-1  Wages.
31.3306  (b)-1T  Question and answer relating to the definition of wages 
          in section 3306(b) (Temporary).
31.3306  (b)-2  Reimbursement and other expense allowance amounts.
31.3306  (b)(1)-1  $3,000 limitation.
31.3306  (b)(2)-1  Payments under employers' plans on account of 
          retirement, sickness or accident disability, medical or 
          hospitalization expenses, or death.
31.3306  (b)(3)-1  Retirement payments.
31.3306  (b)(4)-1  Payments on account of sickness or accident 
          disability, or medical or hospitalization expenses.
31.3306  (b)(5)-1  Payments from or to certain tax-exempt trusts, or 
          under or to certain annuity plans or bond purchase plans.
31.3306  (b)(6)-1  Payment by an employer of employee tax under section 
          3101 or employee contributions under a State law.
31.3306  (b)(7)-1  Payments other than in cash for service not in the 
          course of employer's trade or business.
31.3306  (b)(8)-1  Payments to employees for non-work periods.
31.3306  (b)(9)-1  Moving expenses.
31.3306  (b)(10)-1  Payments under certain employers' plans after 
          retirement, disability, or death.
31.3306  (b)(13)-1  Payments or benefits under a qualified educational 
          assistance program.
31.3306  (c)-1  Employment; services performed before 1955.
31.3306  (c)-2  Employment; services performed after 1954.
31.3306  (c)-3  Employment; excepted services in general.
31.3306  (c)(1)-1  Agricultural labor.
31.3306  (c)(2)-1  Domestic service.
31.3306  (c)(3)-1  Services not in the course of employer's trade or 
          business.
31.3306  (c)(4)-1  Services on or in connection with a non-American 
          vessel or aircraft.
31.3306  (c)(5)-1  Family employment.
31.3306  (c)(6)-1  Services in employ of United States or 
          instrumentality thereof.
31.3306  (c)(7)-1  Services in employ of States or their political 
          subdivisions or instrumentalities.
31.3306  (c)(8)-1  Services in employ of religious, charitable, 
          educational, or certain other organizations exempt from income 
          tax.
31.3306  (c)(9)-1  Railroad industry; services performed by an employee 
          or an employee representative under the Railroad Unemployment 
          Insurance Act.
31.3306  (c)(10)-1  Services in the employ of certain organizations 
          exempt from income tax.
31.3306  (c)(10)-2  Services of student in employ of school, college, or 
          university.
31.3306  (c)(10)-3  Services before 1962 in employ of certain employees' 
          beneficiary associations.
31.3306  (c)(11)-1  Services in employ of foreign government.
31.3306  (c)(12)-1  Services in employ of wholly owned instrumentality 
          of foreign government.
31.3306  (c)(13)-1  Services of student nurse or hospital intern.
31.3306  (c)(14)-1  Services of insurance agent or solicitor.
31.3306  (c)(15)-1  Services in delivery or distribution of newspapers, 
          shopping news, or magazines.
31.3306  (c)(16)-1  Services in employ of international organization.
31.3306  (c)(17)-1  Fishing services.
31.3306  (c)(18)-1  Services of certain nonresident aliens.
31.3306  (d)-1  Included and excluded service.
31.3306  (i)-1  Who are employees.
31.3306  (j)-1  State, United States, and citizen.
31.3306  (k)-1  Agricultural labor.
31.3306  (m)-1  American vessel and aircraft.
31.3306  (n)-1  Services on American vessel whose business is conducted 
          by general agent of Secretary of Commerce.
31.3306  (p)-1  Employees or related corporations.
31.3307-1  Deductions by an employer from remuneration of an employee.
31.3308-1  Instrumentalities of the United States specifically exempted 
          from tax imposed by section 3301.

              Subpart E--Collection of Income Tax at Source

31.3401  (a)-1  Wages.
31.3401  (a)-1T  Question and answer relating to the definition of wages 
          in section 3401(a) (Temporary).
31.3401  (a)-2  Exclusions from wages.
31.3401  (a)-3  Amounts deemed wages under voluntary withholding 
          agreements.
31.3401  (a)-4  Reimbursements and other expense allowance amounts.
31.3401  (a)(1)-1  Remuneration of members of the Armed Forces of the 
          United States for active service in combat zone or while 
          hospitalized as a result of such service.

[[Page 8]]

31.3401  (a)(2)-1  Agricultural labor.
31.3401  (a)(3)-1  Remuneration for domestic service.
31.3401  (a)(4)-1  Cash remuneration for service not in the course of 
          employer's trade or business.
31.3401  (a)(5)-1  Remuneration for services for foreign government or 
          international organization.
31.3401(a)(6)-1  Remuneration for services of nonresident alien 
          individuals.
31.3401  (a)(6)-1A  Remuneration for services of certain nonresident 
          alien individuals paid before January 1, 1967.
31.3401  (a)(7)-1  Remuneration paid before January 1, 1967, for 
          services performed by nonresident alien individuals who are 
          residents of a contiguous country and who enter and leave the 
          United States at frequent intervals.
31.3401  (a)(8)(A)-1  Remuneration for services performed outside the 
          United States by citizens of the United States.
31.3401  (a)(8)(B)-1  Remuneration for services performed in possession 
          of the United States (other than Puerto Rico) by citizen of 
          the United States.
31.3401  (a)(8)(C)-1  Remuneration for services performed in Puerto Rico 
          by citizen of the United States.
31.3401  (a)(9)-1  Remuneration for services performed by a minister of 
          a church or a member of a religious order.
31.3401  (a)(10)-1  Remuneration for services in delivery or 
          distribution of newspapers, shopping news, or magazines.
31.3401  (a)(11)-1  Remuneration other than in cash for service not in 
          the course of employer's trade or business.
31.3401  (a)(12)-1  Payments from or to certain tax-exempt trusts, or 
          under or to certain annuity plans or bond purchase plans, or 
          to individual retirement plans.
31.3401  (a)(13)-1  Remuneration for services performed by Peace Corps 
          volunteers.
31.3401  (a)(14)-1  Group-term life insurance.
31.3401  (a)(15)-1  Moving expenses.
31.3401  (a)(16)-1  Tips.
31.3401  (a)(17)-1  Remuneration for services performed on a boat 
          engaged in catching fish.
31.3401  (a)(18)-1  Payments or benefits under a qualified educational 
          assistance program.
31.3401  (a)(19)-1  Reimbursements under a self-insured medical 
          reimbursement plan.
31.3401  (b)-1  Payroll period.
31.3401  (c)-1  Employee.
31.3401  (d)-1  Employer.
31.3401  (e)-1  Number of withholding exemptions claimed.
31.3401  (f)-1  Tips.
31.3402  (a)-1  Requirement of withholding.
31.3402  (b)-1  Percentage method of withholding.
31.3402  (c)-1  Wage bracket withholding.
31.3402  (d)-1  Failure to withhold.
31.3402  (e)-1  Included and excluded wages.
31.3402  (f)(1)-1  Withholding exemptions.
31.3402  (f)(2)-1  Withholding exemption certificates.
31.3402  (f)(3)-1  When withholding exemption certificate takes effect.
31.3402  (f)(4)-1  Period during which withholding exemption certificate 
          remains in effect.
31.3402  (f)(4)-2  Effective period of withholding exemption 
          certificate.
31.3402  (f)(5)-1  Form and contents of withholding exemption 
          certificates.
31.3402  (f)(6)-1  Withholding exemptions for nonresident alien 
          individuals.
31.3402  (g)-1  Supplemental wage payments.
31.3402  (g)-2  Wages paid for payroll period of more than one year.
31.3402  (g)-3  Wages paid through an agent, fiduciary, or other person 
          on behalf of two or more employers.
31.3402  (h)(1)-1  Withholding on basis of average wages.
31.3402  (h)(2)-1  Withholding on basis of annualized wages.
31.3402  (h)(3)-1  Withholding on basis of cumulative wages.
31.3402  (h)(4)-1  Other methods.
31.3402  (i)-1  Additional withholding.
31.3402  (i)-2  Increases or decreases in withholding.
31.3402  (j)-1  Remuneration other than in cash for service performed by 
          retail commission salesman.
31.3402  (k)-1  Special rule for tips.
31.3402  (l)-1  Determination and disclosure of marital status.
31.3402  (m)-1  Withholding allowances.
31.3402  (n)-1  Employees incurring no income tax liability.
31.3402  (o)-1  Extension of withholding to supplemental unemployment 
          compensation benefits.
31.3402  (o)-2  Extension of withholding to annuity payments if 
          requested by payee.
31.3402  (o)-3  Extension of withholding to sick pay.
31.3402  (p)-1  Voluntary withholding agreements.
31.3402  (q)-1  Extension of withholding to certain gambling winnings.
31.3402  (r)-1  Withholding on distributions of Indian gaming profits to 
          tribal members.
31.3403-1  Liability for tax.
31.3404-1  Return and payment by governmental employer.
31.3405  (c)-1  Withholding on eligible rollover distributions; 
          questions and answers.
31.3406-0  Outline of the backup withholding regulations.
31.3406a-1  Backup withholding requirement on reportable payments.
31.3406a-2  Definition of payors obligated to backup withhold.

[[Page 9]]

31.3406a-3  Scope and extent of accounts subject to backup withholding.
31.3406a-4  Time when payments are considered to be paid and subject to 
          backup withholding.
31.3406  (b((2)-1  Reportable interest payment.
31.3406  (b)(2)-2  Original issue discount.
31.3406  (b)(2)-3  Window transactions.
31.3406  (b)(2)-4  Reportable dividend payment.
31.3406  (b)(2)-5  Reportable patronage dividend payment.
31.3406  (b)(3)-1  Reportable payments of rents, commissions, 
          nonemployee compensation, etc.
31.3406  (b)(3)-2  Reportable barter exchanges and gross proceeds of 
          sales of securities or commodities by brokers.
31.3406  (b)(3)-3  Reportable payments by certain fishing boat 
          operators.
31.3406  (b)(3)-4  Reportable payments of royalties.
31.3406  (b)(4)-1  Exemption for certain minimal payments.
31.3406  (c)-1  Notified payee underreporting of reportable interest or 
          dividend payments.
31.3406  (d)-1  Manner required for furnishing a taxpayer identification 
          number.
31.3406  (d)-2  Payee certification failure.
31.3406  (d)-3  Special 30-day rules for certain reportable payments.
31.3406  (d)-4  Special rules for readily tradable instruments acquired 
          through a broker.
31.3406  (d)-5  Backup withholding when the Service or a broker notifies 
          the payor to withhold because the payee's taxpayer 
          identification number is incorrect.
31.3406  (e)-1  Period during which backup withholding is required.
31.3406  (f)-1  Confidentiality of information.
31.3406  (g)-1  Exception for payments to certain payees and certain 
          other payments.
31.3406  (g)-2  Exception for reportable payments for which withholding 
          is otherwise required.
31.3406  (g)-3  Exemption while payee is waiting for a taxpayer 
          identification number.
31.3406  (h)-1  Definitions.
31.3406  (h)-2  Special rules.
31.3406  (h)-3  Certificates.
31.3406  (i)-1  Effective date.
31.3406  (j)-1  Taxpayer Identification Number (TIN) matching program.

Subpart F--General Provisions Relating to Employment Taxes (Chapter 25, 
                     Internal Revenue Code of 1954)

31.3501  (a)-1T  Question and answer relating to the time employers must 
          collect and pay the taxes on noncash fringe benefits 
          (Temporary).
31.3502-1  Nondeductibility of taxes in computing taxable income.
31.3503-1  Tax under chapter 21 or 22 paid under wrong chapter.
31.3504-1  Acts to be performed by agents.
31.3505-1  Liability of third parties paying or providing for wages.
31.3506-1  Companion sitting placement services.
31.3507-1  Advance payments of earned income credit.
31.3507-2  Earned income credit advance payment certificates.

     Subpart G--Administrative Provisions of Special Application to 
 Employment Taxes (Selected Provisions of Subtitle F, Internal Revenue 
                              Code of 1954)

31.6001-1  Records in general.
31.6001-2  Additional records under Federal Insurance Contributions Act.
31.6001-3  Additional records under Railroad Retirement Tax Act.
31.6001-4  Additional records under Federal Unemployment Tax Act.
31.6001-5  Additional records in connection with collection of income 
          tax at source on wages.
31.6001-6  Notice by district director requiring returns, statements, or 
          the keeping of records.
31.6011  (a)-1  Returns under Federal Insurance Contributions Act.
31.6011  (a)-2  Returns under Railroad Retirement Tax Act.
31.6011  (a)-3  Returns under Federal Unemployment Tax Act.
31.6011  (a)-3A  Returns of the railroad unemployment repayment tax.
31.6011  (a)-4  Returns of income tax withheld.
31.6011  (a)-5  Monthly returns.
31.6011  (a)-6  Final returns.
31.6011  (a)-7  Execution of returns.
31.6011  (a)-8  Composite return in lieu of specified form.
31.6011  (a)-9  Instructions to forms control as to which form is to be 
          used.
31.6011  (a)-10  Instructions to forms may waive filing requirement in 
          case of no liability tax returns.
31.6011  (b)-1  Employers' identification numbers.
31.6011  (b)-2  Employees' account numbers.
31.6051-1  Statements for employees.
31.6051-2  Information returns on Form W-3 and Internal Revenue Service 
          copies of Forms W-2.
31.6051-3  Statements required in case of sick pay paid by third 
          parties.
31.6051-4  Statement required in case of backup withholding.
31.6053-1  Report of tips by employee to employer.

[[Page 10]]

31.6053-2  Employer statement of uncollected employee tax.
31.6053-3  Reporting by certain large food or beverage establishments 
          with respect to tips.
31.6053-4  Substantiation requirements for tipped employees.
31.6061-1  Signing of returns.
31.6065  (a)-1  Verification of returns or other documents.
31.6071  (a)-1  Time for filing returns and other documents.
31.6071  (a)-1A  Time for filing returns with respect to the railroad 
          unemployment repayment tax.
31.6081  (a)-1  Extensions of time for filing returns and other 
          documents.
31.6091-1  Place for filing returns.
31.6101-1  Period covered by returns.
31.6109-1  Supplying of identifying numbers.
31.6151-1  Time for paying tax.
31.6157-1  Cross reference.
31.6161  (a)(1)-1  Extensions of time for paying tax.
31.6205-1  Adjustments of underpayments.
31.6205-2  Adjustments of underpayments of hospital insurance taxes that 
          accrue after March 31, 1986, and before January 1, 1987, with 
          respect to wages of State and local government employees.
31.6302-0  Table of Contents.
31.6302-1  Federal tax deposit rules for withheld income taxes and taxes 
          under the Federal Insurance Contributions Act (FICA) 
          attributable to payments made after December 31, 1992.
31.6302-2  Federal Tax Deposit Rules for amounts withheld under the 
          Railroad Retirement Tax Act (R.R.T.A.) attributable to 
          payments made after December 31, 1992.
31.6302-3  Federal tax deposit rules for amounts withheld under the 
          backup withholding requirements of section 3406 for payments 
          made after December 31, 1992.
31.6302-4  Federal tax deposit rules for withheld income taxes 
          attributable to nonpayroll payments made after December 31, 
          1993.
31.6302  (b)-1  Method of collection.
31.6302  (c)-1  Use of Government depositories in connection with taxes 
          under Federal Insurance Contributions Act and income tax 
          withheld for amounts attributable to payments made before 
          January 1, 1993.
31.6302  (c)-2  Use of Government depositories in connection with 
          employee and employer taxes under Railroad Retirement Tax Act 
          for amounts attributable to payments made before January 1, 
          1993.
31.6302  (c)-2A  Use of Government depositaries in connection with the 
          railroad unemployment repayment tax.
31.6302  (c)-3  Use of Government depositaries in connection with tax 
          under the Federal Unemployment Tax Act.
31.6302  (c)-4  Cross references.
31.6361-1  Collection and administration of qualified State individual 
          income taxes.
31.6402  (a)-1  Credits or refunds.
31.6402  (a)-2  Credit or refund of tax under Federal Insurance 
          Contributions Act or Railroad Retirement Tax Act.
31.6402  (a)-3  Refund of Federal unemployment tax.
31.6404  (a)-1  Abatements.
31.6413  (a)-1  Repayment by employer of tax erroneously collected from 
          employee.
31.6413  (a)-2  Adjustment of overpayments.
31.6413  (a)-3  Repayment by payor of tax erroneously collected from 
          payee.
31.6413  (b)-1  Overpayments of certain employment taxes.
31.6413  (c)-1  Special refunds.
31.6414-1  Credit or refund of income tax withheld from wages.
31.6652  (c)-1  Failure of employee to report tips for purposes of the 
          Federal Insurance Contributions Act.
31.6674-1  Penalties for fraudulent statement or failure to furnish 
          statement.
31.6682-1  False information with respect to withholding.
31.7805-1  Promulgation of regulations.
31.9999-0  Effective dates.

    Authority: 26 U.S.C. 7805.

Sections 31.3121(a)-1, 31.3121(a)-3, 31.3231(e)-1, 31.3231(e)-3, 
31.3306(b)-1, 31.3306(b)-2, 31.3401(a)-1, and 31.3401(a)-4 also issued 
under 26 U.S.C. 62.
Section 31.3121(b)(7)-2 also issued under 26 U.S.C. 3121(b)(7)(F).
Section 31.3121(b)(19)-1 also issued under 26 U.S.C. 7701(b)(11).
Section 31.3306(c)(18)-1 also issued under 26 U.S.C. 7701(b)(11).
Section 31.3401(a)(6)-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
Section 31.3402(f)(1)-1 also issued under 26 U.S.C. 3402(m).
Section 31.3402(f)(5)-1 also issued under 26 U.S.C. 3402 (i) and (m).
Section 31.3402(r)-1 also issued under 26 U.S.C. 3402(p) and (r).
Sections 31.3406(a)-1 through 31.3406(i)-1 also issued under 26 
U.S.C.3406(i).
Section 31.3406(j)-1 also issued under 26 U.S.C. 3406(i).
Section 31.6011(a)-3A is also issued under the authority of 26 U.S.C. 
6011.
Section 31.6011(a)-4 also issued under 26 U.S.C. 6011.
    Section 31.6051-1(d) also issued under 26 U.S.C. 6051.
    Section 31.6051-2 also issued under 26 U.S.C. 6051.
Sections 31.6053-3 (b)(5), (h) and (j)(9) and 31.6053-4 are also issued 
under sec. 1072 of

[[Page 11]]

Pub. L. 98-369, 98 Stat. 1052; and 26 U.S.C. 6001.
Sections 31.6053-3T and 31.6053-4T are also issued under sec. 1072 of 
Pub. L. 98-369, 98 Stat. 1052; and 26 U.S.C. 6001.
    Section 31.6071-1 also issued under 26 U.S.C. 6071.
Section 31.6071(a)-1A is also issued under the authority of 26 U.S.C. 
6071.
    Section 31.6081-1 also issued under 26 U.S.C. 6081.
Section 31.6205-2 is also issued under 26 U.S.C. 6205(a)(1).
Sections 31.6302-1 through 31.6302-3 also issued under 26 U.S.C. 6302 
(a), (c), and (h).
Section 31.6302-4 also issued under 26 U.S.C. 6302 (a) and (c).
Section 31.6302(c)-2A is also issued under 26 U.S.C. 6302 and 6157(d).
Section 31.6302(c)-3 also issued under 26 U.S.C. 6302(h).

    Source: T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 
1960, unless otherwise noted.



                         Subpart A--Introduction



Sec. 31.0-1  Introduction.

    (a) In general. The regulations in this part relate to the 
employment taxes imposed by subtitle C (chapters 21 to 25, inclusive) of 
the Internal Revenue Code of 1954, as amended. References in the 
regulations to the ``Internal Revenue Code'' or the ``Code'' are 
references to the Internal Revenue Code of 1954, as amended, unless 
otherwise indicated. References to the Federal Insurance Contributions 
Act, the Railroad Retirement Tax Act, and the Federal Unemployment Tax 
Act are references to chapters 21, 22, and 23, respectively, of the 
Code. References to sections of law are references to sections of the 
Internal Revenue Code unless otherwise indicated. The regulations in 
this part also provide rules relating to the deposit of other taxes by 
electronic funds transfer.
    (b) Division of regulations. The regulations in this part are 
divided into 7 subparts. Subpart A contains provisions relating to 
general definitions and use of terms, the division and scope of the 
regulations in this part, and the extent to which the regulations in 
this part supersede prior regulations relating to employment taxes. 
Subpart B relates to the taxes under the Federal Insurance Contributions 
Act. Subpart C relates to the taxes under the Railroad Retirement Tax 
Act. Subpart D relates to the tax under the Federal Unemployment Tax 
Act. Subpart E relates to the collection of income tax at source on 
wages under chapter 24 of the Code. Subpart F relates to the provisions 
of chapter 25 of the Code which are applicable in respect of the taxes 
imposed by chapters 21 to 24, inclusive, of the Code. Subpart G relates 
to selected provisions of subtitle F of the Code, relating to procedure 
and administration, which have special application in respect of the 
taxes imposed by subtitle C of the Code. Inasmuch as these regulations 
constitute Part 31 of Title 26 of the Code of Federal Regulations, each 
section of the regulations is preceded by a section symbol and 31 
followed by a decimal point (Sec. 31.). Sections of law or references 
thereto are preceded by ``Sec.'' or the word ``section''.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 8723, 62 FR 
37492, July 14, 1997]



Sec. 31.0-2  General definitions and use of terms.

    (a) In general. As used in the regulations in this part, unless 
otherwise expressly indicated--
    (1) The terms defined in the provisions of law contained in the 
regulations in this part shall have the meanings so assigned to them.
    (2) The Internal Revenue Code of 1954 means the act approved August 
16, 1954 (26 U.S.C.), entitled ``An act to revise the internal revenue 
laws of the United States'', as amended.
    (3) The Internal Revenue Code of 1939 means the act approved 
February 10, 1939 (53 Stat., Part 1), as amended.
    (4) The Social Security Act means the act approved August 14, 1935 
(42 U.S.C. c. 7), as amended.
    (5) (i) The Social Security Amendments of 1954 means the act 
approved September 1, 1954 (68 Stat. 1052), as amended.
    (ii) The Social Security Amendments of 1956 means the act approved 
August 1, 1956 (70 Stat. 807), as amended.
    (iii) The Social Security Amendments of 1958 means the act approved 
August 28, 1958 (72 Stat. 1013), as amended.

[[Page 12]]

    (iv) The Social Security Amendments of 1960 means the act approved 
September 13, 1960 (74 Stat. 924).
    (v) The Social Security Amendments of 1961 means the act approved 
June 30, 1961 (75 Stat. 131).
    (vi) The Social Security Amendments of 1965 means the act approved 
July 30, 1965 (79 Stat. 286).
    (vii) The Social Security Amendments of 1967 means the act approved 
January 2, 1968 (81 Stat. 821).
    (viii) The Social Security Amendments of 1972 means the act approved 
October 30, 1972 (86 Stat. 1329).
    (6) The Social Security Administration means the Social Security 
Administration of the Department of Health and Human Services. (See the 
Statement of Organization and delegations of Authority of the Department 
of Health and Human Services (20 CFR Part 1996).)
    (7) District director means district director of internal revenue. 
The term also includes the Director of International Operations in all 
cases where the authority to perform the functions which may be 
performed by a district director has been delegated to the Director of 
International Operations.
    (8) Person includes an individual, a corporation, a partnership, a 
trust or estate, a joint-stock company, an association, or a syndicate, 
group, pool, joint venture or other unincorporated organization or 
group, through or by means of which any business, financial operation, 
or venture is carried on. It includes a guardian, committee, trustee, 
executor, administrator, trustee in bankruptcy, receiver, assignee for 
the benefit of creditors, conservator, or any person acting in a 
fiduciary capacity.
    (9) Calendar quarter means a period of 3 calendar months ending on 
March 31, June 30, September 30, or December 31.
    (10) Account number means the identifying number of an employee 
assigned, as the case may be, under the Internal Revenue Code of 1954, 
under Subchapter A of Chapter 9 of the Internal Revenue Code of 1939, or 
under Title VIII of the Social Security Act. See also Sec. 301.7701-11 
of this chapter (Regulations on Procedure and Administration).
    (11) Identification number means the identifying number of an 
employer assigned, as the case may be, under the Internal Revenue Code 
of 1954, under Subchapter A or D of Chapter 9 of the Internal Revenue 
Code of 1939, or under Title VIII of the Social Security Act. See also 
Sec. 301.7701-12 of this chapter (Regulations on Procedure and 
Administration).
    (12) Regulations 90 means the regulations approved February 17, 1936 
(26 CFR (1939) Part 400), as amended, relating to the excise tax on 
employers under Title IX of the Social Security Act, and such 
regulations as made applicable to Subchapter C of Chapter 9 and other 
provisions of the Internal Revenue Code of 1939 by Treasury Decision 
4885, approved February 11, 1939 (26 CFR (1939) 1943 Cum. Supp., p. 
5876), together with any amendments to such regulations as so made 
applicable to the Internal Revenue Code of 1939.
    (13) Regulations 91 means the regulations approved November 9, 1936 
(26 CFR (1939) Part 401), as amended, relating to the employees' tax and 
the employers' tax under Title VIII of the Social Security Act, and such 
regulations as made applicable to Subchapter A of Chapter 9 and other 
provisions of the Internal Revenue Code of 1939 by Treasury Decision 
4885, approved February 11, 1939 (26 CFR (1939) 1943 Cum. Supp., p. 
5876), together with any amendments to such regulations as so made 
applicable to the Internal Revenue Code of 1939.
    (14) Regulations 106 means the regulations approved February 24, 
1940 (26 CFR (1939) Part 402), as amended, relating to the employees' 
tax and the employers' tax under the Federal Insurance Contributions Act 
(Subchapter A of Chapter 9 of the Internal Revenue Code of 1939) with 
respect to the period after 1939 and before 1951.
    (15) Regulations 107 means the regulations approved September 12, 
1940 (26 CFR (1939) Part 403), as amended, relating to the excise tax on 
employers under the Federal Unemployment Tax Act (Subchapter C of 
Chapter 9 of the Internal Revenue Code of 1939) with respect to the 
period after 1939 and before 1955.
    (16) Regulations 114 means the regulations approved December 30, 
1948 (26

[[Page 13]]

CFR (1939) Part 411), as amended, relating to the employers' tax, 
employees' tax, and employee representatives' tax under the Railroad 
Retirement Tax Act (Subchapter B of Chapter 9 of the Internal Revenue 
Code of 1939) with respect to compensation paid after 1948 for services 
rendered after 1946 and before 1955.
    (17) Regulations 120 means the regulations approved December 22, 
1953 (26 CFR (1939) Part 406), as amended, relating to collection of 
income tax at source on wages under Subchapter D of Chapter 9 of the 
Internal Revenue Code of 1939 with respect to the period after 1953 and 
before 1955.
    (18) Regulations 128 means the regulations approved December 6, 1951 
(26 CFR (1939) Part 408), as amended, relating to the employee tax and 
the employer tax under the Federal Insurance Contributions Act 
(Subchapter A of Chapter 9 of the Internal Revenue Code of 1939) with 
respect to the period after 1950 and before 1955.
    (19) The cross references in the regulations in this part to other 
portions of the regulations, when the word ``see'' is used, are made 
only for convenience and shall be given no legal effect.
    (b) Subpart B. As used in Subpart B of this part, unless otherwise 
expressly indicated--
    (1) Act means the Federal Insurance Contributions Act.
    (2) Taxes means the employee tax and the employer tax, as 
respectively defined in this paragraph.
    (3) Employee tax means the tax (with respect to wages received by an 
employee after Dec. 31, 1965, the taxes) imposed by section 3101 of the 
Code.
    (4) Employer tax means the tax (with respect to wages paid by an 
employer after Dec. 31, 1965, the taxes) imposed by section 3111 of the 
Code.
    (c) Subpart C. As used in Subpart C of this part, unless otherwise 
expressly indicated--
    (1) Act means the Railroad Retirement Tax Act.
    (2) Railway Labor Act means the act approved May 20, 1926 (45 U.S.C. 
c. 8), as amended.
    (3) Railroad Retirement Act of 1937 means the act approved June 24, 
1937 (45 U.S.C. 228a and following), as amended.
    (4) Railroad Retirement Board means the board established pursuant 
to section 10 of the Railroad Retirement Act of 1937 (45 U.S.C. 228j).
    (5) Tax means the employee tax, the employee representative tax, or 
the employer tax, as respectively defined in this paragraph.
    (6) Employee tax means the tax imposed by section 3201 of the Code.
    (7) Employee representative tax means the tax imposed by section 
3211 of the Code.
    (8) Employer tax means the tax imposed by section 3221 of the Code.
    (d) Subpart D. As used in Subpart D of this part, unless otherwise 
expressly indicated:
    (1) Act means the Federal Unemployment Tax Act.
    (2) Railroad Unemployment Insurance Act means the act approved June 
25, 1938 (45 U.S.C. c. 11), as amended.
    (3) Tax means the tax imposed by section 3301 of the Code.
    (e) Subpart E. As used in Subpart E of this part, unless otherwise 
expressly indicated, tax means the tax required to be deducted and 
withheld from wages under section 3402 of the Code.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6606, 27 FR 
8516, Aug. 25, 1962; T.D. 6658, 28 FR 6631, June 27, 1963; T.D. 6983, 33 
FR 18013, Dec. 4, 1968; T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.0-3  Scope of regulations.

    (a) Subpart B. The regulations in Subpart B of this part relate to 
the imposition of the employee tax and the employer tax under the 
Federal Insurance Contributions Act with respect to wages paid and 
received after 1954 for employment performed after 1936. In addition to 
employment in the case of remuneration therefor paid and received after 
1954, the regulations in Subpart B of this part relate also to 
employment performed after 1954 in the case of remuneration therefor 
paid and received before 1955. The regulations in Subpart B of this part 
include provisions relating to the definition of terms applicable in the 
determination of the taxes under the Federal Insurance Contributions 
Act, such as ``employee'', ``wages'', and ``employment''. The provisions 
of Subpart B of this

[[Page 14]]

part relating to ``employment'' are applicable also, (1) to the extent 
provided in Sec. 31.3121(b)-2, to services performed before 1955 the 
remuneration for which is paid after 1954, and (2) to the extent 
provided in Sec. 31.3121(k)-3, to services performed before 1955 the 
remuneration for which was paid before 1955. (For prior regulations on 
similar subject matter, see 26 CFR (1939) Part 408 (Regulations 128).)
    (b) Subpart C. The regulations in Subpart C of this part relate to 
the imposition of the employee tax, the employee representative tax, and 
the employer tax under the Railroad Retirement Tax Act with respect to 
compensation paid after 1954, for services rendered after such date. The 
regulations in Subpart C of this part include provisions relating to the 
definition of terms applicable in the determination of the taxes under 
the Railroad Retirement Tax Act, such as ``employee'', ``employee 
representative'', ``employer'', and ``compensation''. (For prior 
regulations on similar subject matter, see 26 CFR (1939) Part 411 
(Regulations 114).)
    (c) Subpart D. The regulations in Subpart D of this part relate to 
the imposition on employers of the excise tax under the Federal 
Unemployment Tax Act for the calendar year 1955 and subsequent calendar 
years with respect to wages paid after 1954 for employment performed 
after 1938. In addition to employment in the case of remuneration 
therefor paid after 1954, the regulations in Subpart D of this part 
relate also to employment performed after 1954 in the case of 
remuneration therefor paid before 1955. The regulations in Subpart D of 
this part include provisions relating to the definition of terms 
applicable in the determination of the tax under the Federal 
Unemployment Tax Act, such as ``employee'', ``employer'', 
``employment'', and ``wages''. The regulations in Subpart D of this part 
also include provisions relating to the credits against the Federal tax 
for State contributions. (For prior regulations on similar subject 
matter, see 26 CFR (1939) Part 403 (Regulations 107).)
    (d) Subpart E. The regulations in Subpart E of this part relate to 
the withholding under chapter 24 of the Code of income tax at source on 
wages paid after 1954, regardless of when such wages were earned. The 
regulations in Subpart E of this part include provisions relating to the 
definition of terms applicable in the determination of the tax under 
chapter 24 of the Code, such as ``employee'', ``employer'', and 
``wages''. (For prior regulations on similar subject matter, see 26 CFR 
(1939) Part 406 (Regulations 120).)
    (e) Subpart F. The regulations in Subpart F of this part deal with 
the general provisions contained in chapter 25 of the Code, which relate 
to the employment taxes imposed by chapters 21 to 24, inclusive, of the 
Code. (For prior regulations on the subject matter of section 3503, see 
26 CFR (1939) 411.802 and 408.803 (Regulations 114 and 128, 
respectively). For prior regulations on the subject matter of section 
3504, see 26 CFR (1939) 406.807 and 408.906 (Regulations 120 and 128, 
respectively).)
    (f) Subpart G. The regulations in Subpart G of this part, which are 
prescribed under selected provisions of subtitle F of the Code, relate 
to the procedural and administrative requirements in respect of records, 
returns, deposits, payments, and related matters applicable to the 
employment taxes imposed by subtitle C (chapters 21 to 25, inclusive) of 
the Code. In addition, the provisions of Subpart G of this part relate 
to adjustments and to claims for refund, credit, or abatement, made 
after 1954, in connection with the employment taxes imposed by subtitle 
C of the Internal Revenue Code of 1954, by chapter 9 of the Internal 
Revenue Code of 1939, or by the corresponding provisions of prior law, 
but not to any adjustment reported, or credit taken, in whole or in part 
on any return or supplemental return filed on or before July 31, 1960. 
The provisions of Subpart G of this part also relate to deposits of 
taxes imposed by subchapter B of chapter 9 of the 1939 Code or by 
corresponding provisions of prior law with respect to compensation paid 
after 1954 for services rendered before 1955. For other administrative 
provisions which have application to the employment taxes imposed by 
subtitle C of the Code, see Part 301 of this chapter (Regulations on 
Procedure and Administration). (The administrative and procedural 
regulations applicable with respect to a particular employment tax for a 
prior

[[Page 15]]

period were combined with the substantive regulations relating to such 
tax for such period. For the regulations applicable to the respective 
taxes for prior periods, see paragraphs (a), (b), (c), and (d) of this 
section.) Subpart G of this part also provides rules relating to the 
deposit of other taxes by electronic funds transfer.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8305, July 2, 1964; T.D. 8723, 62 FR 37493, July 14, 1997]



Sec. 31.0-4  Extent to which the regulations in this part supersede prior regulations.

    The regulations in this part, with respect to the subject matter 
within the scope thereof, supersede 25 CFR (1939) Parts 403, 406, 408, 
and 411 (Regulations 107, 120, 128, and 114, respectively). The 
Regulation on Monthly Returns and Payment of Employment Taxes (23 FR 
5006) are also superseded.



  Subpart B--Federal Insurance Contributions Act (Chapter 21, Internal 
                          Revenue Code of 1954)

                            Tax on Employees



Sec. 31.3101-1  Measure of employee tax.

    The employee tax is measured by the amount of wages received after 
1954 with respect to employment after 1936. See Sec. 31.3121(a)-1, 
relating to wages; and Secs. 31.3121(b)-1 to 31.3121(b)-4, inclusive, 
relating to employment. For provisions relating to the time of receipt 
of wages, see Sec. 31.3121(a)-2.
[T.D. 6744, 29 FR 8305, July 2, 1964]



Sec. 31.3101-2  Rates and computation of employee tax.

    (a) Old-age, survivors, and disability insurance. The rates of 
employee tax for old-age, survivors, and disability insurance with 
respect to wages received in calendar years after 1954 are as follows:

                                                                        
                        Calendar year                           Percent 
                                                                        
1955 and 1956................................................          2
1957 and 1958................................................       2.25
1959.........................................................        2.5
1960 and 1961................................................          3
1962.........................................................      3.125
1963 to 1965, both inclusive.................................      3.625
1966.........................................................       3.85
1967.........................................................        3.9
1968.........................................................        3.8
1969 and 1970................................................        4.2
1971 and 1972................................................        4.6
1973.........................................................       4.85
1974 to 2010, both inclusive.................................       4.95
2011 and subsequent calendar years...........................       5.95
                                                                        

    (b) Hospital insurance. The rates of employee tax for hospital 
insurance with respect to wages received in calendar years after 1965 
are as follows:

                                                                        
                        Calendar year                           Percent 
                                                                        
1966.........................................................       0.35
1967.........................................................        .50
1968 to 1972, both inclusive.................................        .60
1973.........................................................        1.0
1974 to 1977, both inclusive.................................       0.90
1978 to 1980, both inclusive.................................       1.10
1981 to 1985, both inclusive.................................       1.35
1986 and subsequent calendar years...........................       1.50
                                                                        

    (c) Computation of employee tax. The employee tax is computed by 
applying to the wages received by the employee the rate in effect at the 
time such wages are received.

    Example. In 1972, employee A performed for employer X services which 
constituted employment (see Sec. 31.3121(b)-2). In 1973 A receives from 
X $1,000 as remuneration for such services. The tax is payable at the 
5.85 percent rate (4.85 percent plus 1.0 percent) in effect for the 
calendar year 1973 (the year in which the wages are received) and not at 
the 5.2 percent rate which was in effect for the calendar year 1972 (the 
year in which the services were performed).
[T.D. 7374, 40 FR 30947, July 24, 1975]



Sec. 31.3101-3  When employee tax attaches.

    The employee tax attaches at the time that the wages are received by 
the employee. For provisions relating to the time of such receipt, see 
Sec. 31.3121(a)-2.



Sec. 31.3102-1  Collection of, and liability for, employee tax; in general.

    (a) The employer shall collect from each of his employees the 
employee tax with respect to wages for employment performed for the 
employer by the employee. The employer shall make the collection by 
deducting or causing to be deducted the amount of the employee tax from 
such wages as and when paid. (For provisions relating to the time of 
such payment, see Sec. 31.3121(a)-2.) The employer is required to 
collect the tax, notwithstanding the

[[Page 16]]

wages are paid in something other than money, and to pay over the tax in 
money. (As to the exclusion from wages of remuneration paid in any 
medium other than cash for certain types of services, see 
Sec. 31.3121(a)(7)-1, relating to such remuneration paid for service not 
in the course of the employer's trade or business or for domestic 
service in a private home of the employer; and Sec. 31.3121(a)(8)-1, 
relating to such remuneration paid for agricultural labor.) For 
provisions relating to the collection of, and liability for, employee 
tax in respect of tips, see Sec. 31.3102-3.
    (b) The employer is permitted, but not required, to deduct amounts 
equivalent to employee tax from payments to an employee of cash 
remuneration to which the sections referred to in this paragraph are 
applicable prior to the time that the sum of such payments equals:
    (1) $50 in the calendar quarter, for service not in the course of 
the employer's trade or business, to which Sec. 31.3121(a)(7)-1 is 
applicable; or
    (2) $50 in the calendar quarter, for domestic service in a private 
home of the employer, to which Sec. 31.3121(a)(7)-1 is applicable; or
    (3) (i) $100 in the calendar year 1955 or 1956, for agricultural 
labor, to which Sec. 31.3121(a)(8)-1 is applicable; or
    (ii) $150 in any calendar year after 1956, for agricultural labor, 
to which Sec. 31.3121(a)(8)-1 is applicable, but only to the extent that 
such payments are made prior to the twentieth day in such calendar year 
on which the employee has performed such agricultural labor for the 
employer for cash remuneration computed on a time basis; or
    (4) $50 in the calendar quarter, for service performed as a home 
worker, to which Sec. 31.3121(a)(10)-1 is applicable.

At such time as the sum of the cash payments in the calendar quarter or 
the calendar year, as the case may be, for a type of service referred to 
in this paragraph equals or exceeds the amount specified, the employer 
is required to collect from the employee any amount of employee tax not 
previously deducted. Further, at such time in any calendar year after 
1956 as the employee has performed agricultural labor for the employer 
on 20 days during such year for cash remuneration computed on a time 
basis, the employer is required, regardless of the amount of 
remuneration paid by him to the employee in the calendar year, to 
collect from the employee any amount of employee tax not previously 
deducted. If an employer pays cash remuneration to an employee for two 
or more of the types of service referred to in this paragraph, the 
provisions of this paragraph are to be applied separately to the amount 
of remuneration attributable to each type of service. For provisions 
relating to the repayment to an employee, or other disposition, of 
amounts deducted from an employee's remuneration in excess of the 
correct amount of employee tax, see Sec. 31.6413(a)-1. The application 
of this paragraph may be illustrated by the following examples:

    Example 1. In the calendar year 1957 employer X makes several 
payments of cash remuneration to employee A for agricultural labor which 
constitutes employment. In March employee A works on some part of each 
of 8 days for which employer X makes his first payment of such cash 
remuneration to A in the amount of $40. X deducts 90 cents (2\1/4\ 
percent of $40) as an amount equivalent to employee tax. In June A works 
5 days for which X makes his second payment of cash remuneration to A in 
the amount of $50. X does not deduct from this payment an amount 
equivalent to employee tax. In October A works 6 days for which X makes 
his third payment of cash remuneration to A in the amount of $60. This 
amount brings the sum of such payments in 1957 to $150, and X is now 
required to collect employee tax from A even though A has performed 
agricultural labor for X on only 19 days in 1957 and regardless of 
whether the cash remuneration for A's services is computed on a time 
basis. The amount of employee tax applicable to the $150 paid by X to A 
is $3.38 (2\1/4\ percent of $150). Inasmuch as X previously deducted 90 
cents in March 1957, X is required to deduct $2.48 ($3.38 minus 90 
cents) from the $60 paid in October 1957.
    Example 2. In the calendar year 1957 employer Y makes several 
payments of cash remuneration to employee B for agricultural labor which 
constitutes employment. B's cash remuneration is computed on a time 
basis. In January employer Y makes his first payment to employee B in 
the amount of $20 for work performed in 1957 on each of 5 days. Y 
deducts 45 cents (2\1/4\ percent of $20) as an amount equivalent to 
employee tax. In April Y makes his second payment of cash remuneration 
to B in the amount of $40 for work

[[Page 17]]

performed in 1957 on each of 10 days. Y deducts 90 cents (2\1/4\ percent 
of $40) as an amount equivalent to employee tax. In May B works for Y on 
each of 5 days and on the last of such days Y makes his third payment of 
cash remuneration to B in the amount of $20 for such work. This period 
of work brings to 20 the number of days in the calendar year 1957 on 
which B has performed agricultural labor for Y for cash remuneration 
computed on a time basis, and Y is required to collect employee tax from 
B even though the amount of remuneration paid is less than $150. The 
amount of employee tax applicable to the $80 paid by Y to B is $1.80 
(2\1/4\ percent of $80). Inasmuch as Y previously deducted $1.35 in 1957 
(45 cents in January and 90 cents in April), Y is required to deduct 45 
cents ($1.80 minus $1.35) from the $20 paid in May 1957.

    (c) In collecting employee tax, the employer shall disregard any 
fractional part of a cent of such tax unless it amounts to one-half cent 
or more, in which case it shall be increased to 1 cent. The employer is 
liable for the employee tax with respect to all wages paid by him to 
each of his employees whether or not it is collected from the employee. 
If, for example, the employer deducts less than the correct amount of 
tax, or if he fails to deduct any part of the tax, he is nevertheless 
liable for the correct amount of the tax. Until collected from him the 
employee also is liable for the employee tax with respect to all the 
wages received by him. Any employee tax collected by or on behalf of an 
employer is a special fund in trust for the United States. See section 
7501. The employer is indemnified against the claims and demands of any 
person for the amount of any payment of such tax made by the employer to 
the district director.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8305, July 2, 1964; T.D. 7001, 34 FR 998, Jan. 23, 1969]



Sec. 31.3102-2  Manner and time of payment of employee tax.

    The employee tax is payable to the district director in the manner 
and at the time prescribed in Subpart G of the regulations in this part. 
For provisions relating to the payment by an employee of employee tax in 
respect of tips, see paragraph (d) of Sec. 31.3102-3.
[T.D. 7001, 34 FR 998, Jan. 23, 1969]



Sec. 31.3102-3  Collection of, and liability for, employee tax on tips.

    (a) Collection of tax from employee-- (1) In general. Subject to the 
limitations set forth in subparagraph (2) of this paragraph, the 
employer shall collect from each of his employees the employee tax on 
those tips received by the employee which constitute wages for purposes 
of the tax imposed by section 3101. (For provisions relating to the 
treatment of tips as wages, see 3121(a)(12) and 3121(q).) The employer 
shall make the collection by deducting or causing to be deducted the 
amount of the employee tax from wages (exclusive of tips) which are 
under the control of the employer or other funds turned over by the 
employee to the employer (see subparagraph (3) of this paragraph). For 
purposes of this section the term ``wages (exclusive of tips) which are 
under the control of the employer'' means, with respect to a payment of 
wages, an amount equal to wages as defined in section 3121(a) except 
that tips and noncash remuneration which are wages are not included, 
less the sum of--
    (i) The tax under section 3101 required to be collected by the 
employer in respect of wages as defined in section 3121(a) (exclusive of 
tips);
    (ii) The tax under section 3402 required to be collected by the 
employer in respect of wages as defined in section 3401(a) (exclusive of 
tips); and
    (iii) The amount of taxes imposed on the remuneration of an employee 
withheld by the employer pursuant to State and local law (including 
amounts withheld under an agreement between the employer and the 
employee pursuant to such law) except that the amount of taxes taken 
into account in this subdivision shall not include any amount 
attributable to tips.
    (2) Limitations. An employer is required to collect employee tax on 
tips which constitute wages only in respect of those tips which are 
reported by the employee to the employer in a written statement 
furnished to the employer pursuant to section 6053(a). The employer is 
responsible for the collection of employee tax on tips reported to him 
only to the extent that the employer can--

[[Page 18]]

    (i) During the period beginning at the time the written statement is 
submitted to him and ending at the close of the 10th day of the month 
following the month in which the statement was submitted, or
    (ii) In the case of an employer who elects to deduct the tax on an 
estimated basis (see paragraph (c) of this section), during the period 
beginning at the time the written statement is submitted to him and 
ending at the close of the 30th day following the quarter in which the 
statement was submitted,

collect the employee tax by deducting it or causing it to be deducted as 
provided in subparagraph (1).
    (3) Furnishing of funds to employer. If the amount of employee tax 
in respect of tips reported by the employee to the employer in a written 
statement (or statements) furnished pursuant to section 6053(a) exceeds 
the wages (exclusive of tips) which are under the control of the 
employer, the employee may furnish to the employer, within the period 
specified in subparagraph (2) (i) or (ii) of this paragraph (whichever 
is applicable), an amount of money equal to the amount of such excess.
    (b) Less than $20 of tips. Notwithstanding the provisions of 
paragraph (a) of this section, if an employee furnishes to his employer 
a written statement--
    (1) Covering a period of less than 1 month, and
    (2) The statement is furnished to the employer prior to the close of 
the 10th day of the month following the month in which the tips were 
actually received by the employee, and
    (3) The aggregate amount of tips reported in the statement and in 
all other statements previously furnished by the employee covering 
periods within the same month is less than $20, and the statements, 
collectively, do not cover the entire month,

the employer may deduct amounts equivalent to employee tax on such tips 
from wages (exclusive of tips) which are under the control of the 
employer or other funds turned over by the employee to the employer. For 
provisions relating to the repayment to an employee, or other 
disposition, of amounts deducted from an employee's remuneration in 
excess of the correct amount of employee tax, see Sec. 31.6413(a)-1. (As 
to the exclusion from wages of tips of less than $20, see 
Sec. 31.3121(a)(12)-1.)
    (c) Collection of employee tax on estimated basis--(1) In general. 
Subject to certain limitations and conditions, an employer may, at his 
discretion, make collection of the employee tax in respect of tips 
reported by an employee to the employer on an estimated basis. An 
employer who elects to make collection of the employee tax on an 
estimated basis shall:
    (i) In respect of each employee, make an estimate of the amount of 
tips that will be reported, pursuant to section 6053(a), by the employee 
to the employer in a calendar quarter.
    (ii) Determine the amount which must be deducted upon each payment 
of wages (exclusive of tips) which are under the control of the employer 
to be made during the quarter by the employer to the employee in order 
to collect from the employee during the quarter an amount equal to the 
amount obtained by multiplying the estimated quarterly tips by the sum 
of the rates of tax under subsections (a) and (b) of section 3101.
    (iii) Deduct from any payment of such employee's wages (exclusive of 
tips) which are under the control of the employer, or from funds 
referred to in paragraph (a)(3) of this section, such amount as may be 
necessary to adjust the amount of tax withheld on the estimated basis to 
conform to the amount of employee tax imposed upon, and required to be 
deducted in respect of, tips reported by the employee to the employer 
during the calendar quarter in written statements furnished to the 
employer pursuant to section 6053(a). If an adjustment is required, the 
additional employee tax required to be collected may be deducted upon 
any payment of the employee's wages (exclusive of tips) which are under 
the control of the employer during the quarter and within the first 30 
days following the quarter or from funds turned over by the employee to 
the employer for such purposes within such period. For provisions 
relating to the repayment to an employee, or other disposition, of 
amounts deducted from an employee's remuneration in excess of the 
correct

[[Page 19]]

amount of employee tax, see Sec. 31.6413(a)-1.
    (2) Estimating tips employee will report-- (i) Initial estimate. The 
initial estimate of the amount of tips that will be reported by a 
particular employee in a calendar quarter shall be made on the basis of 
the facts and circumstances surrounding the employment of that employee. 
However, if a number of employees are employed under substantially the 
same circumstances and working conditions, the initial estimate 
established for one such employee may be used as the initial estimate 
for other employees in that group.
    (ii) Adjusting estimate. If the quarterly estimate of tips in 
respect of a particular employee continues to differ substantially from 
the amount of tips reported by the employee and there are no unusual 
factors involved (for example, an extended absence from work due to 
illness) the employer shall make an appropriate adjustment of his 
estimate of the amount of tips that will be reported by the employee.
    (iii) Reasonableness of estimate. The employer must be prepared, 
upon request of the district director, to disclose the factors upon 
which he relied in making the estimate, and his reasons for believing 
that the estimate is reasonable.
    (d) Employee tax not collected by employer. If--
    (1) The amount of the employee tax imposed by section 3101 in 
respect of those tips received by an employee which constitute wages 
exceeds
    (2) The amount of employee tax imposed by section 3101 (in respect 
of tips reported by the employee to the employer) which can be collected 
by the employer from such employee's wages (exclusive of tips) which are 
under the control of the employer or from funds referred to in paragraph 
(a)(3) of this section,

the employee shall be liable for the payment of tax in an amount equal 
to such excess. For provisions relating to the manner and time of 
payment of employee tax by an employee, see paragraph (d) of 
Sec. 31.6011(a)-1 and paragraph (a)(4) of Sec. 31.6071(a)-1. For 
provisions relating to statements required to be furnished by employers 
to employees in respect of uncollected employee tax on tips reported to 
the employer, see Sec. 31.6053-2.
[T.D. 7001, 34 FR 998, Jan. 23, 1969; 34 FR 1554, Jan. 31, 1969]

                            Tax on Employers



Sec. 31.3111-1  Measure of employer tax.

    The employer tax is measured by the amount of wages paid after 1954 
with respect to employment after 1936. See Sec. 31.3121(a)-1, relating 
to wages, and Secs. 31.3121(b)-1 to 31.3121(b)-4, inclusive, relating to 
employment. For provisions relating to time of payment of wages, see 
Sec. 31.3121(a)-2.
[T.D. 6744, 29 FR 8306, July 2, 1964]



Sec. 31.3111-2  Rates and computation of employer tax.

    (a) Old-age, survivors, and disability insurance. The rates of 
employer tax for old-age, survivors, and disability insurance with 
respect to wages paid in calendar years after 1954 are as follows:

                                                                        
                        Calendar year                           Percent 
                                                                        
1955 and 1956................................................          2
1957 and 1958................................................       2.25
1959.........................................................        2.5
1960 and 1961................................................          3
1962.........................................................      3.125
1963 to 1965, both inclusive.................................      3.625
1966.........................................................       3.85
1967.........................................................        3.9
1968.........................................................        3.8
1969 and 1970................................................        4.2
1971 and 1972................................................        4.6
1973.........................................................       4.85
1974 to 2010, both inclusive.................................       4.95
2011 and subsequent calendar years...........................       5.95
                                                                        

    (b) Hospital insurance. The rates of employer tax for hospital 
insurance with respect to wages paid in calendar years after 1965 are as 
follows:

                                                                        
                        Calendar year                           Percent 
                                                                        
1966.........................................................       0.35
1967.........................................................        .50
1968 to 1972, both inclusive.................................        .60
1973.........................................................        1.0
1974 to 1977, both inclusive.................................       0.90
1978 to 1980, both inclusive.................................       1.10
1981 to 1985, both inclusive.................................       1.35
1986 and subsequent calendar years...........................       1.50
                                                                        

    (c) Computation of employer tax. The employer tax is computed by 
applying to the wages paid by the employer the

[[Page 20]]

rate in effect at the time such wages are paid.
[T.D. 6983, 33 FR 18014, Dec. 4, 1968, as amended by T.D. 7374, 40 FR 
30948, July 24, 1975]



Sec. 31.3111-3  When employer tax attaches.

    The employer tax attaches at the time that the wages are paid by the 
employer. For provisions relating to the time of such payment, see 
Sec. 31.3121(a)-2.



Sec. 31.3111-4  Liability for employer tax.

    The employer is liable for the employer tax with respect to the 
wages paid to his employees for employment performed for him.



Sec. 31.3111-5  Manner and time of payment of employer tax.

    The employer tax is payable to the district director in the manner 
and at the time prescribed in Subpart G of the regulations in this part.



Sec. 31.3112-1  Instrumentalities of the United States specifically exempted from the employer tax.

    Section 3112 makes ineffectual as to the employer tax imposed by 
section 3111 those provisions of law which grant to an instrumentality 
of the United States an exemption from taxation, unless such provisions 
grant a specific exemption from the tax imposed by section 3111 by an 
express reference to such section or the corresponding section of prior 
law (section 1410 of the Internal Revenue Code of 1939). Thus, the 
general exemptions from Federal taxation granted by various statutes to 
certain instrumentalities of the United States without specific 
reference to the tax imposed by section 3111 or by section 1410 of the 
1939 Code are rendered inoperative insofar as such exemptions relate to 
the tax imposed by section 3111. For provisions relating to the 
exception from employment of services performed in the employ of an 
instrumentality of the United States specifically exempted from the 
employer tax, see Sec. 31.3121(b)(5)-1. For provisions relating to 
services performed for an instrumentality exempt on December 31, 1950, 
from the employer tax, see paragraph (c) of Sec. 31.3121 (b) (6)-1.

                           General Provisions



Sec. 31.3121(a)-1  Wages.

    (a)(1) Whether remuneration paid after 1954 for employment performed 
after 1936 constitutes wages is determined under section 3121(a). This 
section and Secs. 31.3121(a)(1)-1 to 31.3121(a)(15)-1, inclusive 
(relating to the statutory exclusions from wages), apply with respect 
only to remuneration paid after 1954 for employment performed after 
1936. Whether remuneration paid after 1936 and before 1940 for 
employment performed after 1936 constitutes wages shall be determined in 
accordance with the applicable provisions of law and of 26 CFR (1939) 
Part 401 (Regulations 91). Whether remuneration paid after 1939 and 
before 1951 for employment performed after 1936 constitutes wages shall 
be determined in accordance with the applicable provisions of law and of 
26 CFR (1939) Part 402 (Regulations 106). Whether remuneration paid 
after 1950 and before 1955 for employment performed after 1936 
constitutes wages shall be determined in accordance with the applicable 
provisions of law and of 26 CFR (1939) Part 408 (Regulations 128).
    (2) The term compensation as used in section 3231(e) of the Internal 
Revenue Code has the same meaning as the term wages as used in this 
section, determined without regard to section 3121(b)(9), except as 
specifically limited by the Railroad Retirement Tax Act (chapter 22 of 
the Internal Revenue Code) or regulation. The Commissioner may provide 
any additional guidance that may be necessary or appropriate in applying 
the definitions of sections 3121(a) and 3231(e).
    (b) The term ``wages'' means all remuneration for employment unless 
specifically excepted under section 3121(a) (see Secs. 31.3121(a)(1)-1 
to 31.3121(a)(15)-1, inclusive) or paragraph (j) of this section.
    (c) The name by which the remuneration for employment is designated 
is immaterial. Thus, salaries, fees, bonuses, and commissions on sales 
or on insurance premiums, are wages if paid as compensation for 
employment.
    (d) Generally the basis upon which the remuneration is paid is 
immaterial

[[Page 21]]

in determining whether the remuneration constitutes wages. Thus, it may 
be paid on the basis of piecework, or a percentage of profits; and it 
may be paid hourly, daily, weekly, monthly, or annually. See, however, 
Sec. 31.3121(a)(8)-1 which relates to the treatment of cash remuneration 
computed on a time basis for agricultural labor.
    (e) Generally the medium in which the remuneration is paid is also 
immaterial. It may be paid in cash or in something other than cash, as 
for example, goods, lodging, food, or clothing. Remuneration paid in 
items other than cash shall be computed on the basis of the fair value 
of such items at the time of payment. See, however, Secs. 31.3121 
(a)(7)-1, 31.3121(a)(8)-1, 31.3121(a)(10)-1, and 31.3121(a)(12)-1, 
relating to the treatment of remuneration paid in any medium other than 
cash for services not in the course of the employer's trade or business 
and for domestic service in a private home of the employer, for 
agricultural labor, for services performed by certain homeworkers, and 
as tips, respectively.
    (f) Ordinarily, facilities or privileges (such as entertainment, 
medical services, or so-called ``courtesy'' discounts on purchases), 
furnished or offered by an employer to his employees generally, are not 
considered as remuneration for employment if such facilities or 
privileges are of relatively small value and are offered or furnished by 
the employer merely as a means of promoting the health, good will, 
contentment, or efficiency of his employees. The term ``facilities or 
privileges'', however, does not ordinarily include the value of meals or 
lodging furnished, for example, to restaurant or hotel employees, or to 
seamen or other employees aboard vessels, since generally these items 
constitute an appreciable part of the total remuneration of such 
employees.
    (g) Amounts of so-called ``vacation allowances'' paid to an employee 
constitute wages. Thus, the salary of an employee on vacation, paid 
notwithstanding his absence from work, constitutes wages.
    (h) Amounts paid specifically--either as advances or 
reimbursements--for traveling or other bona fide ordinary and necessary 
expenses incurred or reasonably expected to be incurred in the business 
of the employer are not wages. Traveling and other reimbursed expenses 
must be identified either by making a separate payment or by 
specifically indicating the separate amounts where both wages and 
expense allowances are combined in a single payment. For amounts that 
are received by an employee on or after July 1, 1990, with respect to 
expenses paid or incurred on or after July 1, 1990, see Sec. 31.3121(a)-
3.
    (i) Remuneration for employment, unless such remuneration is 
specifically excepted under section 3121(a) or paragraph (j) of this 
section, constitutes wages even though at the time paid the relationship 
of employer and employee no longer exists between the person in whose 
employ the services were performed and the individual who performed 
them.

    Example. A is employed by B during the month of January 1955 in 
employment and is entitled to receive remuneration of $100 for the 
services performed for B, the employer, during the month. A leaves the 
employ of B at the close of business on January 31, 1955. On February 
15, 1955 (when A is no longer an employee of B), B pays A the 
remuneration of $100 which was earned for the services performed in 
January. The $100 is wages and the taxes are payable with respect 
thereto.

    (j) In addition to the exclusions specified in Secs. 31.3121(a)(1)-1 
to 31.3121(a)(15)-1, inclusive, the following types of payments are 
excluded from wages:
    (1) Remuneration for services which do not constitute employment 
under section 3121(b) and which are not deemed to be employment under 
section 3121(c) (see Sec. 31.3121(c)-1).
    (2) Remuneration for services which are deemed not to be employment 
under section 3121(c) (see Sec. 31.3121(c)-1).
    (3) Tips or gratuities paid, prior to January 1, 1966, directly to 
an employee by a customer of an employer, and not accounted for by the 
employee to the employer. For provisions relating to the treatment of 
tips received by an employee after December 31, 1965, as wages, see 
Secs. 31.3121(a)(12) and 31.3121(q).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7001, 34 FR 
999, Jan. 23, 1969; T.D. 7374, 40 FR 30948, July 24, 1975; T.D. 8276, 54 
FR 51027, Dec. 12, 1989; T.D. 8324, 55 FR 51696, Dec. 17, 1990; T.D. 
8582, 59 FR 66189, Dec. 23, 1994]

[[Page 22]]



Sec. 31.3121(a)-1T  Question and answer relating to the definition of wages in section 3121(a) (Temporary).

    The following question and answer relates to the definition of wages 
in section 3121(a) of the Internal Revenue Code of 1954, as amended by 
section 531(d)(1)(A) of the Tax Reform Act of 1984 (98 Stat. 885):
    Q-1: Are fringe benefits included in the definition of ``wages'' 
under section 3121(a)?
    A-1: Yes, unless specifically excluded from the definition of 
``wages'' pursuant to section 3121(a)(1) through (20). For example, a 
fringe benefit provided to or on behalf of an employee is excluded from 
the definition of ``wages'' if at the time such benefit is provided it 
is reasonable to believe that the employee will be able to exclude such 
benefit from income under section 117 or 132.
[T.D. 8004, 50 FR 755, Jan. 7, 1985]



Sec. 31.3121(a)-2  Wages; when paid and received.

    (a) In general, wages are received by an employee at the time that 
they are paid by the employer to the employee. Wages are paid by an 
employer at the time that they are actually or constructively paid 
unless under paragraph (c) of this section they are deemed to be 
subsequently paid. For provisions relating to the time when tips 
received by an employee are deemed paid to the employee, see 
Sec. 31.3121(q)-1.
    (b) Wages are constructively paid when they are credited to the 
account of or set apart for an employee so that they may be drawn upon 
by him at any time although not then actually reduced to possession. To 
constitute payment in such a case the wages must be credited to or set 
apart for the employee without any substantial limitation or restriction 
as to the time or manner of payment or condition upon which payment is 
to be made, and must be made available to him so that they may be drawn 
upon at any time, and their payment brought within his own control and 
disposition. For provisions relating to the treatment of deductions from 
remuneration as payments of remuneration, see Sec. 31.3123-1.
    (c) (1) The first $50 of cash remuneration paid, either actually or 
constructively, by an employer to an employee in a calendar quarter 
for--
    (i) Service to which Sec. 31.3121(a)(7)-1 is applicable (service not 
in the course of the employer's trade or business and domestic service 
in a private home of the employer); or
    (ii) Service to which Sec. 31.3121(a)(10)-1 is applicable (service 
performed by certain home workers),

shall be deemed to be paid by the employer to the employee at the first 
moment of time in such calendar quarter that the sum of such cash 
payments made within such quarter is at least $50.
    (2)(i) The first $100 of cash remuneration paid, either actually or 
constructively, by an employer to an employee in the calendar year 1955 
or 1956 for agricultural labor to which Sec. 31.3121 (a)(8)-1 is 
applicable shall be deemed to be paid by the employer to the employee at 
the first moment of time in such calendar year that the sum of such cash 
payments made within such year is at least $100.
    (ii) Cash remuneration paid, either actually or constructively, by 
an employer to an employee in a calendar year after 1956 for 
agricultural labor to which Sec. 31.3121(a)(8)-1 is applicable, and 
before either of the events described in (a) or (b) of this subdivision 
has occurred, shall be deemed to be paid upon the occurrence of the 
earlier of such events, as follows:
    (a) The first moment of time in such calendar year that the sum of 
the payments of such remuneration is at least $150, or
    (b) The twentieth day in such calendar year on which the employee 
has performed such agricultural labor for the employer for cash 
remuneration computed on a time basis.
    (3) If an employer pays cash remuneration to an employee for two or 
more of the types of service referred to in this paragraph, the 
provisions of this paragraph are to be applied separately to the amount 
of remuneration attributable to each type of service.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8306, July 2, 1964; T.D. 7001, 34 FR 999, Jan. 23, 1969]

[[Page 23]]



Sec. 31.3121(a)-3  Reimbursement and other expense allowance amounts.

    (a) When excluded from wages. If a reimbursement or other expense 
allowance arrangement meets the requirements of section 62(c) of the 
Code and Sec. 1.62-2 and the expenses are substantiated within a 
reasonable period of time, payments made under the arrangement that do 
not exceed the substantiated expenses are treated as paid under an 
accountable plan and are not wages. In addition, if both wages and the 
reimbursement or other expense allowance are combined in a single 
payment, the reimbursement or other expense allowance must be identified 
either by making a separate payment or by specifically identifying the 
amount of the reimbursement or other expense allowance.
    (b) When included in wages--(1) Accountable plans--(i) General rule. 
Except as provided in paragraph (b)(1)(ii) of this section, if a 
reimbursement or other expense allowance arrangement satisfies the 
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not 
substantiated within a reasonable period of time or amounts in excess of 
the substantiated expenses are not returned within a reasonable period 
of time, the amount paid under the arrangement in excess of the 
substantiated expenses is treated as paid under a nonaccountable plan, 
is included in wages, and is subject to withholding and payment of 
employment taxes no later than the first payroll period following the 
end of the reasonable period.
    (ii) Per diem or mileage allowances. If a reimbursement or other 
expense allowance arrangement providing a per diem or mileage allowance 
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the 
allowance is paid at a rate for each day or mile of travel that exceeds 
the amount of the employee's expenses deemed substantiated for a day or 
mile of travel, the excess portion is treated as paid under a 
nonaccountable plan and is included in wages. In the case of a per diem 
or mileage allowance paid as a reimbursement, the excess portion is 
subject to withholding and payment of employment taxes when paid. In the 
case of a per diem or mileage allowance paid as an advance, the excess 
portion is subject to withholding and payment of employment taxes no 
later than the first payroll period following the payroll period in 
which the expenses with respect to which the advance was paid (i.e., the 
days or miles of travel) are substantiated. The Commissioner may, in his 
discretion, prescribe special rules in pronouncements of general 
applicability regarding the timing of withholding and payment of 
employment taxes on per diem and mileage allowances.
    (2) Nonaccountable plans. If a reimbursement or other expense 
allowance arrangement does not satisfy the requirements of section 62(c) 
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be 
substantiated or require amounts in excess of the substantiated expenses 
to be returned), all amounts paid under the arrangement are treated as 
paid under a nonaccountable plan, are included in wages, and are subject 
to withholding and payment of employment taxes when paid.
    (c) Effective dates. This section generally applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee on or after July 1, 1990, with respect to expenses paid or 
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section 
applies to payments made under reimbursement or other expense allowance 
arrangements received by an employee on or after January 1, 1991, with 
respect to expenses paid or incurred on or after January 1, 1991.
[T.D. 8324, 55 FR 51696, Dec. 17, 1990]



Sec. 31.3121(a)(1)-1  Annual wage limitation.

    (a) In general. (1) The term ``wages'' does not include that part of 
the remuneration paid by an employer to an employee within any calendar 
year--
    (i) After 1954 and before 1959 which exceeds the first $4,200 of 
remuneration,
    (ii) After 1958 and before 1966 which exceeds the first $4,800 of 
remuneration,
    (iii) After 1965 and before 1968 which exceeds the first $6,600 of 
remuneration,
    (iv) After 1967 and before 1972 which exceeds the first $7,800 of 
remuneration,

[[Page 24]]

    (v) After 1971 and before 1973 which exceeds the first $9,000 of 
remuneration,
    (vi) After 1972 and before 1974 which exceeds the first $10,800 of 
remuneration,
    (vii) After 1973 and before 1975 which exceeds the first $13,200 of 
remuneration, or
    (viii) After 1974 which exceeds the amount equal to the contribution 
and benefit base (as determined under section 230 of the Social Security 
Act) which is effective for such calendar year

(exclusive of remuneration excepted from wages in accordance with 
paragraph (j) of Sec. 31.3121(a)-1 or Secs. 31.3121(a)(2)-1 to 
31.3121(a)(15)-1, inclusive) paid within the calendar year by an 
employer to the employee for employment performed for him at any time 
after 1936. For provisions relating to the treatment of tips for 
purposes of the annual wage limitation see Sec. 31.3121(q)-1.
    (2) The annual wage limitation applies only if the remuneration 
received during any 1 calendar year by an employee from the same 
employer for employment performed after 1936 exceeds the amount of such 
limitation. The limitation in such case relates to the amount of 
remuneration received during any 1 calendar year for employment after 
1936 and not to the amount of remuneration for employment performed in 
any 1 calendar year.

    Example. Employee A, in 1967 receives $7,000 from employer B in part 
payment of $8,000 due him from employment performed in 1967. In 1968 A 
receives from employer B the balance of $1,000 due him for employment 
performed in 1967, and thereafter in 1968 also receives $7,000 for 
employment performed in 1968 for employer B. The first $6,600 of the 
$7,000 received during 1967 is subject to the taxes in 1967. The 
remaining $400 received in 1967 is not included as wages and is not 
subject to the taxes. The balance of $1,000 received in 1968 for 
employment during 1967 is subject to the taxes during 1968 as is also 
the first $6,800 of the $7,000 thereafter received in 1968 ($1,000 plus 
$6,800 totaling $7,800, which is the annual wage limitation applicable 
to remuneration received in 1968 by an employee from any one employer). 
The remaining $200 received in 1968 is not included as wages and is not 
subject to the taxes.

    (3) If during a calendar year the employee receives remuneration 
from more than one employer, the annual wage limitation does not apply 
to the aggregate remuneration received from all of such employers, but 
instead applies to the remuneration received during such calendar year 
from each employer with respect to employment after 1936. In such case 
the first remuneration received in any calendar year after 1974 up to 
the amount equal to the contribution and benefit base (as determined 
under section 230 of the Social Security Act) (the first $13,200 
received in 1974, the first $10,800 received in 1973, the first $9,000 
received in 1972, the first $7,800 received in any calendar year after 
1967 and before 1972, the first $6,600 received in any calendar year 
after 1965 and before 1968, the first $4,800 received in any calendar 
year after 1958 and before 1966, or the first $4,200 received in any 
calendar year after 1954 and before 1959) from each employer constitutes 
wages and is subject to the taxes, even though, under section 6413(c), 
the employee may be entitled to a special credit or refund of a portion 
of the employee tax deducted from his wages received during the calendar 
year. In this connection and in connection with the two examples 
immediately following, see Sec. 31.6413(c)-1, relating to special 
credits or refunds of employee tax. In connection with the annual wage 
limitation in the case of remuneration paid for services performed in 
the employ of the United States or a wholly owned instrumentality 
thereof, see Sec. 31.3122. In connection with the annual wage limitation 
in the case of remuneration paid for services performed in the employ of 
the Government of Guam, the Government of American Samoa, the District 
of Columbia, a political subdivision of the Government of Guam, or the 
Government of American Samoa, or any instrumentality of any of the 
foregoing which is wholly owned thereby, see Sec. 31.3125. In connection 
with the application of the annual wage limitation, see also paragraph 
(b) of this section, relating to the circumstances under which wages 
paid by a predecessor employer are deemed to be paid by his

[[Page 25]]

successor. In connection with the annual wage limitation in the case of 
remuneration paid after December 31, 1978, from two or more related 
corporations that compensate an employee through a common paymaster, see 
Sec. 31.3121(s)-1.

    Example 1. During 1968 employee C receives from employer D a salary 
of $1,300 a month for employment performed for D during the first 7 
months of 1968, or total remuneration of $9,100. At the end of the 6th 
month C has received $7,800 from employer D, and only that part of his 
total remuneration from D constitutes wages subject to the taxes. The 
$1,300 received by employee C from employer D in the 7th month is not 
included as wages and is not subject to the taxes. At the end of the 7th 
month C leaves the employ of D and enters the employ of E. C receives 
remuneration of $1,560 a month from employer E in each of the remaining 
5 months of 1968, or total remuneration of $7,800 from employer E. The 
entire $7,800 received by C from employer E constitutes wages and is 
subject to the taxes. Thus, the first $7,800 received from employer D 
and the entire $7,800 received from employer E constitute wages.
    Example 2. During the calendar year 1968 F is simultaneously an 
officer (an employee) of the X Corporation, the Y Corporation, and the Z 
Corporation and during such year receives a salary of $7,800 from each 
corporation. Each $7,800 received by F from each of the Corporations X, 
Y, and Z (whether or not such corporations are related) constitutes 
wages and is subject to the taxes.

    (b) Wages paid by predecessor attributed to successor. (1) If an 
employer (hereinafter referred to as a successor) during any calendar 
year acquires substantially all the property used in a trade or business 
of another employer (hereinafter referred to as a predecessor), or used 
in a separate unit of a trade or business of a predecessor, and if 
immediately after the acquisition the successor employs in his trade or 
business an individual who immediately prior to the acquisition was 
employed in the trade or business of such predecessor, then, for 
purposes of the application of the annual wage limitation set forth in 
paragraph (a) of this section, any remuneration (exclusive of 
remuneration excepted from wages in accordance with paragraph (j) of 
Sec. 31.3121(a)-1 or Secs. 31.3121(a)(2)-1 to 31.3121(a)(15)-1, 
inclusive) with respect to employment paid (or considered under this 
paragraph as having been paid) to such individual by the predecessor 
during such calendar year and prior to the acquisition shall be 
considered as having been paid by the successor.
    (2) The wages paid, or considered as having been paid, by a 
predecessor to an employee shall, for purposes of the annual wage 
limitation, be treated as having been paid to such employee by a 
successor if:
    (i) The successor during a calendar year acquired substantially all 
the property used in a trade or business, or used in a separate unit of 
a trade or business, of the predecessor;
    (ii) Such employee was employed in the trade or business of the 
predecessor immediately prior to the acquisition and is employed by the 
successor in his trade or business immediately after the acquisition; 
and
    (iii) Such wages were paid during the calendar year in which the 
acquisition occurred and prior to such acquisition.
    (3) The method of acquisition by an employer of the property of 
another employer is immaterial. The acquisition may occur as a 
consequence of the incorporation of a business by a sole proprietor or a 
partnership, the continuance without interruption of the business of a 
previously existing partnership by a new partnership or by a sole 
proprietor, or a purchase or any other transaction whereby substantially 
all the property used in a trade or business, or used in a separate unit 
of a trade or business, of one employer is acquired by another employer.
    (4) Substantially all the property used in a separate unit of a 
trade or business may consist of substantially all the property used in 
the performance of an essential operation of the trade or business, or 
it may consist of substantially all the property used in a relatively 
self-sustaining entity which forms a part of the trade or business.

    Example 1. The M Corporation which is engaged in the manufacture of 
automobiles, including the manufacture of automobile engines, 
discontinues the manufacture of the engines and transfers all the 
property used in such manufacturing operation to the N Company. The N 
Company is considered to have acquired a separate unit of the trade or 
business of the M Corporation, namely, its engine manufacturing unit.
    Example 2. The R Corporation which is engaged in the operation of a 
chain of grocery

[[Page 26]]

stores transfers one of such stores to the S Company. The S Company is 
considered to have acquired a separate unit of the trade or business of 
the R Corporation.

    (5) A successor may receive credit for wages paid to an employee by 
a predecessor only if immediately prior to the acquisition the employee 
was employed by the predecessor in his trade or business which was 
acquired by the successor and if immediately after the acquisition such 
employee is employed by the successor in his trade or business (whether 
or not in the same trade or business in which the acquired property is 
used). If the acquisition involves only a separate unit of a trade or 
business of the predecessor, the employee need not have been employed by 
the predecessor in that unit provided he was employed in the trade or 
business of which the acquired unit was a part.

    Example. The Y Corporation in 1968 acquires by purchase all the 
property of the X Company and immediately after the acquisition employs 
in its trade or business employee A, who, immediately prior to the 
acquisition, was employed by the X Company. The X Company has in 1968 
(the calendar year in which the acquisition occurs) and prior to the 
acquisition paid $5,000 of wages to A. The Y Corporation in 1968 pays to 
A remuneration of $5,000 with respect to employment. Only $2,800 of the 
remuneration paid by the Y Corporation is considered to be wages. For 
purposes of the $7,800 limitation, the Y Corporation is credited with 
the $5,000 paid to A by the X Company. If in the same calendar year, the 
Z Company acquires the property by purchase from the Y Corporation and A 
immediately after the acquistion is employed by the Z Company in its 
trade or business, no part of the remuneration paid to A by the Z 
Company in the year of the acquisition will be considered to be wages. 
The Z Company will be credited with the remuneration paid to A by the Y 
Corporation and also with the wages paid to A by the X Company 
(considered for purposes of the application of the $7,800 limitation as 
having also been paid by the Y Corporation).

    (6) Where a corporation described in section 501(c)(3) which is 
exempt from income tax under section 501(a) has in effect a certificate 
filed pursuant to section 3121(k), or pursuant to section 1426(1) of the 
Internal Revenue Code of 1939, waiving its exemption from the taxes 
imposed by the Act, the activity in which such corporation is engaged is 
considered to be its trade or business for the purpose of determining 
whether the transferred property was used in the trade or business of 
the predecessor and for the purpose of determining whether the 
employment by the predecessor and the successor of an individual whose 
services were retained by the successor constitute employment in a trade 
or business. Thus, if a charitable or religious organization, subject to 
the taxes by virtue of its certificate, acquires all the property of 
another such organization likewise subject to the taxes and retains the 
services of employees of the predecessor, wages paid to such employees 
by the predecessor in the year of the acquisition (and prior to such 
acquisition) will be attributed to the successor for purposes of the 
annual wage limitation.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8307, July 2, 1964; T.D. 6983, 33 FR 18015, Dec. 4, 1968; T.D. 7374, 40 
FR 30948, July 24, 1975; T.D. 7660, 44 FR 75139, Dec. 19, 1979]



Sec. 31.3121(a)(2)-1  Payments under employers' plans on account of retirement, sickness or accident disability, medical or hospitalization expenses, or death.

    (a) The term ``wages'' does not include the amount of any payment 
(including any amount paid by an employer for insurance or annuities, or 
into a fund, to provide for any such payment) made to, or on behalf of, 
an employee or any of his dependents under a plan or system established 
by an employer which makes provision for his employees generally (or for 
his employees generally and their dependents) or for a class or classes 
of his employees (or for a class or classes of his employees and their 
dependents), on account of--
    (1) An employee's retirement,
    (2) Sickness or accident disability of an employee or any of his 
dependents,
    (3) Medical or hospitalization expenses in connection with sickness 
or accident disability of an employee or any of his dependents, or
    (4) Death of an employee or any of his dependents.
    (b) The plan or system established by an employer need not provide 
for payments on account of all of the specified items, but such plan or 
system may

[[Page 27]]

provide for any one or more of such items. Payments for any one or more 
of such items under a plan or system established by an employer solely 
for the dependents of his employees are not within this exclusion from 
wages.
    (c) Dependents of an employee include the employee's husband or 
wife, children, and any other members of the employee's immediate 
family.
    (d) It is immaterial for purposes of this exclusion whether the 
amount or possibility of such benefit payments is taken into 
consideration in fixing the amount of an employee's remuneration or 
whether such payments are required, expressly or impliedly, by the 
contract of service.



Sec. 31.3121(a)(3)-1  Retirement payments.

    The term ``wages'' does not include any payment made by an employer 
to an employee (including any amount paid by an employer for insurance 
or annuities, or into a fund, to provide for any such payment) on 
account of the employee's retirement. Thus, payments made to an employee 
on account of his retirement are excluded from wages under this 
exception even though not made under a plan or system.



Sec. 31.3121(a)(4)-1  Payments on account of sickness or accident disability, or medical or hospitalization expenses.

    The term ``wages'' does not include any payment made by an employer 
to, or on behalf of, an employee on account of the employee's sickness 
or accident disability or the medical or hospitalization expenses in 
connection with the employee's sickness or accident disability, if such 
payment is made after the expiration of 6 calendar months following the 
last calendar month in which such employee worked for such employer. 
Such payments are excluded from wages under this exception even though 
not made under a plan or system. If the employee does not actually 
perform services for the employer during the requisite period, the 
existence of the employer- employee relationship during that period is 
immaterial.



Sec. 31.3121(a)(5)-1  Payments from or to certain tax-exempt trusts, or under or to certain annuity plans or bond purchase plans.

    (a) Payments from or to certain tax- exempt trusts. The term 
``wages'' does not include any payment made--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a trust, or
    (2) To, or on behalf of, an employee or his beneficiary from a 
trust.

If at the time of such payment the trust is exempt from tax under 
section 501(a) as an organization described in section 401(a). A payment 
made to an employee of such a trust for services rendered as an employee 
of the trust and not as a beneficiary thereof is not within this 
exclusion from wages.
    (b) Payments under or to certain annuity plans. (1) The term 
``wages'' does not include any payment made after December 31, 1962--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan is a plan 
described in section 403(a).
    (2) The term ``wages'' does not include any payment made before 
January 1, 1963--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan,

if at the time of such payment the annuity plan meets the requirements 
of section 401(a)(3), (4), (5), and (6).
    (c) Payments under or to certain bond purchase plans. The term 
``wages'' does not include any payment made after December 31, 1962--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a bond purchase plan, or
    (2) To, or on behalf of, an employee or his beneficiary under a bond 
purchase plan,

if at the time of such payment the plan is a qualified bond purchase 
plan described in section 405(a).
[T.D. 6876, 31 FR 2596, Feb. 10, 1966]

[[Page 28]]



Sec. 31.3121(a)(6)-1  Payment by an employer of employee tax under section 3101 or employee contributions under a State law.

    The term ``wages'' does not include any payment by an employer 
(without deduction from the remuneration of, or other reimbursement 
from, the employee) of either (a) the employee tax imposed by section 
3101 or the corresponding section of prior law, or (b) any payment 
required from an employee under a State unemployment compensation law.



Sec. 31.3121(a)(7)-1  Payments for services not in the course of employer's trade or business or for domestic service.

    (a) Meaning of terms--(1) Services not in the course of employer's 
trade or business. The term ``services not in the course of the 
employer's trade or business'' includes services that do not promote or 
advance the trade or business of the employer. Such term does not 
include services performed for a corporation. As used in this section, 
the term does not include service not in the course of the employer's 
trade or business performed on a farm operated for profit or domestic 
service in a private home of the employer. See paragraph (f) of 
Sec. 31.3121(g)-1 for provisions relating to services not in the course 
of the employer's trade or business performed on a farm operated for 
profit.
    (2) Domestic service in a private home of the employer. Services of 
a household nature performed by an employee in or about a private home 
of the person by whom he is employed constitute domestic service in a 
private home of the employer. A private home is a fixed place of abode 
of an individual or family. A separate and distinct dwelling unit 
maintained by an individual in an apartment house, hotel, or other 
similar establishment may constitute a private home. If a dwelling house 
is used primarily as a boarding or lodging house for the purpose of 
supplying board or lodging to the public as a business enterprise, it is 
not a private home. In general, services of a household nature in or 
about a private home include services performed by cooks, waiters, 
butlers, housekeepers, governesses, maids, valets, baby sitters, 
janitors, laundresses, furnacemen, caretakers, handymen, gardeners, 
footmen, grooms, and chauffeurs of automobiles for family use. The term 
``domestic service in a private home of the employer'' does not include 
the services enumerated above unless such services are performed in or 
about a private home of the employer. Services not of a household 
nature, such as services performed as a private secretary, tutor, or 
librarian, even though performed in the employer's home, are not 
included within the term ``domestic service in a private home of the 
employer''. As used in this section, the term does not include domestic 
service in a private home of the employer performed on a farm operated 
for profit or service not in the course of the employer's trade or 
business. See paragraph (f) Sec. 31.3121(g)-1 for provisions relating to 
domestic service in a private home of the employer performed on a farm 
operated for profit.
    (b) Payments other than in cash. The term ``wages'' does not include 
remuneration paid in any medium other than cash (1) for service not in 
the course of the employer's trade or business, or (2) for domestic 
service in a private home of the employer. Cash remuneration includes 
checks and other monetary media of exchange. Remuneration paid in any 
medium other than cash, such as lodging, food, clothing, car tokens, 
transportation passes or tickets, or other goods or commodities, for 
service not in the course of the employer's trade or business or for 
domestic service in a private home of the employer does not constitute 
wages.
    (c) Cash payments. (1) The term ``wages'' does not include cash 
remuneration paid by an employer in any calendar quarter after 1954 to 
an employee for--
    (i) Domestic service in a private home of the employer, or
    (ii) Service not in the course of the employer's trade or business,

unless the cash remuneration paid in such quarter by the employer to the 
employee for such service is $50 or more.
    (2) The test relating to cash remuneration of $50 or more is based 
on the

[[Page 29]]

remuneration paid in a calendar quarter rather than on the remuneration 
earned during a calendar quarter. It is immaterial whether the 
remuneration was earned before 1955 or after 1954.

    Example. In the calendar quarter ending March 31, 1955, employer X 
pays employee A cash remuneration of $50 for service not in the course 
of X's trade or business. Such remuneration constitutes wages subject to 
the taxes even though $10 thereof represents payment for such service 
performed by A for X in December 1954.

In determining whether $50 or more has been paid either for domestic 
service in a private home of the employer or for service not in the 
course of the employer's trade or business, only cash remuneration for 
such service shall be taken into account. Cash remuneration includes 
checks and other monetary media of exchange. Remuneration paid in any 
other medium, such as lodging, food, clothing, car tokens, 
transportation passes or tickets, or other goods or commodities, is 
disregarded in determining whether the cash-remuneration test is met. If 
an employee receives cash remuneration from an employer in a calendar 
quarter for both types of services the $50 cash-remuneration test is to 
be applied separately to each type of service. If an employee receives 
cash remuneration from more than one employer in a calendar quarter for 
domestic service in a private home of the employer or for service not in 
the course of the employer's trade or business, the $50 cash-
remuneration test is to be applied separately to the remuneration 
received from each employer. See Sec. 31.3102-1, relating to deduction 
of employee tax or amounts equivalent to the tax from cash payments for 
the services described in this section; Sec. 31.3121(a)-2, relating to 
time of payment of wages for such services; and Sec. 31.3121(i)-1, 
relating to computations to the nearest dollar of any payment of cash 
remuneration for domestic service in a private home of the employer.



Sec. 31.3121(a)(8)-1  Payments for agricultural labor.

    (a) Scope of this section. For purposes of the regulations in this 
section, the term ``agricultural labor'' means only such agricultural 
labor (see Sec. 31.3121(g)-1) as constitutes employment or is deemed to 
constitute employment by reason of the rules relating to included and 
excluded services contained in section 3121(c) (see Sec. 31.3121(c)-1) 
or the corresponding section of prior law.
    (b) Payments other than in cash. The term ``wages'' does not include 
remuneration paid in any medium other than cash for agricultural labor. 
For meaning of the term ``cash remuneration'', see paragraph (f) of the 
regulations in this section.
    (c) Cash payments. (1) The term ``wages'' does not include cash 
remuneration paid by an employer in the calendar year 1955 or 1956 to an 
employee for agricultural labor unless the cash remuneration paid in 
such year by the employer to the employee for such labor is $100 or 
more.
    (2)(i) The term ``wages'' does not include cash remuneration paid by 
an employer in any calendar year after 1956 to an employee for 
agricultural labor unless the cash remuneration paid in such year by the 
employer to the employee for such labor is $150 or more, or unless the 
employee performs agricultural labor for the employer on 20 days or more 
during such year for cash remuneration computed on a time basis.
    (ii) The application of the provisions of this subparagraph may be 
illustrated by the following example:

    Example. On 18 days in 1957 A performs agricultural labor for X for 
cash remuneration of $8 per day, and X pays A $144 in such year. A 
performs no further service for X. Neither the $150-cash-remuneration 
test nor the 20-day test is met. Accordingly, the remuneration paid by X 
to A is not subject to the taxes. If in 1957 A had performed 
agricultural labor for X on 20 days for cash remuneration of $7.20 per 
day, the $144 paid by X to A would have been subject to the taxes 
because the 20-day test would have been met. Or if A had performed the 
18 days of agricultural labor for cash remuneration of $8.50 per day and 
had been paid in full therefor in 1957, his cash remuneration of $153 
would have been subject to the taxes because the $150-cash-remuneration 
test would have been met.

    (d) Application of cash-remuneration test. (1) If an employee 
receives cash remuneration from an employer both for services which 
constitute agricultural labor and for services which do not constitute 
agricultural labor, only the

[[Page 30]]

amount of such remuneration which is attributable to agricultural labor 
shall be included in determining whether cash remuneration of $150 or 
more ($100 or more in 1955 or 1956) has been paid in the calendar year 
by the employer to the employee for agricultural labor.

    Example. Employer X operates a store and also is engaged in farming 
operations. Employee A, who regularly performs services for X in 
connection with the operation of the store, works on X's farm when 
additional help is required for the farm activities. In the calendar 
year 1957, X pays A $140 in cash computed on a time basis for 
agricultural labor performed on 19 different days in such year, and 
$2,260 for services performed in connection with the operation of the 
store. Since the cash remuneration paid by X to A in the calendar year 
1957 for agricultural labor is less than $150, the cash-remuneration 
test is not met. Since A performed agricultural labor for X on less than 
20 days in 1957, the 20-day test set forth in section 3121(a)(8) is not 
met. The $140 paid by X to A in 1957 for agricultural labor does not 
constitute wages and is not subject to the taxes.

    (2) The test relating to cash remuneration of $150 or more ($100 or 
more in 1955 or 1956) is based on the cash remuneration paid in a 
calendar year rather than on the remuneration earned during a calendar 
year. It is immaterial if such cash remuneration is paid in a calendar 
year other than the year in which the agricultural labor is performed.

    Example. Employer X pays cash remuneration of $150 in the calendar 
year 1957 to employee A for agricultural labor. Such remuneration 
constitutes wages even though $10 of such amount represents payment for 
agricultural labor performed by A for X in December 1956.

    (3) In determining whether $150 or more ($100 or more in 1955 or 
1956) has been paid to an employee for agricultural labor, only cash 
remuneration for such labor shall be taken into account. If an employee 
receives cash remuneration in any one calendar year from more than one 
employer for agricultural labor, the cash-remuneration test is to be 
applied with respect to the remuneration received by the employee from 
each employer in such calendar year for such labor.
    (e) Application of 20-day test. (1) Only agricultural labor for 
which cash remuneration is computed on a time basis is taken into 
account in determining whether an employee performs such labor for such 
remuneration on 20 days or more during a calendar year after 1956. For 
purposes of the 20-day test, the amount of such remuneration is 
immaterial, and it is immaterial if, in addition to cash remuneration 
computed on a time basis, the remuneration for such labor also includes 
remuneration other than cash or remuneration which is not computed on a 
time basis. If cash remuneration paid to an employee after 1956 for 
agricultural labor is computed on a time basis, such cash remuneration 
does not constitute ``wages'' unless it is paid in a calendar year in 
which either the 20-day test or the $150-cash-remuneration test is met.

    Example. Employer X employs A to construct fences on a farm owned by 
X. The work constitutes agricultural labor and is performed on 50 days 
in November and December 1957. A is not employed by X at any other time. 
A's remuneration consists of meals and lodging, $5 cash per day, and 
additional cash measured by the amount of fence constructed. X pays A 
$140 cash in December 1957 and $160 cash in January 1958, in full 
payment for the work. Inasmuch as A has performed agricultural labor for 
X on 50 days in 1957, for remuneration computed on a time basis, the 20-
day test is met for 1957 and the $140 cash paid in 1957 is subject to 
the taxes. It is immaterial that the $150-cash-remuneration test is not 
met for 1957. Inasmuch as X has paid A $160 cash remuneration in 1958 
for agricultural labor, the $150-cash-remuneration test is met for 1958 
and the $160 cash paid in 1958 is subject to the taxes. It is immaterial 
that the 20-day test is not met for 1958. If the remuneration paid by X 
to A in January 1958 had been in an amount less than $150, neither the 
$150-cash-remuneration test nor the 20-day test would have been met for 
the calendar year 1958, and the remuneration paid by X to A in such year 
would not have been subject to the taxes.

    (2) For the purpose of determining whether an employee performs 
agricultural labor for an employer on 20 days or more during any 
calendar year after 1956, for cash remuneration computed on a time 
basis, there shall be counted as one day--
    (i) Any day or portion thereof on which the employee actually 
performs such labor for cash remuneration computed one time basis; and
    (ii) Any day or portion thereof on which the employee does not 
perform

[[Page 31]]

agricultural labor but with respect to which cash remuneration is paid 
or payable to the employee for such labor, such as a day on which the 
employee is sick or on vacation.

An employee who on a particular day reports for work and, at the 
direction of his employer, holds himself in readiness to perform 
agricultural labor shall be considered to be engaged in the actual 
performance of such labor on that day. For purposes of the regulations 
in this section, a day is a period of 24 hours commencing at midnight 
and ending at midnight.

    Example. During the period of 20 days beginning April 11, 1957 and 
ending April 30, 1957, employee A was employed by employer X to perform 
agricultural labor on X's farm. The agreement provided that A would be 
furnished room and board at the farm and would be paid cash wages of 
$150 per month. On one day during the 20-day period A was sick and 
unable to work, and on another day X directed A to refrain from work 
because of weather conditions. At the termination of A's employment X 
paid A cash wages of $100 for the full 20-day period. The 20-day test 
had been met and the $100 cash wages were subject to the taxes.

    (3) If in any one calendar year an employee performs agricultural 
labor for more than one employer, the 20-day test is to be applied with 
respect to the agricultural labor performed by the employee in such year 
for each employer.
    (f) Meaning of ``cash remuneration.'' Cash remuneration includes 
checks and other monetary media of exchange. Cash remuneration does not 
include payments made in any other medium, such as lodging, food, 
clothing, car tokens, transportation passes or tickets, farm products, 
or other goods or commodities.
    (g) Cross references. (1) For provisions relating to deductions of 
employee tax or amounts equivalent to the tax from cash payments for 
agricultural labor, see Sec. 31.3102-1.
    (2) For provisions relating to the time of payment of wages for 
agricultural labor, see Sec. 31.3121(a)-2.
    (3) For provisions relating to records to be kept with respect to 
agricultural labor, see paragraph (b) of Sec. 31.6001-2.
[T.D. 6744, 29 FR 8308, July 2, 1964]



Sec. 31.3121(a)(9)-1  Payments to employees for nonwork periods.

    (a) The term ``wages'' does not include any payment (other than 
vacation or sick pay) made by an employer to an employee for a period 
throughout which the employment relationship exists between the employer 
and the employee, but in which the employee does not work (other than 
being subject to call for the performance of work) for the employer, if 
such payment is made after the calendar month in which--
    (1) The employee attains age 65, if the employee is a man to whom 
the payment is made before January 1975, or if the employee is a woman 
to whom the payment is made before November 1956, or
    (2) The employee attains age 62, if the employee is a man to whom 
the payment is made after December 1974, or if the employee is a woman 
to whom the payment is made after October 1956.
    (b) Vacation or sick pay is not within this exclusion from wages. If 
the employee does any work for the employer in the period for which the 
payment is made, no remuneration paid by such employer to such employee 
with respect to such period is within this exclusion from wages.

    Example. Mrs. A, an employee of X, attained the age of 62 on 
September 15, 1956, and discontinued the performance of regular work for 
X on September 30, 1956. Their employment relationship continued for 
several years until Mrs. A's death, and X paid Mrs. A $50 per month as 
consideration for Mrs. A's agreement to work when asked by X. The 
payment for each month was made on the first day of each succeeding 
month. After September 30, 1956, the only work performed by Mrs. A for X 
was performed on one day in October 1956. The payment made by X to Mrs. 
A on November 1 (for October 1956) is not excluded from wages under this 
exception, but the payments made thereafter are excluded from wages. The 
payment on November 1 was not excluded because Mrs. A worked for X on 
one day in October 1956. (Inasmuch as Mrs. A had attained age 62 in 
September 1956, the November 1 payment would have been excluded if Mrs. 
A had not performed any work for X in October 1956.)
[T.D. 6744, 29 FR 8309, July 2, 1964, as amended by T.D. 7373, 40 FR 
30957, July 24, 1975; 40 FR 32831, Aug. 5, 1975]

[[Page 32]]



Sec. 31.3121(a)(10)-1  Payments to certain home workers.

    (a) The term ``wages'' does not include remuneration paid by an 
employer in any calendar quarter to an employee--
    (1) For services performed after 1954 as a home worker who is an 
employee by reason of the provisions of section 3121(d)(3)(C) (see 
paragraph (d) of Sec. 31.3121(d)-1), or
    (2) For services performed after 1950 and before 1955 as a home 
worker who is an employee by reason of the provisions of section 
1426(d)(3)(C) of the Internal Revenue Code of 1939. unless the cash 
remuneration paid in such quarter by the employer to the employee for 
such services is $50 or more. The test relating to cash remuneration of 
$50 or more is based on remuneration paid in a calendar quarter rather 
than on remuneration earned during a calendar quarter. If $50 or more of 
cash remuneration is paid in a particular calendar quarter, it is 
immaterial whether the $50 is in payment for services performed during 
the quarter of payment or during any other quarter.
    (b) The application of paragraph (a) of this section may be 
illustrated by the following examples:

    Example 1. A, a home worker, performs services for X, a 
manufacturer, in 1954 and 1955. In the performance of the home work A is 
an employee both in 1954 (by reason of section 1426(d)(3)(C) of the 1939 
Code) and in 1955 (by reason of section 3121(d)(3)(C)). In March 1955, A 
returns to X articles made by A at home from materials received by A 
from X in 1954. X pays A cash remuneration of $50 for such work when the 
finished articles are delivered. The $50 includes $10 which represents 
remuneration for home work performed by A in 1954. The entire $50 is 
subject to the taxes.
    Example 2. Assume that the same transactions occur, but that A is 
not subject in 1954 to licensing requirements under the laws of the 
State in which the home work is performed. A, therefore, does not 
perform home work in 1954 as an employee of X by reason of section 
1426(d)(3)(C) of the 1939 Code, and the $10 paid in 1955 for such work 
is not remuneration for employment. The remaining $40 for the home work 
performed in 1955 is remuneration for employment, but is excluded from 
wages by application of the $50 cash-remuneration test.

    (c) In the event an employee receives remuneration in any one 
calendar quarter from more than one employer for services performed as a 
home worker of the character described in paragraph (a) of this section, 
the regulations in this section are to be applied with respect to the 
remuneration received by the employee from each employer in such 
calendar quarter for such services. This exclusion from wages has no 
application to remuneration paid for services performed as a home worker 
who is an employee under either section 3121(d)(2)(see paragraph (c) of 
Sec. 31.3121(d)-1) or section 1426(d)(2) of the 1939 Code, relating to 
common law employees.
    (d) Cash remuneration includes checks and other monetary media of 
exchange. Remuneration paid in any other medium, such as clothing, car 
tokens, transportation passes or tickets, or other goods or commodities, 
is disregarded in determining whether the $50 cash-remuneration test is 
met. If the cash remuneration paid in any calendar quarter by an 
employer to an employee for services performed as a home worker of the 
character described in paragraph (a) of this section is $50 or more, 
then no remuneration, whether in cash or in any medium other than cash, 
paid by the employer to the employee in such calendar quarter for such 
services is excluded from wages under this exception.
    (e) For provisions relating to whether a home worker is an employee 
under section 1426(d)(3)(C) of the 1939 Code, see Sec. 408.204 of 
Regulations 128; 26 CFR (1939) Part 408. See also Sec. 31.3102-1, 
relating to deduction of employee tax or amounts equivalent to the tax 
from cash payments for services performed as a home worker of the 
character described in paragraph (a) of this section, and 
Sec. 31.3121(a)-2, relating to the time of payment of wages for such 
services.



Sec. 31.3121(a)(11)-1  Moving expenses.

    (a) The term ``wages'' does not include remuneration paid on or 
after November 1, 1964, to or on behalf of an employee, either as an 
advance or a reimbursement, specifically for moving expenses incurred or 
expected to be incurred, if (and to the extent that) at the time of 
payment it is reasonable to believe that a corresponding deduction is or 
will be allowable to the employee under section 217. The reasonable 
belief

[[Page 33]]

contemplated by the statute may be based upon any evidence reasonably 
sufficient to induce such belief, even though such evidence may be 
insufficient upon closer examination by the district director or the 
courts finally to establish that a deduction is allowable under section 
217. The reasonable belief shall be based upon the application of 
section 217 and the regulations thereunder in Part 1 of this chapter 
(Income Tax Regulations). When used in this section, the term ``moving 
expenses'' has the same meaning as when used in section 217 and the 
regulations thereunder.
    (b) Except as otherwise provided in paragraph (a) of this section, 
or in a numbered paragraph of section 3121(a), amounts paid to or on 
behalf of an employee for moving expenses are wages for purposes of 
section 3121(a).
[T.D. 7375, 40 FR 42350, Sept. 12, 1975]



Sec. 31.3121(a)(12)-1  Tips.

    The term ``wages'' does not include remuneration received by an 
employee after December 1965 in the form of tips if--
    (a) The tips are paid in any medium other than cash, or
    (b) The cash tips received by an employee in any calendar month in 
the course of his employment by an employer are less than $20.

If the cash tips received by an employee in a calendar month after 
December 1965 in the course of his employment by an employer amount to 
$20 or more, none of the cash tips received by the employee in such 
calendar month are excluded from the term ``wages'' under this section. 
The cash tips to which this section applies include checks and other 
monetary media of exchange. Tips received by an employee in any medium 
other than cash, such as passes, tickets, or other goods or commodities 
do not constitute wages. If an employee in any calendar month performs 
services for two or more employers and receives tips in the course of 
his employment by each employer, the $20 test is to be applied 
separately with respect to the cash tips received by the employee in 
respect of his services for each employer and not to the total cash tips 
received by the employee during the month. As to the time tips are 
deemed paid, see Sec. 31.3121(q)-1. For provisions relating to the 
treatment of tips received by an employee prior to 1966, see paragraph 
(j)(3) of Sec. 31.3121 (a)-1.
[T.D. 7001, 34 FR 999, Jan. 23, 1969]



Sec. 31.3121(a)(13)-1  Payments under certain employers' plans after retirement, disability, or death.

    (a) In general. The term ``wages'' does not include the amount of 
any payment or series of payments made after January 2, 1968, by an 
employer to, or on behalf of, an employee or any of his dependents under 
a plan established by the employer which makes provisions for his 
employees generally (or for his employees generally and their 
dependents) or for a class or classes of his employees (or for a class 
or classes of his employees and their dependents), which is paid or 
commences to be paid upon or within a reasonable time after the 
termination of an employee's employment relationship because of the 
employee's--
    (1) Death,
    (2) Retirement for disability, or
    (3) Retirement after attaining an age specified in the plan 
established by the employer or in a pension plan of the employer at the 
age at which a person in the employee's circumstances is eligible for 
retirement.

A payment or series of payments made under the circumstances described 
in the preceding sentence is excluded from ``wages'' even if made 
pursuant to an incentive compensation plan which also provides for the 
making of other types of payments. However, any payment or series of 
payments which would have been paid if the employee's relationship had 
not been terminated is not excluded from ``wages'' under this section 
and section 3121(a)(13). For example, lump-sum payments for unused 
vacation time or a final paycheck received after retirement are payments 
which the employee would have received whether or not he retired and 
therefore are not excluded from ``wages'' under this section. Further, 
if

[[Page 34]]

any payment is made upon or after termination of employment for any 
reason other than those set out in subparagraphs (1), (2), and (3) of 
this paragraph such payment is not excludable from ``wages'' by this 
section. For example, if a pension plan provides for retirement upon 
disability, completion of 30 years of service, or attainment of age 65, 
and if an employee who is not disabled retires at age 61 after 30 years 
of service, none of the retirement payments made to the employee under 
the pension plan (including any made after he is 65) is excludable from 
``wages'' under this section. However, if the pension plan had 
conditioned retirement after 30 years of service upon attainment of age 
60, all of the retirement payments would have been excludable.
    (b) Plan. The plan or system established by an employer need not 
provide for payments because of termination of employment for all the 
reasons set out in paragraphs (a)(1), (2), and (3) of this section, but 
such plan or system may provide for payments because of termination for 
any one or more of such reasons. Payments because of termination of 
employment for any one or more of such reasons under a plan or system 
established by an employer solely for the dependents of his employees 
are not within this exclusion from wages.
    (c) Dependents. Dependents of an employee include the employee's 
husband or wife, children, and any other members of the employee's 
immediate family.
    (d) Benefit payment. It is immaterial for purposes of this exclusion 
whether the amount or possibility of benefit payments is paid on account 
of services rendered or taken into consideration in fixing the amount of 
an employee's remuneration or whether such payments are required, 
expressly or impliedly, by the contract of service.
    (e) Example. The application of this section may be illustrated by 
the following example:

    Example. A, an employee, receives a salary of $1,500 a month, 
payable on the 5th day of the month following the month for which the 
salary is earned. A's employer has established an incentive compensation 
plan for a class of his employees, including A, providing for the 
payment of deferred compensation on termination of employment, including 
termination upon an employee's death, retirement at age 65 (the 
retirement age specified in the plan), or retirement for disability. On 
March 1, 1973, A attains the age of 65 and retires. On March 5, 1973, A 
receives $5,500 from his employer of which $1,500 represents A's salary 
for services he performed in February 1973, and $4,000 represents 
incentive compensation paid under the employer's plan. The amount of 
$4,000 is excluded from ``wages'' under this section. The amount of 
$1,500 is not excluded from ``wages'' under this section.
[T.D. 7374, 40 FR 30949, July 24, 1975]



Sec. 31.3121(a)(14)-1  Payments by employer to survivor or estate of former employee.

    The term ``wages'' does not include any payment by an employer to a 
survivor or the estate of a former employee made after 1972 and after 
the calendar year in which such employee died.
[T.D. 7374, 40 FR 30950, July 24, 1975, as amended by T.D. 7373, 40 FR 
30957, July 24, 1975]



Sec. 31.3121(a)(15)-1  Payments by employer to disabled former employee.

    The term ``wages'' does not include any payment made after 1972 by 
an employer to an employee, if at the time such payment is made such 
employee is entitled to disability insurance benefits under section 
223(a) of the Social Security Act and such entitlement commenced prior 
to the calendar year in which such payment is made, and if such employee 
did not perform any service for such employer during the period for 
which such payment is made.
[T.D. 7374, 40 FR 30950, July 24, 1975, as amended by T.D. 7373, 40 FR 
30957, July 24, 1975]



Sec. 31.3121(a)(18)-1  Payments or benefits under a qualified educational assistance program.

    The term ``wages'' does not include any payment made, or benefit 
furnished, to or for the benefit of an employee in a taxable year 
beginning after December 31, 1978, if at the time of such payment or 
furnishing it is reasonable to believe that the employee will be able to 
exclude such payment or benefit from income under section 127.
[T.D. 7898, 48 FR 31019, July 6, 1983]

[[Page 35]]



Sec. 31.3121(b)-1  Employment; services to which the regulations in this subpart apply.

    (a) The provisions of the regulations in this subpart relating to 
the term ``employment'' apply with respect to services performed after 
1954. Certain provisions also apply with respect to services performed 
before 1955 for which the remuneration is paid after 1954 (see paragraph 
(b) of Sec. 31.3121(b)-2. For provisions relating generally to services 
performed before 1955, see paragraph (a) of Sec. 31.3121 (b)-2. For 
provisions relating to the circumstances under which services which do 
not constitute employment are nevertheless deemed to be employment, and 
relating to the circumstances under which services which constitute 
employment are nevertheless deemed not to be employment, see 
Sec. 31.3121 (c)-1. For provisions relating to who are employees and who 
are employers see Secs. 31.3121 (d)-1 and 31.3121 (d)-2, respectively.
    (b) The taxes apply with respect to remuneration paid after 1954 for 
services performed before 1955, as well as for services performed after 
1954, to the extent that the remuneration and services constitute wages 
and employment. See Secs. 31.3121(a)-1 to 31.3121(a)(13)-1 relating to 
wages.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR 
18015, Dec. 4, 1968]



Sec. 31.3121(b)-2  Employment; services performed before 1955.

    (a) General rule. (1) Subject to the provisions of paragraph (b) of 
this section:
    (i) Services performed after 1936 and before 1955 which were 
employment under the applicable law in effect before 1955 constitute 
employment under section 3121(b).
    (ii) Services performed after 1936 and before 1955 which were not 
employment under the applicable law in effect before 1955 do not 
constitute employment under section 3121(b).
    (2) Except as provided in paragraph (b) of this section, 
determination of whether services performed before 1955 constitute 
employment shall be made in accordance with the applicable provisions of 
law in effect before 1955 and of the regulations thereunder. The 
regulations applicable in determining whether service performed after 
1936 and before 1955 constitute employment are as follows:
    (i) Services performed after 1936 and before 1940--26 CFR (1939) 
Part 401 (Regulations 91).
    (ii) Services performed after 1939 and before 1951--26 CFR (1939) 
Part 402 (Regulations 106).
    (iii) Services performed after 1950 and before 1955--26 CFR (1939) 
Part 408 (Regulations 128).
    (b) Certain services performed before 1955 the remuneration for 
which is paid after 1954. (1) Services of the following character 
performed before 1955, for which remuneration is paid after 1954, 
constitute employment under section 3121(b):
    (i) Agricultural labor, as defined in section 3121(g) (see 
Sec. 31.3121(g)-1), other than services of the character described in 
section 3121(b)(1) (relating to services performed in connection with 
the production or harvesting of certain oleoresinous products and 
services performed by certain foreign agricultural workers), which, at 
the time performed, constituted employment under section 1426(b) of the 
1939 Code, or would have constituted employment except for the 
provisions of section 1426(b)(1) of such Code, as in effect at the time 
the services were performed.
    (ii) Services not in the course of the employers' trade or business 
(see paragraph (a)(1) of Sec. 31.3121(a)(7)-1) which, at the time 
performed, constituted employment under section 1426(b) of the 1939 
Code, or would have constituted employment except for the provisions of 
section 1426(b)(3) of such Code, as in effect at the time the services 
were performed.
    (2) Services of the character described in paragraphs (a) and (b) of 
Sec. 31.3121(b)(1)-1, which were performed by certain foreign 
agricultural workers before 1955 and the remuneration for which is paid 
after 1954, do not constitute employment under section 3121(b), 
irrespective of whether they constituted employment under section 
1426(b) of the 1939 Code, as in effect at the time the services were 
performed.
    (3) This paragraph has no application to services performed before 
1955 and

[[Page 36]]

the remuneration for which was paid before 1955.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8309, July 2, 1964]



Sec. 31.3121(b)-3  Employment; services performed after 1954.

    (a) In general. Whether services performed after 1954 constitute 
employment is determined in accordance with the provisions of section 
3121(b).
    (b) Services performed within the United States. Services performed 
after 1954 within the United States (see Sec. 31.3121(e)-1) by an 
employee for his employer, unless specifically excepted by section 
3121(b), constitute employment. With respect to services performed 
within the United States, the place where the contract of service is 
entered into is immaterial. The citizenship or residence of the employee 
or of the employer also is immaterial except to the extent provided in 
any specific exception from employment. Thus, the employee and the 
employer may be citizens and residents of a foreign country and the 
contract of service may be entered into in a foreign country, and yet, 
if the employee under such contract performs services within the United 
States, there may be to that extent employment.
    (c) Services performed outside the United States--(1) In general. 
Except as provided in paragraphs (c)(2) and (3) of this section, 
services performed outside the United States (see Sec. 31.3121(e)-1) do 
not constitute employment.
    (2) On or in connection with an American vessel or American 
aircraft. (i) Services performed after 1954 by an employee for an 
employer ``on or in connection with'' an American vessel or American 
aircraft outside the United States (see Sec. 31.3121(e)-1) constitute 
employment if:
    (a) The employee is also employed ``on and in connection with'' such 
vessel or aircraft when outside the United States; and
    (b) The services are performed under a contract of service, between 
the employee and the employer, which is entered into within the United 
States, or during the performance of the contract under which the 
services are performed and while the employee is employed on the vessel 
or aircraft it touches at a port within the United States; and
    (c) The services are not excepted under section 3121(b).
    (ii) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on such vessel or aircraft 
which are also in connection with the vessel or aircraft. Services 
performed on the vessel by employees as officers or members of the crew, 
or as employees of concessionaires, of the vessel, for example, are 
performed under such circumstances, since such services are also 
connected with the vessel. Similarly, services performed on the aircraft 
by employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (iii) If services are performed by an employee ``on and in 
connection with'' an American vessel or American aircraft when outside 
the United States and the conditions listed in paragraph (c)(2)(i) (b) 
and (c) of this section are met, then the services of that employee 
performed on or in connection with the vessel or aircraft constitute 
employment. The expression ``on or in connection with'' refers not only 
to services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (iv) Services performed by a member of the crew or other employee 
whose contract of service is not entered into within the United States, 
and during the performance of which and while the employee is employed 
on the vessel or aircraft it does not touch at a port within the United 
States, do not constitute employment under this subparagraph, 
notwithstanding services

[[Page 37]]

performed by other members of the crew or other employees on or in 
connection with the vessel or aircraft may constitute employment.
    (v) A vessel includes every description of watercraft, or other 
contrivance, used as a means of transportation on water. An aircraft 
includes every description of craft, or other contrivance, used as a 
means of transportation through the air. In the case of an aircraft, the 
term ``port'' means an airport. An airport means an area on land or 
water used regularly by aircraft for receiving or discharging passengers 
or cargo. For definitions of ``American vessel'' and ``American 
aircraft'', see Sec. 31.3121(f)-1.
    (vi) With respect to services performed outside the United States on 
or in connection with an American vessel or American aircraft, the 
citizenship or residence of the employee is immaterial, and the 
citizenship or residence of the employer is material only in case it has 
a bearing in determining whether a vessel is an American vessel.
    (3) By a citizen of the United States as an employee for an American 
employer. Services performed after 1954 outside the United States by a 
citizen of the United States as an employee for an American employer 
constitute employment provided the services are not specifically 
excepted under section 3121(b). For definitions of ``citizen of the 
United States'' and ``American employer'', see Secs. 31.3121(e)-1 and 
3121 (h)-1, respectively.
    (4) By a citizen of the United States as an employee for a foreign 
subsidiary corporation. For provisions relating to the extension of the 
Federal old-age, survivors, and disability insurance system established 
by title II of the Social Security Act to certain services not 
constituting employment which are performed outside the United States by 
citizens of the United States in the employ of a foreign subsidiary of a 
domestic corporation, see section 3121(1) and Part 36 of this chapter 
(Regulations Relating to Contract Coverage of Employees of Foreign 
Subsidiaries).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8309, July 2, 1964]



Sec. 31.3121(b)-4  Employment; excepted services in general.

    (a) Services performed by an employee for an employer do not 
constitute employment for purposes of the taxes if they are specifically 
excepted from employment under any of the numbered paragraphs of section 
3121(b). Services so excepted do not constitute employment for purposes 
of the taxes even though they are performed within the United States, or 
are performed outside the United States on or in connection with an 
American vessel or American aircraft, or are performed outside the 
United States by a citizen of the United States for an American 
employer. If not otherwise provided in the regulations relating to the 
numbered paragraphs of section 3121(b), such regulations apply to 
services performed after 1954.
    (b) The exception attaches to the services performed by the employee 
and not to the employee as an individual; that is, the exception applies 
only to the services in an excepted class rendered by the employee.

    Example. A is an individual who is employed part time by B to 
perform services which are specifically excepted from employment under 
one of the numbered paragraphs of section 312(b). A is also employed by 
C part time to perform services which constitute employment. While no 
tax liability is incurred with respect to A's remuneration for services 
performed in the employ of B (the services being excepted from 
employment), the exception does not embrace the services performed by A 
in the employ of C (which constitute employment) and the taxes attached 
with respect to the wages (see Sec. 31.3121(a)-1) for such services.

    (c) For provisions relating to the circumstances under which 
services which are excepted are nevertheless deemed to be employment, 
and relating to the circumstances under which services which are not 
excepted are nevertheless deemed not to be employment, see 
Sec. 31.3121(c)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8310, July 2, 1964]

[[Page 38]]



Sec. 31.3121(b)(1)-1  Certain services performed by foreign agricultural workers, or performed before 1959 in connection with oleoresinous products.

    (a) Services of workers from Mexico. Services performed before 1965 
by foreign agricultural workers from the Republic of Mexico under 
contracts entered into in accordance with title V of the Agricultural 
Act of 1949, as amended, are excepted from employment. Contracts entered 
into pursuant to the provisions of such title V may provide for the 
performance only of services which constitute ``agricultural 
employment''. The term ``agricultural employment'' includes certain 
services which do not constitute ``agricultural labor'' as that term is 
defined in section 3121(g) (see Sec. 31.3121(g)-1. For purposes of title 
V of the Agricultural Act of 1949, as amended, the term ``agricultural 
employment'' includes services or activities included within the 
provisions of section 3(f) of the Fair Labor Standards Act of 1938, as 
amended, or section 3121(g) of the Internal Revenue Code. Under section 
507 of the Agricultural Act of 1949, as amended, and as in effect before 
October 3, 1961, the term ``agricultural employment'' included also 
horticultural employment, cotton ginning, compressing and storing, 
crushing of oil seeds, and the packing, canning, freezing, drying, or 
other processing of perishable or seasonable agricultural products.
    (b) Services of workers from British West Indies. Services performed 
by a foreign agricultural worker lawfully admitted to the United States 
from the Bahamas, Jamaica, or the other British West Indies, on a 
temporary basis to perform form agricultural labor are excepted from 
employment.
    (c) Services performed after 1956 by foreign workers. Services 
performed after 1956 by a foreign agricultural worker lawfully admitted 
to the United States from any foreign country or possession thereof, 
including the Republic of Mexico, on a temporary basis to perform 
agricultural labor are excepted from employment.
    (d) Services performed before 1959 in connection with the production 
or harvesting of certain oleoresinous products. Services performed 
before 1959 in connection with the production or harvesting of crude gum 
(oleoresin) from a living tree or the processing of such crude gum into 
gum spirits of turpentine and gum rosin, provided the processing is 
carried on by the original producer of the crude gum, are expected from 
employment. However, the services to which this paragraph relates 
constitute agricultural labor as defined in section 3121(g) (see 
paragraph (d) of Sec. 31.3121(g)-1). Thus, any cash remuneration paid 
for such services, to the extent that the services are deemed to 
constitute employment by reason of the rules relating to included and 
excluded services continued in section 3121(c) (see Sec. 31.3121(c)-1), 
is taken into account in applying the test prescribed in section 
3121(a)(8)(B) for determining whether cash remuneration paid for 
agricultural labor constitutes wages (see paragraph (c) of 
Sec. 31.3121(a)(8)-1).
    (e) Cross-reference. See paragraph (b) of Sec. 31.3121(b)-2 for 
provisions relating to the status of services of the character to which 
paragraphs (a) and (b) of this section apply which were performed before 
1955 and the remuneration for which is paid after 1954.
[T.D. 6744, 29 FR 8310, July 2, 1964]



Sec. 31.3121(b)(2)-1  Domestic service performed by students for certain college organizations.

    (a) Services of a household nature performed in or about the club 
rooms or house of a local college club, or in or about the club rooms or 
house of a local chapter of a college fraternity or sorority, by a 
student who is enrolled and regularly attending classes at a school, 
college, or university are excepted from employment. For purposes of 
this exception, the statutory tests are the type of services performed 
by the employee, the character of the place where the services are 
performed, and the status of the employee as a student enrolled and 
regularly attending classes at a school, college, or university.
    (b) In general, services of a household nature in or about the club 
rooms or house of a local college club or local chapter of a college 
fraternity or sorority include services rendered by cooks,

[[Page 39]]

waiters, butlers, maids, janitors, laundresses, furnacemen, handymen, 
gardeners, housekeepers, and housemothers.
    (c) A local college club or local chapter of a college fraternity or 
sorority does not include an alumni club or chapter. If the club rooms 
or house of a local college club or local chapter of a college 
fraternity or sorority is used primarily for the purpose of supplying 
board or lodging to students or the public as a business enterprise, the 
services performed therein are not within the exception.
    (d) The term ``school, college, or university'' within the meaning 
of this exception is to be taken in its commonly or generally accepted 
sense.
    (e) Services of a household nature are not within the exception if 
performed in or about rooming or lodging houses, boarding houses, clubs 
(except local college clubs) hotels, hospitals, eleemosynary 
institutions, or commercial offices or establishments.
    (f) For provisions relating to domestic service in a private home of 
the employer, see Sec. 31.3121(a)(7)-1.



Sec. 31.3121(b)(3)-1  Family employment.

    (a) Certain services are excepted from employment because of the 
existence of a family relationship between the employee and the 
individual employing him. The exceptions are as follows:
    (1) Services performed by an individual in the employ of his or her 
spouse;
    (2) (i) Services performed before 1961 by a father or mother in the 
employ of his or her son or daughter;
    (ii) Services not in the course of the employer's trade or business, 
or domestic service in a private home of the employer, performed after 
1960 but prior to 1968 by a father or mother in the employ of his or her 
son or daughter;
    (iii) Services not in the course of the employer's trade or 
business, or domestic service in a private home of the employer, 
performed after 1967 by a father or mother in the employ of his or her 
son or daughter unless (a) the employer has a child (including an 
adopted child or stepchild) living in his or her home who is under age 
18 or who has a mental or physical condition which requires the personal 
care and supervision of an adult for at least 4 continuous weeks in the 
calendar quarter in which the services are rendered; and (b) the 
employer is during the calendar quarter in which the services are 
rendered:
    (1) A widow or widower;
    (2) A divorced person who has not remarried; or
    (3) A married person who has a spouse living in the home who has a 
mental or physical condition which results in such spouse's being 
incapable of caring for such child for at least 4 continuous weeks in 
the calendar quarter in which the services are rendered; and
    (3) Services performed by a son or daughter under the age of 21 in 
the employ of his or her father or mother.
    (b) Under paragraph (a) (1) and (2) (i) of this section, the 
exception is conditioned solely upon the family relationship between the 
employee and the individual employing him. Under paragraph (a)(2) (ii) 
and (iii) of this section, in addition to the family relationship, there 
is a further requirement that the services performed after 1960 and 
before 1968 for purposes of paragraph (a)(2)(ii) and after 1967 for 
purposes of paragraph (a)(2)(iii) shall be services not in the course of 
the employer's trade or business or shall be domestic service in a 
private home of the employer. The terms ``services not in the course of 
the employer's trade or business'' and ``domestic service in a private 
home of the employer'' have the same meaning as when used in 
Sec. 31.3121(a) (7)-1, except that it is immaterial under paragraphs 
(a)(2) (ii) and (iii) of this section whether or not such services are 
performed on a farm operated for profit. The mere fact that a mental or 
physical disability, whether temporary or permanent, renders a child or 
spouse incapable of self-support does not necessarily mean that the 
child requires the personal care and supervision of an adult or that the 
spouse is incapable of caring for a child within the meaning of 
paragraph (a)(2)(iii) of this section. A written statement by a doctor 
of the existence of the mental or physical condition of the child or 
spouse which states that the child requires the personal care and 
supervision of an adult or that the spouse is incapable of caring for a 
child

[[Page 40]]

and which sets forth the period of time during which the condition has 
existed and is likely to exist will usually be sufficient evidence to 
establish the existence and duration of the condition at the time of the 
statement. Under paragraph (a)(3) of this section, in addition to the 
family relationship, there is a further requirement that the son or 
daughter shall be under the age of 21, and the exception continues only 
during the time that the son or daughter is under the age of 21.
    (c) Services performed in the employ of a corporation are not within 
the exception. Services performed in the employ of a partnership are not 
within the exception unless the requisite family relationship exists 
between the employee and each of the partners comprising the 
partnership.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8311, July 2, 1964; T.D. 7374, 40 FR 30950, July 24, 1975]



Sec. 31.3121(b)(4)-1  Services performed on or in connection with a non-American vessel or aircraft.

    (a) Services performed within the United States by an employee for 
an employer ``on or in connection with'' a vessel not an American 
vessel, or ``on or in connection with'' an aircraft not an American 
aircraft, are excepted from employment if--
    (1) The employee is employed by such employer ``on and in connection 
with'' such vessel or aircraft when outside the United States, and
    (2) (i) The employee is not a citizen of the United States, or (ii) 
the employer is not an American employer.
    (b) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on the vessel or aircraft 
when outside the United States which are also in connection with the 
vessel or aircraft. Services performed on the vessel outside the United 
States by employees as officers or members of the crew, or by employees 
of concessionaires, of the vessel, for example, are performed under such 
circumstances, since such services are also connected with the vessel. 
Similarly, services performed on the aircraft outside the United States 
by employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (c) The expression ``on or in connection with'' refers not only to 
services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (d) Services performed within the United States on or in connection 
with a non-American vessel or aircraft for an employer by an employee 
who is not a citizen of the United States are excepted from employment, 
irrespective of whether the employer is or is not an American employer, 
provided the employee also is employed by such employer on and in 
connection with the vessel or aircraft when outside the United States. 
Services performed within the United States on or in connection with a 
non-American vessel or aircraft by an employee for an employer who is 
not an American employer also are excepted from employment, irrespective 
of whether the employee is or is not a citizen of the United States, 
provided the employee also is employed by such employer on and in 
connection with the vessel or aircraft when outside the United States. 
Services performed within the United States on or in connection with a 
non-American vessel or aircraft for an American employer by an employee 
who is a citizen of the United States are not excepted from employment 
under section 3121(b)(4), irrespective of whether the employee is 
employed by such employer on and in connection with the vessel or 
aircraft when outside the United States. Further, section 3121(b)(4) 
does not except from employment services performed within the United 
States for an employer, whether or not an American employer,

[[Page 41]]

on or in connection with a non-American vessel or aircraft by an 
employee, whether or not a citizen of the United States, who is not also 
employed by such employer on and in connection with the vessel or 
aircraft when outside the United States.
    (e) Services performed outside the United States on or in connection 
with a vessel not an American vessel, or on or in connection with an 
aircraft not an American aircraft, by a citizen of the United States as 
an employee for an American employer are not excepted from employment 
under section 3121(b)(4), irrespective of whether the employee is 
employed on and in connection with such vessel or aircraft when outside 
the United States. Services performed outside the United States on or in 
connection with a vessel not an American vessel or on or in connection 
with an aircraft not an American aircraft, either by an employee who is 
not a citizen of the United States or for an employer who is not an 
American employer, do not, in any event, constitute employment. See 
paragraph (c) of Sec. 31.3121(b)-3, relating to services performed 
outside the United States which constitute employment.
    (f) See paragraph (c)(2)(v) of Sec. 31.3121(b)-3 for definitions of 
``vessel'' and ``aircraft'', Sec. 31.3121(f)-1, for definitions of 
``American vessel'' and ``American aircraft'', Sec. 31.3121(e)-1, for 
definition of ``citizen of the United States'', and Sec. 31.3121(h)-1, 
for definition of ``American employer''.



Sec. 31.3121(b)(5)-1  Services in employ of an instrumentality of the United States specifically exempted from the employer tax.

    Services performed in the employ of an instrumentality of the United 
States are excepted from employment if such instrumentality is exempt 
from the employer tax imposed by section 3111 by virtue of any other 
provision of law which specifically refers to such section 3111 or the 
corresponding section of prior law (section 1410 of the Internal Revenue 
Code of 1939) in granting exemption from the employer tax. This 
exception does not operate to exclude from employment services performed 
in the employ of an instrumentality of the United States unless the 
Congress has granted to such instrumentality a specific exemption from 
the tax imposed by section 3111 or the corresponding section of prior 
law. For provisions which make general exemptions from Federal taxation 
ineffectual as to the employer tax imposed by section 3111, see 
Sec. 31.3112-1. For other exceptions from employment applicable with 
respect to services performed in the employ of an instrumentality of the 
United States, see Sec. 31.3121(b)(6)-1.



Sec. 31.3121(b)(6)-1  Services in employ of United States or instrumentality thereof.

    (a) In general. This section relates to services performed in the 
employ of the United States Government or in the employ of an 
instrumentality of the United States. Particular services which are not 
excepted from employment under one rule set forth in this section may 
nevertheless be excepted under another rule set forth in this section or 
under Sec. 31.3121(b)(5)-1, relating to services in the employ of an 
instrumentality of the United States specifically exempted from the 
employer tax. Moreover, services performed in the employ of the United 
States or of any instrumentality thereof which are not excepted from 
employment under paragraph (5) or (6) of section 3121(b) may 
nevertheless be excepted under some other paragraph of such section. For 
provisions relating generally to the application of the taxes in the 
case of services performed in the employ of the United States or a 
wholly owned instrumentality thereof, see 3122. For provisions relating 
to the computation of remuneration for service performed by an 
individual as a member of a uniformed service or for service performed 
by an individual as a volunteer or volunteer leader within the meaning 
of the Peace Corps Act, see Sec. 31.3121(i)-2 and Sec. 31.3121(i)-3, 
respectively.
    (b) Services covered under a retirement system established by a law 
of the United States. Services performed in the employ of the United 
States or in the employ of any instrumentality thereof are excepted from 
employment under section 3121(b)(6)(A) if such services are covered 
under a law enacted by the Congress of the United States which

[[Page 42]]

specifically provides for the establishment of a retirement system for 
employees of the United States or of such instrumentality. 
Determinations as to whether services are covered by a retirement system 
of the requisite character are to be made as of the time such services 
are performed. Services of an employee who has an option to have his 
services covered under a retirement system are not covered under such 
retirement system unless and until he exercises such option. The test is 
whether particular services performed by an employee are covered by a 
retirement system of the requisite character rather than whether the 
position in which such services are performed is covered by such 
retirement system.
    (c) Services performed for an instrumentality not subject to 
employer tax on December 31, 1950, and covered under a retirement system 
established by such instrumentality. (1) Subject to the provisions of 
subparagraph (4) of this paragraph, services performed in the employ of 
an instrumentality of the United States are excepted from employment 
under section 3121(b)(6)(B) if--
    (i) The particular instrumentality was not subject on December 31, 
1950, to the employer tax imposed by section 1410 of the Internal 
Revenue Code of 1939, and
    (ii) The services are covered by a retirement system established by 
such instrumentality.
    (2) If the particular instrumentality was not in existence on 
December 31, 1950, but is created thereafter under a law which was in 
effect on December 31, 1950, services performed in the employ of such 
instrumentality are excepted from employment (unless otherwise provided 
in paragraph (c)(4) of this section) if--
    (i) The instrumentality had it been in existence on December 31, 
1950, would not have been subject on that date to the employer tax 
imposed by section 1410 of the Internal Revenue Code of 1939, and
    (ii) The services are covered by a retirement system established by 
such instrumentality.

It is immaterial, for purposes of this exception, whether the exemption 
from the employer tax on December 31, 1950, resulted, or would have 
resulted, from a tax exemption as such in effect on December 31, 1950, 
or from the provisions of section 1426(b) (6) of the Internal Revenue 
Code of 1939 in effect on that date, relating to the exception from 
employment of services performed in the employ of certain 
instrumentalities of the United States.
    (3) Determinations as to whether services performed in the employ of 
an instrumentality referred to in paragraph (c)(1) or (2) of this 
section are covered by a retirement system established by such 
instrumentality are to be made as of the time such services are 
performed. Services of an employee who has an option to have his 
services covered under a retirement system established by the 
instrumentality are not covered under such retirement system unless and 
until he exercises such option. The test is whether particular services 
performed by an employee are covered by a retirement system established 
by the instrumentality rather than whether the position in which such 
services are performed is covered by such retirement system.
    (4) The exception from employment provided in section 3121(b)(6)(B) 
has no application with respect to any of the following classes of 
services:
    (i) Services performed in the employ of a corporation which is 
wholly owned by the United States;
    (ii) Services performed in the employ of a production credit 
association, a Federal Reserve Bank, or a Federal Credit Union; services 
performed before December 31, 1959, in the employ of a national farm 
loan association; services performed after December 30, 1959, in the 
employ of a Federal land bank association; services performed after 
December 31, 1959, in the employ of a Federal land bank, a Federal 
intermediate credit bank, or a bank for cooperatives; services performed 
after December 31, 1972, in the employ of a Federal home loan bank; and 
services performed after December 31, 1966, and before January 1, 1973, 
in the employ of a Federal home loan bank, in the case of individuals 
who are in such employ on the latter date, provided that an amount equal 
to the taxes imposed by sections 3101 and 3111 with respect to

[[Page 43]]

all such services performed by all such individuals are paid under the 
provisions of section 3122 by July 1, 1973;
    (iii) Services performed in the employ of a State, county, or 
community committee under the Commodity Stabilization Service;
    (iv) Services performed by a civilian employee, not compensated from 
funds appropriated by the Congress, in the Army and Air Force Exchange 
Service, Army and Air Force Motion Picture Service, Navy Exchanges, 
Marine Corps Exchanges, or other activities, conducted by an 
instrumentality of the United States subject to the jurisdiction of the 
Secretary of Defense, at installations of the Department of Defense for 
the comfort, pleasure, contentment, and mental and physical improvement 
of personnel of such Department; or
    (v) Services performed by a civilian employee, not compensated from 
funds appropriated by the Congress, in the Coast Guard Exchanges or 
other activities, conducted by an instrumentality of the United States 
subject to the jurisdiction of the Secretary of the Treasury, at 
installations of the Coast Guard for the comfort, pleasure, contentment, 
and mental and physical improvement of personnel of the Coast Guard.
    (d) Special classes of services. The following classes of services 
performed either in the employ of the United States or in the employ of 
any instrumentality thereof are excepted from employment under section 
3121(b)(6)(C):
    (1) Services performed as the President or Vice President of the 
United States or a Member, Delegate, or Resident Commissioner, of or to 
the Congress of the United States;
    (2) Services performed in the legislative branch of the United 
States Government;
    (3) Services performed in a penal institution of the United States 
by an inmate thereof;
    (4) (i) Except as provided in paragraph (d)(4)(ii) of this section, 
services performed by student nurses, medical or dental interns, 
residents in training, student dietitians, student physical therapists, 
or student occupational therapists, assigned or attached to a hospital, 
clinic, or medical or dental laboratory operated by any department, 
agency, or instrumentality of the U.S. Government, or by certain other 
student employees described in section 5351(2) of title 5, United States 
Code.
    (ii) The provisions of paragraph (d)(4)(i) of this section have no 
application to services performed after 1965 by medical or dental 
interns or by medical or dental residents in training.
    (5) Services performed by an individual as an employee serving on a 
temporary basis in case of fire, storm, earthquake, flood, or other 
similar emergency; and
    (6) (i) Except as provided in paragraph (d)(6)(ii) of this section, 
services performed by an individual to whom subchapter III of chapter 83 
of title 5, United States Code (civil service retirement) does not apply 
because he is, with respect to such services, subject to another 
retirement system, established either by a law of the United States or 
by the agency or instrumentality of the United States for which such 
services are performed.
    (ii) The provisions of paragraph (d)(6)(i) of this section have no 
application to service performed by an individual to whom subchapter III 
of chapter 83 of title 5, United States Code (civil service retirement) 
does not apply because such individual is subject to the retirement 
system of the Tennessee Valley Authority, if such service is subject to 
the plan approved by the Secretary of Health and Human Services on 
December 28, 1956, pursuant to section 104 (i)(2) of the Social Security 
Amendments of 1956 (70 Stat. 827). See section 201(m)(4) of such 
amendments for provisions relating to the timeliness of payment of tax 
with respect to remuneration paid before 1957 for such services, and 
barring the imposition of interest on the amount of any such tax due for 
any period before December 28, 1956.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8311, July 2, 1964; T.D. 6983, 33 FR 18016, Dec. 4, 1968; T.D. 7373, 40 
FR 30957, July 24, 1975]

[[Page 44]]



Sec. 31.3121(b)(7)-1  Services in employ of States or their political subdivisions or instrumentalities.

    (a) In general. Except as provided in other paragraphs of this 
section, services performed in the employ of any State, any political 
subdivision of a State, or any instrumentality of one or more States or 
political subdivisions thereof which is wholly owned by one or more 
States or political subdivisions are excepted from employment. For the 
definition of the term ``State'', as used in this section, see 
Sec. 31.3121(e)-1.
    (b) Covered transportation service. The exception from employment 
under section 3121(b)(7) does not apply to covered transportation 
service as defined in section 3121(j). See that section and 31.3121(j)-
1.
    (c) Government of American Samoa. The exception from employment 
under section 3121(b)(7) does not apply to services performed after 1960 
in the employ of the Government of American Samoa, any political 
subdivision thereof, or any instrumentality of such Government or 
political subdivision, or combination thereof, which is wholly owned 
thereby, performed by an officer or employee thereof (including a member 
of the legislature of such Government or political subdivision).
    (d) District of Columbia. The exception from employment under 
section 3121(b)(7) does not apply to services performed after September 
30, 1965, in the employ of the District of Columbia or any 
instrumentality which is wholly owned thereby, if such service is not 
covered by a retirement system established by a law of the United 
States. Notwithstanding the preceding sentence the following classes of 
services performed either in the employ of the District of Columbia or 
in the employ of any instrumentality which is wholly owned thereby are 
excepted from employment:
    (1) Services performed in a hospital or penal institution by a 
patient or inmate thereof.
    (2) Services performed by student nurses, student dietitians, 
student physical therapists, or student occupational therapists assigned 
or attached to a hospital, clinic, or medical or dental laboratory 
operated by the District of Columbia or by any wholly owned 
instrumentality thereof, or by certain other student employees described 
in section 5351(2) of title 5, United States Code. This subparagraph 
does not apply to services performed by medical or dental interns or by 
medical or dental residents in training described in such section 
5351(2).
    (3) Services performed by an individual as an employee serving on a 
temporary basis in case of fire, storm, snow, earthquake, flood, or 
other similar emergency.
    (4) Services performed by a member of a board, committee, or council 
of the District of Columbia, paid on a per diem, meeting, or other fee 
basis.
    (e) Government of Guam. The exception from employment under section 
3121(b)(7) does not apply to services performed after 1972 in the employ 
of the Government of Guam or any instrumentality which is wholly owned 
thereby, by an employee properly classified as a temporary or 
intermittent employee, if such service is not covered by a retirement 
system established by a law of Guam. The preceding sentence shall not 
apply to the services performed by an elected official or a member of 
the legislature or in a hospital or penal institution by a patient or 
inmate thereof. For purposes of this paragraph--
    (1) Any person whose services as an officer or employee of such 
Government or instrumentality is not covered by a retirement system 
established by a law of the United States shall not, with respect to 
such service, be regarded as an employee of the United States or any 
agency or instrumentality thereof, and
    (2) The remuneration for service described in subparagraph (1) 
(including fees paid to a public official) shall be deemed to have been 
paid by such Government or instrumentality.
[T.D. 6744, 29 FR 8312, July 2, 1964, as amended by T.D. 6983, 33 FR 
18016, Dec. 4, 1968; T.D. 7373, 40 FR 30958, July 24, 1975]



Sec. 31.3121(b)(7)-2  Service by employees who are not members of a public retirement system.

    (a) Table of contents. This paragraph contains a listing of the 
major headings of this Sec. 31.3121(b)(7)-2.

[[Page 45]]

  Sec. 31.3121(b)(7)-2  Service by employees who are not members of a 
                        public retirement system.

    (a) Table of contents.
    (b) Introduction.
    (c) General rule.
    (1) Inclusion in employment of service by employees who are not 
members of a retirement system.
    (2) Treatment of individuals employed in more than one position.
    (d) Definition of qualified participant.
    (1) General rule.
    (2) Special rule for part time, seasonal and temporary employees.
    (3) Alternative lookback rule.
    (4) Treatment of former participants.
    (e) Definition of retirement system.
    (1) Requirement that system provide retirement-type benefits.
    (2) Requirement that system provide minimum level of benefits.
    (f) Transition rules.
    (1) Application of qualified participant rules during 1991.
    (2) Additional transition rules for plans in existence on November 
5, 1990.

    (b) Introduction. Under section 3121(b)(7)(F), wages of an employee 
of a State or local government are generally subject to tax under FlCA 
after July 1, 1991, unless the employee is a member of a retirement 
system maintained by the State or local government entity. This section 
31.3121(b)(7)-2 provides rules for determining whether an employee is a 
``member of a retirement system''. These rules generally treat an 
employee as a member of a retirement system if he or she participates in 
a system that provides retirement benefits, and has an accrued benefit 
or receives an allocation under the system that is comparable to the 
benefits he or she would have or receive under Social Security. In the 
case of part-time, seasonal and temporary employees, this minimum 
retirement benefit is required to be nonforfeitable.
    (c) General rule--(1) Inclusion in employment of service by 
employees who are not members of a retirement system. Except in the case 
of service described in sections 3121(b)(7)(F) (i) through (v), the 
exception from employment under section 3121(b)(7) does not apply to 
service in the employ of a State or any political subdivision thereof, 
or of any instrumentality of one or more of the foregoing that is wholly 
owned thereby, after July 1, 1991, unless the employee is a member of a 
retirement system of such State, political subdivision or 
instrumentality at the time the service is performed. An employee is not 
a member of a retirement system at the time service is performed unless 
at that time he or she is a qualified participant (as defined in 
paragraph (d) of this section) in a retirement system that meets the 
requirements of paragraph (e) of this section with respect to that 
employee.
    (2) Treatment of individuals employed in more than one position. 
Under section 3121(b)(7)(F), whether an employee is a member of a 
retirement system is determined on an entity-by-entity rather than a 
position-by-position basis. Thus, if an employee is a member of a 
retirement system with respect to service he or she performs in one 
position in the employ of a State, political subdivision or 
instrumentality thereof, the employee is generally treated as a member 
of a retirement system with respect to all service performed for the 
same State, political subdivision or instrumentality in any other 
positions. A State is a separate entity from its political subdivisions, 
and an instrumentality is a separate entity from the State or political 
subdivision by which it is owned for purposes of this rule. See 
paragraph (e)(2) of this section, however, for rules relating to service 
and compensation required to be taken into account in determining 
whether an employee is a member of a retirement system for purposes of 
this section. This rule is illustrated by the following examples:

    Example 1. An individual is employed full-time by a county and is a 
qualified participant (as defined in paragraph (d) of this section) in 
its retirement plan with regard to such employment. In addition to this 
full-time employment, the individual is employed part-time in another 
position with the same county. The part-time position is not covered by 
the county retirement plan, however, and neither the service nor the 
compensation in the part-time position is considered in determining the 
employee's retirement benefit under the county retirement plan. 
Nevertheless, if the retirement plan meets the requirements of paragraph 
(e) of this section with respect to the individual, the exclusion from 
employment under section 3121(b)(7) applies to both the employee's

[[Page 46]]

full-time and part-time service with the county.
    Example 2. An individual is employed full-time by a State and is a 
member of its retirement plan. The individual is also employed part-time 
by a city located in the State, but does not participate in the city's 
retirement plan. The services of the individual for the city are not 
excluded from employment under section 3121(b)(7), because the 
determination of whether services constitute employment for such 
purposes is made separately with respect to each political subdivision 
for which services are performed.

    (d) Definition of qualified participant--(1) General rule--(i) 
Defined benefit retirement systems. Whether an employee is a qualified 
participant in a defined benefit retirement system is determined as 
services are performed. An employee is a qualified participant in a 
defined benefit retirement system (within the meaning of paragraph 
(e)(1) of this section) with respect to services performed on a given 
day if, on that day, he or she is or ever has been an actual participant 
in the retirement system and, on that day, he or she actually has a 
total accrued benefit under the retirement system that meets the minimum 
retirement benefit requirement of paragraph (e)(2) of this section. An 
employee may not be treated as an actual participant or as actually 
having an accrued benefit for this purpose to the extent that such 
participation or benefit is subject to any conditions (other than 
vesting), such as a requirement that the employee attain a minimum age, 
perform a minimum period of service, make an election in order to 
participate, or be present at the end of the plan year in order to be 
credited with an accrual, that have not been satisfied. The rules of 
this paragraph (d)(1)(i) are illustrated by the following examples:

    Example 1. A State maintains a defined benefit plan that is a 
retirement system within the meaning of paragraph (e)(1) of this 
section. Under the terms of the plan, employees in positions covered by 
the plan must complete 6 months of service before becoming participants. 
The exception from employment in section 3121(b)(7) does not apply to 
services of an employee during the employee's 6 months of service prior 
to his or her initial entry into the plan. The same result occurs even 
if, upon the satisfaction of this service requirement, the employee is 
given credit under the plan for all service with the employer (i.e., if 
service is credited for the 6-month waiting period). This is true even 
if the employee makes a required contribution in order to gain the 
retroactive credit. The same result also occurs if the employee can 
elect to participate in the plan before the end of the 6-month waiting 
period, but does not elect to do so.
    Example 2. A political subdivision maintains a defined benefit plan 
that is a retirement system within the meaning of paragraph (e)(1) of 
this section. Under the terms of the plan, service during a plan year is 
not credited for accrual purposes unless a participant has at least 
1,000 hours of service during the year. Benefits that accrue only upon 
satisfaction of this 1,000-hour requirement may not be taken into 
account in determining whether an employee is a qualified participant in 
the plan before the 1,000-hour requirement is satisfied.

    (ii) Defined contribution retirement systems. Whether an employee is 
a qualified participant in a defined contribution retirement system is 
determined as services are performed. An employee is a qualified 
participant in a defined contribution or other individual account 
retirement system (within the meaning of paragraph (e)(1) of this 
section) with respect to services performed on a given day if, on that 
day, he or she has satisfied all conditions (other than vesting) for 
receiving an allocation to his or her account (exclusive of earnings) 
that meets the minimum retirement benefit requirement of paragraph 
(e)(2) of this section with respect to compensation during any period 
ending on that day and beginning on or after the beginning of the plan 
year of the retirement system. This is the case regardless of whether 
the allocations were made or accrued before the effective date of 
section 3121(b)(7)(F). This rule is illustrated by the following 
examples:

    Example 1. A State-owned hospital maintains a nonelective defined 
contribution plan that is a retirement system within the meaning of 
paragraph (e)(1) of this section. Under the terms of the plan, employees 
must be employed on the last day of a plan year in order to receive any 
allocation for the year. Employees may not be treated as qualified 
participants in the plan before the last day of the year.
    Example 2. Assume the same facts as in Example 1 except that, under 
the terms of the plan, an employee who terminates service before the end 
of a plan year receives a pro

[[Page 47]]

rata portion of the allocation he or she would have received at the end 
of the year, e.g., based on compensation earned since the beginning of 
the plan year. If the pro rata allocation available on a given day would 
meet the minimum retirement benefit requirement of paragraph (e)(2) of 
this section with respect to compensation from the beginning of the plan 
year through that day (or some later day), employees are treated as 
qualified participants in the plan on that day.
    Example 3. A political subdivision maintalns an elective defined 
contribution plan that is a retirement system within the meaning of 
paragraph (e)(1) of this section. The plan has a calendar year plan year 
and two open seasons--in December and June--when employees can change 
their contribution elections. In December, an employee elects not to 
contribute to the plan. In June, the employee elects (beginning July 1) 
to contribute a uniform percentage of compensation for each pay period 
to the plan for the remainder of the plan year. The employee is not a 
qualified participant in the plan during the period January-June, 
because no allocations are made to the employee's account with respect 
to compensation during that time, and it is not certain at that time 
that any allocations will be made. If the level of contributions during 
the period July-December meets the minimum retirement benefit 
requirement of paragraph (e)(2) of this section with respect to 
compensation during that period, however, the employee is treated as a 
qualified participant during that period.
    Example 4. Assume the same facts as in Example 3, except that the 
plan allows participants to cancel their elections in cases of economic 
hardship. In October, the employee suffers an economic hardship and 
cancels the election (effective November 1). If the contributions during 
the period July-October are high enough to meet the minimum retirement 
benefit requirement of paragraph (e)(2) of this section with respect to 
compensation during that period, the employee is treated as a qualified 
participant during that period. In addition, if the contributions during 
the period July-October are high enough to meet the requirements for the 
entire period July-December, the employee is treated as a qualified 
participant in the plan throughout the period July-December, even though 
no allocations are made to the employee's account in the last two months 
of the year. There is no requirement that the period used to determine 
whether an employee is a qualified participant on a given day remain the 
same from day to day, as long as the period begins on or after the 
beginning of the plan year and ends on the date the determination is 
being made.
    (2) Special rule for part-time, seasonal and temporary employees--
(i) In general. A part-time, seasonal or temporary employee is generally 
not a qualified participant on a given day unless any benefit relied 
upon to meet the requirements of paragraph (d)(1) of this section is 
100-percent nonforfeitable on that day. This requirement may be applied 
solely to the portion of an employee's benefit under the retirement 
system attributable to compensation and service while an employee is a 
part-time, seasonal or temporary employee, provided that such service is 
taken into account with respect to the remaining portion of the benefit 
for vesting purposes. Rules similar to the rules in section 411(a)(11) 
are applicable in determining whether a benefit is nonforfeitable. Thus, 
a benefit does not fail to be nonforfeitable solely because it can be 
immediately distributed upon separation of service without the consent 
of the employee, provided that the present value of the benefit does not 
exceed $3,500.
    (ii) Treatment of employees entitled to certain distributions upon 
death or separation from service. A part-time, seasonal or temporary 
employee's benefit under a retirement system is considered 
nonforfeitable within the meaning of paragraph (d)(2)(i) of this section 
on a given day if on that day the employee is unconditionally entitled 
under the retirement system to a single-sum distribution on account of 
death or separation from service of an amount that is at least equal to 
7.5 percent of the participant's compensation (within the meaning of 
paragraph (e)(2)(iii)(B) of this section) for all periods of credited 
service taken into account in determining whether the employee's benefit 
under the retirement system meets the minimum retirement benefit 
requirement of paragraph (e)(2) of this section. An employee will be 
considered to be unconditionally entitled to a single-sum distribution 
notwithstanding the fact that the distribution may be forfeitable (in 
whole or in part) upon a finding of such employee's criminal misconduct. 
The participant must be entitled to interest on the distributable amount 
through the date of distribution, at a rate meeting the requirements of 
paragraph (e)(2)(iii)(C) of this section, as part of the single sum.

[[Page 48]]

See paragraph (f)(2)(i)(C) for a transition rule relating to this 
nonforfeitable benefit safe harbor. The rule of this paragraph 
(d)(2)(ii) is illustrated by the following example:

    Example. An employee is required to contribute 7.5 percent of his or 
her compensation to a State's defined benefit plan each year. The 
contribution is ``picked up'' by the employer in accordance with section 
414(h). Under the plan, these amounts plus interest accrued since the 
date each amount was contributed are refundable to the employee in all 
cases upon the employee's death or separation from service with the 
employer. If the interest rate meets the requirements of paragraph 
(e)(2)(iii)(C) of this section, then the employee's benefits under the 
plan are considered nonforfeitable and thus meet the requirement of 
paragraph (d)(2)(i) of this section. Of course, the benefit under the 
plan must still meet the minimum retirement benefit requirement for 
defined benefit plans of paragraph (e)(2)(ii) of this section.

    (iii) Definitions of part-time, seasonal and temporary employee--(A) 
Definition of part-time employee. For purposes of this section, a part-
time employee is any employee who normally works 20 hours or less per 
week. A teacher employed by a post-secondary educational institution 
(e.g., a community or junior college, post-secondary vocational school, 
college, university or graduate school) is not considered a part-time 
employee for purposes of this section if he or she normally has 
classroom hours of one-half or more of the number of classroom hours 
designated by the educational institution as constituting full-time 
employment, provided that such designation is reasonable under all the 
facts and circumstances. In addition, elected officials and election 
workers (otherwise described in section 3121(b)(7)(F)(iv) but paid in 
excess of $100 annually) are not considered part-time, seasonal or 
temporary employees for purposes of this section. The rules of this 
paragraph (d)(2)(iii) are illustrated by the following example:

    Example. A community college treats a teacher as a full-time 
employee if the teacher is assigned to work 15 classroom hours per week. 
A new teacher is assigned to work 8 classroom hours per week. Because 
the assigned classroom hours of the teacher are at least one-half of the 
school's definition of full-time teacher, the teacher is not a part-time 
employee.

    (B) Definition of seasonal employee. For purposes of this section, a 
seasonal employee is any employee who normally works on a full-time 
basis less than 5 months in a year. Thus, for example, individuals who 
are hired by a political subdivision during the tax return season in 
order to process incoming returns and work full-time over a 3-month 
period are seasonal employees.
    (C) Definition of temporary employee. For purposes of this section, 
a temporary employee is any employee performing services under a 
contractual arrangement with the employer of 2 years or less duration. 
Possible contract extensions may be considered in determining the 
duration of a contractual arrangement, but only if, under the facts and 
circumstances, there is a significant likelihood that the employee's 
contract will be extended. Future contract extensions are considered 
significantly likely to occur for purposes of this rule if on average 80 
percent of similarly situated employees (i.e., those in the same or a 
similar job classification with expiring employment contracts) have had 
bona fide offers to renew their contracts in the immediately preceding 2 
academic or calendar years. In addition, future contract extensions are 
considered significantly likely to occur if the employee with respect to 
whom the determination is being made has a history of contract 
extensions with respect to his or her current position. An employee is 
not considered a temporary employee for purposes of this rule solely 
because he or she is included in a unit of employees covered by a 
collective bargaining agreement of 2 years or less duration.
    (D) Treatment of employees participating in certain systems. Whether 
an employee is a part-time, seasonal or temporary employee with respect 
to allocations or benefits under a retirement system is generally 
determined based on service in the position in which the allocations or 
benefits were earned, and does not take into account service in other 
positions with the same or different States, political subdivisions or 
instrumentalities thereof. All of an employee's service in other 
positions

[[Page 49]]

with the same or different States, political subdivisions or 
instrumentalities thereof may be taken into account for purposes of 
determining whether an employee is a part-time, seasonal or temporary 
employee with respect to benefits under the retirement system, however, 
Provided that: The employee's service in the other positions is or was 
covered by the retirement system; all service aggregated for purposes of 
determining whether an employee is a part-time, seasonal or temporary 
employee (and related compensation) is aggregated under the system for 
all purposes in determining benefits (including vesting); and the 
employee is treated at least as favorably as a full-time employee under 
the retirement system for benefit accrual purposes. The rule of this 
paragraph (d)(2)(iii)(D) is illustrated by the following example:

    Example. Assume that an employee works 15 hours per week for a 
county and 10 hours per week for a municipality, and that both of these 
political subdivisions contribute to the same state-wide public employee 
retirement system. Assume further that the employee's service in both 
positions is aggregated under the system for all purposes in determining 
benefits (including vesting). If the employee is covered under the 
retirement system with respect to both positions and is treated for 
benefit accrual purposes at least as favorably as full-time employees 
under the retirement system, then the employee is not considered a part-
time employee of either the county or the municipality for purposes of 
the nonforfeitable benefit requirement of paragraph (d)(2)(i) of this 
section.

    (3) Alternative lookback rule--(i) In general. An employee may be 
treated as a qualified participant in a retirement system throughout a 
calendar year if he or she was a qualified participant in such system 
(within the meaning of paragraphs (d) (1) and (2) of this section) at 
the end of the plan year of the system ending in the previous calendar 
year. This rule is illustrated by the following examples:

    Example 1. A political subdivision maintains a plan that is a 
retirement system within the meaning of paragraph (e)(1) of this 
section. An employee is a qualified participant within the meaning of 
paragraph (d)(1) of this section in the plan on the last day of the plan 
year ending on May 31, 1995. If the alternative lookback rule is used to 
determine FICA liability, no such liability exists with respect to the 
employee or employer for calendar year 1996 by reason of section 
3121(b)(7)(F). The same result would apply if the determination is being 
made with respect to calendar year 1992 and the lookback year was the 
plan year ending May 31, 1991, even though that plan year ended before 
the effective date of section 3121(b)(7)(F).
    Example 2. A political subdivision maintains an elective defined 
contribution plan described in section 457(b) of the Code. An employee 
is eligible to participate in the plan but does not elect to contribute 
for a plan year. Under the general rule of paragraph (d)(1) of this 
section, the employee is not a qualified participant in the plan during 
the plan year because contributions sufficient to meet the minimum 
retirement benefit requirement of paragraph (e)(2) of this section are 
not being made. However, if an employee's status as a qualified 
participant is being determined under the alternative lookback rule, 
then the employee is a qualified participant for the calendar year in 
which the determination is being made if he of she was a qualified 
participant as of the end of the plan year that ended in the previous 
calendar year.

    (ii) Application in first year of participation. If the alternative 
lookback rule is used, an employee who participates in the retirement 
system may be treated as a qualified participant on any given day during 
his or her first plan year of participation in a retirement system 
(within the meaning of paragraph (e)(1) of this section) if and only if 
it is reasonable on such day to believe that the employee will be a 
qualified participant (within the meaning of paragraphs (d)(1) and (2) 
of this section) on the last day of such plan year. In the case of a 
defined contribution retirement system, the determination of whether the 
employee is actually (or is expected to be) a qualified participant at 
the end of the plan year must take into account all compensation since 
the commencement of participation. See paragraph (d)(3)(iv) of this 
section. If this reasonable belief is correct, and the employee is a 
qualified participant on the last day of his or her first plan year of 
participation, then the exception from employment in section 3121(b)(7) 
will apply without regard to section 3121(b)(7)(F) to services of the 
employee for the balance of the calendar year in which the plan year 
ends. For purposes of this paragraph (d)(3)(ii), it is not reasonable to 
assume

[[Page 50]]

the establishment of a new plan until such establishment actually 
occurs. In addition, the rule in this paragraph (d)(3)(ii) may not be 
used to treat an employee as a qualified participant until the employee 
actually becomes a participant in the retirement system. In the case of 
a retirement system that does not permit a new employee to participate 
until the first day of the first month beginning after the employee's 
commencement of service, or some earlier date, a new employee who is not 
a part-time, seasonal or temporary employee may be treated as a 
qualified participant until such date. This 1-month rule of 
administrative convenience applies without regard to whether the 
employer has a reasonable belief that the employee will be a qualified 
participant. The rules of this paragraph (d)(3)(ii) are illustrated by 
the following examples:

    Example 1. A political subdivision maintains a plan that is a 
retirement system within the meaning of paragraph (e)(1) of this section 
and uses the alternative lookback rule of this paragraph (d)(3). Under 
the terms of the plan, service during a plan year is not credited for 
accrual purposes unless a participant has at least 1,000 hours of 
service during the year. Assume that an employee becomes a participant. 
If it is reasonable to believe that the employee will be credited with 
1,000 hours of service by the last day of his or her first year of 
participation and thereby become a qualified participant by reason of 
accruing a benefit that meets the minimum retirement benefit requirement 
of paragraph (e)(2) of this section, the services of the employee are 
not subject to FICA tax from the date of initial participation until the 
end of that plan year. If the employee is a qualified participant on the 
last day of his or her first plan year of participation, then the 
exception from employment for purposes of FICA will apply to services of 
the employee for the balance of the calendar year in which the plan year 
ended.
    Example 2. Assume the same facts as Example 1, except that the 
employee is a newly hired employee and the plan provides that an 
employee may not participate until the first day of his or her first 
full month of employment. Under the 1-month rule of convenience, the 
employee may be treated as a qualified participant until the first date 
on which he or she could participate in the plan.

    (iii) Application in last year of participation. If the alternative 
lookback rule is used, an employee may be treated as a qualified 
participant on any given day during his or her last year of 
participation in a retirement system (within the meaning of paragraph 
(e)(1) of this section) if and only if it is reasonable to believe on 
such day that the employee, will be a qualified participant (within the 
meaning of paragraphs (d)(1) and (2) of this section) on his or her last 
day of participation. For purposes of this paragraph (d)(3)(iii), an 
employee's last year of participation means the plan year that the 
employer reasonably ascertains is the final year of such employee's 
participation (e.g., where the employee has a scheduled retirement date 
or where the employer intends to terminate the plan).
    (iv) Special rule for defined contribution retirement systems. An 
employee may not be treated as a qualified participant in a defined 
contribution retirement system under this paragraph (d)(3) if 
compensation for less than a full plan year or other 12-month period is 
regularly taken into account in determining allocations to the 
employee's account for the plan year unless, under all of the facts and 
circumstances, such arrangement is not a device to avoid the imposition 
of FICA taxes. For example, an arrangement under which compensation 
taken into account is limited to the contribution base described in 
section 3121(x)(1) is not considered a device to avoid FICA taxes by 
reason of such limitation. See paragraph (e)(2)(iii)(B) of this section 
for a rule permitting the use of such limitation. This rule is 
illustrated by the following example:

    Example. A political subdivision maintains a defined contribution 
plan that covers all of its full-time employees and is a retirement 
system within the meaning of paragraph (e)(1) of this section. Under the 
plan, a portion of each participant's compensation in the final month of 
every plan year is allocated to the participant's account. Employees 
covered under the plan generally may not be treated as qualified 
participants under the alternative lookback rule for any portion of the 
calendar year following the year in which such allocation is made.

    (v) Consistency requirement. Beginning with calendar year 1992, if 
the alternative lookback rule is used to determine whether an employee 
is a qualified participant, it must be used consistently from year to 
year and with respect to all employees of the State,

[[Page 51]]

political subdivision or instrumentality thereof making the 
determination. If a retirement system is sponsored by more than one 
State, political subdivision or instrumentality, this consistency 
requirement applies separately to each plan sponsor.
    (4) Treatment of former participants--(i) In general. In general, 
the rules of this paragraph (d) apply equally to former participants who 
continue to perform service for the same State, political subdivision or 
instrumentality thereof or who return after a break in service. Thus, 
for example, a former employee of a political subdivision with a 
deferred benefit under a defined benefit retirement system maintained by 
the political subdivision who is reemployed by the political subdivision 
but does not resume participation in the retirement system, may continue 
to be a qualified participant in the system after becoming reemployed if 
his or her total accrued benefit under the system meets the minimum 
retirement benefit requirement of paragraph (e)(2) of this section 
(taking into account all periods of service (including current service) 
required to be taken into account under that paragraph). See also 
paragraph (e)(2)(v) of this section for situations in which benefits 
under a retirement system may be taken into account even though they 
relate to service for another employer.
    (ii) Treatment of re-hired annuitants. An employee who is a former 
participant in a retirement system maintained by a State, political 
subdivision or instrumentality thereof, who has previously retired from 
service with the State, political subdivision or instrumentality, and 
who is either in pay status (i.e., is currently receiving retirement 
benefits) under the retirement system or has reached nomal retirement 
age under the retirement system, is deemed to be a qualified participant 
in the retirement system without regard to whether he or she continues 
to accrue a benefit or whether the distribution of benefits under the 
retirement system has been suspended pending cessation of services. This 
rule also applies in the case of an employee who has retired from 
service with another State, political subdivision or instrumentality 
thereof that maintains the same retirement system as the current 
employer, provided the employee is a former participant in the system by 
reason of the employee's former employment. Thus, for example, if a 
teacher retires from service with a school district that participates in 
a state-wide teachers' retirement system, begins to receive benefits 
from the system, and later becomes a substitute teacher in another 
school district that participates in the same state-wide system, the 
employee is treated as a re-hired annuitant under this paragraph 
(d)(4)(ii).
    (e) Definition of retirement system--(1) Requirement that system 
provide retirement-type benefits. For purposes of section 3121(b)(7)(F), 
a retirement system includes any pension, annuity, retirement or similar 
fund or system within the meaning of section 218 of the Social Security 
Act that is maintained by a State, political subdivision or 
instrumentality thereof to provide retirement benefits to its employees 
who are participants. Whether a plan is maintained to provide retirement 
benefits with respect to an employee is determined under the facts and 
circumstances of each case. For example, a plan providing only retiree 
health insurance or other deferred welfare benefits is not considered a 
retirement system for this purpose. The legal form of the system is 
generally not relevant. Thus, for example, a retirement system may 
include a plan described in section 401(a), an annuity plan or contract 
under section 403 or a plan described in section 457(b) or (f) of the 
Internal Revenue Code. In addition, the Social Security system is not a 
retirement system for purposes of section 3121(b)(7)(F) and this 
section. These rules are illustrated by the following examples:

    Example 1. Under an employment arrangement, a portion of an 
employee's compensation is regularly deferred for 5 years. Because a 
plan that defers the receipt of compensation for a short span of time 
rather than until retirement is not a plan that provides retirement 
benefits, this arrangement is not a retirement system for purposes of 
section 3121(b)(7)(F).
    Example 2. An individual holds two positions with the same political 
subdivision. The wages earned in one position are subject to FICA tax 
pursuant to an agreement (under section 218 of the Social Security Act)

[[Page 52]]

between the Secretary of Health and Human Services and the State in 
which the political subdivision is located. Because the Social Security 
system is not a retirement system for purposes of section 3121(b)(7)(F), 
the exception from employment in section 3121(b)(7) does not apply to 
service in the other position unless the employee is otherwise a member 
of a retirement system of such political subdivision.

    (2) Requirement that system provide minimum level of benefits--(i) 
In general. A pension, annuity, retirement or similar fund or system is 
not a retirement system with respect to an employee unless it provides a 
retirement benefit to the employee that is comparable to the benefit 
provided under the Old-Age portion of the Old-Age, Survivor and 
Disability Insurance program of Social Security. Whether a retirement 
system meets this requirement is generally determined on an individual-
by-individual basis. Thus, for example, a pension plan that is not a 
retirement system with respect to an employee may nevertheless be a 
retirement system with respect to other employees covered by the system.
    (ii) Defined benefit retirement systems. A defined benefit 
retirement system maintained by a State, political subdivision or 
instrumentality thereof meets the requirements of this paragraph (e)(2) 
with respect to an employee on a given day if and only if, on that day, 
the employee has an accrued benefit under the system that entitles the 
employee to an annual benefit commencing on or before his or her Social 
Security retirement age that is at least equal to the annual Primary 
Insurance Amount the employee would have under Social Security. For this 
purpose, the Primary Insurance Amount an individual would have under 
Social Security is determined as it would be under the Social Security 
Act if the employee had been covered under Social Security for all 
periods of service with the State, political subdivision or 
instrumentality, had never performed service for any other employer, and 
had been fully insured within the meaning of section 214(a) of the 
Social Security Act, except that all periods of service with the State, 
political subdivision or instrumentality must be taken into account 
(i.e., without reduction for low-earning years).
    (iii) Defined contribution retirement systems--(A) In general. A 
defined contribution retirement system maintained by a State, political 
subdivision or instrumentality thereof meets the requirements of 
paragraph (e)(2)(i) of this section with respect to an employee if and 
only if allocations to the employee's account (not including earnings) 
for a period are at least 7.5 percent of the employee's compensation for 
service for the State, political subdivision or instrumentality during 
the period. Matching contributions by the employer may be taken into 
account for this purpose.
    (B) Definition of compensation. The definition of compensation used 
in determining whether a defined contribution retirement system meets 
the minimum retirement benefit requirement must generally be no less 
inclusive than the definition of the employee's base pay as designated 
by the employer or the retirement system, provided such designation is 
reasonable under all the facts and circumstances. Thus, for example, a 
defined contribution retirement system will not fail to meet this 
requirement merely because it disregards for all purposes one or more of 
the following: overtime pay, bonuses, or single-sum amounts received on 
account of death or separation from service under a bona fide vacation, 
compensatory time or sick pay plan, or under severance pay plans. 
Furthermore, any compensation remaining after such amounts are 
disregarded that is in excess of the contribution base described in 
section 3121(x)(1) at the beginning of the plan year may also be 
disregarded. The rules of this paragraph are illustrated by the 
following example:

    Example. A political subdivision maintains an elective defined 
contribution plan that is a retirement system within the meaning of 
paragraph (e)(1) of this section. The plan has a calendar year plan 
year. In 1995, an employee contributes to the plan at a rate of 7.5 
percent of base pay. Assume that the employee will reach the maximum 
contribution base described in section 3121(x)(1) in October of 1995. 
The employee is a qualified participant in the plan for all of the 1995 
plan year without regard to whether the employee ceases to participate 
at any time after reaching the maximum contribution base.


[[Page 53]]


    (C) Reasonable interest rate requirement. A defined contribution 
retirement system does not satisfy this paragraph (e)(2) with respect to 
an employee unless the employee's account is credited with earnings at a 
rate that is reasonable under all the facts and circumstances, or 
employees' accounts are held in a separate trust that is subject to 
general fiduciary standards and are credited with actual earnings on the 
trust fund. Whether the interest rate with which an employee's account 
is credited is reasonable is determined after reducing the rate to 
adjust for the payment of any administrative expenses. The rule of this 
paragraph (e)(2)(iii)(C) is illustrated by the following example:

    Example. A political subdivision maintains a defined contribution 
plan described in section 457(b). Under the plan, the accounts of 
participants are credited annually on the basis of a variable interest 
rate formula determined as of the beginning of the plan year. The 
formula requires an interest rate (after adjustment for administrative 
expense payments) equal to 100 percent of the Applicable Federal Rate 
for long-term debt instruments. This interest rate constitutes a 
reasonable rate of interest.

    (iv) Treatment of emloyees employed in more than one position with 
the same entity. All service and compensation of an employee with 
respect to his or her employment with a State, political subdivision or 
instrumentality thereof must generally be considered in determining 
whether a benefit meets the requirement of this paragraph (e)(2). 
However, for individuals employed simultaneously in multiple positions 
with the same entity, this determination may (but is not required to) be 
made solely by reference to the service and compensation related to a 
single position of the employee with the State, political subdivision or 
instrumentality thereof making the determination, provided that the 
position is not a part-time, seasonal or temporary position.
    (v) Treatment of employees participating in certain systems. In 
general, only compensation from and service for the State, political 
subdivision or instrumentality thereof that employs the employee (and 
the allocations or benefits related to such compensation or service) on 
a given day are considered in determining whether the employee's benefit 
under the retirement system on that day meets the requirements of this 
paragraph (e)(2), even if the employee has other allocations or benefits 
under the same retirement system from service with another State, 
political subdivision or instrumentality thereof. However, an employee's 
total allocations or benefits under a retirement system maintained by 
multiple States, political subdivisions or instrumentalities thereof 
(including the current employer) may be taken into account if:
    (A) The compensation and service on which the additional allocations 
or benefits are based are also taken into account in determining whether 
the employee's allocations or benefits satisfy the minimum retirement 
benefit requirement;
    (B) The retirement system takes all service and compensation of the 
employee in all positions covered by the system into account for all 
benefit determination purposes; and
    (C) If the employee is a part-time, seasonal or temporary employee, 
he or she is treated under the plan for benefit accrual purposes in as 
favorable a manner as a full-time employee participating in the system.
    (vi) Additional testing methods. Additional testing methods may be 
designated by the Commissioner in revenue procedures, revenue rulings, 
notices or other documents of general applicability.
    (f) Transition rules--(1) Application of qualified participant rules 
during 1991--(i) In general. An employee may be treated as a qualified 
participant in a retirement system (within the meaning of paragraph 
(e)(1) of this section) on a given day during the period July 1 through 
December 31, 1991, if it is reasonable on that day to believe that he or 
she will be a qualified participant under the general rule in paragraphs 
(d) (1) and (2) of this section by January 1, 1992 (taking into account 
only service and compensation on or after such date). For purposes of 
this paragraph (f)(1)(i), given the facts and circumstances of a 
particular case, it may be reasonable to assume that the terms of a plan 
will be changed or that a new retirement system will be established

[[Page 54]]

by the end of calendar year 1991, as long as affirmative steps have been 
taken to accomplish this result.
    (ii) Extension of reliance period if legislative action required. If 
a plan amendment or other action is necessary in order to treat an 
employee as a member of a retirement system for purposes of this 
section, such amendment or other action may only be taken by a 
legislative body that does not convene during the period July 1, 1991, 
through December 31, 1991, and the other requirements of paragraph 
(f)(1)(i) of this section are met, the end of the reasonable reliance 
period (including the rule that service and compensation prior to that 
date may be disregarded) provided under paragraph (f)(1)(i) of this 
section is extended from December 31, 1991, to the date that is the last 
day of the first legislative session commencing after December 31, 1991. 
These rules are illustrated by the following examples:

    Example 1. A State maintains a defined benefit plan that meets the 
requirements of paragraph (e) of this section. The plan does not cover a 
particular class of full-time employees as of July 1, 1991. However, in 
light of the enactment of section 3121(b)(7)(F), State officials 
administering the plan for the State intend to request that the 
legislature amend the State statute to include that class of employees 
in the existing plan and otherwise to modify the terms of the plan to 
meet the requirements of section 3121(b)(7)(F) and this section. The 
State legislature meets from January through March each year, and 
legislative action is required to expand coverage under the plan. State 
officials administering the plan have publicized the proposed amendment 
providing for the addition of these employees to the plan. Under the 
transition rule for 1991, if it is reasonable to believe that the 
legislature will pass this bill in the 1992 session, service by the 
employees who will be covered under the plan by reason of the amendment 
is not treated as employment by reason of section 3121(b)(7)(F) during 
the period prior to April 1, 1992. This is true regardless of whether 
the plan provides retroactive coverage for the period July 1, 1991 
through March 31, 1992.
    Example 2. Assume the same facts as in Example 1, except that 
legislative action is not required in order to expand coverage under the 
plan, and that publication of the proposed change to the plan occurs in 
1991. Assume further that coverage is expanded under the plan to include 
the new class of full-time employees as of April 1, 1992. Despite this 
action, in this situation the service by those employees during the 
period January 1, 1992 through March 31, 1992 is not excluded from 
``employment'' under section 3121(b)(7)(F), and wages for that period 
are generally subject to FICA taxes even if the plan provides 
retroactive coverage for any portion of the period July 1, 1991 to March 
31, 1992.

    (2) Additional transition rules for plans in existence on November 
5, 1990--(i) Application of minimum retirement benefit requirement to 
defined benefit retirement systems in plan years beginning before 1993--
(A) In general. A defined benefit retirement system maintained by a 
State, political subdivision or instrumentality thereof on November 5, 
1990, is not subject to the minimum retirement benefit requirement of 
paragraph (e)(2) of this section for any plan year beginning before 
January 1, 1993, with respect to individuals who were actually covered 
under the system on November 5, 1990. Such a retirement system is also 
not subject to the minimum retirement benefit requirement of paragraph 
(e)(2) of this section with respect to an employee who becomes a 
participant after November 5, 1990, if he or she is employed in a 
position that was covered under the retirement system on November 5, 
1990, without regard to whether such coverage was mandatory or elective. 
A retirement system is not described in this paragraph (f)(2)(i)(A) if 
there has been a material decrease in the level of retirement benefits 
under the retirement system pursuant to an amendment adopted subsequent 
to November 5, 1990. Whether such a material decrease in benefits has 
occurred is determined under the facts and circumstances of each case. A 
decrease in benefits is not material to the extent that it does not 
decrease the benefit payable at normal retirement age. These rules are 
illustrated by the following examples:

    Example 1. The retirement formula under a retirement plan that was 
in existence on November 5, 1990, is amended to use career average 
compensation instead of a high 3-year average, without any increase in 
the benefit formula. This amendment constitutes a material decrease in 
the level of benefit under the retirement plan. Therefore, the 
retirement plan is subject to the minimum retirement benefit requirement 
for the plan year for which the amendment is effective and for all 
succeeding plan years.
    Example 2. A defined benefit retirement plan that was in existence 
on November 5,

[[Page 55]]

1990, is subsequently amended to include part-time employees. 
Previously, this class of employees was not covered under the plan 
either on a mandatory or on an elective basis. The plan is subject to 
the minimum retirement benefit requirement with respect to the part-time 
employees because this class of employees was previously excluded from 
coverage under the retirement plan. Of course, the nonforfeitable 
benefit rule applies to the benefit relied upon to meet the minimum 
retirement benefit requirement with respect to any part-time, seasonal 
or temporary employee covered during this period.

    (B) Treatment in plan years beginning after 1992 of benefits accrued 
during previous plan years. The general rule that a defined benefit 
retirement system meets the minimum retirement benefit requirement on 
the basis of total benefits and service accrued to date is modified for 
plans in existence on November 5, 1990. If a defined benefit retirement 
system in existence on November 5, 1990, does not meet the minimum 
retirement benefit requirement solely because the benefits accrued for 
an employee (with respect to whom the system is entitled to relief under 
paragraph (f)(2)(i)(A) of this section) as of the last day of the last 
plan year beginning before January 1, 1993, do not meet the minimum 
retirement benefit requirement of paragraph (e)(2) of this section with 
respect to service and compensation before that time, then the 
retirement system will be deemed to comply with the requirements of 
paragraph (e)(2) of this section if the future service accruals would 
comply with the requirement of paragraph (e)(2) of this section. If 
retirement benefits under a retirement system in existence on November 
5, 1990 are materially decreased within the meaning of paragraph 
(f)(2)(i)(A) of this section, then the date the decrease is effective is 
substituted for January 1, 1993 for purposes of this paragraph. The rule 
of this paragraph (f)(2)(i)(B) is illustrated by the following example:

    Example. A defined benefit plan maintained by a State was in 
existence on November 5, 1990. It provides a retirement benefit on the 
last day of the 1992 plan year that is insufficient to meet the 
requirements of paragraph (e)(2) of this section based on employees' 
total service and compensation with the State at that time. The plan 
will nevertheless meet the requirements of paragraph (e)(2) of this 
section if it is amended to provide benefits sufficient to meet the 
requirements of paragraph (e)(2) of this section based on employees' 
service and compensation in plan years beginning after December 31, 
1992.

    (C) Treatment of part-time, seasonal or temporary employees. A 
defined benefit retirement system is not exempt from the minimum 
retirement benefit requirement with respect to a part-time, seasonal or 
temporary employee during the transition period provided in paragraph 
(f)(2)(i)(A) of this section unless any retirement benefit provided to 
the employee is 100-percent nonforfeitable within the meaning of 
paragraph (d)(2) of this section. In determining whether the benefit is 
nonforfeitable, the special rule in paragraph (d)(2)(ii) of this section 
is modified in two respects during the transition period: first, the 
percentage of compensation required to be available for distribution is 
reduced from 7.5 percent to 6 percent; and second, the period of service 
with respect to which compensation must be determined is modified to 
include all periods of participation by the employee in the system since 
July 1, 1991.
    (ii) Application of minimum retirement benefit requirement to 
defined contribution retirement systems in plan years beginning before 
1993. A defined contribution retirement system maintained by a State, 
political subdivision or instrumentality thereof on November 5, 1990, 
meets the minimum retirement benefit requirement of paragraph (e) (2) of 
this section with respect to an employee for any plan year beginning 
before January 1, 1993, if mandatory allocations to the employee's 
account (not including earnings) for a period are at least 6 percent 
(rather than 7.5 percent) of the employee's compensation for service to 
the State, political subdivision or instrumentality during the period, 
and the plan otherwise meets the requirements of paragraph (e)(2)(iii) 
of this section. This transition rule is only available with respect to 
an employee who is actually covered under the system on November 5, 
1990, and to an employee who becomes a participant after November 5, 
1990, if he or she is employed in a position that was covered under the 
retirement system on November 5, 1990, without regard to

[[Page 56]]

whether such coverage was mandatory or elective. In addition, this 
transition rule is not available with respect to a part-time, seasonal 
or temporary employee unless the mandatory allocation required under 
this paragraph (f)(2)(ii) is 100-percent nonforfeitable within the 
meaning of paragraph (d)(2) of this section. A retirement system is not 
described in this paragraph (f)(2)(ii) if there has been a material 
decrease in the level of retirement benefits under the retirement system 
pursuant to an amendment adopted subsequent to November 5, 1990. Whether 
such a material decrease in benefits has occurred is determined under 
all the facts and circumstances.
    (iii) Application of qualified participant rules. A participant with 
respect to whom relief is granted under paragraph (f)(2)(i)(A) of this 
section may be treated as a qualified participant in the defined benefit 
retirement system on a given day if, on that day, he or she is actually 
a participant in the retirement system, and, on that day, it is 
reasonable to believe that the participant will actually accrue a 
benefit before the end of the plan year of such retirement system in 
which the determination is made. A participant is not treated as 
accruing a benefit for purposes of this rule if his or her accrued 
benefits increase solely as a result of an increase in compensation. 
However, an employee is treated as a qualified participant for a plan 
year if the employee meets all of the applicable conditions for accruing 
the maximum current benefit for such year but fails to accrue a benefit 
solely because of a uniformly applicable benefit limit under the plan. 
In addition, an employee may be treated as a qualified participant in 
the system on a given day if the employee is a re-hired annuitant within 
the meaning of paragraph (d)(4)(ii) of this section. This rule is 
illustrated by the following example:

    Example. A political subdivision maintains a defined benefit plan 
that is a retirement system within the meaning of paragraph (e)(1) of 
this section but does not meet the requirements of paragraph (e)(2) of 
this section. If the plan is not subject to the minimum retirement 
benefit requirement, an employee who is a participant in the retirement 
plan as of the end of a plan year beginning before January 1, 1993, and 
may reasonably be expected to accrue a benefit under the plan by the end 
of such plan year may be treated as a qualified participant in the plan 
throughout the plan year regardless of the actual amount of the accrual.
[T.D. 8354, 56 FR 29570, June 28, 1991; 56 FR 40246, Aug. 14, 1991]



Sec. 31.3121(b)(8)-1  Services performed by a minister of a church or a member of a religious order.

    (a) In general. Services performed by a duly ordained, commissioned, 
or licensed minister of a church in the exercise of his ministry, or by 
a member of a religious order in the exercise of his duties required by 
such order, are excluded from employment, except that services performed 
by a member of such an order in the exercise of such duties (whether 
performed for the order or for another employer) are included in 
employment if an election of coverage under section 3121(r) and 
Sec. 31.3121(r)-1 is in effect with respect to such order or with 
respect to the autonomous subdivision thereof to which such member 
belongs. For provisions relating to the election available to certain 
ministers and members of religious orders with respect to the extension 
of the Federal old-age, survivors, and disability insurance system 
established by title II of the Social Security Act to certain services 
performed by them, see Part 1 of this chapter (Income Tax Regulations).
    (b) Service by a minister in the exercise of his ministry. Except as 
provided in paragraph (c)(3) of this section, service performed by a 
minister in the exercise of his ministry includes the ministration of 
sacerdotal functions and the conduct of religious worship, and the 
control, conduct, and maintenance of religious organizations (including 
the religious boards, societies, and other integral agencies of such 
organizations), under the authority of a religious body constituting a 
church or church denomination. The following rules are applicable in 
determining whether services performed by a minister are performed in 
the exercise of his ministry:
    (1) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of

[[Page 57]]

sacerdotal functions depends on the tenets and practices of the 
particular religious body constituting his church or church 
denomination.
    (2) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenets and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (3) (i) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization.
    (ii) The rule in paragraph (b)(3)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.

    (4) (i) If a minister is performing service for an organization 
which is operated as an integral agency, of a religious organization 
under the authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control conduct, and maintenance of such organization (see paragraph 
(b)(2) of this section) is in the exercise of his ministry.
    (ii) The rule in paragraph (b)(4)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as director of one of its departments. He performs no 
other service. The N Religious Board is an integral agency of O, a 
religious organization operating under the authority of a religious body 
constituting a church denomination. M is performing service in the 
exercise of his ministry.

    (5) (i) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such service may not involve the conduct of religious 
worship or the ministration of sacerdotal functions, is in the exercise 
of his ministry.
    (ii) The rule in paragraph (b)(5)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. (1) 
Section 3121(b)(8)(A) does not except from employment service performed 
by a duly ordained, commissioned, or licensed minister of a church which 
is not in the exercise of his ministry.
    (2) (i) If a minister is performing service for an organization 
which is neither a religious organization nor operated as an integral 
agency of a religious organization and the service is not performed 
pursuant to an assignment or designation by his ecclesiastical 
superiors, then only the service performed by him in the conduct of 
religious worship or the ministration of sacerdotal functions is in the 
exercise of his ministry. See, however, paragraph (c)(3) of this 
section.
    (ii) The rule in paragraph (c)(2)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither

[[Page 58]]

a religious organization nor operated as an integral agency of a 
religious organization. M is not performing the service for N pursuant 
to an assignment or designation by his ecclesiastical superiors. The 
service performed by M for N University is not in the exercise of his 
ministry. However, service performed by M in performing marriages and 
conducting funerals is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the taxes, even though such service may involve the 
ministration of sacerdotal function or the conduct of religious worship. 
Thus, for example, service performed by an individual as a chaplain in 
the Armed Forces of the United States is considered to be performed by a 
commissioned officer in his capacity as such, and not by a minister in 
the exercise of his ministry. Similarly, service performed by an 
employee of a State as a chaplain in a State prison is considered to be 
performed by a civil servant of the State and not by a minister in the 
exercise of his ministry.
    (d) Service in the exercise of duties required by a religious order. 
Service performed by a member of a religious order in the exercise of 
duties required by such order includes all duties required of the member 
by the order. The nature or extent of such service is immaterial so long 
as it is a service which he is directed or required to perform by his 
ecclesiastical superiors.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.3121(b)(8)-2  Services in employ of religious, charitable, educational, or certain other organizations exempt from income tax.

    (a) Services performed by an employee in the employ of a religious, 
charitable, educational, or other organization described in section 
501(c)(3) which is exempt from income tax under section 501(a) are 
excepted from employment. However, this exception does not apply to 
services with respect to which a certificate, filed pursuant to section 
3121 (k) or (r), or section 1426(l) of the Internal Revenue Code of 
1939, is in effect. For provisions relating to the services with respect 
to which such a certificate is in effect, see Secs. 31.3121(k)-1 and 
31.3121(r)-1.
    (b) For provisions relating to exemption from income tax of an 
organization described in section 501(c)(3), see Part 1 of this chapter 
(Income Tax Regulations). For provisions relating to waiver by an 
organization of its exemption from the taxes imposed by sections 3101 
and 3111, see Sec. 31.3121(k)-1. See also Sec. 31.3121(b)(8)-1, relating 
to services performed by a minister of a church in the exercise of his 
ministry or by a member of a religious order in the exercise of duties 
required by such order; Sec. 31.3121(b)(10)-1, relating to services for 
remuneration of less than $50 for calendar quarter in the employ of 
certain organizations exempt from income tax; Sec. 31.3121(b)(10)-2, 
relating to services performed in the employ of a school, college, or 
university by certain students; and Sec. 31.3121(b)(13)-1, relating to 
services performed by certain student nurses and hospital interns.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.3121(b)(9)-1  Railroad industry; services performed by an employee or an employee representative as defined in section 3231.

    Services performed by an individual as an ``employee'' or as an 
``employee representative'', as those terms are defined in section 3231, 
are excepted from employment. For definitions of employee and employee 
representatives, see Secs. 31.3231(b)-1 and 31.3231(c)-1.



Sec. 31.3121(b)(10)-1  Services for remuneration of less than $50 for calendar quarter in the employ of certain organizations exempt from income tax.

    (a) Services performed by an employee in a calendar quarter in the 
employ of an organization exempt from income tax under section 501(a) 
(other than an organization described in section 401(a)) or under 
section 521 are excepted from employment if the remuneration for the 
services is less than

[[Page 59]]

$50. The test relating to remuneration of $50 is based on the 
remuneration earned during a calendar quarter rather than on the 
remuneration paid in a calendar quarter. The exception applies 
separately with respect to each organization for which the employee 
renders services in a calendar quarter. The type of services performed 
by the employee and the place where the services are performed are 
immaterial; the statutory tests are the character of the organization in 
the employ of which the services are performed and the amount of the 
remuneration for services performed by the employee in the calendar 
quarter. For provisions relating to exemption from income tax under 
section 501(a) or 521, see Part 1 of this chapter (Income Tax 
Regulations).

    Example 1. X is a local lodge of a fraternal organization and is 
exempt from income tax under section 501(a) as an organization of the 
character described in section 501(c)(8). X has two paid employees, A, 
who serves exclusively as recording secretary for the lodge, and B, who 
performs services for the lodge as janitor of its clubhouse. For 
services performed during the first calendar quarter of 1955 (that is, 
January 1, 1955, through March 31, 1955, both dates inclusive) A earns a 
total of $30. For services performed by certain student quarter B earns 
$180. Since the remuneration for the services performed by A during such 
quarter is less than $50, all of such services are expected, and the 
taxes do not attach with respect to any of the remuneration for such 
services. Since the remuneration for the services performed by B during 
such quarter, however, is not less than $50, none of such services are 
excepted, and the taxes attached with respect to all of the remuneration 
for such services (that is, $180) as and when paid.
    Example 2. The facts are the same as in example 1, above, except 
that on April 1, 1955, A's salary is increased and, for services 
performed during the calendar quarter beginning on that date (that is, 
April 1, 1955, through June 30, 1955, both dates inclusive), A earns a 
total of $60. Although all of the services performed by A during the 
first quarter were excepted, none of A's services performed during the 
second quarter are excepted since the remuneration for such services is 
not less than $50. The taxes attach with respect to all of the 
remuneration for services performed during the second quarter (that is, 
$60) as and when paid.
    Example 3. The facts are the same as in example 1, above, except 
that A earns $120 for services performed during the year 1955, and such 
amount is paid to him in a lump sum at the end of the year. The services 
performed by A in any calendar quarter during the year are excepted if 
the portion of the $120 attributable to services performed in that 
quarter is less than $50. If, however, the portion of the $120 
attributable to services performed in any calendar quarter during the 
year is not less than $50, the services during that quarter are not 
excepted, and the taxes attach with respect to that portion of the 
remuneration attributable to his services in that quarter.

    (b) See Sec. 31.3121(b)(8)-2, relating to services performed in the 
employ of religious, charitable, educational, and certain other 
organizations exempt from income tax; Sec. 31.3121(b)(8)-1, relating to 
services performed by a minister of a church in the exercise of his 
ministry or by a member of a religious order in the exercise of duties 
required by such order; Sec. 31.3121(b)(10)-2, relating to services 
performed by certain students in the employ of a school, college, or 
university or of a nonprofit organization auxiliary to a school, 
college, or university; and Sec. 31.3121(b)(13)-1, relating to services 
performed by certain student nurses and hospital interns.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7373, 40 FR 30958, July 24, 1975]



Sec. 31.3121(b)(10)-2  Services performed by certain students in the employ of a school, college, or university, or of a nonprofit organization auxiliary to a 
          school, college, or university.

    (a) (1) Services performed in the employ of a school, college, or 
university (whether or not such organization is exempt from income tax) 
are excepted from employment, if the services are performed by a student 
who is enrolled and is regularly attending classes at such school, 
college, or university.
    (2) Services performed after 1972 in the employ of an organization 
which is--
    (i) Described in section 509(a)(3) and Sec. 1.509(a)-4;
    (ii) Organized, and at all times thereafter operated, exclusively 
for the benefit of, to perform the functions of, or to carry out the 
purposes of a school, college, or university; and
    (iii) Operated, supervised, or controlled by or in connection with 
such school, college, or university;

[[Page 60]]


are excepted from employment, if the services are performed by a student 
who is enrolled and is regularly attending classes at such school, 
college, or university. The preceding sentence shall not apply to 
services performed in the employ of a school, college, or university of 
a State or a political subdivision thereof by a student referred to in 
section 218(c)(5) of the Social Security Act (42 U.S.C. 418(c)(5)) if 
such services are covered under the agreement between the Secretary of 
Health, Education, and Welfare and such State entered into pursuant to 
section 218 of such Act. For the definitions of ``operated, supervised, 
or controlled by'', ``supervised or controlled in connection with'', and 
``operated in connection with'', see paragraphs (g), (h), and (i), 
respectively, of Sec. 1.509(a)-4.
    (b) For purposes of this exception, the amount of remuneration for 
services performed by the employee in the calendar quarter, the type of 
services performed by the employee, and the place where the services are 
performed are immaterial. The statutory tests are (1) the character of 
the organization in the employ of which the services are performed as a 
school, college, or university, or as an organization described in 
paragraph (a)(2) of this section, and (2) the status of the employee as 
a student enrolled and regularly attending classes at the school, 
college, or university by which he is employed or with which his 
employer is affiliated.
    (c) The status of the employee as a student performing the services 
shall be determined on the basis of the relationship of such employee 
with the organization for which the services are performed. An employee 
who performs services in the employ of a school, college, or university, 
as an incident to and for the purpose of pursuing a course of study at 
such school, college, or university has the status of a student in the 
performance of such services. An employee who performs services in the 
employ of an organization described in paragraph (a)(2) of this section, 
as an incident to and for the purpose of pursuing a course of study at a 
school, college, or university with which such organization is 
affiliated, has the status of a student in the performance of such 
services.
    (d) The term ``school, college, or university'' within the meaning 
of this exception is to be taken in its commonly or generally accepted 
sense.
    (e) For provisions relating to domestic service performed by a 
student in a local college club, or local chapter of a college 
fraternity or sorority, see Sec. 31.3121(b)(2)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7373, 40 FR 30958, July 24, 1975]



Sec. 31.3121(b)(11)-1  Services in the employ of a foreign government.

    (a) Services performed by an employee in the employ of a foreign 
government are excepted from employment. The exception includes not only 
services performed by ambassadors, ministers, and other diplomatic 
officers and employees but also services performed as a consular or 
other officer or employee of a foreign government, or as a nondiplomatic 
representative thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial. It is also immaterial whether the foreign 
government grants an equivalent exemption with respect to similar 
services performed in the foreign country by citizens of the United 
States.



Sec. 31.3121(b)(12)-1  Services in employ of wholly owned instrumentality of foreign government.

    (a) Services performed by an employee in the employ of certain 
instrumentalities of a foreign government are excepted from employment. 
The exception includes all services performed in the employ of an 
instrumentality of the government of a foreign country, if--
    (1) The instrumentality is wholly owned by the foreign government;
    (2) The services are of a character similar to those performed in 
foreign countries by employees of the United States Government or of an 
instrumentality thereof; and
    (3) The Secretary of State certifies to the Secretary of the 
Treasury that the foreign government, with respect to whose 
instrumentality and employees thereof exemption is claimed, grants an 
equivalent exemption with respect

[[Page 61]]

to services performed in the foreign country by employees of the United 
States Government and of instrumentalities thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial.



Sec. 31.3121(b)(13)-1  Services of student nurse or hospital intern.

    (a) Services performed as a student nurse in the employ of a 
hospital or a nurses' training school are excepted from employment, if 
the student nurse is enrolled and regularly attending classes in a 
nurses' training school and such nurses' training school is chartered or 
approved pursuant to State law.
    (b) Services performed before 1966 as an intern (as distinguished 
from a resident doctor), in the employ of a hospital are excepted from 
employment, if the intern has completed a 4 years' course in a medical 
school chartered or approved pursuant to State law.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR 
18017, Dec. 4, 1968]



Sec. 31.3121(b)(14)-1  Services in delivery or distribution of newspapers, shopping news, or magazines.

    (a) Services of individuals under age 18. Services performed by an 
employee under the age of 18 in the delivery or distribution of 
newspapers or shopping news, not including delivery or distribution (as, 
for example, by a regional distributor) to any point for subsequent 
delivery or distribution, are excepted from employment. Thus, the 
services performed by an employee under the age of 18 in making house-
to-house delivery or sale of newspapers or shopping news, including 
handbills and other similar types of advertising material, are excepted 
from employment. The services are excepted irrespective of the form or 
method of compensation. Incidental services by the employees who makes 
the house-to-house delivery, such as services in assembling newspapers, 
are considered to be within the exception. The exception continues only 
during the time that the employee is under the age of 18.
    (b) Services of individuals of any age. Services performed by an 
employee in, and at the time of, the sale of newspapers or magazines to 
ultimate consumers under an arrangement under which the newspapers or 
magazines are to be sold by him at a fixed price, his compensation being 
based on the retention of the excess of such price over the amount at 
which the newspapers or magazines are charged to him, are excepted from 
employment. The services are excepted whether or not the employee is 
guaranteed a minimum amount of compensation for such services, or is 
entitled to be credited with the unsold newspapers or magazines turned 
back. Moreover, the services are excepted without regard to the age of 
the employee. Services performed other than at the time of sale to the 
ultimate consumer are not within the exception. Thus, the services of a 
regional distributor which are antecedent to but not immediately part of 
the sale to the ultimate consumer are not within the exception. However, 
incidental services by the employee who makes the sale to the ultimate 
consumer, such as services in assembling newspapers or in taking 
newspapers or magazines to the place of sale, are considered to be 
within the exception.



Sec. 31.3121(b)(15)-1  Services in employ of international organization.

    (a) Subject to the provisions of section 1 of the International 
Organizations Immunities Act (22 U.S.C. 288), services performed in the 
employ of an international organization as defined in section 
7701(a)(18) are excepted from employment.
    (b) (1) Section 7701(a)(18) provides as follows:

    Sec. 7701. Definitions. (a) When used in this title, where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof--

                                * * * * *

    (18) International organization. The term ``international 
organization'' means a public international organization entitled to 
enjoy privileges, exemptions, and immunities as an international 
organization under the International Organizations Immunities Act (22 
U.S.C. 288-288f).

    (2) Section 1 of the International Organizations Immunities Act 
provides as follows:


[[Page 62]]


    Sec. 1 [International Organizations Immunities Act.] For the 
purposes of this title [International Organizations Immunities Act], the 
term ``international organization'' means a public international 
organization in which the United States participates pursuant to any 
treaty or under the authority of any Act of Congress authorizing such 
participation or making an appropriation for such participation, and 
which shall have been designated by the President through appropriate 
Executive order as being entitled to enjoy the privileges, exemptions, 
and immunities herein provided. The President shall be authorized, in 
the light of the functions performed by any such international 
organization, by appropriate Executive order to withhold or withdraw 
from any such organization or its officers or employees any of the 
privileges, exemptions, and immunities provided for in this title 
(including the amendments made by this title) or to condition or limit 
the enjoyment by any such organization or its officers or employees of 
any such privilege, exemption, or immunity. The president shall be 
authorized, if in his judgment such action should be justified by reason 
of the abuse by an international organization or its officers and 
employees of the privileges, exemptions, and immunities herein provided 
or for any other reason, at any time to revoke the designation of any 
international organization under this section, whereupon the 
international organization in question shall cease to be classed as an 
international organization for the purposes of this title.



Sec. 31.3121(b)(16)-1  Services performed under share-farming arrangement.

    (a) The term ``employment'' does not include services performed by 
an individual under an arrangement with the owner or tenant of land 
pursuant to which--
    (1) Such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
    (2) The agricultural or horticultural commodities produced by such 
individual, or the proceeds therefrom, are to be divided between such 
individual and such owner or tenant, and
    (3) The amount of such individual's share depends on the amount of 
the agricultural or horticultural commodities produced.

For purposes of this exception, the arrangement pursuant to which the 
individual's services are performed must meet the specified statutory 
conditions.
    (b) If the arrangement between the parties provides that the 
individual who undertakes to produce a crop or livestock is to be 
compensated at a specified rate of pay or is to receive a fixed sum of 
money or a stipulated quantity of the commodities to be produced, 
without regard to the amount actually produced, as distinguished from a 
proportionate share of the crop or livestock, or the proceeds therefrom, 
the services performed by such individual in the production of such crop 
or livestock is not within the exception.
    (c) For provisions relating to the status, under the Self-Employment 
Contributions Act of 1954, of the services which are excepted from 
``employment'' under this section, see the regulations under section 
1402(a) in Part 1 of this chapter (Income Tax Regulations).
[T.D. 6744, 29 FR 8313, July 2, 1964]



Sec. 31.3121(b)(17)-1  Services in employ of Communist organization.

    The term ``employment'' does not include services performed in the 
employ of any organization in any calendar quarter beginning after June 
30, 1956, and during any part of which such organization is registered, 
or there is in effect a final order of the Subversive Activities Control 
Board requiring such organization to register, under the Internal 
Security Act of 1950 (50 U.S.C. 781 et seq.), as amended, as a 
Communist-action organization, a Communist-front organization, or a 
Communist-infiltrated organization.
[T.D. 6744, 29 FR 8313, July 2, 1964]



Sec. 31.3121(b)(18)-1  Services performed by a resident of the Republic of the Philippines while temporarily in Guam.

    (a) Services performed after 1960 by a resident of the Republic of 
the Philippines while in Guam on a temporary basis as a nonimmigrant 
alien admitted to Guam pursuant to section 101(a)(15)(H)(ii) of the 
Immigration and Nationality Act (8 U.S.C. 1101) are excepted from 
employment.
    (b) Section 101(a)(15)(H) of the Immigration and Nationality Act 
provides as follows:


[[Page 63]]


    Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat. 
166)]
    (a) As used in this chapter--

                                * * * * *

    (15) The term ``immigrant'' means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (H) An alien having a residence in a foreign country which he has no 
intention of abandoning (i) who is of distinguished merit and ability 
and who is coming temporarily to the United States to perform temporary 
services of an exceptional nature requiring merit and ability; or (ii) 
who is coming temporarily to the United States to perform other 
temporary services or labor, if unemployed persons capable of performing 
such service or labor cannot be found in this country; or (iii) who is 
coming temporarily to the United States as an industrial trainee;
[T.D. 6744, 29 FR 8313, July 2, 1964]



Sec. 31.3121(b)(19)-1  Services of certain nonresident aliens.

    (a) (1) Services performed after 1961 by a nonresident alien 
individual who is temporarily present in the United States as a 
nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the 
Immigration and Nationality Act (8 U.S.C. 1101), as amended, are 
excepted from employment if the services are performed to carry out a 
purpose for which the individual was admitted. For purposes of this 
section an alien individual who is temporarily present in the United 
States as a nonimmigrant under such subparagraph (F) or (J) is deemed to 
be a nonresident alien individual. The preceding sentence does not apply 
to the extent it is inconsistent with section 7701(b) and the 
regulations under that section. A nonresident alien individual who is 
temporarily present in the United States as a nonimmigrant under such 
subparagraph (J) includes an alien individual admitted to the United 
States as an ``exchange visitor'' under section 201 of the United States 
Information and Educational Exchange Act of 1948 (22 U.S.C. 1446).
    (2) If services are performed by a nonresident alien individual's 
alien spouse or minor child, who is temporarily present in the United 
States as a nonimmigrant under subparagraph (F) or (J) of section 
101(a)(15) of the Immigration and Nationality Act, as amended, the 
services are not deemed for purposes of this section to be performed to 
carry out a purpose for which such individual was admitted. The services 
of such spouse or child are excepted from employment under this section 
only if the spouse or child was admitted for a purpose specified in such 
subparagraph (F) or (J) and if the services are performed to carry out 
such purpose.
    (b) Section 101 of the Immigration and Nationality Act (8 U.S.C. 
1101), as amended, provides in part as follows:

    Sec. 101. Definitions. [Immigration and Nationality Act (68 Stat. 
166)]
    (a) As used in this chapter--* * *
    (15) The term ``immigrant'' means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (F) (i) An alien having a residence in a foreign country which he 
has no intention of abandoning, who is a bona fide student qualified to 
pursue a full course of study and who seeks to enter the United States 
temporarily and solely for the purpose of pursuing such a course of 
study at an established institution of learning or other recognized 
place of study in the United States, particularly designated by him and 
approved by the Attorney General after consultation with the Office of 
Education of the United States, which institution or place of study 
shall have agreed to report to the Attorney General the termination of 
attendance of each nonimmigrant student, and if any such institution of 
learning or place of study fails to make reports promptly the approval 
shall be withdrawn, and (ii) the alien spouse and minor children of any 
such alien if accompanying him or following to join him;

                                * * * * *

    (J) An alien having a residence in a foreign country which he has no 
intention of abandoning who is a bona fide student, scholar, trainee, 
teacher, professor, research assistant, specialist, or leader in a field 
of specialized knowledge or skill, or other person of similar 
description, who is coming temporarily to the United States as a 
participant in a program designated by the Secretary of State, for the 
purpose of teaching, instructing or lecturing, studying, observing, 
conducting research, consulting, demonstrating special skills, or 
receiving training, and the alien spouse and minor children of any such

[[Page 64]]

alien if accompanying him or following to join him.

                                * * * * *

[Sec. 101, Immigration and Nationality Act, as amended by sec. 101, Act 
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75 
Stat. 534]

[T.D. 6744, 29 FR 8313, July 2, 1964, as amended by T.D. 8411, 57 FR 
15241, Apr. 27, 1992]



Sec. 31.3121(b)(20)-1  Service performed on a boat engaged in catching fish.

    (a) In general. (1) Service performed on or after December 31, 1954, 
by an individual on a boat engaged in catching fish or other forms of 
aquatic animal life (hereinafter ``fish'') are excepted from employment 
if--
    (i) The individual receives a share of the boat's (or boats' for a 
fishing operation involving more than one boat) catch of fish or a share 
of the proceeds from the sale of the catch,
    (ii) The amount of the individual's share depends solely on the 
amount of the boat's (or boats' for a fishing operation involving more 
than one boat) catch of fish.
    (iii) The individual does not receive and is not entitled to 
receive, any cash remuneration, other than remuneration that is 
described in sub-division (1) of this subparagraph, and
    (iv) The crew of the boat (or of each boat from which the individual 
receives a share of the catch) normally is made up of fewer than 10 
individuals.
    (2) The requirement of paragraph (a)(1)(ii) is not satisfied if 
there exists an agreement with the boat's (or boats') owner or operator 
by which the individual's remuneration is determined partially or fully 
by a factor not dependent on the size of the catch. For example, if a 
boat is operated under a remuneration arrangement, e.g., a collective 
agreement which specifies that crew members, in addition to receiving a 
share of the catch, are entitled to an hourly wage for repairing nets, 
regardless of whether this wage is actually paid, then all the crew 
members covered by the arrangement are entitled to receive cash 
remuneration other than a share of the catch and their services are not 
excepted from employment by section 3121(b)(20).
    (3) The operating crew of a boat includes all persons on the boat 
(including the captain) who receive any form of remuneration in exchange 
for services rendered while on a boat engaged in catching fish. See 
Sec. 1.6050A-1 for reporting requirements for the operator of a boat 
engaged in catching fish with respect to individuals performing services 
described in this section.
    (4) During the same return period, service performed by a crew 
member may be excepted from employment by section 3121(b)(20) and this 
section for one voyage and not so excepted on a subsequent voyage on the 
same or on a different boat.
    (5) During the same voyage, service performed by one crew member may 
be excepted from employment by section 3121(b)(20) and this section but 
service performed by another crew member may not be so excepted.
    (b) Special rule. Services performed after December 31, 1954, and 
before October 4, 1976, on a boat by an individual engaged in catching 
fish are not excepted from employment for any voyage (for purposes of 
section 3121(b) and the corresponding regulations), even though the 
individual satisfies the requirements of paragraphs (a)(1)(i) through 
(iv) of this section, if the owner or operator of the boat engaged in 
catching fish treated the individual as an employee. For purposes of 
this subparagraph, the individual was treated as an employee if--
    (1) Form 941 was voluntarily filed by the boat operator or owner, 
regardless of whether the tax imposed by chapter 21 was withheld. For 
purposes of this subdivision, the filing of Form 941 is not voluntary if 
the filing was the result of action taken by the Service pursuant to 
section 6651(a) (relating to addition to the tax for failure to file tax 
return or to pay tax);
    (2) The boat owner or operator withheld from the individual's share 
the tax imposed by chapter 21, regardless of whether the tax was paid 
over to the Service; or
    (3) The boat owner or operator made full or partial payment of the 
tax imposed by chapter 21, unless the payment was made pursuant to 
section 7422(a) (relating to no civil actions for refund prior to filing 
claim for refund).

[[Page 65]]

However, for purposes of this paragraph crew members whose services, but 
for paragraphs (a)(1)(i) through (iii), would have been excepted from 
employment by section 3121(b)(20) are not required to pay self-
employment tax on income earned in performing those services. See 
Sec. 1.1402(c)-3(g). Moreover, in such cases the employer is not 
entitled to a refund of the employer's share of any tax imposed by 
chapter 21 that was paid.
[T.D. 7716, 45 FR 57123, Aug. 27, 1980]



Sec. 31.3121(c)-1  Included and excluded services.

    (a) If a portion of the services performed by an employee for an 
employer during a pay period constitutes employment, and the remainder 
does not constitute employment, all the services performed by the 
employee for the employer during the period shall for purposes of the 
taxes be treated alike, that is, either all as included or all as 
excluded. The time during which the employee performs services which 
under section 3121(b) constitute employment, and the time during which 
he performs services which under such section do not constitute 
employment, within the pay period, determine whether all the services 
during the pay period shall be deemed to be included or excluded.
    (b) If one-half or more of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then all the services of that employee for that 
person in that pay period shall be deemed to be employment.
    (c) If less than one-half of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then none of the services of that employee for 
that person in that pay period shall be deemed to be employment.
    (d) The application of the provisions of paragraphs (a), (b), and 
(c) of this section may be illustrated by the following example:

    Example. The AB Club, which is a local college club within the 
meaning of section 3121(b)(2), employs D, a student who is enrolled and 
is regularly attending classes at a university, to perform domestic 
service for the club and to keep the club's books. The domestic services 
performed by D for the AB Club do not constitute employment, and his 
services as the club's bookkeeper constitute employment. D receives a 
payment at the end of each month for all services which he performs for 
the club. During a particular month D spends 60 hours in performing 
domestic service for the club and 40 hours as the club's bookkeeper. 
None of D's services during the month are deemed to be employment, since 
less than one-half of his services during the month constitutes 
employment. During another month D spends 35 hours in the performance of 
domestic services and 60 hours in keeping the club's books. All of D's 
services during the month are deemed to be employment, since one-half or 
more of his services during the month constitutes employment.

    (e) For purposes of this section, a ``pay period'' is the period (of 
not more than 31 consecutive calendar days) for which a payment of 
remuneration is ordinarily made to the employee by the employer. Thus, 
if the periods for which payments of remuneration are made to the 
employee by the employer are of uniform duration, each such period 
constitutes a ``pay period''. If, however, the periods occasionally vary 
in duration, the ``pay period'' is the period for which a payment of 
remuneration is ordinarily made to the employee by the employer, even 
though that period does not coincide with the actual period for which a 
particular payment of remuneration is made. For example, if an employer 
ordinarily pays a particular employee for each calendar week at the end 
of the week, but the employee receives a payment in the middle of the 
week for the portion of the week already elapsed and receives the 
remainder at the end of the week, the ``pay period'' is still the 
calendar week; or if, instead, that employee is sent on a trip by such 
employer and receives at the end of the third week a single remuneration 
payment for three weeks' services, the ``pay period'' is still the 
calendar week.
    (f) If there is only one period (and such period does not exceed 31 
consecutive calendar days) for which a payment of remuneration is made 
to the employee by the employer, such period is deemed to be a ``pay 
period'' for purposes of this section.

[[Page 66]]

    (g) The rules set forth in this section do not apply (1) with 
respect to any services performed by the employee for the employer if 
the periods for which such employer makes payments of remuneration to 
the employee vary to the extent that there is no period ``for which a 
payment of remuneration is ordinarily made to the employee'', or (2) 
with respect to any services performed by the employee for the employer 
if the period for which a payment of remuneration is ordinarily made to 
the employee by such employer exceeds 31 consecutive calendar days, or 
(3) with respect to any service performed by the employee for the 
employer during a pay period if any of such service is excepted by 
section 3121(b)(9) (see Sec. 31.3121(b)(9)-1).
    (h) If during any period for which a person makes a payment of 
remuneration to an employee only a portion of the employee's services 
constitutes employment, but the rules prescribed in this section are not 
applicable, the taxes attach with respect to such services as constitute 
employment as defined in section 3121(b).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8313, July 2, 1964]



Sec. 31.3121(d)-1  Who are employees.

    (a) In general. (1) Whether an individual is an employee with 
respect to services performed after 1954 is determined in accordance 
with section 3121(d) and (o) and section 3506. This section of the 
regulations applies with respect only to services performed after 1954. 
Whether an individual is an employee with respect to services performed 
after 1936 and before 1940 shall be determined in accordance with the 
applicable provisions of law and of 26 CFR (1939) Part 401 (Regulations 
91). Whether an individual is an employee with respect to services 
performed after 1939 and before 1951 shall be determined in accordance 
with the applicable provisions of law and of 26 CFR (1939) Part 402 
(Regulations 106). Whether an individual is an employee with respect to 
services performed after 1950 and before 1955 shall be determined in 
accordance with the applicable provisions of law and of 26 CFR (1939) 
Part 408 (Regulations 128).
    (2) Section 3121(d) contains three separate and independent tests 
for determining who are employees. Paragraphs (b), (c), and (d) of this 
section relate to the respective tests. Paragraph (b) relates to the 
test for determining whether an officer of a corporation is an employee 
of the corporation. Paragraph (c) relates to the test for determining 
whether an individual is an employee under the usual common law rules. 
Paragraph (d) relates to the test for determining which individuals in 
certain occupational groups who are not employees under the usual common 
law rules are included as employees. If an individual is an employee 
under any one of the tests, he is to be considered an employee for 
purposes of the regulations in this subpart whether or not he is an 
employee under any of the other tests.
    (3) If the relationship of employer and employee exists, the 
designation or description of the relationship by the parties as 
anything other than that of employer and employee is immaterial. Thus, 
if such relationship exists, it is of no consequence that the employee 
is designated as a partner, coadventurer, agent, independent contractor, 
or the like.
    (4) All classes or grades of employees are included within the 
relationship of employer and employee. Thus, superintendents, managers, 
and other supervisory personnel are employees.
    (5) Although an individual may be an employee under this section, 
his services may be of such a nature, or performed under such 
circumstances, as not to constitute employment (see Sec. 31.3121(b)-3).
    (b) Corporate officers. Generally, an officer of a corporation is an 
employee of the corporation. However, an officer of a corporation who as 
such does not perform any services or performs only minor services and 
who neither receives nor is entitled to receive, directly or indirectly, 
any remuneration is considered not to be an employee of the corporation. 
A director of a corporation in his capacity as such is not an employee 
of the corporation.
    (c) Common law employees. (1) Every individual is an employee if 
under the usual common law rules the relationship between him and the 
person for

[[Page 67]]

whom he performs services is the legal relationship of employer and 
employee.
    (2) Generally such relationship exists when the person for whom 
services are performed has the right to control and direct the 
individual who performs the services, not only as to the result to be 
accomplished by the work but also as to the details and means by which 
that result is accomplished. That is, an employee is subject to the will 
and control of the employer not only as to what shall be done but how it 
shall be done. In this connection, it is not necessary that the employer 
actually direct or control the manner in which the services are 
performed; it is sufficient if he has the right to do so. The right to 
discharge is also an important factor indicating that the person 
possessing that right is an employer. Other factors characteristic of an 
employer, but not necessarily present in every case, are the furnishing 
of tools and the furnishing of a place to work, to the individual who 
performs the services. In general, if an individual is subject to the 
control or direction of another merely as to the result to be 
accomplished by the work and not as to the means and methods for 
accomplishing the result, he is an independent contractor. An individual 
performing services as an independent contractor is not as to such 
services an employee under the usual common law rules. Individuals such 
as physicians, lawyers, dentists, veterinarians, construction 
contractors, public stenographers, and auctioneers, engaged in the 
pursuit of an independent trade, business, or profession, in which they 
offer their services to the public, are independent contractors and not 
employees.
    (3) Whether the relationship of employer and employee exists under 
the usual common law rules will in doubtful cases be determined upon an 
examination of the particular facts of each case.
    (d) Special classes of employees. (1) In addition to individuals who 
are employees under paragraph (b) or (c) of this section, other 
individuals are employees if they perform services for remuneration 
under certain prescribed circumstances in the following occupational 
groups:
    (i) As an agent-driver or commission-driver engaged in distributing 
meat products, vegetable products, fruit products, bakery products, 
beverages (other than milk), or laundry or dry-cleaning services for his 
principal;
    (ii) As a full-time life insurance salesman;
    (iii) As a home worker performing work, according to specifications 
furnished by the person for whom the services are performed, on 
materials or goods furnished by such person which are required to be 
returned to such person or a person designated by him; or
    (iv) As a traveling or city salesman, other than as an agent-driver 
or commission-driver, engaged upon a full-time basis in the solicitation 
on behalf of, and the transmission to, his principal (except for side-
line sales activities on behalf of some other person) of orders from 
wholesalers, retailers, contractors, or operators of hotels, 
restaurants, or other similar establishments for merchandise for resale 
or supplies for use in their business operations.
    (2) In order for an individual to be an employee under this 
paragraph, the individual must perform services in an occupation falling 
within one of the enumerated groups. If the individual does not perform 
services in one of the designated occupational groups, he is not an 
employee under this paragraph. An individual who is not an employee 
under this paragraph may nevertheless be an employee under paragraph (b) 
or (c) of this section. The language used to designate the respective 
occupational groups relates to fields of endeavor in which particular 
designations are not necessarily in universal use with respect to the 
same service. The designations are addressed to the actual services 
without regard to any technical or colloquial labels which may be 
attached to such services. Thus, a determination whether services fall 
within one of the designated occupational groups depends upon the facts 
of the particular situation.
    (3) The factual situations set forth below are illustrative of some 
of the individuals falling within each of the above enumerated 
occupational groups. The illustrative factual situations are as follows:

[[Page 68]]

    (i) Agent-driver or commission-driver. This occupational group 
includes agent-drivers or commission-drivers who are engaged in 
distributing meat or meat products, vegetables or vegetable products, 
fruit or fruit products, bakery products, beverages (other than milk), 
or laundry or dry-cleaning services for their principals. An agent-
driver or commission-driver includes an individual who operates his own 
truck or the truck of the person for whom he performs services, serves 
customers designated by such person as well as those solicited on his 
own, and whose compensation is a commission on his sales or the 
difference between the price he charges his customers and the price he 
pays to such person for the product or service.
    (ii) Full-time life insurance salesman. An individual whose entire 
or principal business activity is devoted to the solicitation of life 
insurance or annuity contracts, or both, primarily for one life 
insurance company is a full-time life insurance salesman. Such a 
salesman ordinarily uses the office space provided by the company or its 
general agent, and stenographic assistance, telephone facilities, forms, 
rate books, and advertising materials are usually made available to him 
without cost. An individual who is engaged in the general insurance 
business under a contract or contracts of service which do not 
contemplate that the individual's principal business activity will be 
the solicitation of life insurance or annuity contracts, or both, for 
one company, or any individual who devotes only part time to the 
solicitation of life insurance contracts, including annuity contracts, 
and is principally engaged in other endeavors, is not a full-time life 
insurance salesman.
    (iii) Home workers. This occupational group includes a worker who 
performs services off the premises of the person for whom the services 
are performed, according to specifications furnished by such person, on 
materials or goods furnished by such person which are required to be 
returned to such person or a person designated by him. For provisions 
relating to the determination of wages in the case of a home worker to 
whom this subdivision is applicable, see Sec. 31.3121(a)(10)-1.
    (iv) Traveling or city salesman. (a) This occupational group 
includes a city or traveling salesman who is engaged upon a full-time 
basis in the solicitation on behalf of, and the transmission to, his 
principal (except for side-line sales activities on behalf of some other 
person or persons) of orders from wholesalers, retailers, contractors, 
or operators of hotels, restaurants, or other similar establishments for 
merchandise for resale or supplies for use in their business operations. 
An agent-driver or commission-driver is not within this occupational 
group. City or traveling salesmen who sell to retailers or to the others 
specified, operate off the premises of their principals, and are 
generally compensated on a commission basis, are within this 
occupational group. Such salesmen are generally not controlled as to the 
details of their services or the means by which they cover their 
territories, but in the ordinary case they are expected to call on 
regular customers with a fair degree of regularity.
    (b) In order for a city or traveling salesman to be included within 
this occupational group, his entire or principal business activity must 
be devoted to the solicitation of orders for one principal. Thus, the 
multiple-line salesman generally is not within this occupational group. 
However, if the salesman solicits orders primarily for one principal, he 
is not excluded from this occupational group solely because of side-line 
sales activities on behalf of one or more other persons. In such a case, 
the salesman is within this occupational group only with respect to the 
services performed for the person for whom he primarily solicits orders 
and not with respect to the services performed for such other persons. 
The following examples illustrate the application of the foregoing 
provisions:

    Example 1. Salesman A's principal business activity is the 
solicitation of orders from retail pharmacies on behalf of the X 
Wholesale Drug Company. A also occasionally solicits orders for drugs on 
behalf of the Y and Z Companies. A is within this occupational group 
with respect to his services for the X Company but not with respect to 
his services for either the Y Company or the Z Company.
    Example 2. Salesman B's principal business activity is the 
solicitation of orders from retail hardware stores on behalf of the R 
Tool

[[Page 69]]

Company and the S Cooking Utensil Company. B regularly solicits orders 
on behalf of both companies. B is not within this occupational group 
with respect to the services performed for either the R Company or the S 
Company.
    Example 3. Salesman C's principal business activity is the house-to-
house solicitation of orders on behalf of the T Brush Company. C 
occasionally solicits such orders from retail stores and restaurants. C 
is not within this occupational group.

    (4)(i) The fact that an individual falls within one of the 
enumerated occupational groups, however, does not make such individual 
an employee under this paragraph unless (a) the contract of service 
contemplates that substantially all the services to which the contract 
relates in the particular designated occupation are to be performed 
personally by such individual, (b) such individual has no substantial 
investment in the facilities used in connection with the performance of 
such services (other than in facilities for transportation) and (c) such 
services are part of a continuing relationship with the person for whom 
the services are performed and are not in the nature of a single 
transaction.
    (ii) The term ``contract of service'', as used in this paragraph, 
means an arrangement, formal or informal, under which the particular 
services are performed. The requirement that the contract of service 
shall contemplate that substantially all the services to which the 
contract relates in the particular designated occupation are to be 
performed personally by the individual means that it is not contemplated 
that any material part of the services to which the contract relates in 
such occupation will be delegated to any other person by the individual 
who undertakes under the contract to perform such services.
    (iii) The facilities to which reference is made in this paragraph 
include equipment and premises available for the work or enterprise as 
distinguished from education, training, and experience, but do not 
include such tools, instruments, equipment, or clothing, as are commonly 
or frequently provided by employees. An investment in an automobile by 
an individual which is used primarily for his own transportation in 
connection with the performance of services for another person has no 
significance under this paragraph, since such investment is comparable 
to outlays for transportation by an individual performing similar 
services who does not own an automobile. Moreover, the investment in 
facilities for the transportation of the goods or commodities to which 
the services relate is to be excluded in determining the investment in a 
particular case. If an individual has a substantial investment in 
facilities of the requisite character, he is not an employee within the 
meaning of this paragraph, since a substantial investment of the 
requisite character standing alone is sufficient to exclude the 
individual from the employee concept under this paragraph.
    (iv) If the services are not performed as part of a continuing 
relationship with the person for whom the services are performed, but 
are in the nature of a single transaction, the individual performing 
such services is not an employee of such person within the meaning of 
this paragraph. The fact that the services are not performed on 
consecutive workdays does not indicate that the services are not 
performed as part of a continuing relationship.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8314, July 2, 1964; T.D. 7691, 45 24129, Apr. 9, 1980]



Sec. 31.3121(d)-2  Who are employers.

    (a) Every person is an employer if he employs one or more employees. 
Neither the number of employees employed nor the period during which any 
such employee is employed is material for the purpose of determining 
whether the person for whom the services are performed is an employer.
    (b) An employer may be an individual, a corporation, a partnership, 
a trust, an estate, a joint-stock company, an association, or a 
syndicate, group, pool, joint venture, or other unincorporated 
organization, group, or entity. A trust or estate, rather than the 
fiduciary acting for on behalf of the trust or estate, is generally the 
employer.
    (c) Although a person may be an employer under this section, 
services performed in his employ may be of such a

[[Page 70]]

nature, or performed under such circumstances, as not to constitute 
employment (see Sec. 31.3121(b)-3).



Sec. 31.3121(e)-1  State, United States, and citizen.

    (a) When used in the regulations in this subpart, the term ``State'' 
includes the District of Columbia, the Commonwealth of Puerto Rico, the 
Virgin Islands, the Territories of Alaska and Hawaii before their 
admission as States, and (when used with respect to services performed 
after 1960) Guam and American Samoa.
    (b) When used in the regulations in this subpart, the term ``United 
States'', when used in a geographical sense, means the several states 
(including the Territories of Alaska and Hawaii before their admission 
as States), the District of Columbia, the Commonwealth of Puerto Rico, 
and the Virgin Islands. When used in the regulations in this subpart 
with respect to services performed after 1960, the term ``United 
States'' also includes Guam and American Samoa when the term is used in 
a geographical sense. The term ``citizen of the United States'' includes 
a citizen of the Commonwealth of Puerto Rico or the Virgin Islands, and, 
effective January 1, 1961, a citizen of Guam or American Samoa.
[T.D. 6744, 29 FR 8314, July 2, 1964]



Sec. 31.3121(f)-1  American vessel and aircraft.

    (a) The term ``American vessel'' means any vessel which is 
documented (that is, registered, enrolled, or licensed) or numbered in 
conformity with the laws of the United States. It also includes any 
vessel which is neither documented nor numbered under the laws of the 
United States, nor documented under the laws of any foreign country, if 
the crew of such vessel is employed solely by one or more citizens or 
residents of the United States or corporations organized under the laws 
of the United States or of any State. (For provisions relating to the 
terms ``State'' and ``citizen'', see Sec. 31.3121 (e)-1.)
    (b) The term ``American aircraft'' means any aircraft registered 
under the laws of the United States.
    (c) For provisions relating to services performed outside the United 
States on or in connection with an American vessel or American aircraft, 
see paragraph (c)(2) of Sec. 31.3121(b)-3.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8314, July 2, 1964]



Sec. 31.3121(g)-1  Agricultural labor.

    (a) In general. (1) The term ``agricultural labor'' as defined in 
section 3121(g) includes services of the character described in 
paragraph (b), (c), (d), (e), and (f) of this section. In general, 
however, the term does not include services performed in connection with 
forestry, lumbering, or landscaping.
    (2) The term ``farm'' as used in the regulations in this subpart 
includes stock, dairy, poultry, fruit, fur-bearing animal, and truck 
farms, plantations, ranches, nurseries, ranges, orchards, and such 
greenhouses and other similar structures as are used primarily for the 
raising of agricultural or horticultural commodities. Greenhouses and 
other similar structures used primarily for other purposes (for example, 
display, storage, and fabrication of wreaths, corsages, and bouquets) do 
not constitute ``farms''.
    (3) For provisions relating to the exception from employment 
provided with respect to services performed by certain foreign 
agricultural workers and to services performed before 1959 in connection 
with the production or harvesting of certain oleoresinous products, see 
Sec. 31.3121(b)(1)-1. For provisions relating to the exclusion from 
wages of remuneration paid in any medium other than cash for 
agricultural labor and to the test for determining whether cash 
remuneration paid for agricultural labor constitutes wages, see 
Sec. 31.3121(a)(8)-1.
    (b) Services described in section 3121(g)(1). (1) Services performed 
on a farm by an employee of any person in connection with any of the 
following activities constitute agricultural labor:
    (i) The cultivation of the soil;
    (ii) The raising, shearing, feeding, caring for, training, or 
management of livestock, bees, poultry, fur-bearing animals, or 
wildlife; or

[[Page 71]]

    (iii) The raising or harvesting of any other agricultural or 
horticultural commodity.
    (2) Services performed in connection with the production or 
harvesting of maple sap, or in connection with the raising or harvesting 
of mushrooms, or in connection with the hatching of poultry constitute 
agricultural labor only if such services are performed on a farm. Thus, 
services performed in connection with the operation of a hatchery, if 
not operated as part of a poultry or other farm, do not constitute 
agricultural labor.
    (c) Services described in section 3121(g)(2). (1) The following 
services performed by an employee in the employ of the owner or tenant 
or other operator of one or more farms constitute agricultural labor, 
provided the major part of such services is performed on a farm:
    (i) Services performed in connection with the operation, management, 
conservation, improvement, or maintenance of any of such farms or its 
tools or equipment; or
    (ii) Services performed in salvaging timber, or clearing land of 
brush and other debris, left by a hurricane.
    (2) The services described in paragraph (c)(1)(i) of this section 
may include, for example, services performed by carpenters, painters, 
mechanics, farm supervisors, irrigation engineers, bookkeepers, and 
other skilled or semiskilled workers, which contribute in any way to the 
conduct of the farm or farms, as such, operated by the person employing 
them, as distinguished from any other enterprise in which such person 
may be engaged.
    (3) Since the services described in this paragraph must be performed 
in the employ of the owner or tenant or other operator of the farm, the 
term ``agricultural labor'' does not include services performed by 
employees of a commercial painting concern, for example, which contracts 
with a farmer to renovate his farm properties.
    (d) Services described in section 3121(g)(3). Services performed by 
an employee in the employ of any person in connection with any of the 
following operations constitute agricultural labor without regard to the 
place where such services are performed:
    (1) The ginning of cotton;
    (2) The operation or maintenance of ditches, canals, reservoirs, or 
waterways, not owned or operated for profit, used exclusively for 
supplying or storing water for farming purposes; or
    (3) The production or harvesting of crude gum (oleoresin) from a 
living tree or the processing of such crude gum into gum spirits of 
turpentine and gum rosin, provided such processing is carried on by the 
original producer of such crude gum.
    (e) Services described in section 3121(g)(4). (1) Services performed 
by an employee in the handling, planting, drying, packing, packaging, 
processing, freezing, grading, storing, or delivering to storage or to 
market or to a carrier for transportation to market, of any agricultural 
or horticultural commodity constitute agricultural labor if:
    (i) Such services are performed by the employee in the employ of an 
operator of a farm or in the employ of a group of operators of farms 
(other than a cooperative organization);
    (ii) Such services are performed with respect to the commodity in 
its unmanufactured state; and
    (iii) Such operator produced more than one-half of the commodity 
with respect to which such services are performed during the pay period, 
or such group of operators produced all of the commodity with respect to 
which such services are performed during the pay period.
    (2) The term ``operator of a farm'' as used in this paragraph means 
an owner, tenant, or other person, in possession of a farm and engaged 
in the operation of such farm.
    (3) The services described in this paragraph do not constitute 
agricultural labor if performed in the employ of a cooperative 
organization. The term ``organization'' includes corporations, joint-
stock companies, and associations which are treated as corporations 
pursuant to section 7701(a)(3) of the Internal Revenue Code. For 
purposes of this paragraph, any unincorporated group of operators shall 
be deemed a cooperative organization if the number of operators 
comprising such group is more than 20 at any time during the calendar 
quarter in which the services involved are performed.

[[Page 72]]

    (4) Processing services which change the commodity from its raw or 
natural state do not constitute agricultural labor. For example the 
extraction of juices from fruits or vegetables is a processing operation 
which changes the character of the fruits or vegetables from their raw 
or natural state and, therefore, does not constitute agricultural labor. 
Likewise, services performed in the processing of maple sap into maple 
sirup or maple sugar do not constitute agricultural labor. On the other 
hand, services rendered in the cutting and drying of fruits or 
vegetables are processing operations which do not change the character 
of the fruits or vegetables and, therefore, constitute agricultural 
labor, if the other requisite conditions are met. Services performed 
with respect to a commodity after its character has been changed from 
its raw or natural state by a processing operation do not constitute 
agricultural labor.
    (5) The term ``commodity'' refers to a single agricultural or 
horticultural product, for example, all apples are to be treated as a 
single commodity, while apples and peaches are to be treated as two 
separate commodities. The services with respect to each such commodity 
are to be considered separately in determining whether the condition set 
forth in paragraph (e)(1)(iii) of this section has been satisfied. The 
portion of the commodity produced by an operator or group of operators 
with respect to which the services described in this paragraph are 
performed by a particular employee shall be determined on the basis of 
the pay period in which such services were performed by such employee.
    (6) The services described in this paragraph do not include services 
performed in connection with commercial canning or commercial freezing 
or in connection with any commodity after its delivery to a terminal 
market for distribution for consumption. Moreover, since the services 
described in this paragraph must be rendered in the actual handling, 
planting, drying, packing, packaging, processing, freezing, grading, 
storing, or delivering to storage or to market or to a carrier for 
transportation to market, of the commodity, such services do not, for 
example, include services performed as stenographers, bookkeepers, 
clerks, and other office employees, even though such services may be in 
connection with such activities. However, to the extent that the 
services of such individuals are performed in the employ of the owner or 
tenant or other operator of a farm and are rendered in major part on a 
farm, they may be within the provisions of paragraph (c) of this 
section.
    (f) Services described in section 3121(g)(5). (1) Service not in the 
course of the employer's trade or business (see paragraph (a)(1) of 
Sec. 31.3121(a)(7)-1) or domestic service in a private home of the 
employer (see paragraph (a)(2) of Sec. 31.3121(a)(7)-1) constitutes 
agricultural labor if such service is performed on a farm operated for 
profit. The determination whether remuneration for any such service 
performed on a farm operated for profit constitutes wages is to be made 
under Sec. 31.3121(a)(8)-1 rather than under Sec. 31.3121(a)(7)-1. For 
provisions relating to the exception from employment provided with 
respect to any such service performed after 1960 by a father or mother 
in the employ of his or her son or daughter, see Sec. 31.3121(b)(3)-1.
    (2) Generally, a farm is not operated for profit if it is occupied 
by the employer primarily for residential purposes, or is used primarily 
for the pleasure of the employer or his family such as for the 
entertainment of guests or as a hobby of the employer or his family.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8315, July 2, 1964]



Sec. 31.3121(h)-1  American employer.

    (a) The term ``American employer'' means an employer which is (1) 
the United States or any instrumentality thereof, (2) an individual who 
is a resident of the United States, (3) a partnership, if two-thirds or 
more of the partners are residents of the United States, (4) a trust, if 
all of the trustees are residents of the United States, or (5) a 
corporation organized under the laws of the United States or of any 
State. For provisions relating to the terms ``State'' and ``United 
States'', see Sec. 31.3121(e)-1.

[[Page 73]]

    (b) For provisions relating to services performed outside the United 
States by a citizen of the United States as an employee for an American 
employer, see paragraph (c)(3) of Sec. 31.3121(b)-3 and paragraph (e) of 
Sec. 31.3121(b)(4)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6744, 29 FR 
8315, July 2, 1964]



Sec. 31.3121(i)-1  Computation to nearest dollar of cash remuneration for domestic service.

    An employer may, for purposes of the act, elect to compute to the 
nearest dollar any payment of cash remuneration for domestic service 
described in section 3121(a)(7)(B) (see Sec. 31.3121(a)(7)-1) which is 
more or less than a whole-dollar amount. For the purpose of the 
computation to the nearest dollar, the payment of a fractional part of a 
dollar shall be disregarded unless it amounts to one-half dollar or 
more, in which case it shall be increased to one dollar. For example, 
any amount actually paid between $4.50 and $5.49, inclusive, may be 
treated as $5 for purposes of the taxes imposed by the act. If an 
employer elects this method of computation with respect to any payment 
of cash remuneration made in a calendar quarter for domestic service in 
his private home, he must use the same method in computing each payment 
of cash remuneration of more or less than a whole-dollar amount made to 
each of his employees in such calendar quarter for domestic service in 
his private home. Moreover, if an employer elects this method of 
computation with respect to payments of the prescribed character made in 
any calendar quarter, the amount of each payment of cash remuneration so 
computed to the nearest dollar shall, in lieu of the amount actually 
paid, be deemed to constitute the amount of cash remuneration for 
purposes of the act. Thus, the amount of cash payments so computed to 
the nearest dollar shall be used for purposes of determining whether 
such payments constitute wages; for purposes of applying the employee 
and employer tax rates to the wage payments; for purposes of any 
required record keeping; and for purposes of reporting and paying the 
employee tax and employer tax with respect to such wage payments.



Sec. 31.3121(i)-2  Computation of remuneration for service performed by an individual as a member of a uniformed service.

    In the case of an individual performing service after December 31, 
1956, as a member of a uniformed service (see section 31.3121(n)), to 
which the provisions of section 3121(m)(1) (see Sec. 31.3121(m)) are 
applicable, the term ``wages'' shall, subject to the provisions of 
section 3121(a)(1) (see Sec. 31.3121(a)-1), include as the individual's 
remuneration for such service only his basic pay as described in section 
102(10) of the Servicemen's and Veterans' Survivor Benefits Act (38 
U.S.C. 401(1), 403; 72 Stat. 1126).
[T.D. 6744, 29 FR 8315, July 2, 1964]



Sec. 31.3121(i)-3  Computation of remuneration for service performed by an individual as a volunteer or volunteer leader within the meaning of the Peace Corps 
          Act.

    In the case of an individual performing service in his capacity as a 
volunteer or volunteer leader within the meaning of the Peace Corps Act 
(see section 31.3121(p)), the term ``wages'' shall, subject to the 
provisions of section 3121(a)(1) (see Sec. 31.3121(a)-1), include as 
such individual's remuneration for such service only amounts paid 
pursuant to section 5(c) or section 6(1) of the Peace Corps Act (22 
U.S.C. 2501; 75 Stat. 612).
[T.D. 6744, 29 FR 8315, July 2, 1964]



Sec. 31.3121(i)-4  Computation of remuneration for service performed by certain members of religious orders.

    In any case where an individual is a member of a religious order (as 
defined in section 3121(r)(2) and paragraph (b) of Sec. 31.3121(r)-1) 
performing service in the exercise of duties required by such order, and 
an election of coverage under section 3121(r) and Sec. 31.3121(r)-1 is 
in effect with respect to such order or the autonomous subdivision 
thereof to which such member belongs, the term ``wages'' shall, subject 
to the provisions of section 3121(a)(1) (relating to

[[Page 74]]

definition of wages), include as such individual's remuneration for such 
service the fair market value of any board, lodging, clothing, and other 
perquisites furnished to such member by such order or subdivision or by 
any other person or organization pursuant to an agreement (whether 
written or oral) with such order or subdivision. Such other perquisites 
shall include any cash either paid by such order or subdivision or paid 
by another employer and not required by such order or subdivision to be 
remitted to it. For purposes of this section, perquisites shall be 
considered to be furnished over the period during which the member 
receives the benefit of them. (See example 4 of this section.) In no 
case shall the amount included as such individual's remuneration under 
this paragraph be less than $100 a month. All relevant facts and 
elements of value shall be considered in every case. Where the fair 
market value of any board, lodging, clothing, and other perquisites 
furnished to all members of an electing religious order or autonomous 
subdivision (or to all in a group of members) does not vary 
significantly, such order or subdivision may treat all of its members 
(or all in such group of members) as having a uniform wage. The 
provisions of this section may be illustrated by the following examples 
of the treatment of particular perquisites:

    Example 1. M is a religious order which requires its members to take 
a vow of poverty and which has made an election under section 3121(r). 
Under section 3121(i)(4), M must include in the wages of its members the 
fair market value of the clothing it provides for its members. M and 
several other religious orders using essentially the same type of 
religious habit purchase clothing for their members from either of two 
suppliers in arms-length transactions. The fair market value of such 
clothing (i.e., the price at which such items would change hands between 
a willing buyer and a willing seller, neither being under any compulsion 
to buy or to sell) is determined by reference to the actual sales price 
of these suppliers to the religious orders.
    Example 2. N is a religious order which requires its members to take 
a vow of poverty and which has made an election under section 3121(r). N 
operates a seminary adjacent to a university. Students at the university 
obtain lodging and board on campus from the university for its fair 
market value of $2,000 for the school year. Such lodging and board is 
essentially the same as that provided by N at its seminary to N's 
members subject to a vow of poverty. Accordingly, the amount to be 
included in the ``wages'' of such members with respect to lodging and 
board for the same period of time is $2,000.
    Example 3. O is a religious order which requires its members to take 
a vow of poverty and to observe silence, and which has made an election 
under section 3121(r). O operates a monastery in a remote rural area. 
Under section 3121(i)(4), O must include in the wages of its members 
assigned to this monastery the fair market value of the board and 
lodging furnished to them. In making a determination of the fair market 
value of such board and lodging, the remoteness of the monastery, as 
well as the smallness of the rooms and the simplicity of their 
furnishings, affect this determination. However, the facts that the 
facility is used by a religious order as a monastery and that the 
order's members maintain silence do not affect the fair market value of 
such items.
    Example 4. P is a religious order which requires its members to take 
a vow of poverty and which has made an election under section 3121(r). 
Several of P's members are attending a university on a full-time basis. 
The fair market value of the board and lodging of each of such members 
at the university is $1,000 per semester. P pays the university $1,000 
at the beginning of each semester for the board and lodging of each of 
such members. In addition, P gives each such member a $400 cash advance 
to cover his miscellaneous expenses during the semester. Under section 
3121(i)(4), P must prorate the fair market value of such members' board 
and lodging, as well as the miscellaneous items, over the semester and 
include such value in the determination of ``wages''.
    Example 5. Q is a religious order which is a corporation organized 
under the laws of Wisconsin, which requires its members to take a vow of 
poverty, and which has made an election under section 3121(r). Q has 
convents in rural South America and in suburbs and central city areas of 
the United States. Characteristically, in the United States its suburban 
convents provide somewhat larger and newer rooms for its members than do 
its convents in city areas. Moreover, its suburban convents have more 
extensive grounds and somewhat more elaborate facilities than do its 
older convents in city areas. However, both types of convents limit 
resident members to a single, plainly furnished room and provide them 
meals which are comparable. Q's members in South America live in 
extremely primitive dwellings and otherwise have extremely modest 
perquisites. Under section 3121(i)(4), Q may report a uniform wage for 
its members who live in suburban convents and city convents in the 
United

[[Page 75]]

States, as the board, lodging, and perquisites furnished these members 
do not vary significantly from one convent to the other. Q may report 
another uniform wage (but not less than $100 per month apiece) for its 
members who are citizens of the United States and who reside in South 
America based on the fair market value of the perquisites furnished 
these individuals, as the fair market value of the perquisites furnished 
these individuals varies significantly from that of those furnished its 
members who live in its domestic convents but does not vary 
significantly among members in South America whose wages are subject to 
tax.
[T.D. 7280, 38 FR 18369, July 10, 1973]



Sec. 31.3121(j)-1  Covered transportation service.

    (a) Transportation systems acquired in whole or in part after 1936 
and before 1951--(1) In general. Except as provided in subparagraph (2) 
of this paragraph, all service performed in the employ of a State or 
political subdivision thereof in connection with its operation of a 
public transportation system constitutes covered transportation service 
if any part of the transportation system was acquired from private 
ownership after 1936 and before 1951. For purposes of this subparagraph, 
it is immaterial whether any part of the transportation system was 
acquired before 1937 or after 1950, whether the employee was hired 
before, during, or after 1950, or whether the employee had been employed 
by the employer from whom the State or political subdivision acquired 
its transportation system or any part thereof.
    (2) General retirement system protected by State constitution. 
Except as provided in paragraph (a)(3) of this section, service 
performed in the employ of a State or political subdivision in 
connection with its operation of a public transportation system acquired 
in whole or in part from private ownership after 1936 and before 1951 
does not constitute covered transportation service, if substantially all 
service in connection with the operation of the transportation system 
was, on December 31, 1950, covered under a general retirement system 
providing benefits which are protected from diminution or impairment 
under the State constitution by reason of an express provision, dealing 
specifically with retirement systems established by the State or 
political subdivisions of the State, which forbids such diminution or 
impairment.
    (3) Additions to certain transportation systems by acquisition after 
1950. This subparagraph is applicable only in case of an acquisition 
after 1950 from private ownership of an addition to an existing public 
transportation system which was acquired in whole or in part by a State 
or political subdivision thereof from private ownership after 1936 and 
before 1951 and then only in case service for such existing 
transportation system did not constitute covered transportation service 
by reason of the provisions of subparagraph (2) of this paragraph. 
Service in connection with the operation of such transportation system 
(including any additions acquired after 1950) constitutes covered 
transportation service commencing with the first day of the third 
calendar quarter following the calendar quarter in which the addition to 
the existing transportation system was acquired, if such service is 
performed by an employee who became an employee of the State or 
political subdivision in connection with and at the time of its 
acquisition from private ownership of such addition and who before the 
acquisition of such addition rendered service in employment in 
connection with the operation of the addition so acquired by such State 
or political subdivision. However, service performed by such employee in 
connection with the operation of the transportation system does not 
constitute covered transportation service if, on the first day of the 
third calendar quarter following the calendar quarter in which the 
addition was acquired, such service is covered by a general retirement 
system which does not, with respect to such employee, contain special 
provisions applicable only to employees who became employees of the 
State or political subdivision in connection with and at the time of its 
acquisition of such addition.
    (b) Transportation systems in operation on December 31, 1950, no 
part of which was acquired after 1936 and before 1951--(1) In general. 
Except as provided in paragraph (b)(2) of this section, no service 
performed in the employ of a State or a political subdivision thereof in 
connection with its operation of a

[[Page 76]]

public transportation system constitutes covered transportation service 
if no part of such transportation system operated by the State or 
political subdivision on December 31, 1950, was acquired from private 
ownership after 1936 and before 1951.
    (2) Additions acquired after 1950. This subparagraph is applicable 
only in case of an acquisition after 1950 from private ownership of an 
addition to an existing public transportation system which was operated 
by a State or political subdivision on December 31, 1950, but no part of 
which was acquired from private ownership after 1936 and before 1951. 
Service in connection with the operation of such transportation system 
(including any additions acquired after 1950) constitutes covered 
transportation service commencing with the first day of the third 
calendar quarter following the calendar quarter in which the addition to 
the existing transportation system was acquired, if such service is 
performed by an employee who became an employee of the State or 
political subdivision in connection with and at the time of its 
acquisition from private ownership of such addition and who before the 
acquisition of such addition rendered service in employment in 
connection with the operation of the addition so acquired by such State 
or political subdivision. However, service performed by such employee in 
connection with the operation of the transportation system does not 
constitute covered transportation service if, on the first day of the 
third calendar quarter following the calendar quarter in which the 
addition was acquired, such service is covered by a general retirement 
system which does not, with respect to such employee, contain special 
provisions applicable only to employees who became employees of the 
State or political subdivision in connection with and at the time of its 
acquisition of such addition.
    (c) Transportation systems acquired after 1950. All service 
performed in the employ of a State or political subdivision thereof in 
connection with its operation of a public transportation system 
constitutes covered transportation service if the transportation system 
was not operated by the State or political subdivision before 1951 and, 
at the time of its first acquisition after 1950 from private ownership 
of any part of its transportation system, the State or political 
subdivision did not have a general retirement system covering 
substantially all service performed in connection with the operation of 
the transportation system.
    (d) Definitions. For purposes of this section:
    (1) The term ``general retirement system'' means any pension, 
annuity, retirement, or similar fund or system established by a State or 
by a political subdivision thereof for employees of the State, political 
subdivision, or both; but such term does not include such a fund or 
system which covers only service performed in positions connected with 
the operation of its public transportation system.
    (2) A transportation system or a part thereof is considered to have 
been acquired by a State or political subdivision from private ownership 
if prior to the acquisition service performed by the employees in 
connection with the operation of the system or an acquired part thereof 
constituted employment under the act or under subchapter A of chapter 9 
of the Internal Revenue Code of 1939 or was covered by an agreement 
entered into pursuant to section 218 of the Social Security Act (42 
U.S.C. 418), and some of such employees became employees of the State or 
political subdivision in connection with and at the time of such 
acquisition.
    (3) The term ``political subdivision'' includes an instrumentality 
of a State, of one or more political subdivisions of a State, or of a 
State and one or more of its political subdivisions.
    (4) The term ``employment'' includes service covered by an agreement 
entered into pursuant to section 218 of the Social Security Act.



Sec. 31.3121(k)-1  Waiver of exemption from taxes.

    (a) Who may file a waiver certificate--(1) In general. If services 
performed in the employ of an organization are excepted from employment 
under section 3121(b)(8)(B), the organization may file a waiver 
certificate on Form SS-15, together with a list on Form SS-15a, 
certifying that it desires to have the Federal old-age, survivors, and 
disability

[[Page 77]]

insurance system established by title II of the Social Security Act 
extended to services performed by its employees. (For provisions 
relating to the exception under section 3121(b)(8)(B), see that section 
and Sec. 31.3121(b)(8)-2.) A certificate in effect under section 1426(1) 
of the Internal Revenue Code of 1939 on December 31, 1954, remains in 
effect under, and is subject to the provisions of, section 3121(k). If 
the period covered by a certificate filed under section 3121(k), or 
under section 1426(l) of the Internal Revenue Code of 1939, is 
terminated by an organization, a certificate may not thereafter be filed 
by the organization under section 3121(k). For regulations relating to 
certificates filed under section 1426(l) of the Internal Revenue Code of 
1939, see 26 CFR (1939) 408.216 (Regulations 128).
    (2) Organizations having two separate groups of employees. If an 
organization is eligible to file a certificate under section 3121(k), 
and the organization employs both individuals who are in positions 
covered by a pension, annuity, retirement, or similar fund or system 
established by a State or by a political subdivision thereof and 
individuals who are not in such positions, the organization shall divide 
its employees into two separate groups for purposes of any certificate 
filed after August 28, 1958. One group shall consist of all employees 
who are in positions covered by such a fund or system and (i) are 
members of such fund or system, or (ii) are not members of such fund or 
system but are eligible to become members thereof. The other group shall 
consist of all remaining employees. An organization which has so divided 
its employees into two groups may file a certificate after August 28, 
1958, with respect to the employees in either group, or may file a 
separate certificate after such date with respect to employees in each 
group.
    (3) Certificates filed before September 14, 1960. A certificate 
filed before September 14, 1960, is void unless at least two-thirds of 
the employees, determined on the basis of the facts which existed as of 
the date the certificate was filed, concurred in the filing of the 
certificate, and the organization certified to such concurrence in the 
certificate. All individuals who were employees of the organization 
within the meaning of section 3121(d) (see Sec. 31.3121(d)-1) shall be 
included in determining whether two-thirds of the employees of the 
organization concurred in the filing of the certificate; except that 
there shall not be included (i) those employees who at the time of the 
filing of the certificate were performing for the organization services 
only of the character specified in paragraphs (8)(A), (10)(B), and (13) 
of section 3121(b) (see Secs. 31.3121(b)(8)-1, 31.3121(b)(10)-2, and 
31.3121(b)(13)-1, respectively), (ii) those alien employees who at the 
time of the filing of the certificate were performing services for such 
organization under an arrangement which provided for the performance 
only of services outside the United States not on or in connection with 
an American vessel or American aircraft, and (iii) in connection with 
certificates filed after August 28, 1958, those employees who at the 
time of the filing of the certificate were in a group to which such 
certificate was not applicable because of the provisions of section 
3121(k)(1)(E). (See paragraph (a)(2) of this section.) As used in this 
subparagraph, the term ``alien employee'' does not include an employee 
who was a citizen of the Commonwealth of Puerto Rico or a citizen of the 
Virgin Islands, and the term ``United States'' includes Puerto Rico and 
the Virgin Islands.
    (b) Execution and amendment of certificate--(1) Use of prescribed 
forms. An organization filing a certificate pursuant to section 3121(k) 
shall use Form SS-15, in accordance with the regulations and 
instructions applicable thereto. The certificate may be filed only if it 
is accompanied by a list on Form SS-15a, containing the signature, 
address, and social security account number, if any, of each employee, 
if any, who concurs in the filing of the certificate. (For provisions 
relating to account numbers, see Sec. 31.6011(b)-2.) If no employee 
concurs in a certificate filed after September 13, 1960, that fact 
should be stated on the Form SS-15a. (For provisions relating to the 
concurrence of employees in certificates filed before September 14, 
1960, see paragraph (a)(3) of this section.)
    (2) Amendment of list on Form SS- 15a--(i) Certificate filed after 
August 28,

[[Page 78]]

1958. The list on Form SS-15a accompanying a certificate filed after 
August 28, 1958, under section 3121(k), may be amended at any time 
before the expiration of the twenty-fourth month following the calendar 
quarter in which the certificate is filed, by filing a supplemental list 
or lists on Form SS-15a Supplement, containing the signature, address, 
and social security account number, if any, of each additional employee 
who concurs in the filing of the certificate.
    (ii) Certificate filed before August 29, 1958. The list on Form SS-
15a which accompanied a certificate filed before August 29, 1958, under 
section 3121(k) or under section 1426(l) of the Internal Revenue Code of 
1939, may be amended by filing a supplemental list or lists on Form SS-
15a Supplement at any time after August 31, 1954, and before the 
expiration of the twenty-fourth month following the first calendar 
quarter for which the certificate was in effect, or before January 1, 
1959, whichever is the later.
    (3) Where to file certificate or amendment. The certificate on Form 
SS-15 and accompanying list on Form SS-15a of an organization which is 
required to make a return on Form 941 pursuant to Sec. 31.6011(a)-1 or 
Sec. 31.6011(a)-4 shall be filed with the internal revenue officer 
designated in the instructions applicable to Form SS-15 and Form SS-15a. 
The Form SS-15 and Form SS-15a of any other organization shall be filed 
in accordance with the provisions of Sec. 31.6091-1 which are otherwise 
applicable to returns. Each Form SS-15a Supplement shall be filed with 
the internal revenue officer with whom the related Forms SS-15 and SS-
15a were filed.
    (c) Effect of waiver--(1) In general. The exception from employment 
under section 3121(b)(8)(B) does not apply to services with respect to 
which a certificate, filed pursuant to section 3121(k), or section 
1426(l) of the Internal Revenue Code of 1939, is in effect. (See 
Secs. 31.3121(b)(8) and 31.3121(b)(8)-2). If an organization has divided 
its employees into two groups, as set forth in paragraph (a)(2) of this 
section, a certificate filed with respect to either group shall have no 
effect with respect to services performed by an employee as a member of 
the other group; and the provisions of this subparagraph shall apply as 
if each group were separately employed by a different organization. A 
certificate is not terminated if the organization loses its exemption 
under section 501(a) as an organization of the character described in 
section 501(c)(3), but continues effective with respect to any 
subsequent periods during which the organization is so exempt. The 
certificate of an organization may be in effect without being applicable 
to services performed by every employee of the organization. 
Subparagraph (2) of this paragraph relates to the beginning of the 
period for which a certificate is in effect. Subparagraph (3) of this 
paragraph relates to the services with respect to which a certificate is 
in effect. Even though a certificate is in effect with respect to the 
services of an employee, such services may be excepted from employment 
under some provision of section 3121(b) other than paragraph (8)(B) 
thereof. For example, service performed in any calendar quarter in the 
employ of an organization described in section 501(c)(3) and exempt from 
income tax under section 501(a) is excepted from employment under 
section 3121(b)(10)(A) if the remuneration for such service is less than 
$50, regardless of whether the organization files a certificate.
    (2) Beginning of effective period of waiver--(i) Certificate filed 
after July 30, 1965. A certificate filed after July 30, 1965, by an 
organization pursuant to section 3121(k) shall be in effect for the 
period beginning with one of the following dates, which shall be 
designated by the organization on the certificate:
    (a) The first day of the calendar quarter in which the certificate 
is filed,
    (b) The first day of the calendar quarter immediately following the 
quarter in which the certificate is filed, or
    (c) The first day of any calendar quarter preceding the calendar 
quarter in which the certificate is filed, except that such date may not 
be earlier than the first day of the 20th calendar quarter preceding the 
quarter in which such certificate is filed. Thus, a certificate filed in 
December 1965 may be made effective, pursuant to this paragraph 
(c)(2)(i)(c), for the period beginning with the first day of the 
calendar quarter beginning October 1, 1960, or the

[[Page 79]]

first day of any other calendar quarter beginning after October 1, 1960, 
and before October 1, 1965.
    (ii) Certificate filed after August 28, 1958, and before July 31, 
1965. A certificate filed after August 28, 1958, and before July 31, 
1965, by an organization pursuant to section 3121(k) shall be in effect 
for the period beginning with one of the following dates, which shall be 
designated by the organization on the certificate:
    (a) The first day of the calendar quarter in which the certificate 
is filed,
    (b) The first day of the calendar quarter immediately following the 
quarter in which the certificate is filed, or
    (c) The first day of any calendar quarter preceding the calendar 
quarter in which the certificate is filed, except that, in the case of a 
certificate filed before 1960, such date may not be earlier than January 
1, 1956, and in the case of a certificate filed after 1959 (but before 
July 31, 1965), such date may not be earlier than the first day of the 
fourth calendar quarter preceding the quarter in which the certificate 
is filed. Thus, a certificate filed in December 1959 may be made 
effective for the calendar quarter beginning January 1, 1956; but a 
certificate filed in January 1960 may not be made effective for a 
calendar quarter beginning before January 1, 1959.
    (iii) Certificate filed after 1956 and before August 29, 1958. A 
certificate filed by an organization after 1956 and before August 29, 
1958 pursuant to section 3121(k), became effective for the period 
beginning with one of the following dates, as designated by the 
organization on the certificate:
    (a) The first day of the calendar quarter in which the certificate 
was filed, or
    (b) The first day of the calendar quarter immediately following the 
quarter in which the certificate was filed.
    (iv) Certificate filed before 1957. A certificate filed before 1957 
pursuant to section 3121(k) became effective for the period beginning 
with the first day following the close of the calendar quarter in which 
the certificate was filed. In no case, however, shall a certificate 
filed under the provisions of section 3121(k) be in effect with respect 
to services performed before January 1, 1955. (For regulations relating 
to waiver certificates filed under section 1426(l) of the Internal 
Revenue Code of 1939, see 26 CFR (1939) 408.216 (Regulations 128).)
    (3) Services to which certificate applies--(i) In general. If an 
organization's certificate is in effect (see paragraph (c)(2) of this 
section), the certificate becomes effective with respect to services 
performed in its employ by each individual (a) who enters the employ of 
the organization after the calendar quarter in which the certificate is 
filed, as set forth in paragraph (c)(3)(ii) of this section, or (b) 
whose signature appears on the list on Form SS-15a, as set forth in 
paragraph (c)(3)(iii) of this section, or (c) whose signature appears on 
a Form SS-15a Supplement, as set forth in paragraph (c)(3)(iv) or (v) of 
this section. The first date on which such a certificate becomes 
effective with respect to an employee's services shall be the earliest 
date applicable under this subparagraph. An organization's certificate 
is not effective with respect to the services of an employee who is in 
its employ in the calendar quarter in which the certificate is filed and 
who does not sign Form SS-15a or Form SS-15a Supplement, so long as his 
employment relationship with the organization, at the close of the 
calendar quarter in which the certificate is filed and thereafter, 
continues without interruption.
    (ii) Employee hired after quarter in which certificate is filed. If 
an individual enters the employ of an organization on or after the first 
day following the close of the calendar quarter in which the 
organization files a certificate pursuant to section 3121(k), the 
certificate shall be in effect with respect to services performed by the 
individual in the employ of the organization on and after the day he 
enters the employ of the organization. A former employee of the 
organization who is rehired on or after the first day following the 
close of the calendar quarter in which such a certificate is filed shall 
be considered to have entered the employ of the organization after such 
calendar quarter, regardless of whether such individual concurred in the 
filing of the certificate.
    (iii) Employee who signs Form SS-15a. A certificate on Form SS-15 
filed by an

[[Page 80]]

organization pursuant to section 3121(k) shall be in effect with respect 
to services performed by an individual in the employ of the organization 
on and after the first day for which the certificate is in effect, if 
such individual's signature appears on the list on Form SS-15a which 
accompanies such certificate.
    (iv) Employee who signs Form SS-15a Supplement to concur in 
certificate filed after August 28, 1958. If the list on Form SS-15a 
accompanying a certificate filed after August 28, 1958, by an 
organization pursuant to section 3121(k) is amended in accordance with 
paragraph (b)(2)(i) of this section by the filing of a supplemental list 
on Form SS-15a Supplement, the certificate shall be in effect with 
respect to the services of each individual whose signature appears on 
the supplemental list, performed in the employ of the organization--
    (a) On and after the first day for which the certificate is in 
effect, if the supplemental list is filed on or before the last day of 
the month following the calendar quarter in which the certificate is 
filed, or
    (b) On and after the first day of the calendar quarter in which the 
supplemental list is filed, if such list is filed after the close of the 
first month following the calendar quarter in which the certificate is 
filed.
    (v) Employee who signed Form SS-15a Supplement to concur in 
certificate filed before August 29, 1958. If the list on Form SS-15a 
which accompanied a certificate filed before August 29, 1958, by an 
organization pursuant to section 3121(k), or pursuant to section 1426(l) 
of the Internal Revenue Code of 1939, was amended in accordance with 
paragraph (b)(2)(ii) of this section by the filing of a supplemental 
list on Form SS-15a Supplement, the certificate shall be in effect with 
respect to the services of each individual whose signature appears on 
the supplemental list, performed in the employ of the organization--
    (a) On and after the first day for which the certificate is in 
effect, if the supplemental list was filed on or before the last day of 
the month following the first calendar quarter for which the certificate 
was in effect, or
    (b) On and after the first day following the close of the calendar 
quarter in which the supplemental list was filed, but not before January 
1, 1955, if such list was filed after the close of the first month 
following the first calendar quarter for which the certificate is in 
effect.
    (4) Administrative provisions applicable when certificate has 
retroactive effect. For purposes of computing interest and for purposes 
of section 6651 (relating to addition to tax for failure to file tax 
return), in any case in which a certificate filed pursuant to section 
3121(k)(1) is effective pursuant to section 3121(k)(1)(B)(iii) (as 
originally enacted and as amended by section 316(a) of the Social 
Security Amendments of 1965) for one or more calendar quarters prior to 
the quarter in which the certificate is filed, the due date for the 
return and payment of the tax for such prior calendar quarters resulting 
from the filing of such certificate shall be the last day of the 
calendar month following the calendar quarter in which the certificate 
is filed. The statutory period for the assessment of the tax for such 
prior calendar quarters shall not expire before the expiration of 3 
years from such due date. A waiver certificate (as described in section 
3121(k)(1) and this section) furnished to the Internal Revenue Service 
after February 12, 1976, shall not be considered filed with the Internal 
Revenue Service unless interest paid to the organization (or credited to 
its account) in connection with a claim for credit or refund of taxes, 
which claim was based upon the exemption from taxes the organization is 
waiving by such certificate, is repaid. The interest so paid must be 
repaid only to the extent such interest relates to any taxes for which 
the organization or its employees would be liable by reason of the 
waiver certificate. Furthermore, when a waiver certificate has been 
filed prior to the payment of a refund of taxes based upon the exemption 
from taxes the organization in waiving, no credit or refund in respect 
of the taxes for which the exemption has been waived shall be allowed. 
If repayment of the interest is made as required by this subparagraph, 
on or before the last day of the calendar month following

[[Page 81]]

the calendar quarter in which the certificate is furnished to the 
Internal Revenue Service, such certificate shall be considered to have 
been filed on the date it was originally furnished. If repayment occurs 
after that day, such certificate shall be considered to have been filed 
on the date of the repayment. References in this subparagraph to a 
waiver certificate refer also to any supplement to such a certificate.
    (d) Termination of waiver by organization. (1) The period for which 
a certificate filed pursuant to section 3121(k), or pursuant to section 
1426(l) of the Internal Revenue Code of 1939, is in effect may be 
terminated by the organization upon giving to the district director with 
whom the organization is filing returns 2 years' advance notice in 
writing of its desire to terminate the effect of the certificate at the 
end of a specified calendar quarter, but only if, at the time of the 
receipt of such notice by the district director, the certificate has 
been in effect for a period of not less than 8 years. The notice of 
termination shall be signed by the president or other principal officer 
of the organization. Such notice shall be dated and shall show (i) the 
title of the officer signing the notice, (ii) the name, address, and 
identification number of the organization, (iii) the district director 
with whom the certificate was filed, (iv) the date on which the 
certificate became effective, and (v) the date on which the certificate 
is to be terminated. No particular form is prescribed for the notice of 
termination.
    (2) In computing the effective period which must precede the date of 
receipt of the notice of termination, there shall be disregarded any 
period or periods as to which the organization was not exempt from 
income tax under section 501(a) as an organization of the character 
described in section 501(c)(3) or under section 101(6) of the Internal 
Revenue Code of 1939.
    (3) The notice of termination may be revoked by the organization by 
giving, prior to the close of the calendar quarter specified in the 
notice of termination, a written notice of such revocation. The notice 
of revocation shall be filed with the district director with whom the 
notice of termination was filed. The notice of revocation shall be 
signed by the president or other principal officer of the organization. 
Such notice shall be dated and shall show (i) the title of the officer 
signing the notice, (ii) the name, address, and identification number of 
the organization, and (iii) the date of the notice of termination to be 
revoked. No particular form is prescribed for the notice of revocation.
    (e) Termination of waiver by Commissioner. (1) The period for which 
a certificate filed pursuant to section 3121(k), or pursuant to section 
1426(l) of the Internal Revenue Code of 1939, is in effect may be 
terminated by the Commissioner, with the prior concurrence of the 
Secretary of Health, Education, and Welfare, upon a finding by the 
Commissioner that the organization has failed to comply substantially 
with the requirements applicable with respect to the taxes imposed by 
the act (or the corresponding provisions of prior law) or is no longer 
able to comply therewith. The Commissioner shall give the organization 
not less than 60 days' advance notice in writing that the period covered 
by the certificate will terminate at the end of the calendar quarter 
specified in the notice of termination.
    (2) The notice of termination may be revoked by the Commissioner, 
with the prior concurrence of the Secretary of Health, Education, and 
Welfare, by giving written notice of revocation to the organization 
before the close of the calendar quarter specified in the notice of 
termination.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6983, 33 FR 
18018, Dec. 4, 1968; T.D. 7012, 34 FR 7693, May 15, 1969; T.D. 7476, 42 
FR 17874, Apr. 4, 1977]



Sec. 31.3121(k)-2  Waivers of exemption; original effective date changed retroactively.

    (a) Certificates filed after 1955 and before August 29, 1958. (1) An 
organization which filed a certificate under section 3121(k) after 1955 
and before August 29, 1958, may file a request on Form SS-15b at any 
time before 1960 to have such certificate made effective, with respect 
to the services of individuals who concurred in the filing of such 
certificate (initially, or by signing a supplemental list on Form SS-15a 
Supplement which

[[Page 82]]

was filed before Aug. 29, 1958) and whose signatures also appeared on 
such request on Form SS-15b, for the period beginning with the first day 
of any calendar quarter after 1955 which preceded the first calendar 
quarter for which the certificate originally was effective.
    (2) For purposes of computing interest and for purposes of section 
6651 (relating to addition to tax for failure to file tax return), the 
due date for the return and payment of the tax for any calendar quarter 
resulting from the filing of a request referred to in paragraph (a)(1) 
of this section shall be the last day of the calendar month following 
the calendar quarter in which the request is filed. The statutory period 
for the assessment of such tax shall not expire before the expiration of 
3 years from such due date.
    (b) Certificate filed before 1966. (1) An organization which filed a 
certificate on Form SS-15 under section 3121(k)(1)(A) before January 1, 
1966, may amend such certificate during 1965 or 1966 to make the 
certificate effective beginning with the first day of a calendar quarter 
preceding the date designated by the organization on the certificate 
(see paragraph (c)(2) of Sec. 31.3121(k)-1). The amendment of the 
certificate shall be made by filing a Certificate For Retroactive 
Coverage on Form SS-15b. A certificate on Form SS-15 may be amended to 
be effective for the period beginning with the first day of any calendar 
quarter which precedes the calendar quarter for which the certificate 
was originally effective, except that such a certificate may not be made 
effective, through an amendment, for any calendar quarter which begins 
earlier than the 20th calendar quarter preceding the calendar quarter in 
which the organization files a Certificate For Retroactive Coverage on 
Form SS-15b. Thus, if a Certificate For Retroactive Coverage is filed in 
May 1966 in respect of a certificate on Form SS-15 filed in 1965, the 
certificate on Form SS-15 may not be made effective for a calendar 
quarter preceding the quarter beginning April 1, 1961. A certificate on 
Form SS-15 which is amended by a Certificate For Retroactive Coverage on 
Form SS-15b will be effective for the period preceding the first 
calendar quarter for which the certificate originally was effective only 
with respect to the services of individuals who concurred in the filing 
of the certificate (initially, or by signing a supplemental list on Form 
SS-15a Supplement which was filed prior to the date on which the 
Certificate For Retroactive Coverage was filed) and whose signatures 
also appear on the Certificate For Retroactive Coverage on Form SS-15b. 
A Certificate For Retroactive Coverage shall be filed with the district 
director with whom the related Form SS-15 was filed.
    (2) For purposes of computing interest and for purposes of section 
6651 (relating to addition to tax for failure to file tax return), the 
due date for the return and payment of the tax for any calendar quarter 
resulting from the filing of an amendment referred to in paragraph 
(b)(1) of this section shall be the last day of the calendar month 
following the calendar quarter in which the amendment is filed. The 
statutory period for the assessment of such tax shall not expire before 
the expiration of 3 years from such due date.
[T.D. 6983, 33 FR 18018, Dec. 4, 1968]



Sec. 31.3121(k)-3  Request for coverage of individual employed by exempt organization before August 1, 1956.

    (a) Application of this section. This section is applicable to 
requests made after July 31, 1956, and before September 14, 1960, under 
section 403 of the Social Security Amendments of 1954, as amended, 
except that nothing in this section shall render invalid any act 
performed pursuant to, and in accordance with, Revenue Ruling 57-11, 
Cumulative Bulletin 1957-1, page 344, or Revenue Ruling 58-514, 
Cumulative Bulletin 1958-2, page 733. (For regulations relating to 
requests made before August 1, 1956, under section 403 of the Social 
Security Amendments of 1954, see 26 CFR (1939) 408.216(c) and (d) 
(Regulations 128).)
    (b) Organization which did not have waiver certificate in effect--
(1) Coverage requested by employee before August 27, 1958. Pursuant to 
section 403(a) of the Social Security Amendments of 1954, as amended by 
section 401 of the Social Security Amendments of 1956, any individual 
who, as an employee, performed services after December 31, 1950, and

[[Page 83]]

before August 1, 1956, for an organization described in section 
501(c)(3) which was exempt from income tax under section 501(a), or 
which was exempt from income tax under section 101(6) of the Internal 
Revenue Code of 1939, but which failed to file, before August 1, 1956, a 
valid waiver certificate under section 3121(k), or under section 1426(l) 
of the Internal Revenue Code of 1939, may request after July 31, 1956, 
and before August 27, 1958, that such part of the remuneration received 
by him for services performed in the employ of the organization after 
1950 and before 1957 with respect to which employee and employer taxes 
were paid be deemed to constitute remuneration for employment, if:
    (i) Any of the services performed by the individual after December 
31, 1950, and before January 1, 1957, would have constituted employment 
if such a certificate on Form SS-15 filed by the organization had been 
in effect for the period during which the services were performed and 
the individual's signature had appeared on the accompanying list on Form 
SS-15a;
    (ii) The employee and employer taxes were paid with respect to any 
part of the remuneration received by the individual from the 
organization for such services;
    (iii) A part of such taxes was paid before August 1, 1956;
    (iv) Such taxes as were paid before August 1, 1956, were paid by the 
organization in good faith and upon the assumption that it had filed a 
valid certificate under section 3121(k), or under section 1426(l) of the 
Internal Revenue Code of 1939; and
    (v) No refund (or credit) of such taxes had been obtained by either 
the employee or the employer, exclusive of any refund (or credit) which 
would have been allowable if the services performed by the individual 
had constituted employment.
    (2) Coverage requested by employee after August 26, 1958, and before 
September 14, 1960. Requests may be made after August 26, 1958, and 
before September 14, 1960, pursuant to section 403(a) of the Social 
Security Amendments of 1954, as amended by section 401 of the Social 
Security Amendments of 1956, by the Act of August 27, 1958 (Pub. L. 85-
785, 72 Stat. 938), and by section 105(b)(6) of the Social Security 
Amendments of 1960. Any individual who, as an employee, performed 
services after December 31, 1950, and before August 1, 1956, for an 
organization described in section 501(c)(3) which was exempt from income 
tax under section 501(a), or which was exempt from income tax under 
section 101(6) of the Internal Revenue Code of 1939, but which did not 
have in effect during the entire period in which the individual was so 
employed a valid waiver certificate under section 3121(k), or under 
section 1326(l) of the Internal Revenue Code of 1939, may request after 
August 26, 1958, and before September 14, 1960, that such part of the 
remuneration received by him for services performed in the employ of the 
organization after 1950 and before 1957 with respect to which employee 
and employer taxes were paid be deemed to constitute remuneration for 
employment, if:
    (i) Any of the services performed by the individual after December 
31, 1950, and before January 1, 1957, would have constituted employment 
if such a certificate on Form SS-15 filed by the organization had been 
in effect for the period during which the services were performed and 
the individual's signature had appeared on the accompanying list on Form 
SS-15a;
    (ii) The employee and employer taxes were paid with respect to any 
part of the remuneration received by the individual from the 
organization for such services performed during the period in which the 
organization did not have a valid waiver certificate in effect;
    (iii) A part of such taxes was paid before August 1, 1956;
    (iv) Such taxes as were paid before August 1, 1956, were paid by the 
organization in good faith, and either without knowledge that a waiver 
certificate was necessary or upon the assumption that it had filed a 
valid certificate under section 3121(k), or under section 1426(l) of the 
Internal Revenue Code of 1939; and
    (v) No refund (or credit) of such taxes has been obtained by either 
the employee or the employer, exclusive of any refund (or credit) which 
would be allowable if the services performed by

[[Page 84]]

the individual had constituted employment.
    (3) Execution and filing of request. (i) Except where the 
alternative procedure set forth in paragraph (b)(3)(ii) of this section 
is followed, the request of an individual under section 403(a) of the 
Social Security Amendments of 1954, as amended, is required to be made 
and filed as provided in this subdivision. The request shall be made in 
writing, be signed and dated by the individual, and include:
    (a) The name and address of the organization for which the services 
were performed;
    (b) The name, address, and social security account number of the 
individual;
    (c) A statement that the individual has not obtained refund or 
credit (other than a refund or credit which would have been allowable if 
the services had constituted employment) from the district director of 
any part of the employee tax paid with respect to remuneration received 
by him from the organization for services performed after 1950 and 
before 1957; and
    (d) A request that all remuneration received by him from the 
organization for such services with respect to which employee and 
employer taxes had been paid shall be deemed to constitute remuneration 
for employment to the extent authorized by section 403(a) of the Social 
Security Amendments of 1954, as amended.

The request of an individual shall be accompanied by a statement of the 
organization incorporating the substance of each of the five conditions 
listed in paragraph (b)(1) or (2), whichever is appropriate, of this 
section. The statement of the organization shall show also that the 
individual performed services for the organization after December 31, 
1950, and before August 1, 1956; that the organization was an 
organization described in section 501(c)(3) which was exempt from income 
tax under section 501(a) or was exempt from income tax under section 
101(6) of the Internal Revenue Code of 1939, and the district director 
with whom returns on Form 941 were filed. The organization's statement 
shall be signed by the president or other principal officer of the 
organization who shall certify that the statement is correct to the best 
of his knowledge and belief. If the statement of the organization is not 
submitted with the individual's request, the individual shall include in 
his request an explanation of his inability to submit the statement. 
Other information may be required, but should be submitted only upon 
receipt of a specific request therefore. No particular form is 
prescribed for the request of the individual or the statement of the 
organization required to be submitted with the request. The individual's 
request should be filed with the district director with whom the 
organization files returns on Form 941. If the individual is deceased or 
mentally incompetent and the request is made by the legal representative 
of the individual or other person authorized to act on his behalf, the 
request shall be accompanied by evidence showing such person's authority 
to make the request.
    (ii) An organization which has or had in its employ individuals with 
respect to whom section 403(a) of the Social Security Amendments of 
1954, as amended, is applicable may, if it so desires, prepare a form or 
forms for use by any such individual or individuals in making requests 
under such section. Any such form shall provide space for the signature 
of the individual or individuals and contain such information as 
required to be included in a request (see paragraph (b)(3)(i) of this 
section). Any such form used by more than one individual, and any such 
form used by one individual which is signed and returned to the 
organization, shall be submitted by the organization, together with its 
statement (as required in paragraph (b)(3)(i) of this section), to the 
district director with whom the organization files its returns on Form 
941. An individual is not required to use a form prepared by the 
organization but may, at his election, file his request in accordance 
with the provisions of paragraph (b)(3)(i) of this section.
    (4) Optional tax payments by organization. An organization which 
prior to August 1, 1956, reported and paid employee and employer taxes 
with respect to any portion of the remuneration paid to an individual, 
who is eligible to file a request under section 403(a) of

[[Page 85]]

the Social Security Amendments of 1954, as amended, for services 
performed by him after 1950 and before 1957, may report and pay such 
taxes before September 14, 1960, with respect to any remaining portion 
of such remuneration which would have constituted wages if a certificate 
had been in effect with respect to such services. Such taxes may be 
reported as an adjustment without interest in the manner prescribed in 
Subpart G of the regulations in this part.
    (5) Effect of request. If a request is made and filed under the 
conditions stated in this paragraph with respect to one or more 
individuals, remuneration for services performed by each such individual 
after 1950 and before 1957, with respect to which the employee and 
employer taxes are paid on or before the date on which the request was 
filed with the district director, will be deemed to constitute 
remuneration for employment to the extent that such services would have 
constituted employment as defined in section 3121(b), or in section 
1426(b) of the Internal Revenue Code of 1939, if a certificate had been 
in effect with respect to such services. However, the provisions of 
section 3121(a) and Secs. 31.3121(a)-1 to 31.3121(a)(10)-1, inclusive, 
of the regulations in this part or the provisions of section 1426(a) of 
the Internal Revenue Code of 1939 and the regulations in 26 CFR (1939) 
408.226 and 408.227 (Regulations 128), as the case may be, are 
applicable in determining the extent to which such remuneration for 
employment constitutes wages for purposes of the employee and employer 
taxes.
    (c) Individual who failed to sign list of concurring employees--(1) 
In general. Pursuant to section 403(b) of the Social Security Amendments 
of 1954, as amended, any individual who, as an employee, performed 
services after December 31, 1950, and before August 1, 1956, for an 
organization which filed a valid certificate under section 3121(k), or 
under section 1426(l) of the Internal Revenue Code of 1939, but who 
failed to sign the list of employees concurring in the filing of such 
certificate, may request on or before January 1, 1959, that the 
remuneration received by him for such services be deemed to constitute 
remuneration for employment, if:
    (i) Any of the services performed by the individual after December 
31, 1950, and before August 1, 1956, would have constituted employment 
if the signature of such individual had appeared on the list of 
employees who concurred in the filing of the certificate;
    (ii) The employee and employer taxes were paid before August 1, 
1956, with respect to any part of the remuneration received by the 
individual from the organization for such services; and
    (iii) No refund (or credit) of such taxes has been obtained either 
by the employee or the employer, exclusive of any refund (or credit) 
which would be allowable if the services performed by the individual had 
constituted employment.
    (2) Execution and filing of request. (i) Except where the 
alternative procedure set forth in subdivision (ii) of this subparagraph 
is followed, the request of an individual under section 403(b) of the 
Social Security Amendments of 1954, as amended, shall be made and filed 
as provided in this subdivision. The request shall be filed on or before 
January 1, 1959, be made in writing, be signed and dated by the 
individual, and include:
    (a) The name and address of the organization for which the services 
were performed;
    (b) The name, address, and social security account number of the 
individual;
    (c) A statement that the individual has not obtained a refund or 
credit (other than a refund or credit which would be allowable if the 
services had constituted employment) from the district director of any 
part of the employee tax paid before August 1, 1956, with respect to 
remuneration received by him from the organization;
    (d) A request that all remuneration received by the individual from 
the organization for services performed after 1950 and before August 1, 
1956, with respect to which employee and employer taxes were paid before 
August 1, 1956, shall be deemed to constitute remuneration for 
employment to the extent authorized by section 403(b) of the Social 
Security Amendments of 1954, as amended; and
    (e) A statement that the individual understands that, upon the 
filing of

[[Page 86]]

such request with the district director, (1) he will be deemed to have 
concurred in the certificate which was previously filed by the 
organization, and (2) the employee and employer taxes will be applicable 
to all wages received, and to be received, by him for services performed 
for the organization on or after the effective date of such certificate 
to the extent that such taxes would have been applicable if he had 
signed the list on Form SS-15a submitted with the certificate.

The request of an individual shall be accompanied by a statement of the 
organization incorporating the substance of each of the three conditions 
listed in paragraph (c)(1) of this section. The statement of the 
organization should also show that the individual performed services for 
the organization after December 31, 1950, and before August 1, 1956; 
that the organization filed a valid certificate under section 3121(k), 
or under section 1426(l) of the Internal Revenue Code of 1939; and the 
district director with whom returns on Form 941 are filed. Such 
statement shall be signed by the president or other principal officer of 
the organization who shall certify that the statement is correct to the 
best of his knowledge and belief. If the statement of the organization 
is not submitted with the individual's request, the individual shall 
include in his request an explanation of his inability to submit such 
statement. Other information may be required, but should be submitted 
only upon receipt of a specific request therefor. No particular form is 
prescribed for the request of the individual or the statement of the 
organization required to be submitted with the request. The individual's 
request should be filed with the district director with whom the 
organization files returns on Form 941. If the individual is deceased or 
mentally incompetent and the request is made by the legal representative 
of the individual or other person authorized to act on his behalf, the 
request shall be accompanied by evidence showing such persons' authority 
to make the request.
    (ii) An organization which has or had in its employ individuals with 
respect to whom section 403(b) of the Social Security Amendments of 
1954, as amended, is applicable, may, if it so desires, prepare a form 
or forms for use by any such individual or individuals in making 
requests under such section. Any such form shall provide space for the 
signature of the individual or individuals and contain such information 
as is required by paragraph (c)(1)(i) of this section to be included in 
a request. Any such form used by more than one individual, and any such 
form used by one individual, and any such form used by one individual 
which is signed and returned to the organization, shall be submitted by 
the organization, together with its statement (as required in paragraph 
(c)(1)(i) of this section), to the district director with whom the 
organization files returns on Form 941. An individual is not required to 
use a form prepared by the organization but may, at his election, file 
his request in accordance with the provisions of subdivisions (i) of 
this subparagraph.
    (3) Effect of request. An individual who makes and files a request 
under the conditions stated in this paragraph with respect to services 
performed as an employee of an organization described in section 
501(c)(3) which was exempt from income tax under section 501(a), or 
which was exempt from income tax under section 101(6) of the Internal 
Revenue Code of 1939, will be deemed to have signed the list 
accompanying the certificate filed by the organization under section 
3121(k), or under section 1426(l) of the Internal Revenue Code of 1939. 
Accordingly, all services performed by the individual for the 
organization on and after the effective date of the certificate will 
constitute employment to the same extent as if he had, in fact, signed 
the list. The employee tax and employer tax are applicable with respect 
to any remuneration paid to the employee by the organization which 
constitutes wages. If less than the correct amount of such taxes has 
been paid, the additional amount due should be reported as an adjustment 
without interest within the time specified in subpart G of the 
regulations in this part.
[T.D. 6744, 29 FR 8318, July 2, 1964]

[[Page 87]]



Sec. 31.3121(k)-4  Constructive filing of waivers of exemption from social security taxes by certain tax-exempt organizations.

    (a) Constructive filing of waiver certificate where no refund or 
credit has been allowed. (1) This paragraph applies (except as provided 
in subparagraph (3) of this paragraph) to an organization if all of the 
following four conditions are met.
    (i) The organization is one described in section 501(c)(3) of the 
Internal Revenue Code of 1954, which is exempt from income tax under 
section 501(a) of the Code.
    (ii) The organization did not file a valid waiver certificate under 
section 3121(k)(1) of the Internal Revenue Code of 1954 (or the 
corresponding provision of prior law) as of the later of October 19, 
1976, or the earliest date on which it satisfies paragraph (a)(1)(iii) 
of this section.
    (iii) The taxes imposed by sections 3101 and 3111 of the Code were 
paid with respect to remuneration paid by the organization to its 
employees, as though such certificate had been filed, during any period 
that includes all or part of at least three consecutive calendar 
quarters and that did not terminate before the end of the third calendar 
quarter of 1973.
    (iv) The Internal Revenue Service did not allow (or erroneously 
allowed) a refund or credit of any part of the taxes paid as described 
in subdivision (iii) of this subparagraph with respect to remuneration 
for services performed on or after April 1, 1973. For purposes of the 
previous sentence, a refund or credit which would have been allowed, 
even if a valid waiver certificate filed under section 3121(k)(1) had 
been in effect, shall be disregarded. A refund or credit will be 
regarded as having been erroneously allowed if it was credited by the 
Internal Revenue Service to the taxpayer account of the organization or 
any of its employees on or after September 9, 1976, even though it was 
properly made under the law in effect when made.
    (2) (i) An organization to which this paragraph applies shall be 
deemed to have filed a valid waiver certificate under section 3121(k)(1) 
(or the corresponding provision of prior law) for purposes of section 
210(a)(8)(B) of the Social Security Act and section 3121(b)(8)(B). The 
waiver certificate shall be deemed to have been filed on the first day 
of the period described in paragraph (a)(1)(iii) of this section and 
shall be effective on the first day of the calendar quarter in which 
such period began. However, such waiver is effective only with respect 
to remuneration for services performed after 1950.
    (ii) The waiver certificate shall be deemed to have been accompanied 
by a list containing the signature, address, and social security number 
(if any) of each employee with respect to whom the taxes imposed by 
sections 3101 and 3111 were paid as described in paragraph (a)(1)(iii) 
of this section. Each such employee shall be deemed to have concurred in 
the filing of the certificate for purposes of section 210(a)(8)(B) of 
the Social Security Act and section 3121(b)(8)(B). A statement 
containing the name, address, and employer identification number of the 
organization, and the name, last known address, and social security 
number (if any) of each employee described in the preceding sentence 
shall be filed by the organization at the request of the Internal 
Revenue Service.
    (iii) The services of all employees entering or reentering the 
employ of an organization on or after the first day following the close 
of the calendar quarter in which the organization is deemed to have 
filed the waiver certificate, performed on or after the day of such 
entry or reentry, shall be covered by the certificate.
    (3) This paragraph (a) shall not apply to an organization if--
    (i) Prior to the end of the period referred to in paragraph 
(a)(1)(iii) (and, in addition, in the case of an organization organized 
on or before October 9, 1969, prior to October 19, 1976), the 
organization had applied for a ruling or determination letter 
acknowledging it to be exempt from income tax under section 501(c)(3);
    (ii) The organization subsequently received such ruling or 
determination letter;
    (iii) The organization did not pay any taxes under sections 3101 and 
3111 with respect to any employee for any calendar quarter ending after 
the twelfth

[[Page 88]]

month following the date of mailing of the ruling or determination 
letter; and
    (iv) The organization did not pay any taxes under sections 3101 and 
3111 with respect to any calendar quarter beginning after the later of 
December 31, 1975, or the date on which the ruling or determination 
letter was issued.
    (4) In the case of an organization which is deemed under this 
paragraph to have filed a valid waiver certificate under section 
3121(k)(1), if the period with respect to which the taxes imposed by 
sections 3101 and 3111 were paid by the organization (as described in 
paragraph (a)(1)(iii) of this section) terminated prior to October 1, 
1976, taxes under sections 3101 and 3111 with respect to remuneration 
paid by the organization after the termination of such period and prior 
to July 1, 1977, which remained unpaid on December 20, 1977 (or which 
were paid after October 19, 1976, but prior to December 20, 1977), shall 
not be due or payable (or, if paid, shall be refunded). Similarly, an 
organization that received a refund or credit of the taxes described in 
paragraph (a)(1)(iii) of this section after September 8, 1976, shall not 
be liable for the taxes imposed by sections 3101 and 3111 with respect 
to remuneration paid by it prior to July 1, 1977, for which the 
organization received the refund or credit. The waiver certificate, 
which an organization described in this subparagraph is deemed to have 
filed, shall not apply to any service with respect to the remuneration 
for which the taxes imposed by sections 3101 and 3111 are not due or 
payable (or are refunded) by reason of this subparagraph.
    (5) In the case of an organization which is deemed under this 
paragraph to have filed a valid waiver certificate under section 
3121(k)(1), if the taxes imposed by sections 3101 and 3111 were not paid 
during the period referred to in paragraph (a)(1)(iii) of this section 
(whether the period has terminated or not) with respect to remuneration 
paid by the organization to individuals who became its employees after 
the close of the calendar quarter in which such period began, taxes 
under sections 3101 and 3111 with respect to remuneration paid prior to 
July 1, 1977, to such employees, which remain unpaid on December 20, 
1977 (or which were paid after October 19, 1976, but prior to December 
20, 1977), shall not be due or payable (or, if paid, shall be refunded). 
The waiver certificate, which an organization described in this 
subparagraph is deemed to have filed, shall not apply to any service 
with respect to remuneration for which the taxes imposed by sections 
3101 and 3111 are not due or payable (or are refunded) by reason of this 
subparagraph.
    (6) This subparagraph allows certain employees to obtain social 
security coverage for service not covered by a deemed-filed waiver 
certificate by reason of section 3121(k)(4)(C) and paragraph (a)(4) or 
(5) of this section. To qualify under this subparagraph, all of the 
following conditions must be met.
    (i) An individual performed service as an employee of an 
organization which is deemed under this paragraph to have filed a waiver 
certificate under section 3121(k)(1), on or after the first day of the 
period described in paragraph (a)(1)(iii) of this section and before 
July 1, 1977.
    (ii) The service performed by the individual does not constitute 
employment (as defined in section 210 (a) of the Social Security Act and 
section 3121(b) of the Code) because the waiver certificate which the 
organization is deemed to have filed is inapplicable to such service by 
reason of section 3121(k)(4)(C), but would constitute employment (as so 
defined) in the absence of section 3121(k)(4)(C).
    (iii) The individual files a request on or before April 15, 1980, in 
the manner and form, and with such official, as may be prescribed by 
regulations under title II of the Social Security Act.
    (iv) That request is accompanied by full payment of the taxes, which 
would have been paid under section 3101 with respect to the remuneration 
for the service described in paragraph (a)(6)(ii) of this section but 
for the application of section 3121(k)(4)(C) (or by satisfactory 
evidence that appropriate arrangements have been made for the payment of 
such taxes in installments as provided in section 3121(k)(8) and 
paragraph (d) of this section).

If these conditions are satisfied, the remuneration paid for the service 
described in paragraph (a)(6)(i) of this section shall be deemed to 
constitute

[[Page 89]]

remuneration for employment. In any case where remuneration paid by an 
organization to an individual is deemed under this subparagraph to 
constitute remuneration for employment, such organization shall be 
liable (notwithstanding any other provision of the Code or regulations) 
for payment of the taxes it would have been required to pay under 
section 3111 with respect to such remuneration but for the application 
of section 3121(k)(4)(C). The due date for the return and payment by the 
organization of the taxes described in the preceding sentence shall be 
the last day of the calendar month following the calendar quarter in 
which the organization is notified in writing of the employee's request. 
However, see paragraph (d) of this section which permits the payment of 
these taxes in installments.
    (b) Constructive filing of waiver certificate where refund or credit 
has been allowed and new certificate is not filed. (1) This paragraph 
applies to an organization which meets two conditions. First, it must be 
an organization to which paragraph (a) of this section would apply but 
for its failure to satisfy the requirement of paragraph (a)(1)(iv) of 
this section because a refund or credit of taxes was allowed before 
September 9, 1976. Second, it must not have filed an actual valid waiver 
certificate under section 3121(k)(1) in accordance with the requirements 
of paragraph (c) of this section.
    (2) An organization to which this paragraph applies shall be deemed, 
for purposes of section 210(a)(8)(B) of the Social Security Act and 
section 3121(b)(8)(B), to have filed a valid waiver certificate under 
section 3121(k)(1) on April 1, 1978. Such certificate shall be effective 
for the period beginning on the first day of the first calendar quarter 
with respect to which the refund or credit referred to in paragraph 
(b)(1) of this section was allowed (or, if later, on July 1, 1973).
    (3) If an organization is deemed under this paragraph to have filed 
a waiver certificate on April 1, 1978, the provisions of paragraph 
(a)(2)(ii) and (iii) of this section (relating to employees covered by a 
deemed-filed waiver certificate) shall apply. Such certificate shall 
supersede any certificate which may have been actually filed by such 
organization prior to that date.
    (4) Where an organization is deemed under this paragraph to have 
filed a waiver certificate on April 1, 1978, the due date for the return 
and payment of the taxes imposed by sections 3101 and 3111 for wages 
paid prior to April 1, 1978, with respect to services constituting 
employment by reason of such certificate shall be August 1, 1978. 
However, see paragraph (d) of this section which permits the payment of 
these taxes in installments. Such taxes (along with the amount of any 
interest paid in connection with the refund or credit described in 
paragraph (b)(1) of this section) shall be a liability of such 
organization, payable from its own funds. No portion of such taxes (or 
interest) shall be deducted from the wages of (or otherwise collected 
from) the individuals who performed such services, and those individuals 
shall have no liability for the payment thereof.
    (5) This subparagraph allows certain employees of organizations 
covered under this paragraph to obtain social security coverage for 
periods prior to those covered by a deemed-filed waiver certificate. To 
qualify under this subparagraph, all of the following conditions must be 
met.
    (i) An individual performed service, as an employee of an 
organization deemed under this paragraph to have filed a waiver 
certificate under section 3121(k)(1), at any time prior to the period 
for which such certificate is effective.
    (ii) The taxes imposed by sections 3101 and 3111 were paid with 
respect to remuneration paid for such service, but such service (or any 
part thereof ) does not constitute employment (as defined in section 
210(a) of the Social Security Act and section 3121(b)) because the 
applicable taxes so paid were refunded or credited (otherwise than 
through a refund or credit which would have been allowed if a valid 
waiver certificate filed under section 3121(k)(1) had been in effect) 
prior to September 9, 1976.
    (iii) Any portion of such service (with respect to which taxes were 
paid and refunded or credited as described in paragraph (b)(5)(ii) of 
this section) would constitute employment (as so

[[Page 90]]

defined) if the organization had actually filed under section 3121(k)(1) 
a valid waiver certificate effective as provided in paragraph (c)(2) of 
this section (with such individual's signature appearing on the 
accompanying list).

If this subparagraph applies, the remuneration paid for the portion of 
such service described in paragraph (b)(5)(iii) of this section shall be 
deemed to constitute remuneration for employment (as defined in section 
210(a) of the Social Security Act and section 3121(b)), where such 
individual filed a request on or before April 15, 1980 (in the manner 
and form, and with such official, as may be prescribed by regulations 
under title II of the Social Security Act), accompanied by full 
repayment of the taxes which were paid under section 3101 with respect 
to such remuneration and were refunded or credited (or by satisfactory 
evidence that arrangements have been made for the payment of such taxes 
in installments as provided in section 3121(k)(8) and paragraph (d) of 
this section). In any case where remuneration paid by an organization to 
an individual is deemed under this subparagraph to constitute 
remuneration for employment such organization shall be liable 
(notwithstanding any other provision of the Code or regulations) for 
repayment of any taxes which it paid under section 3111 with respect to 
such remuneration and which were refunded or credited to it. Any 
interest received by the organization or its employees in connection 
with a refund or credit with respect to such taxes shall be remitted 
with the repayment of taxes pursuant to this subparagraph.
    (c) Actual filing of waiver certificate by April 1, 1978, where 
refund or credit has been allowed. (1) An organization may file an 
actual waiver certificate in accordance with paragraphs (c)(2) and (3) 
of this section if it is an organization to which paragraph (a) of this 
section would apply but for its failure to meet the condition set forth 
in paragraph (a)(1)(iv) of this section.
    (2) An organization described in paragraph (c)(1) of this section 
was permitted to file an actual waiver certificate on or before April 1, 
1978. This certificate must be effective for the period beginning on or 
before the first day of the first calendar quarter with respect to which 
a refund or credit described in paragraph (b)(1) of this section was 
allowed (or, if later, with the first day of the earliest calendar 
quarter for which such certificate may be in effect under section 
3121(k)(1)(B)(iii)). Such waiver certificate must have been accompanied 
by a list described in section 3121(k)(1)(A), containing the signature, 
address, and social security number of each concurring employee (if 
any).
    (3) Such a waiver certificate shall be valid only if the 
organization complied with the following notification requirements and, 
on or before April 30, 1978, filed (with the service center of the 
Internal Revenue Service with which the waiver certificate was filed) a 
certification that it had complied with these notification requirements. 
However, these requirements shall be conclusively presumed to have been 
met with respect to any employees who concurred in the filing of the 
waiver certificate.
    (i) Written notification of the option to obtain social security 
coverage for the retroactive period covered by the waiver certificate is 
required to have been given to all current and former employees of the 
organization with respect to whose remuneration taxes imposed by 
sections 3101 and 3111 were paid for any part of the period covered by 
the waiver certificate. For purposes of the preceding sentence, in the 
case of a former employee a mailing of notification to his or her last 
known address shall constitute delivery to the former employee. This 
notification must have been given at least 30 days prior to the date by 
which the employee was required to inform the organization whether he or 
she elects the retroactive social security coverage.
    (ii) The notification required by this subparagraph must have stated 
the earliest date for which the waiver certificate is effective and the 
date by which the employee must have informed the organization of a 
decision to elect the retroactive coverage. In addition, the 
notification must have advised the employee how to obtain information as 
to the quarters of social security coverage to be obtained and any taxes 
or interest for which the employee would be liable if the election

[[Page 91]]

was made. The organization must have provided this information to any 
interested employee at least 14 days prior to the last day on which such 
employee was to have informed the organization of any election.
    (iii) If the notification resulted in any employee electing the 
retroactive coverage whose signature did not appear on the list of 
concurring employees which accompanied a previously filed waiver 
certificate, the certification that was supplied on or before April 30, 
1978, must have been accompanied by a special amendment to that list. 
Any employee whose name appears on this special amended list shall be 
treated as if his or her name appeared on the list of concurring 
employees filed with the waiver certificate. The preceding sentence 
shall only apply with respect to amended lists of concurring employees 
filed to comply with the requirements of this subparagraph.
    (4) Any interest received in connection with a refund or credit 
described in paragraph (b)(1) of this section must have been repaid on 
or before April 30, 1978, with respect to each employee who concurs in 
the filing of a waiver certificate pursuant to this paragraph. 
Notwithstanding the provisions of paragraph (c)(4) of Sec. 31.3121(k)-1, 
if such interest was repaid on or before April 30, 1978, the waiver 
certificate shall be considered to have been filed on the date it was 
originally furnished to the Internal Revenue Service.
    (d) Installment payment of taxes for retroactive coverage. This 
paragraph applies if--
    (1) An organization is deemed under paragraph (a) of this section to 
have filed a valid waiver certificate, but the applicable period 
described in paragraph (a)(1)(iii) has terminated and all or part of the 
taxes imposed by sections 3101 and 3111, with respect to remuneration 
paid by such organization to its employees after the close of such 
period, remains payable notwithstanding section 3121(k)(4)(C) and 
paragraph (a)(4) of this section; or
    (2) An organization described in paragraph (c) files a valid waiver 
certificate by March 31, 1978, or, not having filed the certificate by 
that date, is seemed to have filed the certificate on April 1, 1978, 
under paragraph (b); or
    (3) An individual files a request under paragraph (a)(6) or (b)(5) 
to have service treated as constituting remuneration for employment (as 
defined in section 210(a) of the Social Security Act and section 
3121(b)).

If this paragraph applies, the taxes due under sections 3101 and 3111 
(together with any additions to tax or interest other than interest 
described in paragraph (c)(4)) with respect to service constituting 
employment by reason of the waiver certificate for any period prior to 
the first day of the calendar quarter in which the certificate is filed 
or deemed filed, or with respect to service constituting employment by 
reason of an employee request, may be paid in installments over an 
appropriate period of time, as determined by the district director. In 
determining the appropriate period of time, the district director shall 
exercise forbearance and, to the extent possible, grant the organization 
an installment agreement that will allow it sufficient funds to carry 
out its basic mission. If any installment is not paid on or before the 
date fixed for its payment, the total unpaid amount shall become payable 
immediately and shall be paid upon notice and demand.
    (e) Application of certain provisions to cases of constructive 
filing. (1) Except as provided in paragraphs (e)(2) and (3) of this 
section, all of the provisions of section 3121(k) (other than 
subparagraphs (B), (F), and (H) of section 3121(k)(1)) and the 
regulations thereunder (including the provisions requiring the payment 
of taxes under sections 3101 and 3111 with respect to the services 
involved), shall apply with respect to any certificate which is deemed 
to have been filed under paragraph (a) or (b) of this section, in the 
same way they would apply if the certificate had been actually filed on 
that day under section 3121(k)(1).
    (2) The provisions of section 3121(k)(1)(E) shall not apply unless 
the taxes described in paragraph (a)(1)(iii) of this section were paid 
by the organization as though a separate certificate had been filed with 
respect to one or both of the groups to which such provisions relate.

[[Page 92]]

    (3) The action of the organization in obtaining the refund or credit 
described in paragraph (b)(1) of this section shall not be considered a 
termination of such organization's coverage period for purposes of 
section 3121(k)(3).
    (4) Any organization which is deemed to have filed a waiver 
certificate under paragraph (a) or (b) of this section shall be 
considered for purposes of section 3102(b) to have been required to 
deduct the taxes imposed by section 3101 with respect to the services 
involved.
[T.D. 7647, 44 FR 59524, Oct. 16, 1979]



Sec. 31.3121(l)-1  Agreements entered into by domestic corporations with respect to foreign subsidiaries.

    For provisions relating to the extension of the Federal old-age, 
survivors, and disability insurance system established by title II of 
the Social Security Act to certain services performed outside the United 
States by citizens of the United States in the employ of a foreign 
subsidiary of a domestic corporation, see the Regulations Relating to 
Contract Coverage of Employees of Foreign Subsidiaries (part 36 of this 
chapter).



Sec. 31.3121(o)-1  Crew leader.

    The term ``crew leader'' means an individual who furnishes 
individuals to perform agricultural labor for another person, if such 
individual pays (either on his own behalf or on behalf of such person) 
the individuals so furnished by him for the agricultural labor performed 
by them and if such individual has not entered into a written agreement 
with such person whereby such individual has been designated as an 
employee of such person. For purposes of this chapter a crew leader is 
deemed to be the employer of the individuals furnished by him to perform 
agricultural labor, after 1956, for another person, and the crew leader 
is deemed not to be an employee of such other person with respect to the 
performance of services by him after 1956 in furnishing such individuals 
or as a member of the crew. An individual is not a crew leader within 
the meaning of section 3121(o) and of this section if he does not pay 
the agricultural workers furnished by him to perform agricultural labor 
for another person, or if there is an agreement between such individual 
and the person for whom the agricultural labor is performed whereby such 
individual is designated as an employee of such person. Whether or not 
such individual is an employee will be determined under the usual 
common-law rules (see paragraph (c) of Sec. 31.3121(d)-1).
[T.D. 6744, 29 FR 8320, July 2, 1964]



Sec. 31.3121(q)-1  Tips included for employee taxes.

    (a) In general. Except as otherwise provided in paragraph (b) of 
this section, tips received after 1965 by an employee in the course of 
his employment shall be considered remuneration for employment. (For 
definition of the term ``employee'' see 3121(d) and Sec. 31.3121(d)-1.) 
Tips reported by an employee to his employer in a written statement 
furnished to the employer pursuant to section 6053(a) (see Sec. 31.6053-
1) shall be deemed to be paid to the employee at the time the written 
statement is furnished to the employer. Tips received by an employee 
which are not reported to his employer in a written statement furnished 
pursuant to section 6053(a) shall be deemed to be paid to the employee 
at the time the tips are actually received by the employee. For 
provisions relating to the collection of employee tax in respect of tips 
from the employee, see Sec. 31.3102-3.
    (b) Tips not included for employer taxes. Tips received after 1965 
by an employee in the course of his employment do not constitute 
remuneration for employment for purposes of computing wages subject to 
the taxes imposed by subsections (a) and (b) of section 3111.
    (c) Tips received by an employee in course of his employment. Tips 
are considered to be received by an employee in the course of his 
employment for an employer regardless of whether the tips are received 
by the employee from a person other than his employer or are paid to the 
employee by the employer. However, only those tips which are received by 
an employee on his own behalf (as distinguished from tips received on 
behalf of another employee) shall be considered as remuneration paid to 
the employee. Thus, where employees practice tip splitting (for example, 
where waiters pay a portion of

[[Page 93]]

the tips received by them to the busboys), each employee who receives a 
portion of a tip left by a customer of the employer is considered to 
have received tips in the course of his employment.
    (d) Computation of annual wage limitation. In connection with the 
application of the annual wage limitation (see Sec. 31.3121(a)(1)-1), 
tips reported by an employee to his employer in a written statement 
furnished to the employer pursuant to section 6053(a) shall be taken 
into account for purposes of the tax imposed by section 3101. However, 
since tips received by an employee in the course of his employment do 
not constitute remuneration for employment for purposes of the tax 
imposed by section 3111, they are disregarded for purposes of the annual 
wage limitation in respect of such tax. Accordingly, separate 
computations for purposes of the annual wage limitation may be required 
in respect of an employee who receives tips. The provisions of this 
paragraph may be illustrated by the following example:

    Example. During 1966, A is employed as a waiter by X restaurant and 
is paid wages by X restaurant at the rate of $100 a week. At the end of 
October 1966, A has been paid weekly wages in the amount of $4,300 and 
has reported tips in the amount of $2,200. On November 6, 1966, A is 
paid an additional week's wages in the amount of $100 and on November 9, 
1966, A furnishes X restaurant a report of tips actually received by him 
during October. The annual wage limitation of $6,600 (weekly wages of 
$4,400 ($4,300 plus $100) and tips of $2,200) had been reached for 
purposes of the tax imposed by section 3101 prior to November 9 and, 
accordingly, no portion of the tips included in the report furnished on 
that date constitutes wages. However, since tips do not constitute 
remuneration for employment for purposes of the tax imposed by section 
3111, the weekly wages paid to A during the remainder of 1966 will be 
subject to the tax imposed by section 3111.
[T.D. 7001, 34 FR 1000, Jan. 23, 1969]



Sec. 31.3121(r)-1  Election of coverage by religious orders.

    (a) In general. A religious order whose members are required to take 
a vow of poverty, or any autonomous subdivision of such an order, may 
elect to have the Federal old-age, survivors, and disability insurance 
system established by title II of the Social Security Act extended to 
services performed by its members in the exercise of duties required by 
such order or subdivision. See section 3121(i)(4) and Sec. 31.3121(i)-4 
for provisions relating to the computation of the amount of remuneration 
of such members. For purposes of this section, a subdivision of a 
religious order is autonomous if it directs and governs its members, if 
it is responsible for its members' care and maintenance, if it is 
responsible for the members' support and maintenance in retirement, and 
if the members live under the authority of a religious superior who is 
elected by them or appointed by higher authority.
    (b) Definition of member--(1) In general. For purposes of section 
3121(r) and this section, a member of a religious order means any 
individual who is subject to a vow of poverty as a member of such order, 
who performs tasks usually required (and to the extent usually required) 
of an active member of such order, and who is not considered retired 
because of old age or total disability.
    (2) Retirement because of old age--(i) In general. For purposes of 
section 3121(r)(2) and this paragraph, an individual is considered 
retired because of old age if (A) in view of all the services performed 
by the individual and the surrounding circumstances it is reasonable to 
consider him to be retired, and (B) his retirement occurred by reason of 
old age. Even though an individual performs some services in the 
exercise of duties required by the religious order, the first test (the 
retirement test) is met where it is reasonable to consider the 
individual to be retired.
    (ii) Factors to be considered. In determining whether it is 
reasonable to consider an individual to be retired, consideration is 
first to be given to all of the following factors:
    (A) Nature of services. Consideration is given to the nature of the 
services performed by the individual in the exercise of duties required 
by his religious order. The more highly skilled and valuable such 
services are, the more likely the individual rendering such services is 
not reasonably considered retired. Also, whether such services are

[[Page 94]]

of a type performed principally by retired members of the individual's 
religious order may be significant.
    (B) Amount of time. Consideration is also given to the amount of 
time the individual devotes to the performance of services in the 
exercise of duties required by his religious order. This time includes 
all the time spent by him in any activity in connection with services 
that might appropriately be performed in the exercise of duties required 
of active members by the order. Normally, an individual who, solely by 
reason of his advanced age, performs services of less than 45 hours per 
month shall be considered retired. In no event shall an individual who, 
solely by reason of his advanced age, performs services of less than 15 
hours per month not be considered retired.
    (C) Comparison of services rendered before and after retirement. In 
addition, consideration is given to the nature and extent of the 
services rendered by the individual before he ``retired,'' as compared 
with the services performed thereafter. A large reduction in the 
importance or amount of services performed by the individual in the 
exercise of duties required by his religious order tends to show that 
the individual is retired; absence of such reduction tends to show that 
the individual is not retired. Normally, an individual who reduces by at 
least 75 percent the amount of services performed shall be considered 
retired.

Where consideration of the factors described in paragraph (b)(2)(ii) of 
this section does not establish whether an individual is or is not 
reasonably considered retired, all other factors are considered.
    (iii) Examples. The rules of this subparagraph may be illustrated by 
the following examples:
    Example 1. A is a member of a religious order who is subject to a 
vow of poverty. A's religious order is principally engaged in providing 
nursing services, and A has been fully trained in the nursing 
profession. In accordance with the practices of her order, upon 
attaining the age of 65, A is relieved of her nursing duties by reason 
of her age, and is assigned to a mother house where she is required to 
perform only such duties as light housekeeping and ordinary gardening. A 
is reasonably considered retired since the services she is performing 
are simple in nature, are markedly less skilled than those professional 
services which she previously performed, are of a type performed 
principally by retired members of her order, and are performed at a 
location to which members frequently retire.

    Example 2. Assume the same facts as in example 1 except that A is 
not reassigned to a mother house. Instead, she is reassigned to full-
time duties in a hospital not utilizing her nursing skills. Whether A 
has met the retirement test requires consideration of the nature of her 
work. If A's new duties are almost entirely of a make-work nature 
primarily to occupy her body and mind, she is reasonably considered 
retired. However, if they are essential to the operation of the 
hospital, she is not reasonably considered retired.
    Example 3. B is a member of a religious order who is subject to a 
vow of poverty. As such, he provides supportive services to his order, 
such as housekeeping, cooking, and gardening. By reason of having 
attained the age of 62, he reduces the number of hours spent per day in 
these services from 8 hours to 2 hours. B is reasonably considered 
retired in view of the large reduction in the amount of time he devotes 
to his duties.
    Example 4. C is a member of a religious order who is subject to a 
vow of poverty. In his capacity as a member of the order, he performs 
duties as president of a university. Upon attaining the age of 65, C is 
relieved of his duties as president of the university and instead 
becomes a member of its faculty, teaching two courses whereas full-time 
members of the faculty normally teach four comparable courses. Although 
C's duties are no longer as demanding as those he previously performed, 
and although the amount of his time required for them is less than full 
time, he is nonetheless performing duties requiring a high degree of 
skill for a substantial amount of time. Accordingly, C is not reasonably 
considered retired.
    Example 5. Assume the same facts as in example 4, except that C 
teaches only one course upon being relieved of his position as president 
by reason of age. C is reasonably considered retired.
    Example 6. D is a member of a contemplative order who is subject to 
a vow of poverty. In accordance with the practices of his order, upon 
attaining the age of 70, D reduces by 50 percent the amount of time 
spent performing the normal duties of active members of his order. D is 
not reasonably considered retired.
    Example 7. Assume the same facts as in example 6, except that 
because of his age D no longer participates in the more rigorous 
liturgical services of the order and that the amount of time which he 
spends in all duties which might appropriately be performed by active 
members of his order is reduced by 75 percent. D is reasonably 
considered retired

[[Page 95]]

in view of the large reduction in his participation in the usual 
devotional routine of his order.

    (3) Retirement because of total disability. For purposes of section 
3121(r)(2) and this paragraph, an individual is considered retired 
because of total disability (i) if he is unable, by reason of a 
medically determinable physical or mental impairment, to perform the 
tasks usually required of an active member of his order to the extent 
necessary to maintain his status as an active member, and (ii) if such 
impairment is reasonably expected to prevent his resumption of the 
performance of such tasks to such extent. A physical or mental 
impairment is an impairment that results from anatomical, physiological, 
or psychological abnormalities which are demonstrable by medically 
acceptable clinical and laboratory diagnostic techniques. Statements of 
the individual, including his own description of his impairment 
(symptoms), are, alone, insufficient to establish the presence of a 
physical or mental impairment.
    (4) Evidentiary requirements with respect to retirement. There shall 
be attached to the return of taxes paid pursuant to an election under 
section 3121(r) a summary of the facts upon which any determination has 
been made by the religious order or autonomous subdivision that one or 
more of its members retired during the period covered by such return. 
Each summary shall contain the name and social security number of each 
such retired member as well as the date of his retirement. Such order or 
subdivision shall maintain records of the details relating to each such 
``retirement'' sufficient to show whether or not such member or members 
has in fact retired.
    (c) Certificates of election--(1) In general. A religious order or 
an autonomous subdivision of such an order desiring to make an election 
of coverage pursuant to section 3121(r) and this section shall file a 
certificate of election on Form SS-16 in accordance with the 
instructions thereto. However, in the case of an election made before 
August 9, 1973, a document other than Form SS-16 shall constitute a 
certificate of election if it purports to be a binding election of 
coverage and if it is filed with an appropriate official of the Internal 
Revenue Service. Such a document shall be given the effect it would have 
if it were a certificate of election containing the provisions required 
by paragraph (c)(2) of this section. However, it should subsequently be 
supplemented by a Form SS-16.
    (2) Provisions of certificates. Each certificate of election shall 
provide that--
    (i) Such election of coverage by such order or subdivision shall be 
irrevocable,
    (ii) Such election shall apply to all current and future members of 
such order, or in the case of a subdivision thereof to all current and 
future members of such order who belong to such subdivision,
    (iii) All services performed by a member of such order or 
subdivision in the exercise of duties required by such order or 
subdivision shall be deemed to have been performed by such member as an 
employee of such order or subdivision, and
    (iv) The wages of each member, upon which such order or subdivision 
shall pay the taxes imposed on employees and employers by sections 3101 
and 3111, will be determined as provided in section 3121(i)(4).
    (d) Effective date of election--(1) In general. Except as provided 
in paragraph (e) of this section, a certificate of election of coverage 
filed by a religious order or its subdivision pursuant to section 
3121(r) and this section shall be in effect, for purposes of section 
3121(b)(8)(A) and for purposes of section 210(a)(8)(A) of the Social 
Security Act, for the period beginning with whichever of the following 
may be designated by the electing religious order or subdivision:
    (i) The first day of the calendar quarter in which the certificate 
is filed,
    (ii) The first day of the calendar quarter immediately following the 
quarter in which the certificate is filed, or
    (iii) The first day of any calendar quarter preceding the calendar 
quarter in which the certificate is filed, except that such date may not 
be earlier than the first day of the 20th calendar quarter preceding the 
quarter in which such certificate is filed.

[[Page 96]]

    (2) Retroactive elections. Whenever a date is designated as provided 
in paragraph (d)(1)(iii) of this section, the election shall apply to 
services performed before the quarter in which the certificate is filed 
only if the member performing such services was a member at the time 
such services were performed and is living on the first day of the 
quarter in which such certificate is filed. Thus, the election applies 
to an individual who is no longer a member of a religious order on the 
first day of such quarter if he performed services as a member at any 
time on or after the date so designated and is living on the first day 
of the quarter in which such certificate is filed. For purposes of 
computing interest and for purposes of section 6651 (relating to 
additions to tax for failure to file tax return or to pay tax), in any 
case in which such a date is designated the due date for the return and 
payment of the tax, for calendar quarters prior to the quarter in which 
the certificate is filed, resulting from the filing of such certificate 
shall be the last day of the calendar month following the calendar 
quarter in which the certificate is filed. The statutory period for the 
assessment of the tax for such prior calendar quarters shall not expire 
before the expiration of 3 years from such due date.
    (e) Coordination with coverage of lay employees. If at the time the 
certificate of election of coverage is filed by a religious order or 
autonomous subdivision, a certificate of waiver of exemption under 
section 3121(k) (extending coverage to any lay employees) is not in 
effect, the certificate of election shall not become effective unless 
the order or subdivision files a Form SS-15, and a Form SS-15a to 
accompany the certificate on Form SS-15, as provided by section 3121(k) 
and Secs. 31.3121(k)-1 through 31.3121(k)-3. The preceding sentence 
applies even though an order or subdivision has no lay employees at the 
time it files a certificate of election of coverage. The effective date 
of the certificate of waiver of exemption must be no later than the date 
on which the certificate of election becomes effective, and it must be 
specified on the certificate of waiver of exemption that such 
certificate is irrevocable. The certificate of waiver of exemption 
required under this paragraph shall be filed notwithstanding the 
provisions of section 3121(k)(3) (relating to no renewal of the waiver 
of exemption) which otherwise would prohibit the filing of a waiver of 
exemption if an earlier waiver of exemption had previously been 
terminated. If at the time the certificate of election of coverage is 
filed a certificate of waiver of exemption is in effect with respect to 
the electing religious order or autonomous subdivision, the filing of 
the certificate of election shall constitute an amendment of the 
certificate of waiver of exemption making the latter certificate 
irrevocable.
[T.D. 7280, 38 FR 18370, July 10, 1973]



Sec. 31.3121(s)-1  Concurrent employment by related corporations with common paymaster.

    (a) In general. For purposes of sections 3102, 3111, and 3121(a)(1), 
except as otherwise provided in paragraph (c) of this section, when two 
or more related corporations concurrently employ the same individual and 
compensate that individual through a common paymaster which is one of 
the related corporations that employs the individual, each of the 
corporations is considered to have paid only the remuneration it 
actually disburses to that individual. This rule applies whether the 
remuneration was paid with respect to the employment relationship of the 
individual with the disbursing corporation or was paid on behalf of 
another related corporation. Accordingly, if all of the remuneration to 
the individual from the related corporations is disbursed through the 
common paymaster, the total amount of taxes imposed with respect to the 
remuneration under sections 3102 and 3111 is determined as though the 
individual has only one employer (the common paymaster). The common 
paymaster is responsible for filing information and tax returns and 
issuing Forms W-2 with respect to wages it is considered to have paid 
under this section. Section 3121(s) and this section apply only to 
remuneration disbursed in the form of money, check or similar instrument 
by one of the related corporations or its agent.

[[Page 97]]

    (b) Definitions. The definitions contained in this paragraph are 
applicable only for purposes of this section and Sec. 31.3306(p)-1.
    (1) Related corporations. Corporations shall be considered related 
corporations for an entire calendar quarter (as defined in Sec. 31.0-
2(a)(9)) if they satisfy any one of the following four tests at any time 
during that calendar quarter:
    (i) The corporations are members of a ``controlled group of 
corporations'', as defined in section 1563 of the Code, or would be 
members if section 1563(a)(4) and (b) did not apply and if the phrase 
``more than 50 percent'' were substituted for the phrase ``at least 80 
percent'' wherever it appears in section 1563(a).
    (ii) In the case of a corporation that does not issue stock, either 
fifty percent or more of the members of one corporation's board of 
directors (or other governing body) are members of the other 
corporation's board of directors (or other governing body), or the 
holders of fifty percent or more of the voting power to select such 
members are concurrently the holders of more than fifty percent of that 
power with respect to the other corporation.
    (iii) Fifty percent or more of one corporation's officers are 
concurrently officers of the other corporation.
    (iv) Thirty percent or more of one corporation's employees are 
concurrently employees of the other corporation.

The following examples illustrate the application of this paragraph:

    Example 1. (a) X Corporation employs individuals A, B, D, E, F, G, 
and H. Y Corporation employs individuals A, B, and C. Z Corporation 
employs individuals A, C, I, J, K, L, and M. X Corporation is the 
paymaster for all thirteen individuals. The corporations have no 
officers or stockholders in common.
    (b) X and Y are related corporations because at least 30 percent of 
Y's employees are also employees of X. Y and Z are related corporations 
because at least 30 percent of Y's employees are also employees of Z. X 
and Z are not related corporations because neither corporation has 30 
percent of its employees concurrently employed by the other corporation.
    (c) For purposes of determining the amount of the tax liability 
under sections 3102 and 3111, individual B is treated as having one 
employer. Individual C has two employers for these purposes, although Y 
and Z are related corporations, because C is not employed by X 
Corporation, the common paymaster. Individual A also is treated as 
having two employers for the purposes of these sections because X and Y 
Corporations are treated as one employer, and Z Corporation is treated 
as a second employer (since it is not related to the paymaster, X 
Corporation). Of course, individuals D, E, F, G, H, I, J, K, L, and M 
are not concurrently employed by two or more corporations, and, 
accordingly, section 3121 (s) is inapplicable to them.
    Example 2. M and N Corporations are both related to Corporation O 
but are not related to each other. Individual A is concurrently employed 
by all three corporations and paid by O, their common paymaster. 
Although M and N are not related, O is treated as the employer for A's 
employment with M, N, and O.
    Example 3. Corporations X, Y, and Z meet the definition of related 
corporations for the first time on April 12, 1979, and cease to meet it 
on July 5, 1979. A is concurrently employed by X, Y, and Z throughout 
1979. In each of the four calendar quarters of 1979, A's remuneration 
from X, Y, and Z is $2,000, $10,000, and $30,000, respectively. All of 
the remuneration to A from X, Y, and Z for the year is disbursed by X, 
the common paymaster. Under these circumstances, the amount of wages 
subject to sections 3102 and 3111 is as follows:
    For the first calendar quarter

                                                                        
                X                          Y                   Z        
                                                                        
             $2,000                     $10,000             $22,900     
                                                                        
                                                                        
                                                                        
                                                                        

    For the second calendar quarter

                                                                        
                X                          Y                   Z        
                                                                        
             $20,900                       0                   0        
                                                                        
($22,900-$2,000)                                                        
                                                                        
                                                                        

    For the third calendar quarter

                                                                        
                X                          Y                   Z        
                                                                        
                0                          0                   0        
                                                                        
                                                                        
                                                                        
                                                                        

    For the fourth calendar quarter

                                                                        
                X                          Y                   Z        
                                                                        
                0                       $10,000                0        
                                                                        
                                                                        
                                                                        
                                                                        


Of course, if the corporations had been related throughout all of 1979, 
only $22,900 of X's first quarter disbursement would have constituted 
wages subject to sections 3102 and 3111.


[[Page 98]]


    (2) Common paymaster--(i) In general. A common paymaster of a group 
of related corporations is any member thereof that disburses 
remuneration to employees of two or more of those corporations on their 
behalf and that is responsible for keeping books and records for the 
payroll with respect to those employees. The common paymaster is not 
required to disburse remuneration to all the employees of those two or 
more related corporations, but the provisions of this section do not 
apply to any remuneration to an employee that is not disbursed through a 
common paymaster. The common paymaster may pay concurrently employed 
individuals under this section by one combined paycheck, drawn on a 
single bank account, or by separate paychecks, drawn by the common 
paymaster on the accounts of one or more employing corporations.
    (ii) Multiple common paymasters. A group of related corporations may 
have more than one common paymaster. Some of the related corporations 
may use one common paymaster and others of the related corporations use 
another common paymaster with respect to a certain class of employees. A 
corporation that uses a common paymaster to disburse remuneration to 
certain of its employees may use a different common paymaster to 
disburse remuneration to other employees.
    (iii) Examples. The rules of this subparagraph are illustrated by 
the following examples:

    Example 1. S, T, U, and V are related corporations with 2,000 
employees collectively. Forty of these employees are concurrently 
employed by two or more of the corporations, during a calendar quarter. 
The four corporations arrange for S to disburse remuneration to thirty 
of these forty employees for their services. Under these facts, S is the 
common paymaster of S, T, U, and V with respect to the thirty employees. 
S is not a common paymaster with respect to the remaining employees.
    Example 2. (a) W, X, Y, and Z are related corporations. The 
corporations collectively have 20,000 employees. Two hundred of the 
employees are top-level executives and managers, sixty of whom are 
concurrently employed by two or more of the corporations during a 
calendar quarter. Six thousand of the employees are skilled artisans, 
all of whom are concurrently employed by two or more of the corporations 
during the calendar year. The four corporations arrange for Z to 
disburse remuneration to the sixty executives who are concurrently 
employed by two or more of the corporations. W and X arrange for X to 
disburse remuneration to the artisans who are concurrently employed by W 
and X.
    (b) A is an executive who is concurrently employed only by W, Y, and 
Z during the calendar year. Under these facts, Z is a common paymaster 
for W, Y, and Z with respect to A. Assuming that the other requirements 
of this section are met, the amount of the tax liability under sections 
3102 and 3111 is determined as if Z were A's only employer for the 
calendar quarter.
    (c) B is a skilled artisan who is concurrently employed only by W 
and X during the calendar year. Under these facts, X is a common 
paymaster for S and X with respect to B. Assuming that the other 
requirements of this section are met, the amount of the tax liability 
under sections 3102 and 3111 is determined as if X were B's only 
employer for the calendar quarter.

    (3) Concurrent employment. For purposes of this section, the term 
``concurrent employment'' means the contemporaneous existence of an 
employment relationship (within the meaning of section 3121(b)) between 
an individual and two or more corporations. Such a relationship 
contemplates the performance of services by the employee for the benefit 
of the employing corporation (not merely for the benefit of the group of 
corporations), in exchange for remuneration which, if deductible for the 
purposes of Federal income tax, would be deductible by the employing 
corporation. The contemporaneous existence of an employment relationship 
with each corporation is the decisive factor; if it exists, the fact 
that a particular employee is on leave or otherwise temporarily inactive 
is immaterial. However, employment is not concurrent with respect to one 
of the related corporations if the employee's employment relationship 
with that corporation is completely nonexistent during periods when the 
employee is not performing services for that corporation. An employment 
relationship is completely nonexistent if all rights and obligations of 
the employer and employee with respect to employment have terminated, 
other than those that customarily exist after employment relationships 
terminate. Examples of

[[Page 99]]

rights and obligations that customarily exist after employment 
relationships terminate include those with respect to remuneration not 
yet paid, employer's property used by the employee not yet returned to 
the employer, severance pay, and lump-sum termination payments from a 
deferred compensation plan. Circumstances that suggest that an 
employment relationship has become completely nonexistent include 
unconditional termination of participation in deferred compensation 
plans of the employer, forfeiture of seniority claims, and forfeiture of 
unused fringe benefits such as vacation or sick pay. Of course, the 
continued existence of an employment relationship between an individual 
and a corporation is not necessarily established by the individual's 
continued participation in a deferred compensation plan, retention of 
seniority rights, etc., since continuation of those benefits may be 
attributable to employment with a second corporation related to the 
first corporation if the corporations have common benefits plans or if 
the benefits are continued as a matter of corporate reciprocity. An 
individual who does not perform substantial services in exchange for 
remuneration from a corporation is presumed not employed by that 
corporation. Concurrent employment need not exist for any particular 
length of time to meet the requirements of this section, but this 
section only applies to remuneration disbursed by a common paymaster to 
an individual who is concurrently employed by the common paymaster and 
at least one other related corporation at the time the individual 
performs the services for which the remuneration is paid. If the 
employment relationship is nonexistent during a quarter, that employee 
may not be counted towards the 30-percent test set forth in paragraph 
(b)(1)(iv) of this section; however, even if the employment relationship 
is nonexistent, section 3121(s) of the Code would apply to remuneration 
paid to the former employee for services rendered while the employee was 
a common employee. The principles of this subparagraph are illustrated 
by the following examples.

    Example 1. M, N, and O are related corporations which use N as a 
common paymaster with respect to officers. Their respective headquarters 
are located in three separate cities several hundred miles apart. A is 
an officer of M, N, and O who performs substantial services for each 
corporation. A does not work a set length of time at each corporate 
headquarters, and when A leaves one corporate headquarters, it is not 
known when A will return, although it is expected that A will return. 
Under these facts, A is concurrently employed by the three corporations.
    Example 2. P, Q, and R are related corporations whose geographical 
zones of business activity do not overlap. P, Q, and R have a common 
pension plan and arrange for Q to be a common paymaster for managers and 
executives. All three corporations maintain cafeterias for the use of 
their employees. B is a cafeteria manager who has worked at P's 
headquarters for 3 years. On June 1, 1980, B is transferred from P to 
the position of cafeteria manager of R. There are no plans for B's 
return to P. B's accrued pension benefits, vacation and sick pay, do not 
change as a result of the transfer. The decision to transfer B was made 
by Q, the parent corporation. Under these facts, B is not concurrently 
employed by P and R, because B's employment relationship with P was 
completely nonexistent during B's employment with R. Furthermore, 
section 3121(s) is inapplicable since B also was not employed by Q, the 
common paymaster, because B never contracted to perform services for 
remuneration from Q, and Q did not have the right to control the day-to-
day duties of B's work.
    Example 3. C is employed by two related corporations, S and T. C was 
concurrently employed by these corporations between April 1, 1979, and 
June 30, 1979. The corporations used T as the common paymaster with 
respect to C's wages between May 1, 1979, and September 30, 1979. T pays 
C on May 15 for services performed between April 1 and April 30, on July 
15 for services performed between June 1 and June 30, and on August 15 
for services performed between July 1 and July 31. Section 3121 (s) 
applies to the first two payments but does not apply to the third 
payment (there was no concurrent employment). However, if the third 
payment was made by T for services performed for T, T counts the amounts 
previously disbursed to C in 1979 while C was concurrently employed by S 
and T towards the wage base (see section 3121 (a)(1)).

    (c) Allocation of employment taxes--(1) Responsibility to pay tax. 
If the requirements of this section are met, the common paymaster has 
the primary responsibility for remitting taxes pursuant to sections 3102 
and 3111 with respect to the remuneration it disburses as the common 
paymaster. The common paymaster computes these taxes

[[Page 100]]

as though it were the sole employer of the concurrently employed 
individuals. If the common paymaster fails to remit these taxes (in 
whole or in part), it remains liable for the full amount of the unpaid 
portion of these taxes. In addition, each of the other related 
corporations using the common paymaster is jointly and severally liable 
for its appropriate share of these taxes. That share is an amount equal 
to the lesser of:
    (i) The amount of the liability of the common paymaster under 
section 3121(s), after taking account of any tax payments made, or
    (ii) The amount of the liability under sections 3102 and 3111 which, 
but for section 3121(s), would have existed with respect to the 
remuneration from such other related corporation, reduced by an 
allocable portion of any taxes previously paid by the common paymaster 
with respect to that remuneration.

The portion of taxes previously paid by the common paymaster that is 
allocable to each related corporation is determined by multiplying the 
amount of taxes paid by a fraction, the numerator of which is the 
portion of the amount of employment tax liability of the common 
paymaster under section 3121(s) that is allocable to such related 
corporation under paragraph (c)(2) of this section, and the denominator 
of which is the total amount of the common paymaster's liability under 
section 3121(s), both determined without regard to any prior tax 
payments. These rules apply whether or not the tax on employees was 
withheld from the employees' wages.
    (2) Allocation of tax--(i) In general. If the related corporations 
maintain a record of the remuneration disbursed to the employee for 
services performed for each corporation, the remuneration-based 
allocation rules of paragraph (c)(2)(ii) of this section apply. If the 
related corporations do not maintain this record of remuneration, the 
group-wide allocation rules of paragraph (c)(2)(iii) of this section 
apply. In all cases, allocations must be made with respect to each 
payment of wages. The allocation of employment tax liabilities pursuant 
to this subparagraph also determines which related corporation may be 
entitled to income tax deductions with respect to the payments of those 
taxes.
    (ii) Remuneration-based allocation rules. Under the remuneration-
based method of allocation, each related corporation that remunerates an 
employee through a common paymaster has allocated to it for each pay 
period an amount of tax determined according to the following formula:

Portion of wage payment constituting                                    
 re-                                                                    
  muneration to the employee for           Tax on employees under       
 services                                   section 3102 and            
  performed for the corporation              tax on employers under     
                                            section 3111                
-------------------------------------   x    that the common paymaster  
              ---------                     is required                 
Total wage payment constituting remu-        to remit with respect to   
                                            the wage pay-               
  neration to the employee for all           ment                       
 services                                                               
  performed for the related                                             
 corporations                                                           
  using the common paymaster                                            
                                                                        



----------------------------------------------------------------------------------------------------------------
                                            Remuneration                                 Tax on                 
                             ------------------------------------------    Tax on       employees               
        Wage payments                                                     employers     withheld        Total   
                                    X             Y           Total         under         under                 
                                                                        section 3111  section 3102              
----------------------------------------------------------------------------------------------------------------
1...........................        $3,000        $1,000        $4,000       $245.20       $245.20       $490.40
2-3.........................  ............         8,000         8,000        490.40        490.40        980.80
4...........................         1,000         3,000         4,000        245.20        245.20        490.40
5...........................         4,000  ............         4,000        245.20        245.20        490.40

[[Page 101]]

                                                                                                                
6...........................         2,000         2,000         4,000        177.77        177.77        355.54
7-13........................        10,000        18,000        28,000             0             0             0
                             -----------------------------------------------------------------------------------
    Total...................        20,000        32,000        52,000      1,403.77      1,403.77      2,807.54
----------------------------------------------------------------------------------------------------------------

                                                                                                    [GRAPHIC] [TIFF OMITTED] TC05OC91.016
                                                                                                    

    (ii) If Y remits none of the taxes to the Internal Revenue Service, 
X is liable for $2,452.00 (the entire amount due pursuant to sections 
3102 and 3111 with respect to the remuneration to A from X) (12.26%  x  
$20,000). Any amount remitted by X to the Internal Revenue Service under 
these circumstances is also credited against the liability of the common 
paymaster, Y. However, only the portion of the employment taxes 
allocated to X under (i) above may be deducted by X as employment taxes 
paid by it in respect of wages paid by it to its employees.
    (iii) If Y remits $1,000.00 of the total $2,807.54 due, Y as common 
paymaster remains liable for $1,807.54 ($2,807.54 minus $1,000). X's 
liability is the lesser of $1,807.54 (the liability of the common 
paymaster), or X's total liability, in the absence of section 3121 (s), 
on wages paid through the common paymaster ($2,452.00) minus a credit 
for an allocable part of the amount remitted by Y. The part is $412.66

[GRAPHIC] [TIFF OMITTED] TC05OC91.017

    (iii) Group-wide allocation rules. Under the group-wide method of 
allocation, the district director may allocate the taxes imposed by 
sections 3102 and 3111 in an appropriate manner to a related corporation 
that remunerates an employee through a common paymaster if the common 
paymaster fails to remit the taxes to the Internal Revenue Service. 
Allocation in an appropriate manner varies according to the 
circumstances. It may be based on sales, property, corporate payroll, or 
any other basis that reflects the distribution of the services performed 
by the employee, or a combination of the foregoing bases. To the extent 
practicable, the district director may use the principles of Sec. 1.482-
2(b) in making the allocations.

[[Page 102]]

    (d) Effective date. This section is effective with respect to wages 
paid after December 31, 1978.
[T.D. 7660, 44 FR 75139, Dec. 19, 1979; 45 FR 17986, Mar. 20, 1980]



Sec. 31.3123-1  Deductions by an employer from remuneration of an employee.

    Any amount deducted by an employer from the remuneration of an 
employee is considered to be part of the employee's remuneration and is 
considered to be paid to the employee as remuneration at the time that 
the deduction is made. It is immaterial that any act of Congress or the 
law of any State requires or permits such deductions and the payment of 
the amount thereof to the United States, a State, or any political 
subdivision thereof.



  Subpart C--Railroad Retirement Tax Act (Chapter 22, Internal Revenue 
                              Code of 1954)

                            Tax on Employees



Sec. 31.3201-1  Measure of employee tax.

    The employee tax is measured by the amount of compensation received 
for services rendered as an employee. For provisions relating to 
compensation, see Sec. 31.3231(e)-1. For provisions relating to the 
circumstances under which certain compensation is to be disregarded for 
the purpose of determining the employee tax, see paragraphs (b)(1) and 
(2) of Sec. 31.3231(e)-1.
[T.D. 8582, 59 FR 66189, Dec. 23, 1994]



Sec. 31.3201-2  Rates and computation of employee tax.

    (a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee tax rate equals 
the sum of the tax rates in effect under section 3101(a), relating to 
old-age, survivors, and disability insurance, and section 3101(b), 
relating to hospital insurance. The Tier 1 employee tax rate is applied 
to compensation up to the contribution base described in section 
3231(e)(2)(B)(i). The contribution base is determined under section 230 
of the Social Security Act and is identical to the old-age, survivors, 
and disability insurance wage base and the hospital insurance wage base, 
respectively, under the Federal Insurance Contributions Act.
    (ii) Example. The rule in paragraph (a)(1)(i) of this section is 
illustrated by the following example.

    Example. A received compensation of $60,000 in 1992. The section 
3101(a) rate of 6.2 percent would be applied to A's compensation up to 
$55,500, the applicable contribution base for 1992. The section 3101(b) 
rate of 1.45 percent would be applied to the entire $60,000 of A's 
compensation because the applicable contribution base for 1992 is 
$130,200.

    (2)(i) Tier 2 tax. The Tier 2 employee tax rate equals the 
percentage set forth in section 3201(b) of the Code. This rate is 
applied to compensation up to the contribution base described in section 
3231(e)(2)(B)(ii).
    (ii) Example. The rule in paragraph (a)(2)(i) of this section is 
illustrated by the following example.

    Example. A received compensation of $60,000 in 1992. The section 
3201(b) rate of 4.90 percent would be applied to A's compensation up to 
$41,400, the applicable contribution base for 1992.

    (b)(1) Computation. The employee tax is computed by multiplying the 
amount of the employee's compensation with respect to which the employee 
tax is imposed by the rate applicable to such compensation, as 
determined under paragraph (a) of this section. The applicable rate is 
the rate in effect when the compensation is received by the employee. 
For rules relating to the time of receipt, see Sec. 31.3121(a)-2 (a) and 
(b).
    (2) Example. The rule in paragraph (b)(1) of this section is 
illustrated by the following example.

    Example. In 1990, employee A received compensation of $1,000 as 
remuneration for services performed for employer R in 1989. The employee 
tax is payable at the rate of 12.55 percent (7.65 percent plus 4.90 
percent) in effect for 1990 (the year the compensation was received), 
and not the 12.41 percent rate (7.51 percent plus 4.90 percent) in 
effect for 1989 (the year the services were performed).
[T.D. 8582, 59 FR 66189, Dec. 23, 1994]



Sec. 31.3202-1  Collection of, and liability for, employee tax.

    (a) Collection; general rule. The employer shall collect from each 
of his employees the employee tax imposed with respect to the 
compensation of

[[Page 103]]

the employee by deducting or causing to be deducted the amount of such 
tax from the compensation subject to the tax as and when such 
compensation is paid. As to the measure of the employee tax, see 
Sec. 31.3201-1.
    (b) Collection; payments by two or more employers in excess of 
annual compensation limitation. For rules relating to payments by two or 
more employers in excess of the annual compensation limitation see 
Sec. 31.3121(a)(1)-1.
    (c) Undercollections or overcollections. Any undercollection or 
overcollection of employee tax resulting from the employer's inability 
to determine, at the time compensation is paid, the correct amount of 
compensation with respect to which the deduction should be made shall be 
corrected in accordance with the provisions of Subpart G of the 
regulations in this part relating to adjustments, credits, refunds, and 
abatements.
    (d) When fractional part of cent may be disregarded. In collecting 
the employee tax, the employer shall disregard any fractional part of a 
cent of such tax unless it amounts to one-half cent or more, in which 
case it shall be increased to one cent.
    (e) Employer's liability. The employer is liable for the employee 
tax with respect to compensation paid by him, whether or not collected 
from the employee. If the employer deducts less than the correct amount 
of employee tax or fails to deduct any part of the tax, he is 
nevertheless liable for the correct amount of the tax. Until collected 
from him, the employee is also liable for the employee tax. Any employee 
tax collected by or on behalf of an employer is a special fund in trust 
for the United States. See section 7501. An employer is not liable to 
any person for the amount of the employee tax deducted by him and paid 
to the district director.
    (f) Concurrent employment. If two or more related corporations who 
are rail employers concurrently employ the same individual and 
compensate that individual through a common paymaster, which is one of 
the related corporations employing the individual, see Sec. 31.3121(s)-
1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6541, 26 FR 
553, Jan 20, 1961; T.D. 6727, 29 FR 5866, May 5, 1964; T.D. 8582, 59 FR 
66189, Dec. 23, 1994]

                     Tax on Employee Representatives



Sec. 31.3211-1  Measure of employee representative tax.

    The employee representative tax is measured by the amount of 
compensation received for services rendered as an employee 
representative. For provisions relating to compensation, see 
Sec. 31.3231(e)-1.
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3211-2  Rates and computation of employee representative tax.

    (a) Rates--(1)(i) Tier 1 tax. The Tier 1 employee representative tax 
rate equals the sum of the tax rates in effect under sections 3101(a) 
and 3111(a), relating to the employee and the employer tax for old-age, 
survivors, and disability insurance, and sections 3101(b) and 3111(b), 
relating to the employee and the employer tax for hospital insurance. 
The Tier 1 employee representative tax rate is applied to compensation 
up to the contribution base described in section 3231(e)(2)(B)(i). The 
contribution base is determined under section 230 of the Social Security 
Act, and is identical to the old-age, survivors, and disability 
insurance wage base and the hospital insurance wage base, respectively, 
under the Federal Insurance Contributions Act.
    (ii) Example. The rule in paragraph (a)(1)(i) of this section is 
illustrated by the following example.

    Example. B, an employee representative, received compensation of 
$60,000 in 1992. The sections 3101(a) and 3111(a) rates of 12.4 percent 
(6.2 percent plus 6.2 percent) would be applied to B's compensation up 
to $55,500, the applicable contribution base for 1992. The sections 
3101(b) and 3111(b) rates of 2.9 percent (1.45 percent plus 1.45 
percent) would be applied to the entire $60,000 of B's compensation 
because the applicable contribution base for 1992 is $130,200.


[[Page 104]]


    (2) (i) Tier 2 tax. The Tier 2 employee representative tax rate 
equals the percentage set forth in section 3211(a)(2) of the Code. This 
rate is applied up to the contribution base described in section 
3231(e)(2)(B)(ii).
    (ii) Example. The rule in paragraph (a)(2)(i) of this section is 
illustrated by the following example.

    Example. B received compensation of $60,000 in 1992. The section 
3211(a)(2) rate of 14.75 percent would be applied to B's compensation up 
to $41,400, the applicable contribution base for 1992.

    (3) Supplemental Annuity Tax. The supplemental annuity tax for each 
work-hour for which compensation is paid to an employee representative 
for services rendered as an employee representative is imposed at the 
same rate as the excise tax imposed on every employer under section 
3221(c). See also Sec. 31.3211-3.
    (b) (1) Computation. The employee representative tax is computed by 
multiplying the amount of the employee representative's compensation 
with respect to which the employee representative tax is imposed by the 
rate applicable to such compensation, as determined under paragraph (a) 
of this section. The applicable rate is the rate in effect when the 
compensation is received by the employee representative. For rules 
relating to the time of receipt, see Sec. 31.3121(a)-2 (a) and (b).
    (2) Example. The rule in paragraph (b)(1) of this section is 
illustrated by the following example.

    Example. In 1990, employee representative B received $1,000 as 
remuneration for services performed for employer R in 1989. The employee 
representative tax is payable at the rate of 30.05 percent (15.30 
percent plus 14.75 percent) in effect for 1990 (the year the 
compensation was received), and not the 29.77 percent rate (15.02 
percent plus 14.75 percent) in effect for 1989 (the year the services 
were performed).

    (c) (1) Rule where compensation is received both as an employee 
representative and employee. The following rule applies to an individual 
who renders service both as an employee representative and as an 
employee. The employee representative tax is imposed on compensation 
received as an employee representative under the rules described in 
Sec. 31.3211-2. The employee tax is imposed on compensation received as 
an employee under the rules described in Sec. 31.3201-2. However, if the 
total compensation received is greater than the applicable contribution 
base, the employee representative tax is imposed on the amount equal to 
the contribution base less the amount received for services rendered as 
an employee.
    (2) Example. The rule in paragraph (c)(1) of this section is 
illustrated by the following example.

    Example. C performed services both as an employee and an employee 
representative in 1992. C received compensation of $40,000 as an 
employee and $20,000 as an employee representative. C's entire 
compensation of $40,000 is subject to tax under the rules described in 
Sec. 31.3201-2. The amount of employee representative compensation 
subject to the section 3101(a) and the section 3111(a) rate is $15,500 
($55,500-$40,000). The entire $20,000 is subject to the sections 3101(b) 
and 3111(b) rates since the combined compensation is less than $130,200, 
the applicable contribution base for 1992. The amount of the employee 
representative compensation subject to the section 3211(a)(2) rate is 
$1,400 ($41,400-$40,000).
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3211-3  Employee representative supplemental tax.

    See paragraphs (a), (b), and (c) of Sec. 31.3221-3 for rules 
applicable to the supplemental tax for each work-hour for which 
compensation is paid to an employee representative for services rendered 
as an employee representative.
[T.D. 8525, 59 FR 9666, Mar. 1, 1994]



Sec. 31.3212-1  Determination of compensation.

    See Sec. 31.3231(e)-1 for regulations applicable to compensation.

                            Tax on Employers



Sec. 31.3221-1  Measure of employer tax.

    (a) General Rule--The employer tax is measured by the amount of 
compensation paid by an employer to its employees. For provisions 
relating to compensation, see Sec. 31.3231(e)-1. For provisions relating 
to the circumstances under which certain compensation is to be 
disregarded for purposes of determining the employer tax, see paragraphs 
(b) (1) and (2) of Sec. 31.3231(e)-1.

[[Page 105]]

    (b) Payments by two or more employers in excess of annual 
compensation limitation. For rules relating to payments by two or more 
employers in excess of the annual compensation limitation, see 
Sec. 31.3121(a)(1)-1.
    (c) Underpayments or overpayments. Any underpayment or overpayment 
of employer tax resulting from the employer's inability to determine, at 
the time such tax is paid, the correct amount of compensation with 
respect to which the tax should be paid shall be corrected in accordance 
with the provisions of Subpart G of the regulations in this part 
relating to adjustments, credits, refunds, and abatements.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6541, 26 FR 
555, Jan. 20, 1961; T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3221-2  Rates and computation of employer tax.

    (a) Rates--(1)(i) Tier 1 tax. The Tier 1 employer tax rate equals 
the sum of the tax rates in effect under section 3111(a), relating to 
old-age, survivors, and disability insurance, and section 3111(b), 
relating to hospital insurance. The Tier 1 employer tax rate is applied 
to compensation up to the contribution base described in section 
3231(e)(2)(B)(i). The contribution base is determined under section 230 
of the Social Security Act and is identical to the old-age, survivors, 
and disability insurance wage base and the hospital insurance wage base, 
respectively, under the Federal Insurance Contributions Act.
    (ii) Example. The rule in paragraph (a)(1)(i) of this section is 
illustrated by the following example.

    Example. R's employee, A, received compensation of $60,000 in 1992. 
The section 3111(a) rate of 6.2 percent would be applied to A's 
compensation up to $55,500, the applicable contribution base for 1992. 
The section 3111(b) rate of 1.45 percent would be applied to the entire 
$60,000 of A's compensation because the applicable contribution base for 
1992 is $130,200.

    (2)(i) Tier 2 tax. The Tier 2 employer tax rate equals the 
percentage set forth in section 3221(b) of the Internal Revenue Code. 
This rate is applied up to the contribution base described in section 
3231(e)(2)(B)(ii).
    (ii) Example. The rule in paragraph (a)(2)(i) of this section is 
illustrated by the following example.

    Example. R's employee, A, received compensation of $60,000 in 1992. 
The section 3221(b) rate of 16.10 percent would be applied to A's 
compensation up to $41,400, the applicable contribution base for 1992.

    (3) Supplemental Annuity Tax. The supplemental annuity tax for each 
work-hour for which compensation is paid by an employer for services 
rendered during any calendar quarter by employees is imposed at the tax 
rate determined each calendar quarter by the Railroad Retirement Board. 
See also Sec. 31.3221-3.
    (b)(1) Computation. The employer tax is computed by multiplying the 
amount of the compensation with respect to which the employer tax is 
imposed by the rate applicable to such compensation, as determined under 
paragraph (a) of this section. The applicable rate is the rate in effect 
at the time the compensation is paid. For rules relating to the time of 
payment, see Sec. 31.3121(a)-2(a) and (b).
    (2) Example. The rule in paragraph (b)(1) of this section is 
illustrated by the following example.

    Example. In 1990, R's employee A received $1,000 as remuneration for 
services performed for R in 1989. The employer tax is payable at the 
rate of 23.75 percent (7.65 percent plus 16.10 percent) in effect for 
1990 (the year the compensation was received) and not the 23.61 percent 
rate (7.51 percent plus 16.10 percent) in effect for 1989 (the year the 
services were performed).
[T.D. 8582, 59 FR 66190, Dec. 23, 1994]



Sec. 31.3221-3  Supplemental tax.

    (a) Introduction--(1) In general. Section 3221(c) imposes an excise 
tax on every employer, as defined in section 3231(a) and 
Sec. 31.3231(a)-1, with respect to individuals employed by the employer. 
The tax is imposed for each work-hour for which the employer pays 
compensation, as defined in section 3231(e) and Sec. 31.3231(e)-1, for 
services rendered to the employer during a calendar quarter. This 
Sec. 31.3221-3 provides rules for determining the number of taxable 
work-hours.
    (2) Overview. Paragraph (b) of this section defines work-hours. 
Paragraph (c) of this section demonstrates the

[[Page 106]]

calculation of work-hours. Paragraph (d) of this section offers a safe 
harbor calculation of work-hours for use by any employer in lieu of 
calculating the number of work-hours for each employee.
    (b) Definition of work-hours--(1) In general. For purposes of 
section 3221(c) and this section, work-hours are hours for which the 
employee is compensated, whether or not the employee performs services.
    (i) Payments included in work-hours. Work-hours include regular time 
worked; overtime; time paid for vacations and holidays; time allowed for 
meals; away-from-home terminal time; called and not used, runaround, and 
deadheading time; time for attending court, participating in 
investigations, and attending claim and safety meetings; and guaranteed 
time not worked. Work-hours also include conversion hours, that is, 
compensation converted into work-hours. Conversion hours may be derived 
from payment by the mile or by the piece. Work-hours also include time 
for which the employee is paid for periods of absence not due to 
sickness or accident disability, such as for routine medical and dental 
examinations or for time lost.
    (ii) Payments excluded from work-hours. Certain kinds of payments 
are not subject to conversion into work-hours. These include those 
payments that are specifically excluded from compensation within the 
meaning of section 3231(e), such as certain sick pay payments (section 
3231(e)(1)(i)); tips (section 3231(e)(1)(ii)); and amounts paid 
specifically (either as an advance, as reimbursement, or allowance) for 
traveling expenses (section 3231(e)(1)(iii)). Traveling expenses paid 
under a nonaccountable plan are excluded from work-hours even though 
they are includible in compensation. See Sec. 31.3231(e)-1(a)(5). Also 
excluded from work-hours are amounts representing bonuses, amounts 
received pursuant to the exercise of an employee stock option, and all 
separation payments or severance allowances.
    (2) Hourly compensation. Because the tax under section 3221(c) is 
calculated on the basis of work-hours, the number of hours for which an 
employee receives compensation is the figure used to determine work-
hours. In the case of an hourly-rated employee, each hour for which the 
employee receives compensation is one work-hour.
    (3) Daily, weekly, monthly compensation. (i) If an employee is paid 
by the day, week, month, or other period of time, the tax is imposed on 
the number of hours comprehended in the rate and, if any, the number of 
overtime hours for which additional compensation is paid. Thus, in the 
case of an office worker who receives an annual salary based on an 8-
hour, 5-day-a-week work schedule that includes paid holidays, vacations, 
and sick time, the number of work-hours for one month is 174 (2088 
hours/year 12 months).
    (ii) The rule in paragraph (b)(3)(i) of this section is illustrated 
by the following examples.

    Example 1. A, an office worker, receives an annual salary that is 
paid monthly. The salary is based on an 8-hour, Monday through Friday 
work schedule. A is not paid for overtime hours. A is not expected to 
work on holidays, during A's annual vacation, or during periods that A 
is ill. The number of work-hours for one month is 174 (2088 hours/year 
12 months). This figure remains constant, even though some 
months have more workdays than others.
    Example 2. B is paid a stated amount for each day B works, 
regardless of the number of hours worked. However, if B works more than 
8 hours during any day, B is paid overtime for each additional hour 
worked that day. B is not paid for holidays, vacations, or sick time. 
During May, B worked 6 hours on 4 days, 7 hours on 6 days, 8 hours on 6 
days, and 9 hours on 5 days. Because B is paid a daily rate for up to 8 
hours, 8 hours are comprehended in the daily rate. Therefore, the number 
of work-hours for May is 173 (21 days x 8 hours/day+5 overtime hours), 
even though B actually worked 159 hours.

    (4) Conversion hours--(i) Compensation not based on time (hour, day, 
month, etc.), such as compensation paid by the mile or by the piece, 
must be converted into the number of hours represented by the 
compensation paid. Thus, if an employee is paid by the mile, 1 work-hour 
equals the number of miles constituting a workday, divided by 8 hours. 
However, in the case of a collective bargaining agreement that specifies 
a number of hours as constituting a workday, the number of hours 
specified under the agreement may be used instead of 8.

[[Page 107]]

    (ii) The rule in paragraph (b)(4)(i) of this section is illustrated 
by the following example.

    Example. C's normal workday consists of 2 150-mile round trips that 
together take 6 hours. C is paid by the mile. The collective bargaining 
agreement does not specify the number of hours in a workday. Thus, the 
number of work-hours for each day C works is 8, or 1 work-hour for each 
37.5 miles (300 miles/day  8 hours/day). If the applicable 
collective bargaining agreement specifies that 6 hours constitute a 
workday, the number of work-hours for each day C works would be 6.

    (c) Calculation of work-hours--(1) An employer may calculate the 
work-hours separately for each employee, as described in the examples in 
this paragraph. If the employer chooses to calculate work-hours 
separately for each employee, the employer must calculate the number of 
regular hours, overtime hours, and conversion hours for each employee 
for each month. In lieu of separate calculations, the employer may 
calculate the work-hours for all the employer's employees using the safe 
harbor formula described in paragraph (d) of this section.
    (2) The rules in paragraph (c) of this section are illustrated by 
the following examples.

    Example 1. D worked 8 hours a day, Monday through Friday, during the 
months of February and March 1992. D did not work on President's Day, 
but was paid for the holiday. D's work-hours for February were 160 (19 
days  x  8 hours a day + 8 holiday hours). D's work-hours for March were 
176 (22 days  x  8 hours a day).
    Example 2. E worked 7-hour shifts every Tuesday through Saturday 
during the months of February and March 1992. E also worked 7 overtime 
hours during February and 21 overtime hours during March. Also, E was 
paid for 7 hours on President's Day, even though E did not work on that 
day. The number of work-hours for February was 161 (21 days  x  7 hours 
a day + 7 overtime hours + 7 holiday hours). The number of work-hours 
for March was 168 (21 days  x  7 hours a day + 21 overtime hours). 
Because E receives an hourly wage and was paid for the President's Day 
holiday, the number of hours (7) for which E was paid are added to the 
hours E actually worked. If E had worked on President's Day and had 
received extra pay for working on a holiday and holiday pay for 7 hours, 
the employer would include 14 hours in E's work-hours for that day, the 
7 hours E actually worked and the 7 holiday hours for which E was paid.
    Example 3. Employment beginning during month. F began employment on 
March 16, a Monday, and worked 8 hours a day, Monday through Friday. The 
employer calculates that F's hours for the month were 96, because F 
worked 12 8-hour days during the month. If March 16 were on a Friday, 
the employer would calculate 11 days, or 88 hours.
    Example 4. Employment ending during month. G's last day of 
employment was Friday, March 13. G worked 8 hours a day, Monday through 
Friday, except for March 3, when G was ill. G was paid for 8 hours for 
March 3. The employer calculates that G's work-hours for March were 80, 
because G worked 9 8-hour days and was paid for an additional 8 hours.

    (d) Safe harbor--(1) In general. In lieu of calculating work-hours 
separately for each employee, an employer may use the safe harbor for 
all employees. If the employer elects to use the safe harbor for a 
calendar year, the employer must use the safe harbor for all employees 
for the entire calendar year. If an employer uses the safe harbor for a 
calendar year, the employer need not elect the safe harbor for the 
following calendar year. An employer that elects the safe harbor for a 
calendar year may not subsequently elect to separately calculate 
employee work-hours for that calendar year.
    (2) Method of calculation. The safe harbor treats each employee of 
the employer as receiving monthly compensation for a number of hours 
equal to the safe harbor number. To determine the number of work-hours 
for a month, the employer multiplies the safe harbor number by the 
number that equals the total number of employees to whom the employer 
paid compensation during the month.
    (i) Safe harbor number defined. The safe harbor number is the number 
established in guidance of general applicability promulgated by the 
Commissioner.
    (ii) Employee defined. Solely for purposes of this paragraph, an 
employee is any individual who is paid compensation, within the meaning 
of Sec. 31.3231(e)-1, regardless of the amount, during the month. Thus, 
for example, a part-time, temporary, or seasonal employee is counted as 
an employee. A terminated employee is counted in the month of 
termination (provided the terminated

[[Page 108]]

employee received compensation in the month of termination), but not in 
any subsequent month in which the employee does not perform service for 
the employer as an employee, even if the terminated employee is paid 
compensation in a subsequent month. Thus, for example, an employee who 
terminates employment during the month, receives compensation during the 
month of termination, and receives a final paycheck the following month 
is counted as an employee of the employer for the month of termination 
but not for the following month.
    (3) Method of election. An employer makes the safe harbor election 
for a calendar year on the employment tax return filed for the previous 
calendar year.
    (4) Additional rules. The Commissioner may, in revenue procedures, 
revenue rulings, notices, or other guidance of general applicability, 
revise the safe harbor number or provide additional safe harbors that 
satisfy section 3221(c).
    (e) Effective dates. This Sec. 31.3221-3 is effective for calendar 
years beginning after December 31, 1992, except that paragraph (d) is 
effective for calendar years beginning after December 31, 1993. 
Taxpayers may apply the rules in paragraphs (a), (b), and (c) of this 
section before January 1, 1993.
[T.D. 8525, 59 FR 9666, Mar. 1, 1994]

                           General Provisions



Sec. 31.3231(a)-1  Who are employers.

    (a) Each of the following persons is an employer within the meaning 
of the act:
    (1) Any carrier, that is, any express carrier, sleeping car carrier, 
or rail carrier providing transportation subject to subchapter I of 
chapter 105 of title 49;
    (2) Any company--
    (i) Which is directly or indirectly owned or controlled by one or 
more employers as defined in paragraph (a)(1) of this section, or under 
common control therewith, and
    (ii) Which operates any equipment or facility or performs any 
service (except trucking service, casual service, and the casual 
operation of equipment or facilities) in connection with--
    (a) The transportation of passengers or property by railroad, or
    (b) The receipt, delivery, elevation, transfer in transit, 
refrigeration or icing, storage, or handling of property transported by 
railroad;
    (3) Any receiver, trustee, or other individual or body, judicial or 
otherwise, when in the possession of the property or operating all or 
any part of the business of any employer as defined in paragraph (a)(1) 
or (2) of this section;
    (4) Any railroad association, traffic association, tariff bureau, 
demurrage bureau, weighing and inspection bureau, collection agency, and 
any other association, bureau, agency, or organization controlled and 
maintained wholly or principally by two or more employers as defined in 
paragraph (a)(1), (2) or (3) of this section and engaged in the 
performance of services in connection with or incidental to railroad 
transportation;
    (5) Any railway labor organization, national in scope, which has 
been or may be organized in accordance with the provisions of the 
Railway Labor Act; and
    (6) Any subordinate unit of a national railway-labor-organization 
employer, that is, any State or National legislative committee, general 
committee, insurance department, or local lodge or division, of an 
employer as defined in paragraph (a)(5) of this section, established 
pursuant to the constitution and bylaws of such employer.
    (b) As used in paragraph (a)(2) of this section, the term 
``controlled'' includes direct or indirect control, whether legally 
enforceable and however exercisable or exercised. The control may be by 
means of stock ownership, or by agreements, licenses, or any other 
devices which insure that the operation of the company is in the 
interest of one or more carriers. It is the reality of the control, 
however, which is decisive, not its form nor the mode of its exercise.
    (c) As used in paragraph (a)(2) of this section, the term casual 
applies when the service rendered or the operation of equipment or 
facilities by a controlled company or person in connection with the 
transportation of passengers or property by railroad is so irregular or 
infrequent as to afford no substantial basis for an inference that such 
service

[[Page 109]]

or operation will be repeated, or whenever such service or operation is 
insubstantial.
    (d) The term ``employer'' does not include any street, interurban, 
or suburban electric railway, unless such railway is operating as a part 
of a general steam-railroad system of transportation, but shall not 
exclude any part of the general steam-railroad system of transportation 
which is operated by any other motive power.
    (e) The term ``employer'' does not include any company by reason of 
its being engaged in the mining of coal, the supplying of coal to an 
employer where delivery is not beyond the mine tipple and the operation 
of equipment or facilities for such mining or supplying of coal, or in 
any of such activities.
    (f) Any company that is described in paragraph (a)(2) of this 
section is an employer under section 3231. In certain cases, based on 
all the facts and circumstances, it may be appropriate to segregate 
those businesses engaged in rail services and therefore subject to the 
Railroad Retirement Tax Act from those businesses engaged exclusively in 
nonrail services and therefore not subject to the Railroad Retirement 
Tax Act. The factors considered are set forth in guidance published by 
the Internal Revenue Service.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960; 25 FR 14021, Dec. 31, 1960; T.D. 
8582, 59 FR 66191, Dec. 23, 1994]



Sec. 31.3231(b)-1  Who are employees.

    (a) In general. (1) An individual who is in the service of one or 
more employers for compensation is an employee within the meaning of the 
act. (For definitions of the terms ``employer'', ``service'', and 
``compensation'', see subsections (a), (d), and (e), respectively, of 
section 3231.) An individual is in the service of an employer, with 
respect to services rendered for compensation, if--
    (i) He is subject to the continuing authority of the employer to 
supervise and direct the manner in which he renders such services; or
    (ii) He is rendering professional or technical services and is 
integrated into the staff of the employer; or
    (iii) He is rendering, on the property used in the employer's 
operations, other personal services the rendition of which is integrated 
into the employer's operations.
    (2) In order that an individual may be in the service of an employer 
within the meaning of paragraph (a)(1)(i) of this section, it is not 
necessary that the employer actually direct or control the manner in 
which the services are rendered; it is sufficient if the employer has 
the right to do so. The right of an employer to discharge an individual 
is also an important factor indicating that the individual is subject to 
the continuing authority of the employer to supervise and direct the 
manner of rendition of the services. Other factors indicating that an 
individual is subject to the continuing authority of the employer to 
supervise and direct the manner of rendition of the services are the 
furnishing of tools and the furnishing of a place to work by the 
employer to the individual who renders the services.
    (3) In general, if an individual is subject to the control or 
direction of an employer merely as to the result to be accomplished by 
the work and not as to the means and methods for accomplishing the 
result, he is an independent contractor. On individual performing 
services as an independent contractor is not, as to such services, in 
the service of an employer within the meaning of paragraph (a)(1)(i) of 
this section. However, an individual performing services as an 
independent contractor may be, as to such services, in the service of an 
employer within the meaning of paragraph (a)(1) (ii) or (iii) of this 
section.
    (4) Whether or not an individual is an employee will be determined 
upon an examination of the particular facts of the case.
    (5) If an individual is an employee, it is of no consequence that he 
is designated as a partner, coadventurer, agent, independent contractor, 
or otherwise, or that he performs services on a part-time basis.
    (6) No distinction is made between classes or grades of employees. 
Thus, superintendents, managers, and other supervisory personnel are 
employees within the meaning of the act. An officer of an employer is an 
employee, but a director as such is not.

[[Page 110]]

    (7) In determining whether an individual is an employee with respect 
to services rendered within the United States, the citizenship or 
residence of the individual, or the place where the contract of service 
was entered into is immaterial.
    (8) If an individual performs services for an employer (other than a 
local lodge or division or a general committee of a railway-labor-
organization employer) which does not conduct the principal part of its 
business within the United States, such individual shall be deemed to be 
in the service of such employer only to the extent that he performs 
services for it in the United States. Thus, with respect to services 
rendered for such employer outside the United States, such individual is 
not in the service of an employer.
    (9) If an individual performs services for an employer (other than a 
local lodge or division or a general committee of a railway-labor-
organization employer) which conducts the principal part of its business 
within the United States, he is in the service of such employer whether 
his services are rendered within or without the United States. In the 
case of an individual, not a citizen or resident of the United States, 
rendering services in a place outside the United States to an employer 
which is required under the laws applicable in such place to employ, in 
whole or in part, citizens or residents thereof, such individual shall 
not be deemed to be in the service of an employer with respect to 
services so rendered.
    (10) The term ``employee'' does not include any individual while he 
is engaged in the physical operations consisting of the mining of coal, 
the preparation of coal, the handling (other than movement by rail with 
standard railroad locomotives) of coal not beyond the mine tipple, or 
the loading of coal at the tipple.
    (b) Employees of local lodges or divisions of railway-labor-
organization employers. (1) An individual is in the service of a local 
lodge or division of a railway-labor-organization employer (see 
paragraph (a)(6) of Sec. 31.3231(a)-1) only if--
    (i) All, or substantially all, the individuals constituting the 
membership of such local lodge or division are employees of an employer 
conducting the principal part of its business in the United States; or
    (ii) The headquarters of such local lodge or division is located in 
the United States.
    (2) (i) An individual in the service of a local lodge or division is 
not an employee within the meaning of the act unless he was, on or after 
August 29, 1935, in the service of a carrier (see Sec. 31.3231(g) for 
definition of carrier) or he was, on August 29, 1935, in the 
``employment relation'' to a carrier.
    (ii) An individual shall be deemed to have been in the employment 
relation to a carrier on August 29, 1935, if (a) he was on that date on 
leave of absence from his employment expressly granted to him by the 
carrier by whom he was employed, or by a duly authorized representative 
or such carrier, and the grant of such leave of absence was established 
to the satisfaction of the Railroad Retirement Board before July 1947; 
or (b) he was in the service of a carrier after August 29, 1935, and 
before January 1946 in each of six calendar months whether or not 
consecutive; or (c) before August 29, 1935, he did not retire and was 
not retired or discharged from the service of the last carrier by whom 
he was employed or its corporate or operating successor, but (1) solely 
by reason of his physical or mental disability he ceased before August 
29, 1935, to be in the service of such carrier and thereafter remained 
continuously disabled until he attained age sixty-five or until August 
1945, or (2) solely for such last stated reason a carrier by whom he was 
employed before August 29, 1935, or a carrier who is its successor did 
not on or after August 29, 1935, and before August 1945 call him to 
return to service, or (3) if he was so called he was solely for such 
reason unable to render service in six calendar months as provided in 
(b) of this subdivision; or (d) he was on August 29, 1935, absent from 
the service of a carrier by reason of a discharge which, within one year 
after the effective date thereof, was protested, to an appropriate labor 
representative or to the carrier, as wrongful, and which was followed 
within 10 years of the effective date thereof by his reinstatement in

[[Page 111]]

good faith to his former service with all his seniority rights. However, 
an individual shall not be deemed to have been in the employment 
relation to a carrier on August 29, 1935, if before that date he was 
granted a pension or gratuity on the basis of which a pension was 
awarded to him pursuant to section 6 of the Railroad Retirement Act of 
1937 (45 U.S.C. 228f), or if during the last payroll period before 
August 29, 1935, in which he rendered service to a carrier he was not, 
with respect to any service in such payroll period, in the service of an 
employer (see paragraph (a) of this section).
    (c) Employees of general committees of railway-labor-organization 
employers. An individual is in the service of a general committee of a 
railway-labor-organization employer (see paragraph (a)(6) of 
Sec. 31.3231(a)-1) only if--
    (1) He is representing a local lodge or division described in 
paragraph (b)(1) of this section; or
    (2) All, or substantially all, the individuals represented by such 
general committee are employees of an employer conducting the principal 
part of its business in the United States; or
    (3) He acts in the capacity of a general chairman or an assistant 
general chairman of a general committee which represents individuals 
rendering service in the United States to an employer. In such case, if 
his office or headquarters is not located in the United States and the 
individuals represented by such general committee are employees of an 
employer not conducting the principal part of its business in the United 
States, only a part of his remuneration for such service shall be 
regarded as compensation. The part of his remuneration regarded as 
compensation shall be in the same proportion to his total remuneration 
as the mileage in the United States under the jurisdiction of such 
general committee bears to the total mileage under its jurisdiction, 
unless such mileage formula is inapplicable, in which case such other 
formula as the Railroad Retirement Board may have prescribed pursuant to 
section 1(c) of the Railroad Retirement Act of 1937 (45 U.S.C. 228a) 
shall be applicable. However, no part of his remuneration for such 
service shall be regarded as compensation if the application of such 
mileage formula, or such other formula as the Railroad Retirement Board 
may have prescribed, would result in his compensation for the service 
being less than 10 percent of his remuneration for such service.



Sec. 31.3231(c)-1  Who are employee representatives.

    (a) An employee representative within the meaning of the act is--
    (1) Any officer or official representative of a railway labor 
organization which is not included as an employer under section 3231(a) 
who--
    (i) Was in the service of an employer either before or after June 
29, 1937, and
    (ii) Is duly authorized and designated to represent employees in 
accordance with the Railway Labor Act.

For railway labor organizations which are employers under section 
3231(a), see paragraph (a) (5) and (6) of Sec. 31.3231(a)-1.
    (2) Any individual who is regularly assigned to or regularly 
employed by an employee representative, as defined in paragraph (a)(1) 
of this section, in connection with the duties of such employee 
representative's office.
    (b) In determining whether an individual is an employee 
representative, his citizenship or residence is material only insofar as 
those factors may affect the determination of whether he was ``in the 
service of an employer'' (see paragraph (a) of Sec. 31.3231(b)-1).



Sec. 31.3231(d)-1  Service.

    See Sec. 31.3231(b)-1 for regulations relating to the term ``in the 
service of an employer.''



Sec. 31.3231(e)-1  Compensation.

    (a) Definition--(1) The term compensation has the same meaning as 
the term wages in section 3121(a), determined without regard to section 
3121(b)(9), except as specifically limited by the Railroad Retirement 
Tax Act (chapter 22 of the Internal Revenue Code) or regulation. The 
Commissioner may provide any additional guidance that may be necessary 
or appropriate in applying the definitions of sections 3121(a) and 
3231(e).
    (2) A payment made by an employer to an individual through the 
employer's payroll is presumed, in the absence

[[Page 112]]

of evidence to the contrary, to be compensation for services rendered as 
an employee of the employer. Likewise, a payment made by an employee 
organization to an employee representative through the organization's 
payroll is presumed, in the absence of evidence to the contrary, to be 
compensation for services rendered by the employee representative as 
such. For rules regarding the treatment of deductions by an employer 
from remuneration of an employee, see Sec. 31.3123-1.
    (3) The term compensation is not confined to amounts paid for active 
service, but includes amounts paid for an identifiable period during 
which the employee is absent from the active service of the employer 
and, in the case of an employee representative, amounts paid for an 
identifiable period during which the employee representative is absent 
from the active service of the employee organization.
    (4) Compensation includes amounts paid to an employee for loss of 
earnings during an identifiable period as the result of the displacement 
of the employee to a less remunerative position or occupation as well as 
pay for time lost.
    (5) For rules regarding the treatment of reimbursement and other 
expense allowance amounts, see Sec. 31.3121(a)-3. For rules regarding 
the inclusion of fringe benefits in compensation, see Sec. 31.3121(a)-
1T.
    (b) Special Rules. (1) If the amount of compensation earned in any 
calendar month by an individual as an employee in the service of a local 
lodge or division of a railway-labor-organization employer is less than 
$25, the amount is disregarded for purposes of determining the employee 
tax under section 3201 and the employer tax under section 3221.
    (2) Compensation for service as a delegate to a national or 
international convention of a railway-labor-organization employer is 
disregarded for purposes of determining the employee tax under section 
3201 and the employer tax under section 3221 if the individual rendering 
the service has not previously rendered service, other than as a 
delegate, which may be included in the individual's years of service for 
purposes of the Railroad Retirement Act.
    (3) For special provisions relating to the compensation of certain 
general chairs or assistant general chairs of a general committee of a 
railway-labor-organization employer, see paragraph (c)(3) of 
Sec. 31.3231(b)-1.
[T.D. 8582, 59 FR 66191, Dec. 23, 1994]



Sec. 31.3231(e)-2  Contribution base.

    The term compensation does not include any remuneration paid during 
any calendar year by an employer to an employee for services rendered in 
excess of the applicable contribution base. For rules applying this 
provision, see Sec. 31.3121(a)(1)-1.
[T.D. 8582, 59 FR 66191, Dec. 23, 1994]



 Subpart D--Federal Unemployment Tax Act (Chapter 23, Internal Revenue 
                              Code of 1954)



Sec. 31.3301-1  Persons liable for tax.

    Every person who is an employer as defined in section 3306(a) (see 
Sec. 31.3306(a)-1) is liable for the tax. Even if an employer is not 
subject to any State unemployment compensation law, he is nevertheless 
liable for the tax. However, if he is subject to such a State law, he 
may be entitled to certain credits against the tax (see 
Secs. 31.3302(a)1 to 31.3302(c)-1, inclusive). For provisions relating 
to payment of the tax, see Subpart G of the regulations in this part.



Sec. 31.3301-2  Measure of tax.

    The tax for any calendar year is measured by the amount of wages 
paid by the employer during such year with respect to employment after 
December 31, 1938. (See Sec. 31.3306(b)-1, relating to wages, and 
Secs. 31.3306(c)-1 to 31.3306(c)-3, inclusive, relating to employment.)
[T.D. 6658, 28 FR 6632, June 27, 1963]



Sec. 31.3301-3  Rate and computation of tax.

    (a) The rates of tax with respect to wages paid in calendar years 
after 1954 are as follows:

[[Page 113]]



                                                                        
                                                                Percent 
                                                                        
In the calendar years 1955 to 1960, both inclusive...........          3
In the calendar year 1961....................................        3.1
In the calendar year 1962....................................        3.5
In the calendar year 1963....................................       3.35
In the calendar year 1964 and subsequent calendar years......        3.1
                                                                        

    (b) The tax is computed by applying to the wages paid in a calendar 
year, with respect to employment after December 31, 1938, the rate in 
effect at the time the wages are paid.
[T.D. 6658, 28 FR 6632, June 27, 1963]



Sec. 31.3301-4  When wages are paid.

    Wages are paid when actually or constructively paid. Wages are 
constructively paid when they are credited to the account of or set 
apart for an employee so that they may be drawn upon by him at any time 
although not then actually reduced to possession. To constitute payment 
in such a case the wages must be credited to or set apart for the 
employee without any substantial limitation or restriction as to the 
time or manner of payment or condition upon which payment is to be made, 
and must be made available to him so that they may be drawn upon at any 
time, and their payment brought within his own control and disposition. 
See Sec. 31.6011(a)-3, relating to the return on which wages are to be 
reported.



Sec. 31.3302(a)-1  Credit against tax for contributions paid.

    (a) In general. Subject to the provision of paragraphs (b) and (c) 
of this section and to the provisions of Sec. 31.3302(c)-1, the taxpayer 
may credit against the tax for any taxable year the total amount of 
contributions paid by him into an unemployment fund maintained during 
such year under a State law which has been found by the Secretary of 
Labor to contain the provisions specified in section 3304(a); Provided, 
however, That no credit may be taken for contributions under a State law 
if such State has not been duly certified for the calendar year to the 
Secretary of the Treasury by the Secretary of Labor. The contributions 
may be credited against the tax whether or not they are paid with 
respect to employment as defined in section 3306(c). For provisions 
relating to additional credit against the tax, see Sec. 31.3302(b)-1.
    (b) Limitation on the taxable year with respect to which 
contributions are allowable. In order to be allowable as credit against 
the tax for any taxable year, the contributions must have been paid with 
respect to such year.

    Example 1. Under the unemployment compensation law of State X, 
employer M is required to report in his contribution return for the 
quarter ending December 31, 1955, all remuneration payable for services 
rendered in such quarter. A portion of such remuneration is not paid to 
his employees until February 1, 1956. On January 20, 1956, M pays to the 
State the total amount of contributions due with respect to all 
remuneration so required to be reported. Such contributions, including 
those with respect to the remuneration paid on February 1, 1956, may be 
included in computing the credit against the tax for the calendar year 
1955. This is true even though the remuneration paid on February 1, 1956 
(if it constitutes ``wages'') is required to be reported in the Federal 
return for 1956 and not in the Federal return for 1955.
    Example 2. Under the unemployment compensation law of State Y, 
employer N is required to include in his contribution return for the 
quarter ending December 31, 1955, certain remuneration paid on December 
30, to 1955, to an employee for services to be rendered after December 
31. On January 20, 1956, N pays to the State the total amount of 
contributions due with respect to all remuneration required to be 
reported on the contribution return. Such contributions, including those 
with respect to the remuneration paid on December 30, 1955, may be 
included in computing the credit against the tax for the calendar year 
1955.

    (c) Limitation on amount of credit allowable based on time when 
contributions are paid--(1) In general. The amount of credit allowable 
for contributions paid into a State unemployment fund depends in part on 
the time of payment of such contributions. Although contributions paid 
at any time may be credited against the tax (subject to the limitations 
referred to in paragraphs (c)(2) and (3) of this section), no refund or 
credit of the tax based on credit for contributions paid will be allowed 
unless the contributions are paid prior to the expiration of the period 
of limitations applicable to refund or credit of the tax. For general 
provisions relating to the limitation period and to refunds, credits and 
abatements of the tax, see

[[Page 114]]

respectively Secs. 301.6511(a)-1, 301.6402-2 and 301.6404-1 of this 
chapter (Regulations on Procedure and Administration).
    (2) Amount of credit allowable when contributions are paid on or 
before last day for filing return. Contributions paid into a State 
unemployment fund on or before the last day upon which the Federal 
return for the taxable year is required to be filed may be credited 
against the tax in an amount equal to such contributions, but not, 
however, to exceed the total credits, determined pursuant to 
Sec. 31.3302(c)-1. For provisions relating to the time for filing the 
return, see Sec. 31.6071(a)-1 in Subpart G of this part.
    (3) Amount of credit allowable when contributions are paid after 
last day for filing return. Contributions paid into a State unemployment 
fund after the last day upon which the Federal return for the taxable 
year is required to be filed may be credited against the tax in an 
amount not to exceed 90 percent of the amount which would have been 
allowable as credit on account of such contributions had they been paid 
into a State unemployment fund on or before such last day. However, see 
paragraph (c)(4) of this section relating to the payment of 
contributions to the wrong State. For general provisions relating to 
refunds, credits, and abatements of the tax, see Secs. 301.6402-2 and 
301.6404-1 of this chapter (Regulations on Procedure and 
Administration).

    Example 1. The Federal return of the M Company for the calendar year 
1961 discloses total wages of $400,000. The Federal tax, imposed at the 
rate of 3.1 percent, is $12,400. The company is liable for total State 
contributions of $8,000 for 1961. The due date of the Federal return is 
January 31, 1962, no extension of time for filing the return having been 
granted. The contributions are not paid until February 1, 1962. If the 
contributions had been paid on or before January 31, 1962, the entire 
amount of $8,000 could have been credited against the tax. (Credits 
could not exceed 2.7 percent of the wages, or $10,800. See 
Sec. 31.3302(c)-1.) Since the contributions were paid after January 31, 
1962, the M Company is entitled to a credit of 90 percent of the amount 
which would have been allowable as credit had the contributions been 
paid on time (90 percent of $8,000, or $7,200), the net liability for 
Federal tax being $5,200 ($12,400 minus $7,200).
    Example 2. The facts are the same as in example 1, except that the M 
Company is liable for and pays total State contributions of $12,000, 
instead of $8,000. If the contributions had been paid on or before 
January 31, 1962, the amount allowable as credit would have been $10,800 
(2.7 percent of wages of $400,000). Since the contributions were paid 
after January 31, 1962, the M Company is entitled to a credit of 90 
percent of $10,800, or $9,720, the net liability for Federal tax being 
$2,680 ($12,400 minus $9,720).
    Example 3. The Federal return of the R Company for the calendar year 
1961 discloses a total tax of $3,100. The company is liable for total 
State contributions of $2,700 for such year. The due date of the Federal 
return is January 31, 1962, no extension of time for filing the return 
having been granted. The R Company pays $1,700 of the total State 
contributions on or before such date, and the remaining $1,000 on 
February 1, 1962. If the $1,000 had been paid on or before January 31, 
1962, that amount could have been credited against the tax (such amount 
plus the $1,700 paid on or before January 31, 1962, not exceeding the 
aggregate credit allowable). Since the $1,000 was paid after January 31, 
1962, the R Company is entitled to a credit of 90 percent of this amount 
or $900, plus the credit of $1,700 allowable for the contributions paid 
on or before January 31, 1962. The net liability for Federal tax is thus 
$500 ($3,100 minus $2,600).

    (4) Amount of credit allowable when contributions are paid to wrong 
State. Contributions for the taxable year paid into a State unemployment 
fund which are required under the unemployment compensation law of that 
State, but which are paid with respect to remuneration on the basis of 
which the taxpayer had, prior to such payment, erroneously paid an 
amount as contributions under another unemployment compensation law, 
shall be deemed for purposes of the credit to have been paid at the time 
of the erroneous payment. If, by reason of such other law, the taxpayer 
was entitled to cease paying contributions for such taxable year with 
respect to services subject to such other law, the payment into the 
proper fund shall be deemed for purposes of credit to have been made on 
the date the Federal return for such year was actually filed by the 
taxpayer under Sec. 31.6011(a)-3.

    Example. Employee N, whose Federal return for the calendar year 1961 
discloses a total tax of $3,100, employs individuals in State X and 
State Y during the calendar year 1961. N assumes in good faith that the

[[Page 115]]

services of his employees are covered by the unemployment compensation 
law of State Y, and pays as contributions to State Y the amount of 
$2,700 based upon the remuneration of the employees. All of the services 
were in fact covered by the unemployment compensation law of State X, 
and none by the law of State Y. The payment to State Y was made on 
January 31, 1962. When the error was discovered thereafter, N paid to 
State X contributions in the amount of $2,700 based upon such 
remuneration. Since the contributions were paid to State Y on January 
31, 1962, the contributions to State X are, for purposes of the credit, 
deemed to have been paid on such date. N is entitled to a credit of 
$2,700 against the Federal tax of $3,100, the net liability for Federal 
tax being $400 ($3,100 minus $2,700).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6632, June 27, 1963]



Sec. 31.3302(a)-2  Refund of State contributions.

    If, subsequent to the filing of the return, a refund is made by a 
State to the taxpayer of any part of his contribution credited against 
the tax, the taxpayer is required to advise the district director of the 
date and amount of such refund and the reason therefor, and to pay the 
tax, if any, due as a result of such refund, together with interest from 
the date when the tax was due.



Sec. 31.3302(a)-3  Proof of credit under section 3302(a).

    Credit against the tax for any calendar year for contributions paid 
into State unemployment funds shall not be allowed unless there is 
submitted to the district director:
    (a) A certificate of the proper officer of each State (the laws of 
which required the contributions to be paid) showing, for the taxpayer:
    (1) The total amount of contributions required to be paid under the 
State law with respect to such calendar year (exclusive of penalties and 
interest) which was actually paid on or before the date the Federal 
return is required to be filed; and
    (2) The amounts and dates of such required payments (exclusive of 
penalties and interest) actually paid after the date the Federal return 
is required to be filed.
    (b) A statement by the taxpayer that no part of any payment made by 
him into a State unemployment fund for such calendar year, which is 
claimed as a credit against the tax, was deducted or is to be deducted 
from the remuneration of individuals in his employ. Such statement shall 
contain or be verified by a written declaration that it is made under 
the penalties of perjury.
    (c) Such other or additional proof as the Commissioner or the 
district director may deem necessary to establish the right to the 
credit provided for under section 3302(a).



Sec. 31.3302(b)-1  Additional credit against tax.

    (a) In general. In addition to the credit against the tax allowable 
for contributions actually paid to State unemployment funds (see 
Sec. 31.3302(a)-1), the taxpayer may be entitled to a credit under 
section 3302(b). This additional credit is allowable to the taxpayer 
with respect to the amount of contributions which he is relieved from 
paying to an unemployment fund under the provisions of a State law which 
have been certified for the taxable year as provided in section 3303. 
Generally, an additional credit is available to an employer, if under 
the provisions of a State law which have been so certified he is 
permitted to pay contributions to such State for the taxable year, or 
portion thereof, at a rate which is both lower than the highest rate 
applied under such law in such year and lower than 2.7 percent. No 
additional credit is allowable except with respect to a State law 
certified by the Secretary of Labor for the taxable year as provided in 
section 3303 (or with respect to any provisions thereof so certified).
    (b) Method of computing amount of additional credit allowable with 
respect to a State law--(1) Certification of a State law as a whole. In 
ascertaining the additional credit for any taxable year with respect to 
a particular State law which the Secretary of Labor certifies as a whole 
to the Secretary of the Treasury in accordance with the provisions of 
section 3303, the taxpayer must first compute the following amounts:
    (i) The amount of contributions (whether or not with respect to 
employment as defined in section 3306(c))

[[Page 116]]

which the taxpayer would have been required to pay under the State law 
for such year if throughout the year he had been subject to the highest 
rate applied under such law in such year, or to a rate of 2.7 percent, 
whichever rate is lower.
    (ii) The amount of contributions (whether or not with respect to 
employment as defined in section 3306 (c)) he was required to pay under 
the State law with respect to such year, whether or not paid.

The amount computed under paragraph (b)(1)(ii) of this section should 
then be subtracted from the amount computed under paragraph (b)(1)(i) of 
this section and the result will be the additional credit for the 
taxable year with respect to the law of that State.

    Example. A employs individuals only in State X during the calendar 
year 1955. The unemployment compensation law of State X has been 
certified in its entirety to the Secretary of the Treasury by the 
Secretary of Labor for such year. The highest rate applied in such year 
under such State law to any taxpayer is 3 percent. However, A has 
obtained a rate of 1 percent under the law of such State and is required 
to pay his entire year's contribution at that rate. The amount of 
remuneration of A's employees subject to contributions under such State 
law is $25,000. A's additional credit under section 3302(b) is $425, 
computed as follows:

Remuneration subject to contributions.........................   $25,000
                                                               =========
Contributions at 2.7 percent rate.............................       675
Less:                                                                   
  Contributions required to be paid at 1 percent rate.........       250
                                                               ---------
Additional credit to A........................................       425
                                                                        


Since the 2.7 percent rate is less than the highest rate applied (3 
percent), the 2.7 percent rate is used in computing the amount ($675) 
from which the amount of contributions required to be paid at the 1 
percent rate ($250) is deducted in order to ascertain the additional 
credit ($425).

    (2) Certification with respect to particular provisions of a State 
law. If the Secretary of Labor makes a certification to the Secretary of 
the Treasury with respect to particular provisions of a State law for 
any taxable year pursuant to section 3303, the additional credit of the 
taxpayer for such year with respect to such law shall be computed in 
such manner as the Commissioner shall determine.
    (c) Amount of additional credit allowable to taxpayer with respect 
to more than one State law. If the taxpayer is entitled to additional 
credit with respect to more than one State law in any taxable year, the 
additional credit allowable with respect to each State law shall be 
computed separately (in accordance with paragraph (b) of this section) 
and the total additional credit allowable against the tax for such year 
shall be the aggregate of the additional credits allowable with respect 
to such State laws. For limitation on total credits, see 
Sec. 31.3302(c)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6632, June 27, 1963]



Sec. 31.3302(b)-2  Proof of additional credit under section 3302(b).

    Additional credit under section 3302(b) shall not be allowed against 
the tax for any calendar year unless there is submitted--
    (a) To the Commissioner a certificate of the proper officer of each 
State (with respect to the law of which the additional credit is 
claimed) showing the highest rate of contributions applied under the 
State law in such calendar year to any person having individuals in his 
employ; and
    (b) To the district director a certificate of the proper officer of 
each State (with respect to the law of which the additional credit is 
claimed) showing for the taxpayer--
    (1) The total remuneration with respect to which contributions were 
required to be paid by the taxpayer under the State law with respect to 
such calendar year; and
    (2) The rate of contributions applied to the taxpayer under the 
State law with respect to such calendar year.

If under the law of such State different rates of contributions were 
applied to the taxpayer during particular periods of such calendar year, 
the certificate shall set forth the information called for in paragraphs 
(b)(1) and (2) of this section with respect to each such period.
    (c) Such other or additional proof as the Commissioner or the 
district director may deem necessary to establish the right to the 
additional credit provided for under section 3302(b).

[[Page 117]]



Sec. 31.3302(c)-1  Limit on total credits.

    (a) In general. Paragraph (b) of this section relates to the 
limitation on the aggregate of the credits allowable under section 3302 
(a) and (b). Paragraph (c) of this section relates to reductions, under 
certain circumstances, of the total credits allowable after applying 
section 3302 (a), (b), and (c)(1). In paragraphs (c)(1), (2), and (3) of 
this section, relate, respectively, to reductions of credits in respect 
of advances under title XII of the Social Security Act before September 
13, 1960, advances under title XII of the Social Security Act after 
September 12, 1960, and payments under the Temporary Unemployment 
Compensation Act of 1958. A reduction of credit under paragraph (c)(1), 
(2), or (3) of this section applies separately from, and in addition to, 
a reduction under any other such subparagraph. See section 3302(d) and 
Sec. 31.3302(d)-1 for definitions and special rules relating to section 
3302(c), and for a provision that, in applying section 3302(c), the 
Federal tax shall be computed at the rate of 3 percent.
    (b) Limitation on aggregate credit. The aggregate of the credit 
under section 3302(a) and the additional credit under section 3302(b) 
shall not exceed 90 percent of the tax against which credit is taken, 
computed as if the tax were imposed at the rate of 3 percent. Thus, the 
aggregate of the credit which is allowable to an employer for any 
taxable year shall not exceed 2.7 percent of the wages paid by the 
employer during the year.
    (c) Reductions of amount of credit otherwise allowable--(1) Advances 
before September 13, 1960, under title XII of Social Security Act--(i) 
Credit reductions for 1961 and 1962. Pursuant to section 3302(c)(2), as 
applicable to credit allowable for any year ended before 1963, the total 
credits otherwise allowable under section 3302 to a taxpayer subject to 
the unemployment compensation law of the State of--
    (a) Alaska shall be reduced for the taxable year 1961 by an amount 
equal to 0.15 percent of the wages paid by the taxpayer during 1961 
which are attributable to Alaska, and shall be reduced for the taxable 
year 1962 by an amount equal to 0.3 percent of the wages paid by the 
taxpayer during 1962 which are attributable to Alaska; or
    (b) Michigan shall be reduced for the taxable year 1962 by an amount 
equal to 0.15 percent of the wages paid by the taxpayer during 1962 
which are attributable to Michigan.
    (ii) Credit reductions for 1963 and subsequent years. If any balance 
of an advance or advances under title XII of the Social Security Act, 
made before September 13, 1960, to the unemployment account of a State, 
remains unpaid on January 1, 1963, or on January 1 of any succeeding 
taxable year, the total credits otherwise allowable under section 3302 
to a taxpayer subject to the unemployment compensation law of the State 
shall be reduced for the taxable year unless--
    (a) No balance of such advance or advances exists as of the 
beginning of November 10 of the taxable year, or
    (b) The State pays into the Federal unemployment account, before 
November 10 of the taxable year, the amount certified by the Secretary 
of Labor pursuant to section 3302(c)(2), and designates such payment as 
being made for purposes of the last sentence of section 3302(c)(2).

The credit reduction for a taxable year shall be a percentage of the 
wages paid by the taxpayer during that taxable year which are 
attributable to the State. The percentage for the taxable year 1963, or 
for any succeeding taxable year beginning before January 1, 1968, is 
0.15 percent (that is, 5 percent of the Federal tax, computed as if 
imposed at the rate of 3 percent of the wages). The percentage for any 
taxable year beginning on or after January 1, 1968, is the percentage 
reduction for the immediately preceding taxable year plus 0.15 percent. 
Thus, for 1968 the percentage is 0.3 percent, for 1969 the percentage is 
0.45 percent, and for 1970 the percentage is 0.6 percent.
    (2) Advances after September 12, 1960, under title XII of Social 
Security Act--(i) In general. If any balance of an advance or advances 
under title XII of the Social Security Act, made after September 12, 
1960, to the unemployment account of a State, remains unpaid on January 
1 of two consecutive taxable

[[Page 118]]

years, the total credits otherwise allowable under section 3302 to a 
taxpayer subject to the unemployment compensation law of the State shall 
be reduced for the taxable year beginning with the second consecutive 
January 1, unless prior to November 10 of that taxable year the total 
amount of any such advance or advances made to the account of the State 
has been fully repaid. The reduction made pursuant to this subdivision 
in the total credits otherwise allowable for the taxable year beginning 
with the second consecutive January 1 shall be 0.3 percent of the wages 
paid by the taxpayer during the taxable year which are attributable to 
the State (that is, 10 percent of the Federal tax, computed as if 
imposed at the rate of 3 percent of the wages). In the case of any 
succeeding taxable year beginning with a consecutive January 1 on which 
there exists such a balance of an unreturned advance or advances made 
after September 12, 1960, the total credits otherwise allowable shall be 
further reduced unless prior to November 10 of that succeeding taxable 
year the total amount of any such advance or advances made to the 
account of the State has been fully repaid. The reduction for each such 
succeeding taxable year beginning with a consecutive January 1 on which 
such a balance exists shall be a percentage of the wages paid by the 
taxpayer during that succeeding taxable year which are attributable to 
the State. The percentage reduction for any such succeeding taxable year 
shall be the aggregate of (a) the percentage reduction (without regard 
to paragraph (c)(2)(ii) or (iii) of this section) for the immediately 
preceding taxable year, (b) 0.3 percent of the wages paid by the 
taxpayer during the taxable year which are attributable to the State, 
and (c) the percentage, if any, described in paragraph (c)(2)(ii) or 
(iii) of this section.
    (ii) Additional reduction if a balance of advances exists after 
third or fourth consecutive January 1. If the credit reduction described 
in subdivision (i) of this subparagraph is made for the third or fourth 
consecutive taxable year, the total credits otherwise allowable under 
section 3302 to a taxpayer subject to the unemployment compensation law 
of the State shall be further reduced for the taxable year unless the 
average employer contribution rate (see section 3302(d)(4)) for such 
State for the calendar year preceding such taxable year is at least 2.7 
percent. The percentage of reduction, if any, under this subdivision 
shall be the percentage referred to in section 3302(c)(3)(B) which is 
certified by the Secretary of Labor pursuant to section 3302(d)(7).
    (iii) Additional reduction if a balance of advances exists after 
fifth or any succeeding consecutive January 1. If the credit reduction 
described in subdivision (i) of this subparagraph is made for the fifth 
or any succeeding taxable year, the total credits otherwise allowable 
under section 3302 to a taxpayer subject to the unemployment 
compensation law of the State shall be further reduced for the taxable 
year unless the average employer contribution rate (see section 
3302(d)(4)) for the State for the calendar year preceding such taxable 
year equals or exceeds the 5-year benefit cost rate (see section 
3302(d)(5)) applicable to the State for the taxable year or 2.7 percent, 
whichever is higher. The percentage of reduction, if any, under this 
subdivision for a taxable year shall be the percentage referred to in 
section 3302(c)(3)(C) which is certified by the Secretary of Labor 
pursuant to section 3302(d)(7).
    (3) Payments under the Temporary Unemployment Compensation Act of 
1958. If any amount of temporary unemployment compensation was paid in a 
State under the Temporary Unemployment Compensation Act of 1958, the 
total credits otherwise allowable under section 3302 to a taxpayer with 
respect to wages attributable to the State for the taxable year 
beginning January 1, 1963, and for each taxable year thereafter, shall 
be reduced unless prior to November 10 of the taxable year--
    (i) There have been restored to the Treasury the amounts of 
temporary unemployment compensation paid in the State (except amounts 
paid to individuals who exhausted their unemployment compensation under 
title XV of the Social Security Act and title IV of the Veterans' 
Readjustment Assistance Act of 1952 prior to their making their first 
claims under the Temporary Unemployment Compensation Act of

[[Page 119]]

1958), the amount of costs incurred in the administration of the 
Temporary Unemployment Compensation Act of 1958); with respect to the 
State, and the amount estimated by the Secretary of Labor as the State's 
proportionate share of other costs incurred in the administration of 
such Act, or
    (ii) The State restores to the general fund of the Treasury the 
amount certified by the Secretary of Labor pursuant to section 104 of 
the Temporary Unemployment Compensation Act of 1958, and designates such 
restoration as being made for purposes of the last sentence of such 
section.

The credit reduction for a taxable year shall be a percentage of the 
wages paid by the taxpayer during that year which are attributable to 
the State. The percentage for the taxable year 1963 is 0.15 percent 
(that is, 5 percent of the Federal tax, computed as if imposed at the 
rate of 3 percent). The percentage for any succeeding year is 0.3 
percent (that is, 10 percent of the Federal tax, computed as if imposed 
at the rate of 3 percent).
    (4) Example. The cumulative effect of the credit reductions 
described in this paragraph may be illustrated by the following example:

    Example. Advances to the unemployment account of State X were made 
in 1957 and in 1961 under title XII of the Social Security Act. Payments 
under the Temporary Unemployment Compensation Act of 1958 were made in 
State X in 1958. No portion of the advances or payments is returned 
before November 10, 1964. As a consequence:
    (a) The credit reduction applicable under subparagraph (1) of this 
paragraph is made for 1964 at the rate of 0.15 percent;
    (b) The credit reduction described in subparagraph (2) of this 
paragraph has been made for 1963 (the second successive year after 1961) 
at the rate of 0.3 percent. The rate of credit reduction under 
subparagraph (2) for 1964 is 1 percent (the aggregate of 0.6 percent 
under section 3302(c)(3)(A) and 0.4 percent (assumed for purposes of 
this example to be the percentage referred to in section 3302(c)(3)(B) 
which is certified by the Secretary of Labor), and
    (c) The credit reduction described in subparagraph (3) of this 
paragraph has been made for 1963 at the rate of 0.15 percent. The rate 
of credit reduction for 1964 is 0.3 percent.

The cumulative rate of credit reduction applicable for 1964 to wages 
attributable to State X is 1.45 percent, representing the aggregate of 
the percentage reductions applicable under subparagraphs (1), (2), and 
(3) of this paragraph (0.15 percent, 1 percent, and 0.3 percent, 
respectively). In 1964 Employer A paid wages of $100,000, all of which 
are subject to the unemployment compensation law of State X. The credit 
which would be allowable (under section 3302 (a), (b), and (c)(1)) if 
there were no credit reduction is $2,700. Employer A's tax is computed 
as follows for 1964:

Total taxable wages (attributable to State X)...    $100,000            
                                                 =============          
Gross Federal tax (3.1 percent of wages)........       3,100            
Less credit:                                                            
  Gross credit..................................      $2,700            
  Credit reduction (1.45 percent of wages)......       1,450            
  Net credit....................................       1,250            
                                                 -------------          
Amount of Federal tax due.......................       1,850            
                                                                        

[T.D. 6658, 28 FR 6633, June 27, 1963, as amended by T.D. 6708, 29 FR 
3198, Mar. 10, 1964]



Sec. 31.3302(d)-1  Definitions and special rules relating to limit on total credits.

    (a) Rate of tax deemed to be 3 percent. In applying the provisions 
of section 3302(c) relating to the limitation on total credits, and to 
reductions of credits otherwise allowable, the tax imposed by section 
3301 shall be computed at the rate of 3 percent in lieu of any other 
rate prescribed in section 3301 (see Sec. 31.3301-3).
    (b) Wages attributable to a particular State. For purposes of 
section 3302(c) (2) or (3), wages are attributable to a particular State 
if they are subject to the unemployment compensation law of the State. 
If wages are not subject to the unemployment compensation law of any 
State, the determination as to whether such wages, or any portion 
thereof, are attributable to the particular State with respect to which 
the reduction in total credits is imposed shall be made in accordance 
with rules prescribed by the Commissioner.
    (c) Employment Security Act of 1960. The Employment Security Act of 
1960, referred to in section 3302(c)(2), means title V of the Social 
Security Amendments of 1960.
[T.D. 6658, 28 FR 6635, June 27, 1963]

[[Page 120]]



Sec. 31.3302(e)-1  Successor employer.

    (a) In general. In addition to the credits against the tax allowable 
under section 3302(a) and (b) for any taxable year after 1960, the 
taxpayer may be entitled to an amount of credit under section 3302(e). 
Credit under section 3302(e) is provided in the case of a taxpayer who 
(1) acquires substantially all of the property used in a trade or 
business, or in a separate unit of a trade or business, of another 
person (referred to in this section as a predecessor) who is not an 
employer (see Sec. 31.3306(a)-1) for the calendar year in which the 
acquisition takes place, and (2) immediately after the acquisition 
employs in his trade or business one or more individuals who immediately 
prior to the acquisition were employed in the trade or business of the 
predecessor.
    (b) Method of computing credit under section 3302(e). (1) Except as 
provided in paragraph (b)(2) of this section, the amount of credit to 
which the taxpayer may be entitled under section 3302(e) is the amount 
of credit to which the predecessor would be entitled under section 3302 
(a), (b), and (e), without regard to the limits in section 3302(c), if 
the predecessor were an employer.
    (2) If, during the calendar year in which the acquisition takes 
place, the predecessor pays remuneration, subject to contributions under 
the unemployment compensation law of a State, to any employee other than 
the individuals referred to in paragraph (a) of this section, the 
taxpayer will be entitled only to a portion of the amount of credit 
described in paragraph (b)(1) of this section. The portion is determined 
by multiplying such amount by a fraction. The numerator of the fraction 
is the total amount of remuneration, subject to such contributions, paid 
by the predecessor during such year to the individuals referred to in 
paragraph (a) of this section. The denominator of the fraction is the 
total amount of remuneration, subject to such contributions, paid by the 
predecessor during such year to all employees for services performed by 
them in the trade or business, or unit thereof, acquired by the 
taxpayer.

    Example. In April 1961 the X Partnership terminated after selling 
all of its property to the Y Corporation. During 1961, the X Partnership 
paid its employees and former employees a total of $1,000,000 as 
remuneration subject to contributions under the employment compensation 
law of a State. (Note that the X Partnership did not qualify as an 
employer for 1961 for purposes of the Federal unemployment tax, because 
it had employees during less than 20 weeks in 1961.) When the Y 
Corporation acquired the property it concurrently employed all 
individuals who were then in the employ of the X Partnership. Assume 
that the X Partnership, if it had qualified as an employer for 1961, 
would have been entitled to a total credit against the Federal tax of 
$30,000 under section 3302 (a) and (b), without regard to the limits in 
section 3302(c). Of the $1,000,000 remuneration paid by the X 
Partnership in 1961, one-fifth (or $200,000) was paid to individuals who 
were employed by the Y Corporation at the time it acquired the property 
of the X Partnership. Under section 3302(e), therefore, the Y 
Corporation is entitled to credit of $6,000, which is one-fifth of the 
credit ($30,000) which would have been available to the X Partnership.

    (3) The aggregate amount of credit allowable to the taxpayer under 
section 3302 (a), (b), and (e) is subject to the limits in section 
3302(c).
    (c) Proof of credit under section 3302(e). Credit under section 
3302(e) shall not be allowed against the tax for any taxable year unless 
there is submitted to the district director (1) such information or 
proof as may be called for in the return on which the credit is 
reported, or in the instructions relating to the return, and (2) such 
other or additional proof as the Commissioner or the district director 
may deem necessary to establish the right to the credit provided for 
under section 3302(e).
    (d) Cross-references. See paragraph (b) of Sec. 31.3306(b)(1)-1 for 
examples of the acquisition of property used in a trade or business, or 
in a separate unit thereof.
[T.D. 6658, 28 FR 6635, June 27, 1963]



Sec. 31.3306(a)-1  Who are employers.

    (a) Definition--(1) For calendar years 1956 through 1969, inclusive. 
Every person who employs 4 or more employees in employment (within the 
meaning of section 3306 (c) and (d)) on a total of 20 or more calendar 
days during any calendar year after 1955 and before 1970, each such day 
being in a different calendar week, is with respect to such year an 
employer subject to the tax.

[[Page 121]]

    (1a) For 1970 and subsequent calendar years. Every person who 
employs 4 or more employees in employment (within the meaning of section 
3306 (c) and (d)) on a total of 20 or more calendar days during a 
calendar year after 1969, or during the calendar year immediately 
preceding such a calendar year, each such day being in a different 
calendar week, is with respect to such year an employer subject to the 
tax.
    (2) For calendar year 1955. Every person who employs 8 or more 
employees in employment (within the meaning of section 3306 (c) and (d)) 
on a total of 20 or more calendar days during the calendar year 1955, 
each such day being in a different calendar week, is with respect to 
such year an employer subject to the tax.
    (3) General agents of the Secretary of Commerce. For provisions 
relating to the circumstances under which an employee who performs 
services as an officer or member of the crew of an American vessel (i) 
which is owned by or bareboat chartered to the United States and (ii) 
whose business is conducted by a general agent of the Secretary of 
Commerce shall be deemed to be performing services for such general 
agent rather than for the United States, see Sec. 31.3306 (N)-1.
    (b) The several weeks in each of which occurs a day on which the 
prescribed number of employees are employed need not be consecutive 
weeks. It is not necessary that the employees so employed be the same 
individuals; they may be different individuals on each day. Neither is 
it necessary that the prescribed number of employees be employed at the 
same moment of time or for any particular length of time or on any 
particular basis of compensation. It is sufficient if the total number 
of employees employed during the 24 hours of a calendar day is 4 or more 
(8 or more for the calendar year 1955).
    (c) In determining whether a person employs a sufficient number of 
employees to be an employer subject to the tax, each employee is counted 
with respect to services which constitute employment as defined in 
section 3306(c) (see Sec. 31.3306(c)-2). No employee is counted with 
respect to services which do not constitute employment as so defined. 
See, however, paragraph (d) of this section.
    (d) The provisions of paragraph (c) of this section are subject to 
the provisions of section 3306(d), relating to services which do not 
constitute employment but which are deemed to be employment, and 
relating to services which constitute employment but which are deemed 
not to be employment (see Sec. 31.3306(d)-1). For example, if the 
services of an employee during a pay period are deemed to be employment 
under section 3306(d), even though a portion thereof does not constitute 
employment under section 3306(c), the employee is counted with respect 
to all services during the pay period. On the other hand, if the 
services of an employee during a pay period are deemed not to be 
employment, even though a portion thereof constitutes employment, the 
employee is not counted with respect to any services during the pay 
period.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7037, 35 FR 
6709, Apr. 28, 1970]



Sec. 31.3306(b)-1  Wages.

    (a) Applicable law and regulations--(1) Remuneration paid after 
1954. Whether remuneration paid after 1954 for employment performed 
after 1938 constitutes wages is determined under section 3306(b). 
Accordingly, only remuneration paid after 1954 for employment performed 
after 1938 is covered by this section of the regulations and by the 
sections relating to the statutory exclusions from wages 
(Secs. 31.3306(b)(1)-1 to 31.3306(b)(10)-1).
    (2) Remuneration paid after 1939 and before 1955. Whether 
remuneration paid after 1939 and before 1955 for employment performed 
after 1938 constitutes wages shall be determined in accordance with the 
applicable provisions of law and of 26 CFR (1939) Part 403 (Regulations 
107).
    (3) Remuneration paid in 1939. Whether remuneration paid in 1939 for 
employment performed after 1938 constitutes wages shall be determined in 
accordance with the applicable provisions of law and of 26 CFR (1939) 
Part 400 (Regulations 90).

[[Page 122]]

    (b) The term ``wages'' means all remuneration for employment unless 
specifically excepted under section 3306(b) (see Secs. 31.3306(b)(1)-1 
to 31.3306(b)(10)-1, inclusive) or paragraph (j) of this section.
    (c) The name by which the remuneration for employment is designated 
is immaterial. Thus, salaries, fees, bonuses, and commissions are wages 
if paid as compensation for employment.
    (d) The basis upon which the remuneration is paid is immaterial in 
determining whether the remuneration constitutes wages. Thus, it may be 
paid on the basis of piecework or a percentage of profits; and it may be 
paid hourly, daily, weekly, monthly, or annually.
    (e) Except in the case of remuneration paid for services not in the 
course of the employer's trade or business (see Sec. 31.3306(b)(7)-1), 
the medium in which the remuneration is paid is also immaterial. It may 
be paid in cash or in something other than cash, as for example, goods, 
lodging, food, or clothing. Remuneration paid in items other than cash 
shall be computed on the basis of the fair value of such items at the 
time of payments.
    (f) Ordinarily, facilities or privileges (such as entertainment, 
medical services, or so-called ``courtesy'' discounts on purchases), 
furnished or offered by an employer to his employees generally, are not 
considered as remuneration for employment if such facilities or 
privileges are of relatively small value and are offered or furnished by 
the employer merely as a means of promoting the health, good will, 
contentment, or efficiency of his employees. The term ``facilities or 
privileges'', however, does not ordinarily include the value of meals or 
lodging furnished, for example, to restaurant or hotel employees, or to 
seamen or other employees aboard vessels, since generally these items 
constitute an appreciable part of the total remuneration of such 
employees.
    (g) Amounts of so-called ``vacation allowances'' paid to an employee 
constitute wages. Thus, the salary of an employee on vacation, paid 
notwithstanding his absence from work, constitutes wages.
    (h) Amounts paid specifically--either as advances or 
reimbursements--for traveling or other bona fide ordinary and necessary 
expenses incurred or reasonably expected to be incurred in the business 
of the employer are not wages. Traveling and other reimbursed expenses 
must be identified either by making a separate payment or by 
specifically indicating the separate amounts where both wages and 
expense allowances are combined in a single payment. For amounts that 
are received by an employee on or after July 1, 1990, with respect to 
expenses paid or incurred on or after July 1, 1990, see Sec. 31.3306(b)-
2.
    (i) Remuneration paid by an employer to an individual for 
employment, unless such remuneration is specifically excepted under 
section 3306(b), constitutes wages even though at the time paid the 
individual is no longer an employee.

    Example. A is employed by B, an employer, during the month of June 
1955 in employment and is entitled to receive remuneration of $100 for 
the services performed for B during the month. A leaves the employ of B 
at the close of business on June 30, 1955. On July 15, 1955 (when A is 
no longer an employee of B), B pays A the remuneration of $100 which was 
earned for the services performed in June. The $100 is wages, and the 
tax is payable with respect thereto.

    (j) In addition to the exclusions specified in Secs. 31.3306(b)(1)-1 
to 31.3306(b)(10)-1, inclusive, the following types of payments are 
excluded from wages:
    (1) Remuneration for services which do not constitute employment 
under section 3306(c).
    (2) Remuneration for services which are deemed not to be employment 
under section 3306(d) (Sec. 31.3306(d)-1).
    (3) Tips or gratuities paid directly to an employee by a customer of 
an employer, and not accounted for by the employee to the employer.
    (k) For provisions relating to the treatment of deductions from 
remuneration as payments of remuneration, see Sec. 31.3307-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6636, June 27, 1963; T.D. 7375, 40 FR 42350, Sept. 12, 1975; T.D. 8276, 
54 FR 51028, Dec. 12, 1989; T.D. 8324, 55 FR 51697, Dec. 17, 1990]

[[Page 123]]



Sec. 31.3306(b)-1T  Question and answer relating to the definition of wages in section 3306(b) (Temporary).

    The following question and answer relates to the definition of wages 
in section 3306(b) of the Internal Revenue Code of 1954, as amended by 
section 531(d)(3) of the Tax Reform Act of 1984 (98 Stat. 885):
    Q-1: Are fringe benefits included in the definition of wages under 
section 3306(b)?
    A-1: Yes, unless specifically excluded from the definition of 
``wages'' pursuant to section 3306(b) (1) through (16). For example, a 
fringe benefit provided to or on behalf of an employee is excluded from 
the definition of ``wages'' if at the time such benefit is provided it 
is reasonable to believe that the employee will be able to exclude such 
benefit from income under section 117 or 132.
[T.D.8004, 50 FR 755, Jan. 7, 1985]



Sec. 31.3306(b)-2  Reimbursement and other expense allowance amounts.

    (a) When excluded from wages. If a reimbursement or other expense 
allowance arrangement meets the requirements of section 62(c) of the 
Code and Sec. 1.62-2 and the expenses are substantiated within a 
reasonable period of time, payments made under the arrangement that do 
not exceed the substantiated expenses are treated as paid under an 
accountable plan and are not wages. In addition, if both wages and the 
reimbursement or other expense allowance are combined in a single 
payment, the reimbursement or other expense allowance must be identified 
either by making a separate payment or by specifically identifying the 
amount of the reimbursement or other expense allowance.
    (b) When included in wages--(1) Accountable plans--(i) General rule. 
Except as provided in paragraph (b)(1)(ii) of this section, if a 
reimbursement or other expense allowance arrangement satisfied the 
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not 
substantiated within a reasonable period of time or amounts in excess of 
the substantiated expenses are not returned within a reasonable period 
of time, the amount paid under the arrangement in excess of the 
substantiated expenses is treated as paid under a nonaccountable plan, 
is included in wages, and is subject to withholding and payment of 
employment taxes no later than the first payroll period following the 
end of the reasonable period.
    (ii) Per diem or mileage allowances. If a reimbursement or other 
expense allowance arrangement providing a per diem or mileage allowance 
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the 
allowance is paid at a rate for each day or mile of travel that exceeds 
the amount of the employee's expenses deemed substantiated for a day or 
mile of travel, the excess portion is treated as paid under a 
nonaccountable plan and is included in wages. In the case of a per diem 
or mileage allowance paid as a reimbursement, the excess portion is 
subject to withholding and payment of employment taxes when paid. In the 
case of a per diem or mileage allowance paid as an advance, the excess 
portion is subject to withholding and payment of employment taxes no 
later than the first payroll period following the payroll period in 
which the expenses with respect to which the advance was paid (i.e., the 
days or miles of travel) are substantiated. The Commissioner may, in his 
discretion, prescribe special rules in pronouncements of general 
applicability regarding the timing of withholding and payment of 
employment taxes on per diem and mileage allowances.
    (2) Nonaccountable plans. If a reimbursement or other expense 
allowance arrangement does not satisfy the requirements of section 62(c) 
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be 
substantiated or require amounts in excess of the substantiated expenses 
to be returned), all amounts paid under the arrangement are treated as 
paid under a nonaccountable plan, are included in wages, and are subject 
to withholding and payment of employment taxes when paid.
    (c) Effective dates. This section generally applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee on or after July 1, 1990, with respect to expenses paid or 
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section 
applies to payments made

[[Page 124]]

under reimbursement or other expense allowance arrangements received by 
an employee on or after January 1, 1991, with respect to expenses paid 
or incurred on or after January 1, 1991.
[T.D. 8324, 55 FR 51697, Dec. 17, 1990]



Sec. 31.3306(b)(1)-1  $3,000 limitation.

    (a) In general. (1) the term ``wages'' does not include that part of 
the remuneration paid within any calendar year by an employer to an 
employee which exceeds the first $3,000 of remuneration (exclusive of 
remuneration excepted from wages in accordance with paragraph (j) of 
Sec. 31.3306(b)-1 or Secs. 31.3306(b)(2)-1 to 31.3306(b)(8)-1, 
inclusive), paid within such calendar year by such employer to such 
employee for employment performed for him at any time after 1938.
    (2) The $3,000 limitation applies only if the remuneration paid 
during any one calendar year by an employer to the same employee for 
employment performed after 1938 exceeds $3,000. The limitation in such 
case relates to the amount of remuneration paid during any one calendar 
year for employment after 1938 and not to the amount of remuneration for 
employment performed in any one calendar year.

    Example. Employer B, in 1955, pays employee A $2,500 on account of 
$3,000 due him for employment performed in 1955. In 1956 employer B pays 
employee A the balance of $500 due him for employment performed in the 
prior year (1955), and thereafter in 1956 also pays A $3,000 for 
employment performed in 1956. The $2,500 paid in 1955 is subject to tax 
in 1955. The balance of $500 paid in 1956 for employment during 1955 is 
subject to tax in 1956, as is also the first $2,500 paid of the $3,000 
for employment during 1956 (this $500 for 1955 employment added to the 
first $2,500 paid for 1956 employment constitutes the maximum wages 
subject to the tax which could be paid in 1956 by B to A). The final 
$500 paid by B to A in 1956 is not included as wages and is not subject 
to the tax.

    (3) If during a calendar year an employee is paid remuneration by 
more than one employer, the limitation of wages to the first $3,000 of 
remuneration paid applies, not to the aggregate remuneration paid by all 
employers with respect to employment performed after 1938, but instead 
to the remuneration paid during such calendar year by each employer with 
respect to employment performed after 1938. In such case the first 
$3,000 paid during the calendar year by each employer constitutes wages 
and is subject to the tax. In connection with the application of the 
$3,000 limitation, see also paragraph (b) of this section relating to 
the circumstances under which wages paid by a predecessor employer are 
deemed to be paid by his successor. In connection with the annual wage 
limitation in the case of remuneration after December 31, 1978 from two 
or more related corporations that compensate an employee through a 
common paymaster, see Sec. 31.3306(p)-1.

    Example 1. During 1955 employer D pays to employee C a salary of 
$600 a month for employment performed for D during the first seven 
months of 1955, or total remuneration of $4,200. At the end of the fifth 
month C has been paid $3,000 by employer D, and only that part of his 
total remuneration from D constitutes wages subject to the tax. The $600 
paid to employee C by employer D in the sixth month, and the like amount 
paid in the seventh month, are not included as wages and are not subject 
to the tax. At the end of the seventh month C leaves the employ of D and 
enters the employ of E. Employer E pays to C remuneration of $600 a 
month in each of the remaining five months of 1955, or total 
remuneration of $3,000. The entire $3,000 paid by E to employee C 
constitutes wages and is subject to the tax. Thus, the first $3,000 paid 
by employer D and the entire $3,000 paid by employer E constitute wages.
    Example 2. During the calendar year 1955 F is simultaneously an 
officer (an employee) of the X Corporation, the Y Corporation, and the Z 
Corporation, each such corporation being an employer for such year. 
During such year F is paid a salary of $3,000 by each Corporation. Each 
$3,000 paid to F by each of the corporations, X, Y, and Z (whether or 
not such corporations are related), constitutes wages and is subject to 
the tax.

    (b) Wages paid by predecessor attributed to successor. (1) If an 
employer (hereinafter referred to as a successor) during any calendar 
year acquires substantially all the property used in a trade or business 
of another employer (hereinafter referred to as a predecessor), or used 
in a separate unit of a trade or business of a predecessor, and if 
immediately after the acquisition the successor employs in his trade or 
business an individual who immediately prior to the acquisition was 
employed in the trade or business of such predecessor, then, for 
purposes of

[[Page 125]]

the application of the $3,000 limitation set forth in paragraph (a) of 
this section, any remuneration (exclusive of remuneration excepted from 
wages in accordance with paragraph (j) of Sec. 31.3306(b)-1 or 
Secs. 31.3306(b)(2)-1 to 31.3306(b)(8)-1, inclusive), with respect to 
employment paid (or considered under this provision as having been paid 
to such individual by such predecessor during such calendar year and 
prior to such acquisition shall be considered as having been paid by 
such successor. Wages paid by a predecessor shall not be considered as 
having been paid by the successor unless both the predecessor and the 
successor are employers as defined in section 3306(a) for the calendar 
year in which the acquisition occurs (see Sec. 31.3306(a)-1, relating to 
who are employers).
    (2) The wages paid, or considered as having been paid, by a 
predecessor to an employee shall, for purposes of the $3,000 limitation, 
be treated as having been paid to such employee by a successor, if:
    (i) The successor during a calendar year acquired substantially all 
the property used in a trade or business, or used in a separate unit of 
a trade or business, of the predecessor;
    (ii) Such employee was employed in the trade or business of the 
predecessor immediately prior to the acquisition and is employed by the 
successor in his trade or business immediately after the acquisition; 
and
    (iii) Such wages were paid during the calendar year in which the 
acquisition occurred and prior to such acquisition.
    (3) The method of acquisition by an employer of the property of 
another employer is immaterial. The acquisition may occur as a 
consequence of the incorporation of a business by a sole proprietor of a 
partnership, the continuance without interruption of the business of a 
previously existing partnership by a new partnership or by a sole 
proprietor, or a purchase or any other transaction whereby substantially 
all the property used in a trade or business, or used in a separate unit 
of a trade or business, of one employer is acquired by another employer.
    (4) Substantially all the property used in a separate unit of a 
trade or business may consist of substantially all the property used in 
the performance of an essential operation of the trade or business, or 
it may consist of substantially all the property used in a relatively 
self-sustaining entity which forms a part of the trade or business.

    Example 1. The M Corporation which is engaged in the manufacture of 
automobiles, including the manufacture of automobile engines, 
discontinues the manufacture of the engines and transfers all the 
property used in such manufacturing operations to the N Company. The N 
Company is considered to have acquired a separate unit of the trade or 
business of the M Corporation, namely, its engine manufacturing unit.
    Example 2. The R Corporation which is engaged in the operation of a 
chain of grocery stores transfers one of such stores to the S Company. 
The S Company is considered to have acquired a separate unit of the 
trade or business of the R Corporation.

    (5) A successor may receive credit for wages paid to an employee by 
a predecessor only if immediately prior to the acquisition the employee 
was employed by the predecessor in his trade or business which was 
acquired by the successor and if immediately after the acquisition such 
employee is employed by the successor in his trade or business (whether 
or not in the same trade or business in which the acquired property is 
used). If the acquisition involves only a separate unit of a trade or 
business of the predecessor, the employee need not have been employed by 
the predecessor in that unit provided he was employed in the trade or 
business of which the acquired unit was a part.

    Example. The Y Corporation in 1955 acquires all the property of the 
X Manufacturing Company and immediately after the acquisition employs in 
its trade or business employee A, who, immediately prior to the 
acquisition, was employed by the X Company. Both the Y Corporation and 
the X Company are employers, as defined in the Act, for the calendar 
year 1955. The X Company has in 1955 (the calendar year in which the 
acquisition occurs) and prior to the acquisition paid $2,000 of wages to 
A. The Y Corporation in 1955 pays to A remuneration with respect to 
employment of $2,000. Only $1,000 of such remuneration is considered to 
be wages. For purposes of the $3,000 limitation, the Y Corporation is 
credited with the $2,000 paid to A by the X Company. If, in the same 
calendar year, the property is acquired from the Y Corporation by the Z 
Company,

[[Page 126]]

an employer for such year, and A immediately after the acquisition is 
employed by the Z Company in its trade or business, no part of the 
remuneration paid to A by the Z Company in the year of the acquisition 
will be considered to be wages. The Z Company will be credited with the 
remuneration paid to A by the Y Corporation and also with the wages paid 
to A by the X Company (considered for purposes of the application of the 
$3,000 limitation as having also been paid by the Y Corporation).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6636, June 27, 1963; T.D. 7660, 44 FR 75142, Dec. 19, 1979]



Sec. 31.3306(b)(2)-1  Payments under employers' plans on account of retirement, sickness or accident disability, medical or hospitalization expenses, or death.

    (a) The term ``wages'' does not include the amount of any payment 
(including any amount paid by an employer for insurance or annuities, or 
into a fund, to provide for any such payment) made to, or on behalf of, 
an employee or any of his dependents under a plan or system established 
by an employer which makes provision for his employees generally (or for 
his employees generally and their dependents) or for a class or classes 
of his employees (or for a class or classes of his employees and their 
dependents), on account of:
    (1) An employee's retirement,
    (2) Sickness or accident disability of an employee or any of his 
dependents,
    (3) Medical or hospitalization expenses in connection with sickness 
or accident disability of an employee or any of his dependents, or
    (4) Death of an employee or any of his dependents.
    (b) The plan or system established by an employer need not provide 
for payments on account of all of the specified items, but such plan or 
system may provide for any one or more of such items. Payments for any 
one or more of such items under a plan or system established by an 
employer solely for the dependents of his employees are not within this 
exclusion from wages.
    (c) Dependents of an employee include the employee's husband or 
wife, children, and any other members of the employee's immediate 
family.
    (d) It is immaterial for purposes of this exclusion whether the 
amount or possibility of such benefit payments is taken into 
consideration in fixing the amount of an employee's remuneration or 
whether such payments are required, expressly or impliedly, by the 
contract of service.



Sec. 31.3306(b)(3)-1  Retirement payments.

    The term ``wages'' does not include any payment made by an employer 
to an employee (including any amount paid by an employer for insurance 
or annuities, or into a fund, to provide for any such payment) on 
account of the employee's retirement. Thus payments made to an employee 
on account of his retirement are excluded from wages under this 
exception even though not made under a plan or system.



Sec. 31.3306(b)(4)-1  Payments on account of sickness or accident disability, or medical or hospitalization expenses.

    The term ``wages'' does not include any payment made by an employer 
to, or on behalf of, an employee on account of the employee's sickness 
or accident disability or the medical or hospitalization expenses in 
connection with the employee's sickness or accident disability, if such 
payment is made after the expiration of 6 calendar months following the 
last calendar month in which such employee worked for such employer. 
Such payments are excluded from wages under this exception even though 
not made under a plan or system. If the employee does not actually 
perform services for the employer during the requisite period, the 
existence of the employer-employee relationship during that period is 
immaterial.



Sec. 31.3306(b)(5)-1  Payments from or to certain tax-exempt trusts, or under or to certain annuity plans or bond purchase plans.

    (a) Payments from or to certain tax-exempt trusts. The term 
``wages'' does not include any payment made--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a trust, or
    (2) To, or on behalf of an employee or his beneficiary from a trust,

if at the time of such payment the trust is exempt from tax under 
section

[[Page 127]]

501(a) as an organization described in section 401(a). A payment made to 
an employee of such a trust for services rendered as an employee of the 
trust and not as a beneficiary thereof is not within this exclusion from 
wages.
    (b) Payments under or to certain annuity plans. (1) The term 
``wages'' does not include any payment made after December 31, 1962--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan is a plan 
described in section 403(a).
    (2) The term ``wages'' does not include any payment made before 
January 1, 1963--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan meets the 
requirements of section 401(a) (3), (4), (5), and (6).
    (c) Payments under or to certain bond purchase plans. The term 
``wages'' does not include any payment made after December 31, 1962--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a bond purchase plan, or
    (2) To, or on behalf of, an employee or his beneficiary under a bond 
purchase plan,

if at the time of such payment the plan is a qualified bond purchase 
plan described in section 405(a).
[T.D. 6658, 28 FR 6636, June 27, 1963]



Sec. 31.3306(b)(6)-1  Payment by an employer of employee tax under section 3101 or employee contributions under a State law.

    The term ``wages'' does not include any payment by an employer 
(without deduction from the remuneration of, or other reimbursement 
from, the employee) of either (a) the employee tax imposed by section 
3101 or the corresponding section of prior law, or (b) any payment 
required from an employee under a State unemployment compensation law.



Sec. 31.3306(b)(7)-1  Payments other than in cash for service not in the course of employer's trade or business.

    The term ``wages'' does not include remuneration paid in any medium 
other than cash for service not in the course of the employer's trade or 
business. Cash remuneration includes checks and other monetary media of 
exchange. Remuneration paid in any medium other than cash, such as 
lodging, food, or other goods or commodities, for service not in the 
course of the employer's trade or business does not constitute wages. 
Remuneration paid in any medium other than cash for other types of 
services does not come within this exclusion from wages. For provisions 
relating to the circumstances under which service not in the course of 
the employer's trade or business does not constitute employment, see 
Sec. 31.3306(c)(3)-1.



Sec. 31.3306(b)(8)-1  Payments to employees for non-work periods.

    The term ``wages'' does not include any payment (other than vacation 
or sick pay) made by an employer to an employee after the calendar month 
in which the employee attains age 65, if--
    (a) Such employee does no work (other than being subject to call for 
the performance of work) for such employer in the period for which such 
payment is made; and
    (b) The employer-employee relationship exists between the employer 
and employee throughout the period for which such payment is made.

Vacation or sick pay is not within this exclusion from wages. If the 
employee does any work for the employer in the period for which the 
payment is made, no remuneration paid by such employer to such employee 
with respect to such period is within this exclusion from wages. For 
example, if employee A, who attained the age of 65 in January 1955, is 
employed by the X Company on a stand-by basis and is paid $200 by the X 
Company for being subject to call during the month of February 1955 and 
an additional $25 for work performed for the X Company on one day in 
February 1955, then none of

[[Page 128]]

the $225 is excluded from wages under this exception.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6708, 29 FR 
3199, Mar. 10, 1964]



Sec. 31.3306(b)(9)-1  Moving expenses.

    (a) The term ``wages'' does not include remuneration paid on or 
after November 1, 1964, to or on behalf of an employee, either as an 
advance or a reimbursement, specifically for moving expenses incurred or 
expected to be incurred, if (and to the extent that) at the time of 
payment it is reasonable to believe that a corresponding deduction is or 
will be allowable to the employee under section 217. The reasonable 
belief contemplated by the statute may be based upon any evidence 
reasonably sufficient to induce such belief, even though such evidence 
may be insufficient upon closer examination by the district director or 
the courts finally to establish that a deduction is allowable under 
section 217. The reasonable belief shall be based upon the application 
of section 217 and the regulations thereunder in Part 1 of this chapter 
(Income Tax Regulations). When used in this section, the term ``moving 
expenses'' has the same meaning as when used in section 217 and the 
regulations thereunder.
    (b) Except as otherwise provided in paragraph (a) of this section, 
or in a numbered paragraph of section 3306(b), amounts paid to or on 
behalf of an employee for moving expenses are wages for purposes of 
section 3306(b).
[T.D. 7375, 40 FR 42351, Sept. 12, 1975]



Sec. 31.3306(b)(10)-1  Payments under certain employers' plans after retirement, disability, or death.

    (a) In general. The term ``wages'' does not include the amount of 
any payment or series of payments made after January 2, 1968, by an 
employer to, or on behalf of, an employee or any of his dependents under 
a plan established by the employer which makes provisions for his 
employees generally (or for his employees generally and their 
dependents) or for a class or classes of his employees (or for a class 
or classes of his employees and their dependents), which is paid or 
commences to be paid upon or within a reasonable time after the 
termination of an employee's employment relationship because of the 
employee's--
    (1) Death,
    (2) Retirement for disability, or
    (3) Retirement after attaining an age specified in the plan 
established by the employer or in a pension plan of the employer as the 
age at which a person in the employee's circumstances is eligible for 
retirement.

A payment or series of payments made under the circumstances described 
in the preceding sentence is excluded from ``wages'' even if made 
pursuant to an incentive compensation plan which also provides for the 
making of other types of payments. However, any payment or series of 
payments which would have been paid if the employee's relationship had 
not been terminated is not excluded from ``wages'' under this section 
and section 3306(b)(10). For example, lump-sum payments for unused 
vacation time or a final paycheck received after retirement are payments 
which the employee would have received whether or not he retired and 
therefore are not excluded from ``wages.'' Further, if any payment is 
made upon or after termination of employment for any reason other than 
those set out in paragraphs (a)(1), (2), and (3) of this section such 
payment is not excludable from ``wages'' by this section. For example, 
if a pension plan provides for retirement upon disability, completion of 
30 years of service, or attainment of age 65, and if an employee who is 
not disabled retires at age 61 after 30 years of service, none of the 
retirement payments made to the employee under the pension plan 
(including any made after he is 65) is excludable from ``wages'' under 
this section. However, if the pension plan had conditioned retirement 
after 30 years of service upon attainment of age 60, all of the 
retirement payments would have been excludable.
    (b) Plan. The plan or system established by an employer need not 
provide for payments because of termination of employment for all the 
reasons set out in paragraphs (a)(1), (2), and (3) of this section, but 
such plan or system may provide for payments because of termination for 
any one or more of such reasons. Payments because of termination

[[Page 129]]

of employment for any one or more of such reasons under a plan or system 
established by an employer solely for the dependents of his employees 
are not within this exclusion from wages.
    (c) Dependents. Dependents of an employee include the employee's 
husband or wife, children, and any other members of the employee's 
immediate family.
    (d) Benefit payments. It is immaterial for purposes of this 
exclusion whether the amount or possibility of such benefit payments is 
paid on account of services rendered or taken into consideration in 
fixing the amount of an employee's remuneration or whether such payments 
are required expressly or impliedly, by the contract of service.
    (e) Example. The application of this section may be illustrated by 
the following example:

    Example. A, an employee, receives a salary of $1,500 a month, 
payable on the 5th day of the month following the month for which the 
salary is earned. A's employer has established an incentive compensation 
plan for a class of his employees, including A, providing for the 
payment of deferred compensation on termination of employment, including 
termination upon an employee's death, retirement at age 65 (the 
retirement age specified in the plan), or retirement for disability. On 
March 1, 1973, A attains the age of 65 and retires. On March 5, 1973, A 
receives $5,500 from his employer of which $1,500 represents A's salary 
for services he performed in February 1973, and $4,000 represents 
incentive compensation paid under the employer's plan. The amount of 
$4,000 is excluded from ``wages'' under this section. The amount of 
$1,500 is not excluded from ``wages'' under this section.
[T.D. 7374, 40 FR 30951, July 24, 1975]



Sec. 31.3306(b)(13)-1  Payments or benefits under a qualified educational assistance program.

    The term ``wages'' does not include any payment made, or benefit 
furnished, to or for the benefit of an employee in a taxable year 
beginning after December 31, 1978, if at the time of such payment or 
furnishing it is reasonable to believe that the employee will be able to 
exclude such payment or benefit from income under section 127.
[T.D. 7898, 48 FR 31019, July 6, 1983]



Sec. 31.3306(c)-1  Employment; services performed before 1955.

    (a) Services performed after 1938 and before 1955 constitute 
employment under section 3306(c) if such services were employment under 
the law applicable to the period in which they were performed.
    (b) The tax applies with respect to remuneration paid by an employer 
after 1954 for services performed after 1938 and before 1955, as well as 
for services performed after 1954, to the extent that the remuneration 
and services constitute wages and employment. See Secs. 31.3306(b)-1 to 
31.3306(b)(8)-1, inclusive, relating to wages.
    (c) Determination of whether services performed after 1938 and 
before 1955 constitute employment shall be made in accordance with the 
provisions of law applicable to the period in which they were performed 
and of the regulations thereunder. The regulations applicable in 
determining whether services performed after 1938 and before 1955 
constitute employment are as follows:
    (1) Services performed in 1939--26 CFR (1939) Part 400 (Regulations 
90).
    (2) Services performed after 1939 and before 1955--26 CFR (1939) 
Part 403 (Regulations 107).



Sec. 31.3306(c)-2  Employment; services performed after 1954.

    (a) In general. Whether services performed after 1954 constitute 
employment is determined under subsections (c) and (n) of section 3306.
    (b) Services performed within the United States. Services performed 
after 1954 within the United States (see Sec. 31.3306(j)-1) by an 
employee for the person employing him, unless specifically excepted 
under section 3306(c), constitute employment. With respect to services 
performed within the United States, the place where the contract of 
service is entered into is immaterial. The citizenship or residence of 
the employee or of the person employing him also is immaterial except to 
the extent provided in any specific exception from employment. Thus, the 
employee and the person employing him may be citizens and residents of a 
foreign country and the contract of

[[Page 130]]

service may be entered into in a foreign country, and yet, if the 
employee under such contract performs services within the United States, 
there may be to that extent employment.
    (c) Services performed outside the United States--(1) In general. 
Except as provided in subparagraph (2) of this paragraph, services 
performed outside the United States (see Sec. 31.3306(j)-1) do not 
constitute employment.
    (2) On or in connection with an American vessel or American 
aircraft. (i) This subparagraph relates to services performed after 1954 
``on or in connection with'' an American vessel, and to services 
performed after 1961 ``on or in connection with'' an American aircraft 
to the extent that the remuneration for the latter services is paid 
after 1961. Such services performed outside the United States by an 
employee for the person employing him constitute employment if:
    (a) The employee is also employed ``on and in connection with'' such 
vessel or aircraft when outside the United States; and
    (b) The services are performed under a contract of service, between 
the employee and the person employing him, which is entered into within 
the United States, or during the performance of the contract under which 
the services are performed and while the employee is employed on the 
vessel or aircraft it touches at a port within the United States; and
    (c) The services are not excepted under section 3306(c). (See 
particularly Sec. 31.3306(c)(17)-1, relating to fishing.)
    (ii) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on the vessel or aircraft 
which are also in connection with the vessel or aircraft. Services 
performed on the vessel by employees as officers or members of the crew, 
or as employees of concessionaires, of the vessel, for example, are 
performed under such circumstances, since the services are also 
connected with the vessel. Similarly, services performed on the aircraft 
by employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (iii) If services are performed by an employee ``on and in 
connection with'' an American vessel or American aircraft when outside 
the United States and the conditions in (b) and (c) of paragraph 
(c)(2)(i) of this section are met, then the services of that employee 
performed on or in connection with the vessel or aircraft constitute 
employment. The expression ``on or in connection with'' refers not only 
to services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (iv) Services performed by a member of the crew or other employee 
whose contract of service is not entered into within the United States, 
and during the performance of which and while the employee is employed 
on the vessel or aircraft it does not touch at a port within the United 
States, do not constitute employment, notwithstanding that service 
performed by other members of the crew or other employees on or in 
connection with the vessel or aircraft may constitute employment.
    (v) A vessel includes every description of watercraft, or other 
contrivance, used as a means of transportation on water. An aircraft 
includes every description of craft, or other contrivance, used as a 
means of transportation through the air. In the case of an aircraft, the 
term ``port'' means an airport. An airport means an area on land or 
water used regularly by aircraft for receiving or discharging passengers 
or cargo. For definitions of ``American vessel'' and ``American 
aircraft'', see Sec. 31.3306(m)-1.
    (vi) With respect to services performed outside the United States on 
or in connection with an American vessel or American aircraft, the 
citizenship or

[[Page 131]]

residence of the employee is immaterial, and the citizenship or 
residence of the employer is material only in case it has a bearing in 
determining whether a vessel is an American vessel.
[T.D. 6658, 28 FR 6636, June 27, 1963]



Sec. 31.3306(c)-3  Employment; excepted services in general.

    (a) Services performed by an employee for the person employing him 
do not constitute employment for purposes of the tax if they are 
specifically excepted from employment under any of the numbered 
paragraphs of section 3306(c). Services so excepted do not constitute 
employment for purposes of the tax even though they are performed within 
the United States, or are performed outside the United States on or in 
connection with an American vessel or American aircraft. If not 
otherwise provided in the regulations relating to the numbered 
paragraphs of section 3306(c), such regulations apply with respect to 
services performed after 1954.
    (b) The exception attaches to the services performed by the employee 
and not to the employee as an individual; that is, the exception applies 
only to the services rendered by the employee in an excepted class.

    Example. A is an individual who is employed part time by B to 
perform services which constitutes ``agricultural labor'' (see 
Sec. 31.3306 (k)-1). A is also employed by C part time to perform 
services as a grocery clerk in a store owned by him. While A's services 
which constitute ``agricultural labor'' are expected, the exception does 
not embrace the services performed by A as a grocery clerk in the employ 
of C and the latter services are not excepted from employment.

    (c) For provisions relating to the circumstances under which 
services which are excepted are nevertheless deemed to be employment, 
and relating to the circumstances under which services which are not 
excepted are nevertheless deemed not to be employment, see 
Sec. 31.3306(d)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6637, June 27, 1963]



Sec. 31.3306(c)(1)-1  Agricultural labor.

    Services performed by an employee for the person employing him which 
constitute ``agricultural labor'' as defined in section 3306(k) are 
excepted from employment. For provisions relating to the definition of 
the term ``agricultural labor'', see Sec. 31.3306(k)-1.



Sec. 31.3306(c)(2)-1  Domestic service.

    (a) In a private home. (1) Services of a household nature performed 
by an employee in or about a private home of the person by whom he is 
employed are excepted from employment. A private home is a fixed place 
of abode of an individual or family. A separate and distinct dwelling 
unit maintained by an individual in an apartment house, hotel, or other 
similar establishment may constitute a private home. If a dwelling house 
is used primarily as a boarding or lodging house for the purpose of 
supplying board or lodging to the public as a business enterprise, it is 
not a private home and the services performed therein are not excepted.
    (2) In general, services of a household nature in or about a private 
home include services performed by cooks, waiters, butlers, 
housekeepers, governesses, maids, valets, baby sitters, janitors, 
laundresses, furnacemen, caretakers, handymen, gardeners, footmen, 
grooms, and chauffeurs of automobile for family use.
    (b) In a local college club or local chapter of a college fraternity 
or sorority. (1) Services of a household nature performed by an employee 
in or about the club rooms or house of a local college club or of a 
local chapter of a college fraternity or sorority by which he is 
employed are excepted from employment. A local college club or local 
chapter of a college fraternity or sorority does not include an alumni 
club or chapter. If the club rooms or house of a local college club or 
local chapter of a college fraternity or sorority is used primarily for 
the purpose of supplying board or lodging to students or the public as a 
business enterprise, the services performed therein are not within the 
exception.
    (2) In general, services of a household nature in or about the club 
rooms or house of a local college club or local chapter of a college 
fraternity or sorority include services rendered by cooks,

[[Page 132]]

waiters, butlers, maids, janitors, laundresses, furnacemen, handymen, 
gardeners, housekeepers, and housemothers.
    (c) Services not excepted. Services not of a household nature, such 
as services performed as a private secretary, tutor, or librarian, even 
though performed in the employer's private home or in a local college 
club or local chapter of a college fraternity or sorority, are not 
within the exception. Services of a household nature are not within the 
exception if performed in or about rooming or lodging houses, boarding 
houses, clubs (except local college clubs), hotels, hospitals, 
eleemosynary institutions, or commercial offices or establishments.



Sec. 31.3306(c)(3)-1  Services not in the course of employer's trade or business.

    (a) Services not in the course of the employer's trade or business 
performed by an employe for an employer in a calendar quarter are 
excepted from employment unless--
    (1) The cash remuneration paid for such services performed by the 
employee for the employer in the calendar quarter is $50 or more; and
    (2) Such employee is regularly employed in the calendar quarter by 
such employer to perform such services.

Unless the tests set forth in both paragraphs (a)(1) and (2) of this 
section are met, the services are excepted from employment.
    (b) The term ``services not in the course of the employer's trade or 
business'' includes services that do not promote or advance the trade or 
business of the employer. Services performed for a corporation do not 
come within the exception.
    (c) The test relating to cash remuneration of $50 or more is based 
on the remuneration earned during a calendar quarter rather than on the 
remuneration paid in a calendar quarter. However, for purposes of 
determining whether the test is met, it is also required that the 
remuneration be paid, although it is immaterial when the remuneration is 
paid. Furthermore, in determining whether $50 or more has been paid for 
services not in the course of the employer's trade or business, only 
cash remuneration for such services shall be taken into account. The 
term ``cash remuneration'' includes checks and other monetary media of 
exchange. Remuneration paid in any other medium, such as lodging, food, 
or other goods or commodities, is disregarded in determining whether the 
cash-remuneration test is met.
    (d) For purposes of this exception, an individual is deemed to be 
regularly employed by an employer during a calendar quarter only if--
    (1) Such individual performs services not in the course of the 
employer's trade or business for such employer for some portion of the 
day on at least 24 days (whether or not consecutive) during such 
calendar quarter; or
    (2) Such individual was regularly employed (as determined under 
paragraph (d)(1) of this section) by such employer in the performance of 
services not in the course of the employer's trade or business during 
the preceding calender quarter (including the last calendar quarter of 
1954).
    (e) In determining whether an employee has performed services not in 
the course of the employer's trade or business on at least 24 days 
during a calendar quarter, there shall be counted as one day--
    (1) Any day or portion thereof on which the employee actually 
performs such services; and
    (2) Any day or portion thereof on which the employee does not 
perform services of the prescribed character but with respect to which 
cash remuneration is paid or payable to the employee for such services, 
such as a day on which the employee is sick or on vacation.

An employee who on a particular day reports for work and, at the 
direction of his employer, holds himself in readiness to perform 
services not in the course of the employer's trade or business shall be 
considered to be engaged in the actual performance of such services on 
that day. For purposes of this exception, a day is a period of 24 hours 
commencing at midnight and ending at midnight.
    (f) For provisions relating to the exclusion from wages of 
remuneration paid in any medium other than cash for

[[Page 133]]

services not in the course of the employer's trade or business, see 
Sec. 31.3306(b) (7)-1.



Sec. 31.3306(c)(4)-1  Services on or in connection with a non-American vessel or aircraft.

    (a) Services performed within the United States by an employee for 
an employer ``on or in connection with'' a vessel not an American 
vessel, or ``on or in connection with'' an aircraft not an American 
aircraft, are excepted from employment if the employee is employed by 
the employer ``on and in connection with'' the vessel or aircraft when 
outside the United States.
    (b) An employee performs services on and in connection with the 
vessel or aircraft if he performs services on the vessel or aircraft 
when outside the United States which are also in connection with the 
vessel or aircraft. Services performed on the vessel outside the United 
States by employees as officers or members of the crew, or by employees 
of concessionaires, of the vessel, for example, are performed under such 
circumstances, since such services are also connected with the vessel. 
Similarly, services performed on the aircraft outside the United States 
by employees as officers or members of the crew of the aircraft are 
performed on and in connection with such aircraft. Services may be 
performed on the vessel or aircraft, however, which have no connection 
with it, as in the case of services performed by an employee while on 
the vessel or aircraft merely as a passenger in the general sense. For 
example, the services of a buyer in the employ of a department store 
while he is a passenger on a vessel are not in connection with the 
vessel.
    (c) The expression ``on or in connection with'' refers not only to 
services performed on the vessel or aircraft but also to services 
connected with the vessel or aircraft which are not actually performed 
on it (for example, shore services performed as officers or members of 
the crew, or as employees of concessionaires, of the vessel).
    (d) The citizenship or residence of the employee and the place where 
the contract of service is entered into are immaterial for purposes of 
this exception, and the citizenship or residence of the person employing 
him is material only in case it has a bearing in determining whether the 
vessel is an American vessel. For definitions of the terms ``vessel'' 
and ``aircraft'', see paragraph (c)(2)(v) of Sec. 31.3306(c)-2. For 
definitions of the terms ``American vessel'' and ``American aircraft'', 
see Sec. 31.3306(m)-1.
    (e) Since the only services performed outside the United States 
which constitute employment are those described in section 3306(c) and 
paragraph (c) of Sec. 31.3306(c)-2 (relating to services performed 
outside the United States on or in connection with an American vessel or 
American aircraft), services performed outside the United States on or 
in connection with a vessel not an American vessel, or an aircraft not 
an American aircraft, do not constitute employment in any event.
    (f) The provisions of section 3306(c) (4) and of this section, 
insofar as they relate to services performed on or in connection with an 
aircraft not an American aircraft, apply only to services performed 
after 1961 for which remuneration is paid after 1961.
[T.D. 6658, 28 FR 6637, June 27, 1963]



Sec. 31.3306(c)(5)-1  Family employment.

    (a) Certain services are excepted from employment because of the 
existence of a family relationship between the employee and the 
individual employing him. The exceptions are as follows:
    (1) Services performed by an individual in the employ of his or her 
spouse;
    (2) Services performed by a father or mother in the employ of his or 
her son or daughter; and
    (3) Services performed by a son or daughter under the age of 21 in 
the employ of his or her father or mother.
    (b) Under paragraph (a) (1) and (2) of this section, the exception 
is conditioned solely upon the family relationship between the employee 
and the individual employing him. Under paragraph (a)(3) of this 
section, in addition to the family relationship, there is a further 
requirement that the son or daughter shall be under the age of 21, and 
the exception continues only during the time that such son or daughter 
is under the age of 21.

[[Page 134]]

    (c) Services performed in the employ of a corporation are not within 
the exception. Services performed in the employ of a partnership are not 
within the exception unless the requisite family relationship exists 
between the employee and each of the partners comprising the 
partnership.



Sec. 31.3306(c)(6)-1  Services in employ of United States or instrumentality thereof.

    (a) Services in employ of United States or wholly-owned 
instrumentality thereof. Services performed in the employ of the United 
States Government, except as provided in section 3306(n) (see 
Sec. 31.3306(n)-1), are excepted from employment. Services performed in 
the employ of an instrumentality of the United States which is wholly 
owned by the United States also are excepted from employment.
    (b) Services in employ of instrumentality not wholly owned by United 
States--(1) Services performed after 1961. Services performed after 1961 
in the employ of an instrumentality of the United States which is 
partially owned by the United States are excepted from employment, if 
the remuneration for such service is paid after 1961. Services performed 
after 1961 in the employ of an instrumentality of the United States 
which is neither wholly owned nor partially owned by the United States 
are excepted from employment if (i) the instrumentality is exempt from 
the tax imposed by section 3301 by virtue of any provision of law which 
specifically refers to section 3301 or the corresponding section of 
prior law in granting exemption from such tax, and (ii) the remuneration 
for such service is paid after 1961. For provisions which make general 
exemptions from Federal taxation ineffectual as to the tax imposed by 
section 3301, see Sec. 31.3308-1.
    (2) Services performed before 1962. Services performed in the employ 
of an instrumentality of the United States which is not wholly owned by 
the United States are excepted from employment if the instrumentality is 
exempt from the tax imposed by section 3301 by virtue of any other 
provision of law, and (i) the services are performed before 1962 or (ii) 
remuneration for the services is paid before 1962.
[T.D. 6658, 28 FR 6638, June 27, 1963]



Sec. 31.3306(c)(7)-1  Services in employ of States or their political subdivisions or instrumentalities.

    (a) Services performed in the employ of any State, or of any 
political subdivision thereof, are excepted from employment. Services 
performed in the employ of an instrumentality of one or more States or 
political subdivisions thereof are excepted if the instrumentality is 
wholly owned by one or more of the foregoing. Services performed in the 
employ of an instrumentality of one or more of the several States or 
political subdivisions thereof which is not wholly owned by one or more 
of the foregoing are excepted only to the extent that the 
instrumentality is with respect to such services immune under the 
Constitution of the United States from the tax imposed by section 3301.
    (b) For provisions relating to the term ``State'' see 
Sec. 31.3306(j)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6638, June 27, 1963]



Sec. 31.3306(c)(8)-1  Services in employ of religious, charitable, educational, or certain other organizations exempt from income tax.

    (a) Services performed after 1961. Services performed by an employee 
after 1961 in the employ of a religious, charitable, educational, or 
other organization described in section 501(c)(3) which is exempt from 
income tax under section 501(a) are excepted from employment, if the 
remuneration for such service is paid after 1961. For provisions 
relating to exemption from income tax of an organization described in 
section 501(c) (3), see Part 1 of this chapter (Income Tax Regulations).
    (b) Services performed before 1962. (1) Services performed by an 
employee in the employ of an organization described in section 
3306(c)(8) as in effect before 1962, that is, a corporation, community 
chest, fund, or foundation, organized and operated exclusively for 
religious, charitable, scientific, testing for public safety, literary, 
or educational purposes, or for the prevention of cruelty to children or 
animals, no

[[Page 135]]

part of the net earnings of which inures to the benefit of any private 
shareholder or individual, and no substantial part of the activities of 
which is carrying on propaganda, or otherwise attempting, to influence 
legislation, are excepted from employment if (i) the services are 
performed before 1962, or (ii) remuneration for the services is paid 
before 1962.
    (2) Any organization which is an organization of a type described in 
section 501(c)(3) and which--
    (i) Is exempt from income tax under section 501(a), or
    (ii) Has been denied exemption from income tax under section 501(a) 
by reason of the provisions of section 503 or 504, relating to 
prohibited transactions and to accumulations out of income, 
respectively,

is an organization of a type described in section 3306(c)(8) as in 
effect before 1962. An organization which would be an organization of a 
type described in section 501(c)(3) except for those provisions of 
section 501(c)(3) which are not contained in section 3306(c)(8) as in 
effect before 1962 (provisions relating to participation or intervention 
in a political campaign on behalf of a candidate for public office) is 
also an organization of a type described in section 3306(c)(8) as in 
effect before 1962.
[T.D. 6658, 28 FR 6638, June 27, 1963]



Sec. 31.3306(c)(9)-1  Railroad industry; services performed by an employee or an employee representative under the Railroad Unemployment Insurance Act.

    (a) Services performed by an individual as an ``employee'' or as an 
``employee representative'', as those terms are defined in section 1 of 
the Railroad Unemployment Insurance Act, as amended, are excepted from 
employment.
    (b) Section 1 of the Railroad Unemployment Insurance Act (45 U.S.C. 
351), as amended, provides, in part, as follows:

    For the purposes of this Act, except when used in amending the 
provisions of other Acts--
    (a) The term ``employer'' means any carrier (as defined in 
subsection (b) of this section), and any company which is directly or 
indirectly owned or controlled by one or more such carriers or under 
common control therewith, and which operates any equipment or facility 
or performs any service (except trucking service, casual service, and 
the casual operation of equipment or facilities) in connection with the 
transportation of passengers or property by railroad, or the receipt, 
delivery elevation, transfer in transit, refrigeration or icing, 
storage, or handling of property transported by railroad, and any 
receiver, trustee, or other individual or body, judicial or otherwise, 
when in the possession of the property or operating all or any part of 
the business of any such employer: Provided, however, That the term 
``employer'' shall not include any street, interurban, or suburban 
electric railway, unless such railway is operating as a part of a 
general steam-railroad system of transportation, but shall not exclude 
any part of the general steam-railroad system of transportation now or 
hereafter operated by any other motive power. The Interstate Commerce 
Commission is hereby authorized and directed upon request of the Board, 
or upon complaint of any party interested, to determine after hearing 
whether any line operated by electric power falls within the terms of 
this proviso. The term ``employer'' shall also include railroad 
associations, traffic associations, tariff bureaus, demurrage bureaus, 
weighing and inspection bureaus, collection agencies, and other 
associations, bureaus, agencies, or organizations controlled and 
maintained wholly or principally by two or more employers as 
hereinbefore defined and engaged in the performance of services in 
connection with or incidental to railroad transportation and railway 
labor organizations, national in scope, which have been or may be 
organized in accordance with the provisions of the Railway Labor Act, 
and their State and National legislative committees and their general 
committees and their insurance departments and their local lodges and 
divisions, established pursuant to the constitution and bylaws of such 
organizations. The term ``employer'' shall not include any company by 
reason of its being engaged in the mining of coal, the supplying of coal 
to an employer where delivery is not beyond the mine tipple, and the 
operation of equipment or facilities therefor, or in any of such 
activities.
    (b) The term ``carrier'' means an express company, sleeping-car 
company, or carrier by railroad, subject to part I of the Interstate 
Commerce Act.
    (c) The term ``company'' includes corporations, associations, and 
joint-stock companies.
    (d) The term ``employee'' (except when used in phrases establishing 
a different meaning) means any individual who is or has been (i) in the 
service of one or more employers for compensation, or (ii) an employee 
representative. The term ``employee'' shall

[[Page 136]]

include an employee of a local lodge or division defined as an employer 
in section 1 (a) only if he was in the service of a carrier on or after 
August 29, 1935. The term ``employee'' includes an officer of an 
employer.
    The term ``employee'' shall not include any individual while such 
individual is engaged in the physical operations consisting of the 
mining of coal, the preparation of coal, the handling (other than 
movement by rail with standard railroad locomotives) of coal not beyond 
the mine tipple, or the loading of coal at the tipple.
    (e) An individual is in the service of an employer whether his 
service is rendered within or without the United States if (i) he is 
subject to the continuing authority of the employer to supervise and 
direct the manner of rendition of his service, or he is rendering 
professional or technical services and is integrated into the staff of 
the employer, or he is rendering, on the property used in the employer's 
operations, other personal services the rendition of which is integrated 
into the employer's operations, and (ii) he renders such service for 
compensation: Provided, however, That an individual shall be deemed to 
be in the service of an employer, other than a local lodge or division 
or a general committee of a railway-labor-organization employer, not 
conducting the principal part of its business in the United States only 
when he is rendering service to it in the United States; and an 
individual shall be deemed to be in the service of such a local lodge or 
division only if (1) all, or substantially all, the individuals 
constituting its membership are employees of an employer conducting the 
principal part of its business in the United States; or (2) the 
headquarters of such local lodge or division is located in the United 
States; and an individual shall be deemed to be in the service of such a 
general committee only if (1) he is representing a local lodge or 
division described in clauses (1) or (2) immediately above; or (2) all, 
or substantially all, the individuals represented by it are employees of 
an employer conducting the principal part of its business in the United 
States; or (3) he acts in the capacity of a general chairman or an 
assistant general chairman of a general committee which represents 
individuals rendering service in the United States to an employer, but 
in such case if his office or headquarters is not located in the United 
States and the individuals represented by such general committee are 
employees of an employer not conducting the principal part of its 
business in the United States, only such proportion of the remuneration 
for such service shall be regarded as compensation as the proportion 
which the mileage in the United States under the jurisdiction of such 
general committee bears to the total mileage under its jurisdiction, 
unless such mileage formula is inapplicable, in which case the Board may 
prescribe such other formula as it finds to be equitable, and if the 
application of such mileage formula, or such other formula as the Board 
may prescribe, would result in the compensation of the individual being 
less than 10 per centum of his remuneration for such service no part of 
such remuneration shall be regarded as compensation: Provided further, 
That an individual not a citizen or resident of the United States shall 
not be deemed to be in the service of an employer when rendering service 
outside the United States to an employer who is required under the laws 
applicable in the place where the service is rendered to employ therein, 
in whole or in part, citizens or residents thereof.
    (f) The term ``employee representative'' means any officer or 
official representative of a railway labor organization other than a 
labor organization included in the term employer as defined in section 
1(a) who before or after August 29, 1935, was in the service of an 
employer as defined in section 1(a) and who is duly authorized and 
designated to represent employees in accordance with the Railway Labor 
Act, and any individual who is regularly assigned to or regularly 
employed by such officer or official representative in connection with 
the duties of his office.

                                * * * * *

    (i) The term ``compensation'' means any form of money remuneration, 
including pay for time lost but excluding tips, paid for services 
rendered as an employee to one or more employers, or as an employee 
representative: Provided, however, That in computing the compensation 
paid to any employee, no part of any month's compensation in excess of 
$300 for any month before July 1, 1954, or in excess of $350 for any 
month after June 30, 1954, and before the calendar month next following 
the month [May] in which this Act was amended in 1959, or in excess of 
$400 for any month after the month [May] in which this Act was so 
amended, shall be recognized. A payment made by an employer to an 
individual through the employer's pay roll shall be presumed, in the 
absence of evidence to the contrary, to be compensation for service 
rendered by such individual as an employee of the employer in the period 
with respect to which the payment is made. An employee shall be deemed 
to be paid, ``for time lost'' the amount he is paid by an employer with 
respect to an identifiable period of absence from the active service of 
the employer, including absence on account of personal injury, and the 
amount he is paid by the employer for loss of earnings resulting from 
his displacement to a less remunerative position or occupation. If a 
payment is made

[[Page 137]]

by an employer with respect to a personal injury and includes pay for 
time lost, the total payment shall be deemed to be paid for time lost 
unless, at the time of payment, a part of such payment is specifically 
apportioned to factors other than time lost, in which event only such 
part of the payment as is not so apportioned shall be deemed to be paid 
for time lost. Compensation earned in any calendar month before 1947 
shall be deemed paid in such month regardless of whether or when payment 
will have been in fact made, and compensation earned in any calendar 
year after 1946 but paid after the end of such calendar year shall be 
deemed to be compensation paid in the calendar year in which it will 
have been earned if it is so reported by the employer before February 1 
of the next succeeding calendar year or, if the employee establishes, 
subject to the provisions of section 8, the period during which such 
compensation will have been earned.

                                * * * * *

    (r) The term ``Board'' means the Railroad Retirement Board.
    (s) The term ``United States'', when used in a geographical sense, 
means the States, Alaska, Hawaii, and the District of Columbia.

                                * * * * *

[Sec. 1, Railroad Unemployment Insurance Act, as amended by secs. 1 and 
2, Act of June 20, 1939, 53 Stat. 845; secs. 1 and 3, Act of Aug. 13, 
1940, 54 Stat. 785, 786; sec. 15, Act of Apr. 8, 1942, 56 Stat. 210; 
secs. 1 and 2, Act of July 31, 1946, 60 Stat. 722; sec. 302, Act of Aug. 
31, 1954, 68 Stat. 1040; sec. 301, Act of May 19, 1959, Pub. L. 86-28, 
73 Stat. 30]

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6658, 28 FR 
6638, June 27, 1963]



Sec. 31.3306(c)(10)-1  Services in the employ of certain organizations exempt from income tax.

    (a) In general. (1) This section deals with the exception from 
employment of certain services performed in the employ of any 
organization exempt from income tax under section 501(a) (other than an 
organization described in section 401(a)) or under section 521. (See the 
provisions of Secs. 1.401-1, 1.501(a)-1, and 1.521-1 of this chapter 
(Income Tax Regulations).) If the services meet the tests set forth in 
paragraphs (b), (c), (d), or (e) of this section, the services are 
excepted.
    (2) See also Sec. 31.3306(c)(8)-1 for provisions relating to the 
exception of services performed in the employ of religious, charitable, 
educational, or certain other organizations exempt from income tax; 
Sec. 31.3306(c)(10)-2 for provisions relating to the exception of 
services performed by certain students in the employ of a school, 
college, or university; and Sec. 31.3306(c)(10)-3 for provisions 
relating to the exception of services performed before 1962 in the 
employ of certain employees' beneficiary associations.
    (b) Remuneration less than $50 for calendar quarter. Services 
performed by an employee in a calendar quarter in the employ of an 
organization exempt from income tax under section 501(a) (other than an 
organization described in section 401(a)) or under section 521 are 
excepted from employment, if the remuneration for the service is less 
than $50. The test relating to remuneration of $50 is based on the 
remuneration earned during a calendar quarter rather than on the 
remuneration paid in a calendar quarter. The exception applies 
separately with respect to each organization for which the employee 
renders services in a calendar quarter. The type of services performed 
by the employee and the place where the services are performed are 
immaterial; the statutory tests are the character of the organization in 
the employ of which the services are performed and the amount of the 
remuneration for services performed by the employee in the calendar 
quarter.

    Example 1. X is a local lodge of a fraternal organization and is 
exempt from income tax under section 501(a) as an organization of the 
character described in section 501 (c)(8). X has a number of paid 
employees, among them being A who serves exclusively as recording 
secretary for the lodge, and B who performs services for the lodge as 
janitor of its clubhouse. For services performed during the first 
calendar quarter of 1955 (that is, January 1, 1955, through March 31, 
1955, both dates inclusive) A earns a total of $30. For services 
performed during the same calendar quarter B earns $180. Since the 
remuneration for the services performed by A during such quarter is less 
than $50, all of such services are excepted. Thus, A is not counted as 
an employee in employment on any of the days during such quarter for 
purposes of determining whether the X organization is an employer (see 
Sec. 31.3306(a)-1). Even though it is

[[Page 138]]

subsequently determined that X is an employer, A's remuneration of $30 
for services performed during the first calendar quarter of such year is 
not subject to tax. B's services, however, are not excepted during such 
quarter since the remuneration therefor is not less than $50. Thus, B is 
counted as an employee in employment during all of such quarter for 
purposes of determining whether the X organization is an employer. If it 
is determined that the X organization is an employer, B's remuneration 
of $180 for services performed during the first calendar quarter is 
included in computing the tax.
    Example 2. The facts are the same as in example 1, above, except 
that on April 1, 1955, A's salary is increased and, for services 
performed during the calendar quarter beginning on that date (that is, 
April 1, 1955, through June 30, 1955, both dates inclusive), A earns 
$60. Although all of the services performed by A during the first 
quarter were excepted, none of A's services performed during the second 
quarter are excepted since the remuneration for such services is not 
less than $50. A, therefore, is counted as an employee in employment 
during all of the second quarter for the purpose of determining whether 
the X organization is an employer. If it is determined that the X 
organization is an employer, A's remuneration of $60 for services 
performed during the second calendar quarter is included in computing 
the tax.
    Example 3. The facts are the same as in example 1, above, except 
that A earns $120 for services performed during the year 1955, and such 
amount is paid to him in a lump sum at the end of the year. The services 
performed by A in any calendar quarter during the year are excepted if 
the portion of the $120 attributable to services performed in that 
quarter is less than $50. In such case, A is not counted as an employee 
in employment on any of the days during such quarter for purposes of 
determining whether the X organization is an employer. If, however, the 
portion of the $120 attributable to services performed in any calendar 
quarter during the year is not less than $50, the services during that 
quarter are not excepted. In the latter case, A is counted as an 
employee in employment during all of such quarter and, if it is 
determined that the X organization is an employer, that portion of the 
$120 attributable to services performed in such quarter is included in 
computing the tax.

    (c) Collection of dues or premiums for fraternal beneficiary 
societies, and ritualistic services in connection with such societies, 
before 1962. The following services performed by an employee in the 
employ of a fraternal beneficiary society, order, or association exempt 
from income tax under section 501(a) are excepted from employment if the 
services are performed before 1962 or if remuneration for the services 
is paid before 1962:
    (1) Services performed away from the home office of such a society, 
order, or association in connection with the collection of dues or 
premiums for such society, order, or association; and
    (2) Ritualistic services (wherever performed) in connection with 
such a society, order, or association.

For purposes of the paragraph the amount of the remuneration for 
services performed by the employee in the calendar quarter is 
immaterial; the tests are the character of the organization in whose 
employ the services are performed, the type of services, and, in the 
case of collection of dues or premiums, the place where the services are 
performed.
    (d) Students employed before 1962. (1) Services performed in the 
employ of an organization exempt from income tax under section 501(a) 
(other than an organization described in section 401(a)) or under 
section 521 by a student who is enrolled and is regularly attending 
classes at a school, college, or university, are excepted from 
employment if the services are performed before 1962 or if remuneration 
for the services is paid before 1962. For purposes of this paragraph, 
the amount of remuneration for services performed by the employee in the 
calendar quarter, the type of services, and the place where the services 
are performed are immaterial; the tests are the character of the 
organization in whose employ the services are performed and the status 
of the employee as a student enrolled and regularly attending classes at 
a school, college, or university.
    (2) The term ``school, college, or university'' as used in this 
paragraph is to be taken in its commonly or generally accepted sense. 
For provisions relating to services performed before 1962 by a student 
enrolled and regularly attending classes at a school, college, or 
university not exempt from income tax in the employ of such school, 
college, or university, see paragraph (b) of Sec. 31.3306(c)(10)-2. For 
provisions relating to services performed after 1961 by a student 
enrolled and regularly attending classes at a school, college, or 
university in the employ of such school,

[[Page 139]]

college, or university, see paragraph (a) or Sec. 31.3306(c)(10)-2.
    (e) Services performed before 1962 in employ of agricultural or 
horticultural organization exempt from income tax. (1) Services 
performed by an employee in the employ of an agricultural or 
horticultural organization which is described in section 501(c)(5) and 
the regulations thereunder and which is exempt from income tax under 
section 501(a) are excepted from employment if the services are 
performed before 1962 or if remuneration for the services is paid before 
1962.
    (2) For purposes of this paragraph, the type of services performed 
by the employee, the amount of remuneration for the services, and the 
place where the services are performed are immaterial; the test is the 
character of the organization in whose employ the services are 
performed.
[T.D. 6658, 28 FR 6639, June 27, 1963]



Sec. 31.3306(c)(10)-2  Services of student in employ of school, college, or university.

    (a) Services performed after 1961. Services performed after 1961 in 
the employ of a school, college, or university, by a student who is 
enrolled and is regularly attending classes at the school, college, or 
university, are excepted from employment (whether or not the school, 
college, or university is exempt from income tax), if remuneration for 
the services is paid after 1961.
    (b) Services performed before 1962. Services performed in the employ 
of a school, college, or university not exempt from income tax under 
section 501(a), by a student who is enrolled and is regularly attending 
classes at the school, college, or university, are excepted from 
employment if the services are performed before 1962 or if remuneration 
for the services is paid before 1962.
    (c) Application of section. (1) For purposes of this section, the 
type of services performed by the employee, the place where the services 
are performed, and the amount of remuneration for services performed by 
the employee are immaterial; the tests are the character of the 
organization in the employ of which the services are performed and the 
status of the employee as a student enrolled and regularly attending 
classes at the school, college, or university, in the employ of which he 
performs the services.
    (2) The status of the employee as a student performing the services 
shall be determined on the basis of the relationship of such employee 
with the organization for which the services are performed. An employee 
who performs services in the employ of a school, college, or university 
as an incident to and for the purpose of pursuing a course of study at 
such school, college, or university has the status of a student in the 
performance of such services.
    (3) The term ``school, college, or university'' as used in this 
section is to be taken in its commonly or generally accepted sense.
    (4) For provisions relating to services performed before 1962 by a 
student in the employ of an organization exempt from income tax, see 
paragraph (d) of Sec. 31.3306(c)(10)-1.
[T.D. 6658, 28 FR 6640, June 27, 1963]



Sec. 31.3306(c)(10)-3  Services before 1962 in employ of certain employees' beneficiary associations.

    (a) Voluntary employees' beneficiary associations. Services 
performed by an employee in the employ of a voluntary employees' 
beneficiary association providing for the payment of life, sick, 
accident, or other benefits to the members of such association or their 
dependents are excepted from employment if--
    (1) No part of its net earnings inures (other than through such 
payments) to the benefit of any private shareholder or individual,
    (2) 85 percent or more of the income consists of amounts collected 
from members for the sole purpose of making such payments and meeting 
expenses, and
    (3) The services are performed before 1962, or remuneration for the 
services is paid before 1962.
    (b) Federal employees' beneficiary associations. Services performed 
by an employee in the employ of a voluntary

[[Page 140]]

employees' beneficiary association providing for the payment of life, 
sick, accident, or other benefits to the members of such association or 
their dependents or their designated beneficiaries are excepted from 
employment if--
    (1) Admission to membership in the association is limited to 
individuals who are officers or employees of the United States 
Government,
    (2) No part of the net earnings of the association inures (other 
than through such payments) to the benefit of any private shareholder or 
individual, and
    (3) The services are performed before 1962, or remuneration for the 
services is paid before 1962.
    (c) Application of tests. For purposes of this section, the type of 
services performed by the employee, the amount of remuneration for the 
services, and the place where the services are performed are immaterial; 
the test is the character of the organization in whose employ the 
services are performed.
[T.D. 6658, 28 FR 6640, June 27, 1963]



Sec. 31.3306(c)(11)-1  Services in employ of foreign government.

    (a) Services performed by an employee in the employ of a foreign 
government are excepted from employment. The exception includes not only 
services performed by ambassadors, ministers, and other diplomatic 
officers and employees but also services performed as a consular or 
other officer or employee of a foreign government, or as a nondiplomatic 
representative thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial. It is also immaterial whether the foreign 
government grants an equivalent exemption with respect to similar 
services performed in the foreign country by citizens of the United 
States.



Sec. 31.3306(c)(12)-1  Services in employ of wholly owned instrumentality of foreign government.

    (a) Services performed by an employee in the employ of certain 
instrumentalities of a foreign government are excepted from employment. 
The exception includes all services performed in the employ of an 
instrumentality of the government of a foreign country, if--
    (1) The instrumentality is wholly owned by the foreign government;
    (2) The services are of a character similar to those performed in 
foreign countries by employees of the United States Government or of an 
instrumentality thereof; and
    (3) The Secretary of State certifies to the Secretary of the 
Treasury that the foreign government, with respect to whose 
instrumentality exemption is claimed, grants an equivalent exemption 
with respect to services performed in the foreign country by employees 
of the United States Government and of instrumentalities thereof.
    (b) For purposes of this exception, the citizenship or residence of 
the employee is immaterial.



Sec. 31.3306(c)(13)-1  Services of student nurse or hospital intern.

    (a) Services performed as a student nurse in the employ of a 
hospital or a nurses' training school are excepted from employment, if 
the student nurse is enrolled and regularly attending classes in a 
nurses' training school and such nurses' training school is chartered or 
approved pursuant to State law.
    (b) Services performed as an intern (as distinguished from a 
resident doctor) in the employ of a hospital are excepted from 
employment, if the intern has completed a 4 years' course in a medical 
school chartered or approved pursuant to State law.



Sec. 31.3306(c)(14)-1  Services of insurance agent or solicitor.

    (a) Services performed for a person by an employee as an insurance 
agent or insurance solicitor are excepted from employment, if all such 
services performed for such person by such individual are performed for 
remuneration solely by way of commission.
    (b) If all or any part of the remuneration of an employee for 
services performed as an insurance agent or insurance solicitor for a 
person is a salary, none of his services performed as an insurance agent 
or insurance solicitor for such person are excepted from employment, and 
his total remuneration (for

[[Page 141]]

example, salary, or salary and commissions) for such services is 
included for purposes of computing the tax.



Sec. 31.3306(c)(15)-1  Services in delivery or distribution of newspapers, shopping news, or magazines.

    (a) Services of individuals under age 18. Services performed by an 
employee under the age of 18 in the delivery or distribution of 
newspapers or shopping news, not including delivery or distribution (as, 
for example, by a regional distributor) to any point for subsequent 
delivery or distribution, are excepted from employment. Thus, the 
services performed by an employee under the age of 18 in making house-
to-house delivery or sale of newspapers or shopping news, including 
handbills and other similar types of advertising material, are excepted. 
The services are excepted irrespective of the form or method of 
compensation. Incidental services by the employee who makes the house-
to-house delivery, such as services in assembling newspapers, are 
considered to be within the exception. The exception continues only 
during the time that the employee is under the age of 18.
    (b) Services of individuals of any age. Services performed by an 
employee in, and at the time of, the sale of newspapers or magazines to 
ultimate consumers under an arrangement under which the newspapers or 
magazines are to be sold by him at a fixed price, his compensation being 
based on the retention of the excess of such price over the amount at 
which the newspapers or magazines are charged to him, are excepted from 
employment. The services are excepted whether or not the employee is 
guaranteed a minimum amount of compensation for such services, or is 
entitled to be credited with the unsold newspapers or magazines turned 
back. Moreover, the services are excepted without regard to the age of 
the employee. Services performed other than at the time of sale to the 
ultimate consumer are not within the exception. Thus, the services of a 
regional distributor which are antecedent to but not immediately part of 
the sale to the ultimate consumer are not within the exception. However, 
incidental services by the employee who makes the sale to the ultimate 
consumer, such as services in assembling newspapers or in taking 
newspapers or magazines to the place of sale, are considered to be 
within the exception.



Sec. 31.3306(c)(16)-1  Services in employ of international organization.

    (a) Subject to the provisions of section 1 of the International 
Organizations Immunities Act (22 U.S.C. 228), services performed in the 
employ of an international organization as defined in section 
7701(a)(18) are excepted from employment.
    (b) (1) Section 701(a)(18) provides as follows:

    Sec. 7701. Definitions. (a) When used in this title, where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof--

                                * * * * *

    (18) International organization. The term ``international 
organization'' means a public international organization entitled to 
enjoy privileges, exemptions, and immunities as an international 
organization under the International Organizations Immunities Act (22 
U.S.C. 288-288f).

    (2) Section 1 of the International Organizations Immunities Act 
provides as follows:

    Sec. 1. [International Organizations Immunities Act.] For the 
purposes of this title [International Organizations Immunities Act], the 
term ``international organization'' means a public international 
organization in which the United States participates pursuant to any 
treaty or under the authority of any Act of Congress authorizing such 
participation or making an appropriation for such participation, and 
which shall have been designated by the President through appropriate 
Executive order as being entitled to enjoy the privileges, exemptions, 
and immunities herein provided. The President shall be authorized, in 
the light of the functions performed by any such international 
organization, by appropriate Executive order to withhold or withdraw 
from any such organization or its officers or employees any of the 
privileges, exemptions, and immunities provided for in this title 
(including the amendments made by this title) or to condition or limit 
the enjoyment by any such organization or its officers or employees of 
any such privilege, exemption, or immunity. The President shall be 
authorized, if in his judgment such action should be justified by reason 
of the abuse by an international organization or its officers

[[Page 142]]

and employees of the privileges, exemptions, and immunities herein 
provided or for any other reason, at any time to revoke the designation 
of any international organization under this section, whereupon the 
international organization in question shall cease to be classed as an 
international organization for the purposes of this title.



Sec. 31.3306(c)(17)-1  Fishing services.

    (a) In general. Subject to the limitations prescribed in paragraphs 
(b) and (c) of this section, services described in this paragraph are 
excepted from employment. Services performed by an individual in the 
catching, taking, harvesting, cultivating, or farming of any kind of 
fish, shell-fish (for example, oysters, clams, and mussels), crustacea 
(for example, lobsters, crabs, and shrimps), sponges, seaweeds, or other 
aquatic forms of animal and vegetable life are excepted. The exception 
extends to services performed as an officer or member of the crew of a 
vessel while the vessel is engaged in any such activity whether or not 
the officer or member of the crew is himself so engaged. In the case of 
an individual who is engaged in any such activity in the employ of any 
person, the services performed, by such individual in the employ of such 
person, as an ordinary incident to any such activity are also excepted. 
Similarly, for example, the shore services of an officer or member of 
the crew of a vessel engaged in any such activity are excepted if such 
services are an ordinary incident to any such activity. Services 
performed as an ordinary incident to any such activity may include, for 
example, services performed in such cleaning, icing, and packing of fish 
as are necessary for the immediate preservation of the catch.
    (b) Salmon and halibut fishing. Services performed in connection 
with the catching or taking of salmon or halibut, for commercial 
purposes, are not within the exception. Thus, neither the services of an 
officer or member of the crew of a vessel (irrespective of its tonnage) 
which is engaged in the catching or taking of salmon or halibut, for 
commercial purposes, nor the services of any other individual in 
connection with such activity, are within the exception.
    (c) Vessels of more than 10 net tons. Services described in 
paragraph (a) of this section performed on or in connection with a 
vessel of more than 10 net tons are not within the exception. For 
purposes of the exception, the tonnage of the vessel shall be determined 
in the manner provided for determining the register tonnage of merchant 
vessels under the laws of the United States.



Sec. 31.3306(c)(18)-1  Services of certain nonresident aliens.

    (a) (1) Services performed after 1961 by a nonresident alien 
individual who is temporarily present in the United States as a 
nonimmigrant under subparagraph (F) or (J) of section 101(a) (15) of the 
Immigration and Nationality Act (8 U.S.C. 1101), as amended, are 
excepted from employment if the services are performed to carry out a 
purpose for which the individual was admitted. For purposes of this 
section an alien individual who is temporarily present in the United 
States as a nonimmigrant under such subparagraph (F) or (J) is deemed to 
be a nonresident alien individual. The preceding sentence does not apply 
to the extent it is inconsistent with section 7701(b) and the 
regulations under that section. A nonresident alien individual who is 
temporarily present in the United States as a nonimmigrant under such 
subparagraph (J) includes an alien individual admitted to the United 
States as an ``exchange visitor'' under section 201 of the United States 
Information and Educational Exchange Act of 1948 (22 U.S.C. 1446).
    (2) If services are performed by a nonresident alien individual's 
alien spouse or minor child, who is temporarily present in the United 
States as a nonimmigrant under subparagraph (F) or (J) of section 
101(a)(15) of the Immigration and Nationality Act, as amended, the 
services are not deemed for purposes of this section to be performed to 
carry out a purpose for which such individual was admitted. The services 
of such spouse or child are excepted from employment under this section 
only if the spouse or child was admitted for a purpose specified in such 
subparagraph (F) or (J) and if the services are performed to carry out 
such purpose.
    (b) Section 101 of the Immigration and Nationality Act (8 U.S.C. 
1101), as amended, provides, in part, as follows:


[[Page 143]]


    Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat. 
166)]
    (a) As used in this chapter--* * *
    (15) The term immigrant means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (F) (i) An alien having a residence in a foreign country which he 
has no intention of abandoning, who is a bona fide student qualified to 
pursue a full course of study and who seeks to enter the United States 
temporarily and solely for the purpose of pursuing such a course of 
study at an established institution of learning or other recognized 
place of study in the United States, particularly designated by him and 
approved by the Attorney General after consultation with the Office of 
Education of the United States, which institution or place of study 
shall have agreed to report to the Attorney General the termination of 
attendance of each nonimmigrant student, and if any such institution of 
learning or place of study fails to make reports promptly the approval 
shall be withdrawn, and (ii) the alien spouse and minor children of any 
such alien if accompanying him or following to join him;

                                * * * * *

    (J) An alien having a residence in a foreign country which he has no 
intention of abandoning who is a bona fide student, scholar, trainee, 
teacher, professor, research assistant, specialist, or leader in a field 
of specialized knowledge or skill, or other person of similar 
description, who is coming temporarily to the United States as a 
participant in a program designated by the Secretary of State, for the 
purpose of teaching, instructing or lecturing, studying, observing, 
conducting research, consulting, demonstrating special skills, or 
receiving training, and the alien spouse and minor children of any such 
alien if accompanying him or following to join him.

                                * * * * *

[Sec. 101, Immigration and Nationality Act, as amended by sec. 101, Act 
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75 
Stat. 534]

[T.D. 6658, 28 FR 6640, June 27, 1963, as amended by T.D. 8411, 57 FR 
15241, Apr. 27, 1992]



Sec. 31.3306(d)-1  Included and excluded service.

    (a) If a portion of the services performed by an employee for the 
person employing him during a pay period constitutes employment, and the 
remainder does not constitute employment, all the services of the 
employee during the period shall for purposes of the tax be treated 
alike, that is, either all as included or all as excluded. The time 
during which the employee performs services which under section 3306(c) 
constitute employment, and the time during which he performs services 
which under such section do not constitute employment, within the pay 
period, determine whether all the services during the pay period shall 
be deemed to be included or excluded.
    (b) If one-half or more of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then all the services of that employee for that 
person in that pay period shall be deemed to be employment.
    (c) If less than one-half of the employee's time in the employ of a 
particular person in a pay period is spent in performing services which 
constitute employment, then none of the services of that employee for 
that person in that pay period shall be deemed to be employment.
    (d) The application of the provisions of paragraphs (a), (b), and 
(c) of this section may be illustrated by the following examples:

    Example 1. Employer B, who operates a farm and a store, employs A to 
perform services in connection with both operations. A's services on the 
farm are such that they are excepted as agricultural labor and do not 
constitute employment, and his services in the store constitute 
employment. He is paid at the end of each month. During a particular 
month A works 120 hours on the farm and 80 hours in the store. None of 
A's services during the month are deemed to be employment, since less 
than one-half of his services during the month constitutes employment. 
During another month A works 75 hours on the farm and 120 hours in the 
store. All of A's services during the month are deemed to be employment, 
since one-half or more of his services during the month constitutes 
employment.
    Example 2. Employee C is employed as a maid by D, a medical doctor, 
whose home and office are located in the same building. C's services in 
the home are excepted as domestic service and do not constitute 
employment, and her services in the office constitute employment. She is 
paid each week.

[[Page 144]]

During a particular week C works 20 hours in the home and 20 hours in 
the office. All of C's services during that week are deemed to be 
employment, since one-half or more of her services during the week 
constitutes employment. During another week C works 22 hours in the home 
and 15 hours in the office. None of C's services during that week are 
deemed to be employment, since less than one-half of her services during 
the week constitutes employment.

    (e) For purposes of this section, a ``pay period'' is the period (of 
not more than 31 consecutive calendar days) for which a payment of 
remuneration is ordinarily made to the employee by the person employing 
him. Thus, if the periods for which payments of remuneration are made to 
the employee by such person are of uniform duration, each such period 
constitutes a ``pay period''. If, however, the periods occasionally vary 
in duration, the ``pay period'' is the period for which a payment of 
remuneration is ordinarily made to the employee by such person, even 
though that period does not coincide with the actual period for which a 
particular payment of remuneration is made. For example, if a person 
ordinarily pays a particular employee for each calendar week at the end 
of the week, but the employee receives a payment in the middle of the 
week for the portion of the week already elapsed and receives the 
remainder at the end of the week, the ``pay period'' is still the 
calendar week; or if, instead, that employee is sent on a trip by such 
person and receives at the end of the third week a single remuneration 
payment for 3 weeks' services, the ``pay period'' is still the calendar 
week.
    (f) If there is only one period (and such period does not exceed 31 
consecutive calendar days) for which a payment of remuneration is made 
to the employee by the person employing him, such period is deemed to be 
a ``pay period'' for purposes of this section.
    (g) The rules set forth in this section do not apply (1) with 
respect to any services performed by the employee for the person 
employing him if the periods for which such person makes payments of 
remuneration to the employee vary to the extent that there is no period 
``for which a payment of remuneration is ordinarily made to the 
employee,'' or (2) with respect to any services performed by the 
employee for the person employing him if the period for which a payment 
of remuneration is ordinarily made to the employee by such person 
exceeds 31 consecutive calendar days, or (3) with respect to any service 
performed by the employee for the person employing him during a pay 
period if any of such service is excepted by section 3306(c) (9) (see 
Sec. 31.3306(c) (9)-1).
    (h) If during any period for which a person makes a payment of 
remuneration to an employee only a portion of the employee's services 
constitutes employment, but the rules prescribed in this section are not 
applicable, the tax attaches with respect to such services as constitute 
employment as defined in section 3306(c) (provided such person is an 
employer as defined in section 3306(a) and Sec. 31.3306(a)-1).



Sec. 31.3306(i)-1  Who are employees.

    (a) Every individual is an employee if the relationship between him 
and the person for whom he performs services is the legal relationship 
of employer and employee. (The word ``employer'' as used in this section 
only, notwithstanding the provisions of Sec. 31.3306(a)-1, includes a 
person who employs one or more employees.)
    (b) Generally such relationship exists when the person for whom 
services are performed has the right to control and direct the 
individual who performs the services, not only as to the result to be 
accomplished by the work but also as to the details and means by which 
that result is accomplished. That is, an employee is subject to the will 
and control of the employer not only as to what shall be done but how it 
shall be done. In this connection, it is not necessary that the employer 
actually direct or control the manner in which the services are 
performed; it is sufficient if he has the right to do so. The right to 
discharge is also an important factor indicating that the person 
possessing that right is an employer. Other factors characteristic of an 
employer, but not necessarily present in every case, are the furnishing 
of tools and the furnishing of a place to work, to the individual who 
performs the services. In general, if an individual is

[[Page 145]]

subject to the control or direction of another merely as to the result 
to be accomplished by the work and not as to the means and methods for 
accomplishing the result, he is an independent contractor. An individual 
performing services as an independent contractor is not as to such 
services an employee. Individuals such as physicians, lawyers, dentists, 
veterinarians, construction contractors, public stenographers, and 
auctioneers, engaged in the pursuit of an independent trade, business, 
or profession, in which they offer their services to the public, are 
independent contractors and not employees.
    (c) Whether the relationship of employer and employee exists will in 
doubtful cases be determined upon an examination of the particular facts 
of each case.
    (d) If the relationship of employer and employee exists, the 
designation or description of the relationship by the parties as 
anything other than that of employer and employee is immaterial. Thus, 
if such relationship exists, it is of no consequence that the employee 
is designated as a partner, coadventurer, agent, independent contractor, 
or the like.
    (e) All classes or grades of employees are included within the 
relationship of employer and employee. Thus, superintendents, managers, 
and other supervisory personnel are employees. Generally, an officer of 
a corporation is an employee of the corporation. However, an officer of 
a corporation who as such does not perform any services or performs only 
minor services and who neither receives nor is entitled to receive, 
directly or indirectly, any remuneration is considered not to be an 
employee of the corporation. A director of a corporation in his capacity 
as such is not an employee of the corporation.
    (f) Although an individual may be an employee under this section, 
his services may be of such a nature, or performed under such 
circumstances, as not to constitute employment (see Sec. 31.3306(c)-2).



Sec. 31.3306(j)-1  State, United States, and citizen.

    (a) When used in the regulations in this subpart, the term ``State'' 
includes the District of Columbia, the Territories of Alaska and Hawaii 
before their admission as States, and (when used with respect to 
remuneration paid after 1960 for services performed after 1960) the 
Commonwealth of Puerto Rico.
    (b) When used in the regulations in this subpart, the term ``United 
States'', when used in a geographical sense, means the several States 
(including the Territories of Alaska and Hawaii before their admission 
as States), and the District of Columbia. When used in the regulations 
in this subpart with respect to remuneration paid after 1960 for 
services performed after 1960, the term ``United States'' also includes 
the Commonwealth of Puerto Rico when the term is used in a geographical 
sense, and the term ``citizen of the United States'' includes a citizen 
of the Commonwealth of Puerto Rico.
[T.D. 6658, 28 FR 6641, June 27, 1963]



Sec. 31.3306(k)-1  Agricultural labor.

    (a) In general. (1) Services performed by an employee for the person 
employing him which constitute ``agricultural labor'' as defined in 
section 3306(k) are excepted from employment by reason of section 
3306(c)(1). See Sec. 31.3306(c)(1)-1. The term ``agricultural labor'' as 
defined in section 3306(k) includes services of the character described 
in paragraphs (b), (c), (d), and (e) of this section. In general, 
however, the term does not include services performed in connection with 
forestry, lumbering, or landscaping.
    (2) The term ``farm'' as used in this subpart includes stock, dairy, 
poultry, fruit, fur-bearing animal, and truck farms, plantations, 
ranches, nurseries, ranges, orchards, and such greenhouses and other 
similar structures as are used primarily for the raising of agricultural 
or horticultural commodities. Greenhouses and other similar structures 
used primarily for other purposes (for example, display, storage, and 
fabrication of wreaths, corsages, and bouquets) do not constitute 
``farms''.
    (b) Services described in section 3306(k)(1). Services performed on 
a farm by an employee of any person in connection with any of the 
following activities constitute agricultural labor:

[[Page 146]]

    (1) The cultivation of the soil;
    (2) The raising, shearing, feeding, caring for, training, or 
management of livestock, bees, poultry, fur-bearing animals, or 
wildlife; or
    (3) The raising or harvesting of any other agricultural or 
horticultural commodity.
    (c) Services described in section 3306(k)(2). (1) The following 
services performed by an employee in the employ of the owner or tenant 
or other operator of one or more farms constitute agricultural labor, if 
the major part of such services is performed on a farm:
    (i) Services performed in connection with the operation, management, 
conservation, improvement, or maintenance of any such farms or its tools 
or equipment; or
    (ii) Services performed in salvaging timber, or clearing land of 
brush and other debris, left by a hurricane.
    (2) The services described in paragraph (c)(1)(i) of this section 
may include, for example, services performed by carpenters, painters, 
mechanics, farm supervisors, irrigation engineers, bookkeepers, and 
other skilled or semiskilled workers, which contribute in any way to the 
conduct of the farm or farms, as such, operated by the person employing 
them, as distinguished from any other enterprise in which such person 
may be engaged.
    (3) Since the services described in this paragraph must be performed 
in the employ of the owner or tenant or other operator of the farm, 
services performed by employees of a commercial painting concern, for 
example, which contracts with a farmer to renovate his farm properties, 
do not constitute agricultural labor.
    (d) Services described in section 3306(k)(3). Services performed by 
an employee in the employ of any person in connection with any of the 
following operations constitute agricultural labor without regard to the 
place where such services are performed:
    (1) The ginning of cotton;
    (2) The hatching of poultry;
    (3) The raising or harvesting of mushrooms;
    (4) The operation or maintenance of ditches, canals, reservoirs, or 
waterways used exclusively for supplying or storing water for farming 
purposes;
    (5) The production or harvesting of maple sap or the processing of 
maple sap into maple sirup or maple sugar (but not the subsequent 
blending or other processing of such sirup or sugar with other 
products); or
    (6) The production or harvesting of crude gum (oleoresin) from a 
living tree or the processing of such crude gum into gum spirits of 
turpentine and gum rosin provided such processing is carried on by the 
original producer of such crude gum.
    (e) Services described in section 3306(k)(4). (1)(i) Services 
performed by an employee in the employ of a farmer or a farmers' 
cooperative organization or group in the handling, planting, drying, 
packing, packaging, processing, freezing, grading, storing, or 
delivering to storage or to market or to a carrier for transportation to 
market, of any agricultural or horticultural commodity, other than 
fruits and vegetables (see paragraph (e)(2) of this section), produced 
by such farmer or farmer-members of such organization or group of 
farmers constitute agricultural labor, if such services are performed as 
an incident to ordinary farming operations.
    (ii) Generally services are performed ``as an incident to ordinary 
farming operations'' within the meaning of this paragraph if they are 
services of the character ordinarily performed by the employees of a 
farmer or of a farmers' cooperative organization or group as a 
prerequisite to the marketing, in its unmanufactured state, of any 
agricultural or horticultural commodity produced by such farmer or by 
the members of such farmers' organization or group. Services performed 
by employees of such farmer or farmers' organization or group in the 
handling, planting, drying, packing, packaging, processing, freezing, 
grading, storing, or delivering to storage or to market or to a carrier 
for transportation to market, of commodities produced by persons other 
than such farmer or members of such farmers' organization or group are 
not performed ``as an incident to ordinary farming operations''.
    (2) Services performed by an employee in the employ of any person in

[[Page 147]]

the handling, planting, drying, packing, packaging, processing, 
freezing, grading, storing, or delivering to storage or to market or to 
a carrier for transportation to market, of fruits and vegetables, 
whether or not of a perishable nature, constitute agricultural labor, if 
such services are performed as an incident to the preparation of such 
fruits and vegetables for market. For example, if services in the 
sorting, grading, or storing of fruits, or in the cleaning of beans, are 
performed as an incident to their preparation for market, such services 
may constitute agricultural labor, whether performed in the employ of a 
farmer, a farmers' cooperative, or a commercial handler of such 
commodities.
    (3) The services described in paragraphs (e)(1) and (2) of this 
section do not include services performed in connection with commercial 
canning or commercial freezing or in connection with any commodity after 
its delivery to a terminal market for distribution for consumption. 
Moreover, since the services described in such subparagraphs must be 
rendered in the actual handling, planting, drying, packing, packaging, 
processing, freezing, grading, storing, or delivering to storage or to 
market or to a carrier for transportation to market, of the commodity, 
such services do not, for example, include services performed as 
stenographers, bookkeepers, clerks, and other office employees, even 
though such services may be in connection with such activities. However, 
to the extent that the services of such individuals are performed in the 
employ of the owner or tenant or other operator of a farm and are 
rendered in major part on a farm, they may be within the provisions of 
paragraph (c) of this section.



Sec. 31.3306(m)-1  American vessel and aircraft.

    (a) The term ``American vessel'' means any vessel which is 
documented (that is, registered, enrolled, or licensed) or numbered in 
conformity with the laws of the United States. It also includes any 
vessel which is neither documented nor numbered under the laws of the 
United States, nor documented under the laws of any foreign country, if 
the crew of such vessel is employed solely by one or more citizens or 
residents of the United States or corporations organized under the laws 
of the United States or of any State. (For provisions relating to the 
terms ``State'' and ``citizen'', see Sec. 31.3306(j)-1.)
    (b) The term ``American aircraft'' means any aircraft registered 
under the laws of the United States.
    (c) For provisions relating to services performed outside the United 
States on or in connection with an American vessel or American aircraft, 
see paragraph (c) of Sec. 31.3306(c)-2.
[T.D. 6658, 28 FR 6641, June 27, 1963]



Sec. 31.3306(n)-1  Services on American vessel whose business is conducted by general agent of Secretary of Commerce.

    (a) Section 3306(n) and this section of the regulations apply with 
respect only to services performed by an officer or member of the crew 
of an American vessel (1) which is owned by or bareboat chartered to the 
United States, and (2) whose business is conducted by a general agent of 
the Secretary of Commerce. Whether services performed by such an officer 
or member of a crew under the above conditions constitute employment is 
determined under section 3306(c) and (n), but without regard to section 
3306(c)(6). See Sec. 31.3306(c)(6)-1, relating to services performed in 
the employ of the United States and instrumentalities thereof. If, 
without regard to section 3306(c)(6), such services constitute 
employment, they are not excepted from employment by reason of the fact 
that they are performed on or in connection with an American vessel 
which is owned by or bareboat chartered to the United States and whose 
business is conducted by a general agent of the Secretary of Commerce, 
that is, such services are not excepted from employment by section 
3306(c)(6). For provisions relating to services performed within the 
United States and services performed outside the United States which 
constitute employment, see Sec. 31.3306(c)-2.
    (b) The expression ``officer or member of the crew'' includes the 
master or officer in charge of the vessel, however designated, and every 
individual, subject to his authority, serving on board

[[Page 148]]

and contributing in any way to the operation and welfare of the vessel. 
Thus, the expression includes, for example, the master, mates, pilots, 
pursers, surgeons, stewards, engineers, firemen, cooks, clerks, 
carpenters, and deck hands.
    (c) An employee of the United States who performs services as an 
officer or member of the crew of an American vessel which is owned by or 
bareboat chartered to the United States and whose business is conducted 
by a general agent of the Secretary of Commerce shall be deemed, under 
section 3306(n), to be performing services for such general agent rather 
than for the United States. Any such general agent of the Secretary of 
Commerce is considered a legal entity in his capacity as such general 
agent, separate and distinct from his identity as a person employing 
individuals on his own account. Each such general agent who in his 
capacity as such qualifies as an employer under section 3306(a) is with 
respect to each calendar year for which he so qualifies subject to the 
tax imposed by section 3301, and to all the requirements imposed upon an 
employer as defined in section 3306(a) by the regulations in this part, 
with respect to services which constitute employment by reason of 
section 3306(n) and this section of the regulations.



Sec. 31.3306(p)-1  Employees of related corporations.

    (a) In general. For purposes of sections 3301, 3302, and 3306(b)(1), 
when two or more related corporations concurrently employ the same 
individual and compensate that individual through a common paymaster 
which is one of the related corporations for which the individual 
performs services, each of the corporations is considered to have paid 
only the remuneration it actually disburses to that individual (unless 
the disbursing corporation fails to remit the taxes due). Paragraphs (b) 
and (c) of Sec. 31.3121(s)-1 contain rules defining related 
corporations, common paymasters, and concurrent employment, and rules 
for determining the liability of the other related corporations for 
employment taxes if the common paymaster fails to remit the taxes 
pursuant to sections 3102 and 3111, and for allocating these taxes among 
the related corporations. Those rules also apply to the tax under 
section 3301. For purposes of applying those rules to this section, 
references in those rules to section 3111 are considered references to 
sections 3301 and 3302, and references to section 3121 are considered 
references to section 3306.
    (b) Allocation of credit for contributions to State unemployment 
funds. A special rule for applying the rules of Sec. 31.3121(s)-1 to 
this section applies if it is necessary to determine the ultimate 
liability of each related corporation for which services are performed 
in the event the common paymaster fails to remit the tax to the Internal 
Revenue Service. In determining the ultimate liability of a corporation, 
the credit for contributions to State unemployment funds that the 
corporation may claim under section 3302 is calculated as if each 
corporation were a separate employer.
    (c) Effective date. This section is effective with respect to wages 
paid after December 31, 1978.
[T.D. 7660, 44 FR 75142, Dec. 19, 1979]



Sec. 31.3307-1  Deductions by an employer from remuneration of an employee.

    Any amount deducted by an employer from the remuneration of an 
employee is considered to be a part of the employee's remuneration and 
is considered to be paid to the employee as remuneration at the time 
that the deduction is made. It is immaterial that any act of Congress or 
the law of any State requires or permits such deductions and the payment 
of the amount thereof to the United States, a State, or any political 
subdivision thereof.



Sec. 31.3308-1  Instrumentalities of the United States specifically exempted from tax imposed by section 3301.

    Section 3308 makes ineffectual as to the tax imposed by section 3301 
(with respect to remuneration paid after 1961 for services performed 
after 1961) those provisions of law which grant to an instrumentality of 
the United States an exemption from taxation, unless such provisions 
grant a specific exemption from the tax imposed by section 3301 by an 
express reference to such section or

[[Page 149]]

the corresponding section of prior law. Thus, the general exceptions 
from Federal taxation granted by various statutes to certain 
instrumentalities of the United States without specific reference to the 
tax imposed by section 3301 or the corresponding section of prior law 
are rendered inoperative insofar as such exemptions relate to the tax 
imposed by section 3301. For provisions relating to the exception from 
employment of services performed in the employ of an instrumentality of 
the United States specifically exempted from the tax imposed by section 
3301, see Sec. 31.3306(c)(6)-1.
[T.D. 6658, 28 FR 6641, June 27, 1963]



              Subpart E--Collection of Income Tax at Source



Sec. 31.3401(a)-1  Wages.

    (a) In general. (1) The term ``wages'' means all remuneration for 
services performed by an employee for his employer unless specifically 
excepted under section 3401(a) or excepted under section 3402(e).
    (2) The name by which the remuneration for services is designated is 
immaterial. Thus, salaries, fees, bonuses, commissions on sales or on 
insurance premiums, pensions, and retired pay are wages within the 
meaning of the statute if paid as compensation for services performed by 
the employee for his employer.
    (3) The basis upon which the remuneration is paid is immaterial in 
determining whether the remuneration constitutes wages. Thus, it may be 
paid on the basis of piecework, or a percentage of profits; and may be 
paid hourly, daily, weekly, monthly, or annually.
    (4) Generally the medium in which remuneration is paid is also 
immaterial. It may be paid in cash or in something other than cash, as 
for example, stocks, bonds, or other forms of property. (See, however, 
Sec. 31.3401(a)(11)-1, relating to the exclusion from wages of 
remuneration paid in any medium other than cash for services not in the 
course of the employer's trade or business, and Sec. 31.3401(a)(16)-1, 
relating to the exclusion from wages of tips paid in any medium other 
than cash.) If services are paid for in a medium other than cash, the 
fair market value of the thing taken in payment is the amount to be 
included as wages. If the services were rendered at a stipulated price, 
in the absence of evidence to the contrary, such price will be presumed 
to be the fair value of the remuneration received. If a corporation 
transfers to its employees its own stock as remuneration for services 
rendered by the employee, the amount of such remuneration is the fair 
market value of the stock at the time of the transfer.
    (5) Remuneration for services, unless such remuneration is 
specifically excepted by the statute, constitutes wages even though at 
the time paid the relationship of employer and employee no longer exists 
between the person in whose employ the services were performed and the 
individual who performed them.

    Example. A is employed by R during the month of January 1955 and is 
entitled to receive remuneration of $100 for the services performed for 
R, the employer, during the month. A leaves the employ of R at the close 
of business on January 31, 1955. On February 15, 1955 (when A is no 
longer an employee of R), R pays A the remuneration of $100 which was 
earned for the services performed in January. The $100 is wages within 
the meaning of the statute.

    (b) Certain specific items--(1) Pensions and retirement pay. (i) In 
general, pensions and retired pay are wages subject to withholding. 
However, no withholding is required with respect to amounts paid to an 
employee upon retirement which are taxable as annuities under the 
provisions of section 72 or 403. So-called pensions awarded by one to 
whom no services have been rendered are mere gifts or gratuities and do 
not constitute wages. Those payments of pensions or other benefits by 
the Federal Government under Title 38 of the United States Code which 
are excluded from gross income are not wages subject to withholding.
    (ii) Amounts received as retirement pay for service in the Armed 
Forces of the United States, the Coast and Geodetic Survey, or the 
Public Health Service or as a disability annuity paid under the 
provisions of section 831 of the Foreign Service Act of 1946, as amended 
(22) U.S.C. 1081; 60 Stat. 1021), are subject to withholding unless such

[[Page 150]]

pay or disability annuity is excluded from gross income under section 
104(a)(4), or is taxable as an annuity under the provisions of section 
72. Where such retirement pay or disability annuity (not excluded from 
gross income under section 104(a)(4) and not taxable as an annuity under 
the provisions of section 72) is paid to a nonresident alien individual, 
withholding is required only in the case of such amounts paid to a 
nonresident alien individual who is a resident of Puerto Rico.
    (2) Traveling and other expenses. Amounts paid specifically--either 
as advances or reimbursements--for traveling or other bona fide ordinary 
and necessary expenses incurred or reasonably expected to be incurred in 
the business of the employer are not wages and are not subject to 
withholding. Traveling and other reimbursed expenses must be identified 
either by making a separate payment or by specifically indicating the 
separate amounts where both wages and expense allowances are combined in 
a single payment. For amounts that are received by an employee on or 
after July 1, 1990, with respect to expenses paid or incurred on or 
after July 1, 1990, see Sec. 31.3401 (a)-4.
    (3) Vacation allowances. Amounts of so-called ``vacation 
allowances'' paid to an employee constitute wages. Thus, the salary of 
an employee on vacation, paid notwithstanding his absence from work, 
constitutes wages.
    (4) Dismissal payments. Any payments made by an employer to an 
employee on account of dismissal, that is, involuntary separation from 
the service of the employer, constitute wages regardless of whether the 
employer is legally bound by contract, statute, or otherwise to make 
such payments.
    (5) Deductions by employer from remuneration of an employee. Any 
amount deducted by an employer from the remuneration of an employee is 
considered to be a part of the employee's remuneration and is considered 
to be paid to the employee as remuneration at the time that the 
deduction is made. It is immaterial that any act of Congress, or the law 
of any State or of Puerto Rico, requires or permits such deductions and 
the payment of the amounts thereof to the United States, a State, a 
Territory, Puerto Rico, or the District of Columbia, or any political 
subdivision of any one or more of the foregoing.
    (6) Payment by an employer of employee's tax, or employee's 
contributions under a State law. The term ``wages'' includes the amount 
paid by an employer on behalf of an employee (without deduction from the 
remuneration of, or other reimbursement from, the employee) on account 
of any payment required from an employee under a State unemployment 
compensation law, or on account of any tax imposed upon the employee by 
any taxing authority, including the taxes imposed by sections 3101 and 
3201.
    (7) Remuneration for services as employee of nonresident alien 
individual or foreign entity. The term ``wages'' includes remuneration 
for services performed by a citizen or resident (including, in regard to 
wages paid after February 28, 1979, an individual treated as a resident 
under section 6013 (g) or (h)) of the United States as an employee of a 
nonresident alien individual, foreign partnership, or foreign 
corporation whether or not such alien individual or foreign entity is 
engaged in trade or business within the United States. Any person paying 
wages on behalf of a nonresident alien individual, foreign partnership, 
or foreign corporation, not engaged in trade or business within the 
United States (including Puerto Rico as if a part of the United States), 
is subject to all the provisions of law and regulations applicable with 
respect to an employer. See Sec. 31.3401(d)-1, relating to the term 
``employer'', and Sec. 31.3401(a)(8)(C)-1, relating to remuneration paid 
for services performed by a citizen of the United States in Puerto Rico.
    (8) Amounts paid under accident or health plans--(i) Amounts paid in 
taxable years beginning on or after January 1, 1977--(a) In general. 
Withholding is required on all payments of amounts includible in gross 
income under section 105(a) and Sec. 1.105-1 (relating to amounts 
attributable to employer contributions), made in taxable years beginning 
on or after January 1, 1977, to an employee under an accident or health 
plan for a period of absence from work on

[[Page 151]]

account of personal injuries or sickness. Payments on which withholding 
is required by this subdivision are wages as defined in section 3401(a), 
and the employer shall deduct and withhold in accordance with the 
requirements of chapter 24 of subtitle C of the Code. Third party 
payments of sick pay, as defined in section 3402(o) and the regulations 
thereunder, are not wages for purposes of this section.
    (b) Payments made by an agent of the employer. (1) Payments are 
considered made by the employer if a third party makes the payments as 
an agent of the employer. The determining factor as to whether a third 
party is an agent of the employer is whether the third party bears any 
insurance risk. If the third party bears no insurance risk and is 
reimbursed on a cost plus fee basis, the third party is an agent of the 
employer even if the third party is responsible for making 
determinations of the eligibility of individual employees of the 
employer for sick pay payments. If the third party is paid an insurance 
premium and not reimbursed on a cost plus fee basis, the third party is 
not an agent of the employer, but the third party is a payor of third 
party sick pay for purposes of voluntary withholding from sick pay under 
sections 3402(o) and 6051(f) and the regulations thereunder. If a third 
party and an employer enter into an agency agreement as provided in 
paragraph (c) of Sec. 31.6051-3 (relating to statements required in case 
of sick pay paid by third parties), that agency agreement does not make 
the third party an agent of the employer for purposes of this paragraph.
    (2) Payments made by agents subject to this paragraph are 
supplemental wages as defined in Sec. 31.3402(g)-1. Unless the agent is 
also an agent for purposes of withholding tax from the employee's 
regular wages, the agent may deem tax to have been withheld from the 
employee's regular wages. Consequently, the agent may determine the tax 
to be withheld from supplemental wages by using a flat percentage rate 
of 20 percent as provided in Sec. 31.3402 (g)-1.
    (3) This paragraph is only applicable to amounts paid on or after 
May 25, 1983 unless the agent actually withheld taxes before that date.
    (c) Exceptions to withholding. (1) Withholding is not required on 
payments that are specifically excepted under the numbered paragraphs of 
section 3401(a) (relating to the definition of wages), under section 
3402(e) (relating to included and excluded wages), or under section 
3402(n) (relating to employees incurring no income tax liability).
    (2) Withholding is not required on disability payments to the extent 
that the payments are excludable from gross income under section 105(d). 
In determining the excludable portion of the disability payments, the 
employer may assume that payments that the employer makes to the 
employee are the employee's sole source of income. This exception 
applies only if the employee furnishes the employer with adequate 
verification of disability. A certificate from a qualified physician 
attesting that the employee is permanently and totally disabled (within 
the meaning of section 105(d)) shall be deemed to constitute adequate 
verification. This exception does not affect the requirement that a 
statement (which includes any amount paid under section 105(d)) be 
furnished under either section 6041 (relating to information at source) 
or section 6051 (relating to receipts for employees) and the regulations 
thereunder.
    (ii) Amounts paid after December 31, 1955 and before January 1, 
1977--(a) In general. The term ``wage continuation payment'', as used in 
this subdivision, means any payment to an employee which is made after 
December 31, 1955, and before January 1, 1977 under a wage continuation 
plan (as defined in paragraph (a)(2)(i) of Sec. 1.105-4 and Sec. 1.105-5 
of Part 1 of this chapter (Income Tax Regulations)) for a period of 
absence from work on account of personal injuries or sickness, to the 
extent such payment is attributable to contributions made by the 
employer which were not includable in the employee's gross income or is 
paid by the employer. Any such payment, whether or not excluded from the 
gross income of the employee under section 105(d), constitutes ``wages'' 
(unless specifically excepted under any of the numbered paragraphs of 
section 3401(a) or under section 3402(e) and withholding thereon is 
required except

[[Page 152]]

as provided in paragraphs (b)(8)(ii) (b), (c), and (d) of this section.
    (b) Amounts paid before January 1, 1977, by employer for whom 
services are performed for period of absence beginning after December 
31, 1963. (1) Withholding is not required upon the amount of any wage 
continuation payment for a period of absence beginning after December 
31, 1963, paid before January 1, 1977, to an employee directly by the 
employer for whom he performs services to the extent that such payment 
is excludable from the gross income of the employee under the provisions 
of section 105(d) in effect with respect to such payments, provided the 
records maintained by the employer--
    (i) Separately show the amount of each such payment and the 
excludable portion thereof, and
    (ii) Contain data substantiating the employee's entitlement to the 
exclusion provided in section 105(d) with respect to such amount, either 
by a written statement from the employee specifying whether his absence 
from work during the period for which the payment was made was due to a 
personal injury or to sickness and whether he was hospitalized for at 
least one day during this period; or by any other information which the 
employer reasonably believes establishes the employee's entitlement to 
the exclusion under section 105(d). Employers shall not be required to 
ascertain the accuracy of any written statement submitted by an employee 
in accordance with this subdivision (b)(1)(ii).

For purposes of this subdivision (b)(1), wage continuation payments 
reasonably expected by the employer to be made on behalf of the employer 
by another person shall be taken into account in determining whether the 
75 percent test contained in section 105(d) is met and in computing the 
amount of any wage continuation payment made directly by the employer 
for whom services are performed by the employee which is within the $75 
or $100 weekly rate of exclusion from the gross income of the employee 
provided in section 105(d). In making this latter computation, the 
amount excludable under section 105(d) shall be applied first against 
payments reasonably expected to be made on behalf of the employer by the 
other person and then, to the extent any part of the exclusion remains, 
against the payments made directly by the employer. In a case in which 
wage continuation payments are not paid at a constant rate for the first 
30 calendar days of the period of absence, the determination of whether 
the 75 percent test contained in section 105(d) is met shall be based 
upon the length of the employee's absence as of the end of the period 
for which the payment by the employer is made, without regard to the 
effect which any further extension of such absence may have upon the 
excludability of the payment.
    (2) The computation of the amount of any wage continuation payment 
with repect to which the employer may refrain from withholding may be 
illustrated by the following examples:

    Example 1. A, an employee of B, normally works Monday through Friday 
and has a regular weekly rate of wages of $100. On Monday, November 5, 
1974, A becomes ill, and as a result is absent from work for two weeks, 
returing to work on Monday, November 19, 1974. A is not hospitalized. 
Under B's noncontributory wage continuation plan, A receives no benefits 
for the first three working days of absence and is paid benefits 
directly by B at the rate of $85 a week thereafter ($34 for the last two 
days of the first week of absence and $85 for the second week of 
absence). No wage continuation payment is made by any other person. 
Since the benefits are entirely attributable to contributions to the 
plan by B, such benefits are wage continuation payments in their 
entirety. The wage continuation payments for the first seven calender 
days of absence are not excludable from A's gross income because A was 
not hospitalized for at least one day during his period of absence, and 
therefore B must withhold with respect to such payments. Under section 
105(a), the wage continuation payments attributable to absence after the 
first seven calendar days of absence are excludable to the extent that 
they do not exceed a rate of $75 a week. Under the principles stated in 
paragraph (e)(6)(iv) of Sec. 1.105-4 of this chapter (Income Tax 
Regulations), the wage continuation payments in this case are at a rate 
not in excess of 75 percent (\119/200\ or 59.5 percent) of A's regular 
weekly rate of wages. Accordingly, B may refrain from withholding with 
respect to $75 of the wage continuation payment attributable to the 
second week of absence.
    Example 2. Assume the facts in example 1 except that A is unable to 
return to work until Monday, February 11, 1975, and that, of

[[Page 153]]

the $85 a week of wage continuation payments $35 is paid directly by B 
and $50 is reasonably expected by B to be paid by C, an insurance 
company, on behalf of B. In such a case, both the $50 and the $35 
payments constitute wage continuation payments and the amount of such 
payments which is attributable to the first 30 calendar days of absence 
is at a rate not in excess of 75 percent (\323/440\ or 73.4 percent) of 
A's regular weekly rate of wages. Therefore, under section 105(d), the 
portion of such payments which is attributable to absence after the 
first seven calendar days of absence is excludable to the extent that it 
does not exceed a rate of $75 a week for the eighth through the 
thirtieth calendar day of absence and does not exceed a rate of $100 a 
week thereafter. B may refrain from withholding with repect to $25 a 
week (the amount by which the $75 maximum excludable amount exceeds the 
$50 reasonably expected by B to be paid by C) of his direct payments for 
the eighth through the thirtieth calendar day of absence. Thereafter, B 
may refrain from withholding with respect to the entire $35 paid 
directly by him since the maximum excludable amount ($100 a week) 
exceeds the total of payments made by B and payments which B reasonably 
expects will be made by C.

    (c) Amounts paid by employer for whom services are performed for 
period of absence beginning before January 1, 1964. Withholding is not 
required upon the amount of any wage continuation payment for a period 
of absence beginning before January 1, 1964, made to an employee 
directly by the employer for whom he performs services to the extent 
that such payment is excludable from the gross income of the employee 
under the provisions of section 105(d) in effect with respect to such 
payments, provided the records maintained by the employer--
    (1) Separately show the amount of each such payment and the 
excludable portion thereof, and
    (2) Contain data substantiating the employee's entitlement to the 
exclusion provided in section 105(d) with respect to such amount, either 
by a written statement from the employee specifying whether his absence 
from work during the period for which the payment was made was due to a 
personal injury or whether such absence was due to sickness, and, if the 
latter, whether he was hospitalized for at least one day during this 
period; or by any other information which the employer reasonably 
believes establishes the employee's entitlement to the exclusion under 
section 105(d). Employers shall not be required to ascertain the 
accuracy of the information contained in any written statement submitted 
by an employee in accordance with this paragraph (b)(8)(ii) (c)(2). For 
purposes of this paragraph (b)(8) (ii)(c), the computation of the amount 
excludable form the gross income of the employee under section 105(d) 
may be made either on the basis of the wage continuation payments which 
are made directly by the employer for whom the employee performs 
services, or on the basis of such payments in conjunction with any wage 
continuation payments made on behalf of the employer by a person who is 
regarded as an employer under section 3401(d)(1).
    (d) Amounts paid before January 1, 1977 by person other than the 
employer for whom services are performed. No tax shall be withheld upon 
any wage continuation payment made to an employee by or on behalf of a 
person who is not the employer for whom the employee performs services 
but who is regarded as an employer under section 3401(d)(1). For 
example, no tax shall be withheld with respect to wage continuation 
payments made on behalf of an employer by an insurance company under an 
accident or health policy, by a separate trust under an accident or 
health plan, or by a State agency from a sickness and disability fund 
maintained under State law.
    (e) Cross references. See sections 6001 and 6051 and the regulations 
thereunder for rules with respect to the records which must be 
maintained in connection with wage continuation payments and for rules 
with respect to the statements which must be furnished an employee in 
connection with wage continuation payments, respectively. See also 
section 105 and Sec. 1.105-4 of this chapter (Income Tax Regulations).
    (9) Value of meals and lodging. The value of any meals or lodging 
furnished to an employee by his employer is not subject to withholding 
if the value of the meals or lodging is excludable from the gross income 
of the employee. See Sec. 1.119-1 of this chapter (Income Tax 
Regulations).

[[Page 154]]

    (10) Facilities or privileges. Ordinarily, facilities or privileges 
(such as entertainment, medical services, or so-called ``courtesy'' 
discounts on purchases), furnished or offered by an employer to his 
employees generally, are not considered as wages subject to withholding 
if such facilities or privileges are of relatively small value and are 
offered or furnished by the employer merely as a means of promoting the 
health, good will, contentment, or efficiency of his employees.
    (11) Tips or gratuities. Tips or gratuities paid, prior to January 
1, 1966, directly to an employee by a customer of an employer, and not 
accounted for by the employee to the employer are not subject to 
withholding. For provisions relating to the treatment of tips received 
by an employee after December 31, 1965, as wages, see Secs. 31.3401(f)-1 
and 31.3402(k)-1.
    (12) Remuneration for services performed by permanent resident of 
Virgin Islands--(i) Exemption from withholding. No tax shall be withheld 
for the United States under chapter 24 from a payment of wages by an 
employer, including the United States or any agency thereof, to an 
employee if at the time of payment it is reasonable to believe that the 
employee will be required to satisfy his income tax obligations with 
respect to such wages under section 28(a) of the Revised Organic Act of 
the Virgin Islands (68 Stat. 508). That section provides that all 
persons whose permanent residence is in the Virgin Islands ``shall 
satisfy their income tax obligations under applicable taxing statutes of 
the United States by paying their tax on income derived from all sources 
both within and outside the Virgin Islands into the treasury of the 
Virgin Islands''.
    (ii) Claiming exemption. If the employee furnishes to the employer a 
statement in duplicate that he expects to satisfy his income tax 
obligations under section 28(a) of the Revised Organic Act of the Virgin 
Islands with respect to all wages subsequently to be paid to him by the 
employer during the taxable year to which the statement relates, the 
employer may, in the absence of information to the contrary, rely on 
such statement as establishing reasonable belief that the employee will 
so satisfy his income tax obligations. The employee's statement shall 
identify the taxable year to which it relates, and both the original and 
the duplicate copy thereof shall be signed and dated by the employee.
    (iii) Disposition of statement. The original of the statement shall 
be retained by the employer. The duplicate copy of the statement shall 
be sent by the employer to the Director of International Operations, 
Washington, D.C. 20225, on or before the last day of the calendar year 
in which the employer receives the statement from the employee.
    (iv) Applicability of subparagraph. This subparagraph has no 
application with respect to any payment of remuneration which is not 
subject to withholding by reason of any other provision of the 
regulations in this subpart.
    (13) Federal employees resident in Puerto Rico. Except as provided 
in paragraph (d) of Sec. 31.3401(a)(6)-1, the term ``wages'' includes 
remuneration for services performed by a nonresident alien individual 
who is a resident of Puerto Rico if such services are performed as an 
employee of the United States or any agency thereof. The place where the 
services are performed is immaterial for purposes of this subparagraph.
    (14) Supplemental unemployment compensation benefits. (i) 
Supplemental unemployment compensation benefits paid to an individual 
after December 31, 1970, shall be treated (for purposes of the 
provisions of Subparts E, F, and G of this part which relate to 
withholding of income tax) as if they were wages, to the extent such 
benefits are includible in the gross income of such individual.
    (ii) For purposes of this subparagraph, the term ``supplemental 
unemployment compensation benefits'' means amounts which are paid to an 
employee, pursuant to a plan to which the employer is a party, because 
of the employee's involuntary separation from the employment of the 
employer, whether or not such separation is temporary, but only when 
such separation is one resulting directly from a reduction in force, the 
discontinuance of a plant or operation, or other similar conditions.

[[Page 155]]

    (iii) For the meanings of the terms ``involuntary separation from 
the employment of the employer'' and ``other similar conditions'', see 
subparagraphs (3) and (4) of Sec. 1.501(c)(17)-1(b) of this chapter 
(Income Tax Regulations).
    (iv) As used in this subparagraph, the term ``employee'' means an 
employee within the meaning of paragraph (a) of Sec. 31.3401(c)-1, the 
term ``employer'' means an employer within the meaning of paragraph (a) 
of Sec. 31.3401(d)-1, and the term ``employment'' means employment as 
defined under the usual common law rules.
    (v) References in this chapter to wages as defined in section 
3401(a) shall be deemed to refer also to supplemental unemployment 
compensation benefits which are treated under this subparagraph as if 
they were wages.
    (c) Geographical definitions. For definition of the term ``United 
States'' and for other geographical definitions relating to the 
Continental Shelf see section 638 and Sec. 1.638-1 of this chapter.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5251, May 28, 1963; T.D. 6908, 31 FR 16775, Dec. 31, 1966; T.D. 7001, 34 
FR 1000, Jan. 23, 1969; T.D. 7068, 35 FR 17328, Nov. 11, 1970; T.D. 
7277, 38 FR 12742, May 15, 1973; T.D. 7493, 42 FR 33728, July 1, 1977; 
T.D. 7670, 45 FR 6932, Jan. 31, 1980; T.D. 7888, 48 FR 17587, Apr. 25, 
1983; T.D. 8276, 54 FR 51028, Dec. 12, 1989; T.D. 8324, 55 FR 51697, 
Dec. 17, 1990]



Sec. 31.3401(a)-1T  Question and answer relating to the definition of wages in section 3401(a) (Temporary).

    The following question and answer relates to the definition of wages 
in section 3401(a) of the Internal Revenue Code of 1954, as amended by 
section 531(d)(4) of the Tax Reform Act of 1984 (98 Stat. 886):
    Q-1: Are fringe benefits included in the definition of ``wages'' 
under section 3401(a)?
    A-1: Yes, unless specifically excluded from the definition of 
``wages'' pursuant to section 3401(a) (1) through (20). For example, a 
fringe benefit provided to or on behalf of an employee is excluded from 
the definition of ``wages'' if at the time such benefit is provided it 
is reasonable to believe that the employee will be able to exclude such 
benefit from income under section 117 or 132.
[T.D. 8004, 50 FR 756, Jan. 7, 1985]



Sec. 31.3401(a)-2  Exclusions from wages.

    (a) In general. (1) The term ``wages'' does not include any 
remuneration for services performed by an employee for his employer 
which is specifically excepted from wages under section 3401(a).
    (2) The exception attaches to the remuneration for services 
performed by an employee and not to the employee as an individual; that 
is, the exception applies only to the remuneration in an excepted 
category.

    Example. A is an individual who is employed part time by B to 
perform domestic service in his home (see Sec. 31.3401(a)(3)-1). A is 
also employed by C part time to perform services as a clerk in a 
department store owned by him. While no withholding is required with 
respect to A's remuneration for services performed in the employ of B 
(the remuneration being excluded from wages), the exception does not 
embrace the remuneration for services performed by A in the employ of C 
and withholding is required with respect to the wages for such services.

    (3) For provisions relating to the circumstances under which 
remuneration which is excepted is nevertheless deemed to be wages, and 
relating to the circumstances under which remuneration which is not 
excepted is nevertheless deemed not to be wages, see Sec. 31.3402(e)-1.
    (4) For provisions relating to payments with respect to which a 
voluntary withholding agreement is in effect, which are not defined as 
wages in section 3401(a) but which are nevertheless deemed to be wages, 
see Secs. 31.3401(a)-3 and 31.3402(p)-1.
    (b) Fees paid a public official. (1) Authorized fees paid to public 
officials such as notaries public, clerks of courts, sheriffs, etc., for 
services rendered in the performance of their official duties are 
excepted from wages and hence are not subject to withholding. However, 
salaries paid such officials by the Government, or by a Government 
agency or instrumentality, are subject to withholding.
    (2) Amounts paid to precinct workers for services performed at 
election booths in State, county, and municipal

[[Page 156]]

elections and fees paid to jurors and witnesses are in the nature of 
fees paid to public officials and therefore are not subject to 
withholding.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5251, May 28, 1963; T.D. 7096, 36 FR 5216, Mar. 18, 1971]



Sec. 31.3401(a)-3  Amounts deemed wages under voluntary withholding agreements.

    (a) In general. Notwithstanding the exceptions to the definition of 
wages specified in section 3401(a) and the regulations thereunder, the 
term ``wages'' includes the amounts described in paragraph (b)(1) of 
this section with respect to which there is a voluntary withholding 
agreement in effect under section 3402(p). References in this chapter to 
the definition of wages contained in section 3401(a) shall be deemed to 
refer also to this section (Sec. 31.3401(a)-3).
    (b) Remuneration for services. (1) Except as provided in 
subparagraph (2) of this paragraph, the amounts referred to in paragraph 
(a) of this section include any remuneration for services performed by 
an employee for an employer which, without regard to this section, does 
not constitute wages under section 3401(a). For example, remuneration 
for services performed by an agricultural worker or a domestic worker in 
a private home (amounts which are specifically excluded from the 
definition of wages by section 3401(a) (2) and (3), respectively) are 
amounts with respect to which a voluntary withholding agreement may be 
entered into under section 3402(p). See Secs. 31.3401(c)-1 and 
31.3401(d)-1 for the definitions of ``employee'' and ``employer''.
    (2) For purposes of this paragraph, remuneration for services shall 
not include amounts not subject to withholding under Sec. 31.3401(a)-
1(b)(12) (relating to remuneration for services performed by a permanent 
resident of the Virgin Islands), Sec. 31.3401(a)-2(b) (relating to fees 
paid to a public official), section 3401(a)(5) (relating to remuneration 
for services for foreign government or international organization), 
section 3401(a)(8)(B) (relating to remuneration for services performed 
in a possession of the United States (other than Puerto Rico) by 
citizens of the United States), section 3401(a)(8)(C) (relating to 
remuneration for services performed in Puerto Rico by citizens of the 
United States), section 3401(a)(11) (relating to remuneration other than 
in cash for service not in the course of employer's trade or business), 
section 3401(a)(12) (relating to payments from or to certain tax-exempt 
trusts, or under or to certain annuity plans or bond purchase plans), 
section 3401(a)(14) (relating to group-term life insurance), section 
3401(a)(15) (relating to moving expenses), or section 3401(a)(16)(A) 
(relating to tips paid in any medium other than cash).
[T.D. 7096, 36 FR 5216, Mar. 18, 1971]



Sec. 31.3401(a)-4  Reimbursements and other expense allowance amounts.

    (a) When excluded from wages. If a reimbursement or other expense 
allowance arrangement meets the requirements of section 62(c) of the 
Code and Sec. 1.62-2 and the expenses are substantiated within a 
reasonable period of time, payments made under the arrangement that do 
not exceed the substantiated expenses are treated as paid under an 
accountable plan and are not wages. In addition, if both wages and the 
reimbursement or other expense allowance are combined in a single 
payment, the reimbursement or other expense allowance must be identified 
either by making a separate payment or by specifically identifying the 
amount of the reimbursement or other expense allowance.
    (b) When included in wages--(1) Accountable plans--(i) General rule. 
Except as provided in paragraph (b)(1)(ii) of this section, if a 
reimbursement or other expense allowance arrangement satisfies the 
requirements of section 62(c) and Sec. 1.62-2, but the expenses are not 
substantiated within a reasonable period of time or amounts in excess of 
the substantiated expenses are not returned within a reasonable period 
of time, the amount paid under the arrangement in excess of the 
substantiated expenses is treated as paid under a nonaccountable plan, 
is included in wages, and is subject to withholding and payment of 
employment taxes no later than the first payroll period following the 
end of the reasonable period.

[[Page 157]]

    (ii) Per diem or mileage allowances. If a reimbursement or other 
expense allowance arrangement providing a per diem or mileage allowance 
satisfies the requirements of section 62(c) and Sec. 1.62-2, but the 
allowance is paid at a rate for each day or mile of travel that exceeds 
the amount of the employee's expenses deemed substantiated for a day or 
mile of travel, the excess portion is treated as paid under a 
nonaccountable plan and is included in wages. In the case of a per diem 
or mileage allowance paid as a reimbursement, the excess portion is 
subject to withholding and payment of employment taxes when paid. In the 
case of a per diem or mileage allowance paid as an advance, the excess 
portion is subject to withholding and payment of employment taxes no 
later than the first payroll period following the payroll period in 
which the expenses with respect to which the advance was paid (i.e., the 
days or miles of travel) are substantiated. The Commissioner may, in his 
discretion, prescribe special rules in pronouncements of general 
applicability regarding the timing of withholding and payment of 
employment taxes on per diem and mileage allowances.
    (2) Nonaccountable plans. If a reimbursement or other expense 
allowance arrangement does not satisfy the requirements of section 62(c) 
and Sec. 1.62-2 (e.g., the arrangement does not require expenses to be 
substantiated or require amounts in excess of the substantiated expenses 
to be returned), all amounts paid under the arrangement are treated as 
paid under a nonaccountable plan, are included in wages, and are subject 
to withholding and payment of employment taxes when paid.
    (c) Withholding rate. Employers may add any payments made under 
reimbursement or other expense allowance arrangements that are subject 
to income tax withholding to the employee's regular wages for a payroll 
period and compute withholding taxes on the total. Alternatively, the 
employer may withhold income tax from the reimbursement or other expense 
allowance at the flat 20-percent rate applicable to supplemental wages, 
provided the employer withholds income tax from the employee's regular 
wages and provided the reimbursement or allowance is paid separately (or 
separately identified if wages and reimbursement amounts are combined in 
a single payment). See Sec. 31.3401 (g)-1 regarding supplemental wage 
payments.
    (d) Effective dates. This section generally applies to payments made 
under reimbursement or other expense allowance arrangements received by 
an employee on or after July 1, 1990, with respect to expenses paid or 
incurred on or after July 1, 1990. Paragraph (b)(1)(ii) of this section 
applies to payments made under reimbursement or other expense allowance 
arrangements received by an employee on or after January 1, 1991, with 
respect to expenses paid or incurred on or after January 1, 1991.
[T.D. 8324, 55 FR 51698, Dec. 17, 1990]



Sec. 31.3401(a)(1)-1  Remuneration of members of the Armed Forces of the United States for active service in combat zone or while hospitalized as a result of 
          such service.

    Remuneration paid for active service as a member of the Armed Forces 
of the United States performed in a month during any part of which such 
member served in a combat zone (as determined under section 112) or is 
hospitalized at any place as a result of wounds, disease, or injury 
incurred while serving in such a combat zone is excepted from wages and 
is, therefore, not subject to withholding. The exception with respect to 
hospitalization is applicable, however, only if during all of such month 
there are combatant activities in some combat zone (as determined under 
section 112). See Sec. 1.112-1 of this chapter (Income Tax Regulations).



Sec. 31.3401(a)(2)-1  Agricultural labor.

    The term ``wages'' does not include remuneration for services which 
constitute agricultural labor as defined in section 3121(g). For 
regulations relating to the definition of the term ``agricultural 
labor'', see Sec. 31.3121(g)-1.



Sec. 31.3401(a)(3)-1  Remuneration for domestic service.

    (a) In a private home. (1) Remuneration paid for services of a 
household nature performed by an employee in or about a private home of 
the person by whom he is employed is excepted from

[[Page 158]]

wages and hence is not subject to withholding. A private home is a fixed 
place of abode of an individual or family. A separate and distinct 
dwelling unit maintained by an individual in an apartment house, hotel, 
or other similar establishment may constitute a private home. If a 
dwelling house is used primarily as a boarding or lodging house for the 
purpose of supplying board or lodging to the public as a business 
enterprise, it is not a private home, and the remuneration paid for 
services performed therein is not within the exception.
    (2) In general, services of a household nature in or about a private 
home include services performed by cooks, waiters, butlers, 
housekeepers, governesses, maids, valets, baby sitters, janitors, 
laundresses, furnacemen, caretakers, handymen, gardeners, footmen, 
grooms, and chauffeurs of automobiles for family use.
    (b) In a local college club or local chapter of a college fraternity 
or sorority. (1) Remuneration paid for services of a household nature 
performed by an employee in or about the club rooms or house of a local 
college club or of a local chapter of a college fraternity or sorority 
by which he is employed is excepted from wages and hence is not subject 
to withholding. A local college club or local chapter of a college 
fraternity or sorority does not include an alumni club or chapter. If 
the club rooms or house of a local college club or local chapter of a 
college fraternity or sorority is used primarily for the purpose of 
supplying board or lodging to students or the public as a business 
enterprise, the remuneration paid for services performed therein is not 
within the exception.
    (2) In general, services of a household nature in or about the club 
rooms or house of a local college club or local chapter of a college 
fraternity or sorority include services rendered by cooks, waiters, 
butlers, maids, janitors, laundresses, furnacemen, handymen, gardeners, 
housekeepers, and housemothers.
    (c) Remuneration not excepted. Remuneration paid for services not of 
a household nature, such as services performed as a private secretary, 
tutor, or librarian, even though performed in the employer's private 
home or in a local college club or local chapter of a college fraternity 
or sorority, is not within the exception. Remuneration paid for services 
of a household nature is not within the exception if performed in or 
about rooming, or lodging houses, boarding houses, clubs (except local 
college clubs), hotels, hospitals, eleemosynary institutions, or 
commercial offices or establishments.



Sec. 31.3401(a)(4)-1  Cash remuneration for service not in the course of employer's trade or business.

    (a) Cash remuneration paid for services not in the course of the 
employer's trade or business performed by an employee for an employer in 
a calendar quarter is excepted from wages and hence is not subject to 
withholding unless--
    (1) The cash remuneration paid for such services performed by the 
employee for the employer in the calendar quarter is $50 or more; and
    (2) Such employee is regularly employed in the calendar quarter by 
such employer to perform such services.

Unless the tests set forth in both paragraphs (a)(1) and (2) of this 
section are met, cash remuneration for service not in the course of the 
employer's trade or business is excluded from wages. (For provisions 
relating to the exclusion from wages of remuneration paid in any medium 
other than cash for services not in the course of the employer's trade 
or business, see Sec. 31.3401(a)(11)-1.)
    (b) The term ``services not in the course of the employer's trade or 
business'' includes services that do not promote or advance the trade or 
business of the employer. As used in this section, the term does not 
include service not in the course of the employer's trade or business 
performed on a farm operated for profit or domestic service in a private 
home, local college club, or local chapter of a college fraternity or 
sorority. Accordingly, this exception does not apply with respect to 
remuneration which is excepted from wages under section 3401(a)(2) or 
section 3401(a)(3) (see Secs. 31.3401(a)(2)-1 and 31.3401(a)(3)-1, 
respectively). Remuneration paid for service performed for a corporation 
does not come within the exception.

[[Page 159]]

    (c) The test relating to cash remuneration of $50 or more is based 
on the remuneration earned during a calendar quarter rather than on the 
remuneration paid in a calendar quarter. However, for purposes of 
determining whether the test is met, it is also required that the 
remuneration be paid, although it is immaterial when the remuneration is 
paid. Furthemore, in determining whether $50 or more has been paid for 
service not in the course of the employer's trade or business, only cash 
remuneration for such service shall be taken into account. The term 
``cash remuneration'' includes checks and other monetary media of 
exchange. Remuneration paid in any other medium, such as lodging, food, 
or other goods or commodities, is disregarded in determining whether the 
cash-remuneration test is met.
    (d) For purposes of this exception, an individual is deemed to be 
regularly employed by an employer during a calendar quarter only if--
    (1) Such individual performs service not in the course of the 
employer's trade or business for such employer for some portion of the 
day on at least 24 days (whether or not consecutive) during such 
calendar quarter; or
    (2) Such individual was regularly employed (as determined under 
paragraph (d)(1) of this section) by such employer in the performance of 
service not in the course of the employer's trade or business during the 
preceding calendar quarter.
    (e) In determining whether an employee has performed service not in 
the course of the employer's trade or business on at least 24 days 
during a calendar quarter, there shall be counted as one day--
    (1) Any day or portion thereof on which the employee actually 
performs such service; and
    (2) Any day or portion thereof on which the employee does not 
perform service of the prescribed character but with respect to which 
cash remuneration is paid or payable to the employee for such service, 
such as a day on which the employee is sick or on vacation.

An employee who on a particular day reports for work and, at the 
direction of his employer, holds himself in readiness to perform service 
not in the course of the employer's trade or business shall be 
considered to be engaged in the actual performance of such service on 
that day. For purposes of this exception, a day is a continuous period 
of 24 hours commencing at midnight and ending at midnight.



Sec. 31.3401(a)(5)-1  Remuneration for services for foreign government or international organization.

    (a) Services for foreign government. (1) Remuneration paid for 
services performed as an employee of a foreign government is excepted 
from wages and hence is not subject to withholding. The exception 
includes not only remuneration paid for services performed by 
ambassadors, ministers, and other diplomatic officers and employees but 
also remuneration paid for services performed as a consular or other 
officer or employee of a foreign government or as a nondiplomatic 
representative of such a government. However, the exception does not 
include remuneration for services performed for a corporation created or 
organized in the United States or under the laws of the United States or 
any State (including the District of Columbia or the Territory of Alaska 
or Hawaii) or of Puerto Rico even though such corporation is wholly 
owned by such a government.
    (2) The citizenship or residence of the employee and the place where 
the services are performed are immaterial for purposes of the exception.
    (b) Services for international organization. (1) Subject to the 
provisions of section 1 of the International Organizations Immunities 
Act (22 U.S.C. 288), remuneration paid for services performed within or 
without the United States by an employee for an international 
organization as defined in section 7701(a)(18) is excepted from wages 
and hence is not subject to withholding. The term ``employee'' as used 
in the preceding sentence includes not only an employee who is a citizen 
or resident of the United States but also an employee who is a 
nonresident alien individual. The term ``employee'' also includes an 
officer. An organization designated by the President through appropriate 
Executive order as entitled to enjoy the privileges, exemptions,

[[Page 160]]

and immunities provided in the International Organizations Immunities 
Act may enjoy the benefits of the exclusion from wages with respect to 
remuneration paid for services performed for such organization prior to 
the date of the issuance of such Executive order, if (i) the Executive 
order does not provide otherwise and (ii) the organization is a public 
international organization in which the United States participates, 
pursuant to a treaty or under the authority of an act of Congress 
authorizing such participation or making an appropriation for such 
participation, at the time such services are performed.
    (2) Section 7701(a)(18) provides as follows:

    Sec. 7701. Definitions. (a) When used in this title, where not 
otherwise distinctly expressed or manifestly incompatible with the 
intent thereof--

                                * * * * *

    (18) International organization. The term ``international 
organization'' means a public international organization entitled to 
enjoy privileges, exemptions, and immunities as an international 
organization under the International Organizations Immunities Act (22 
U.S.C. 288-288f).

    (3) Section 1 of the International Organizations Immunities Act 
provides as follows:

    Section 1. [International Organizations Immunities Act.] For the 
purposes of this title [International Organizations Immunities Act], the 
term ``international organization'' means a public international 
organization in which the United States participates pursuant to any 
treaty or under the authority of any Act of Congress authorizing such 
participation or making an appropriation for such participation, and 
which shall have been designated by the President through appropriate 
Executive order as being entitled to enjoy the privileges, exemptions, 
and immunities herein provided. The President shall be authorized, in 
the light of the functions performed by any such international 
organization, by appropriate Executive order to withhold or withdraw 
from any such organization or its officers or employees any of the 
privileges, exemption, and immunities provided for in this title 
(including the amendments made by this title) or to condition or limit 
the enjoyment by any such organization or its officers or employees of 
any such privilege, exemption, or immunity. The President shall be 
authorized, if in his judgment such action should be justified by reason 
of the abuse by an international organization or its officers and 
employees of the privileges, exemptions, and immunities herein provided 
or for any other reason, at any time to revoke the designation of any 
international organization under this section, whereupon the 
international organization in question shall cease to be classed as an 
international organization for the purposes of this title.



Sec. 31.3401(a)(6)-1  Remuneration for services of nonresident alien individuals.

    (a) In general. All remuneration paid after December 31, 1966, for 
services performed by a nonresident alien individual, if such 
remuneration otherwise constitutes wages within the meaning of 
Sec. 31.3401(a)-1 and if such remuneration is effectively connected with 
the conduct of a trade or business within the United States, is subject 
to withholding under section 3402 unless excepted from wages under this 
section. In regard to wages paid under this section after February 28, 
1979, the term ``nonresident alien individual'' does not include a 
nonresident alien individual treated as a resident under section 6013 
(g) or (h).
    (b) Remuneration for services performed outside the United States. 
Remuneration paid to a nonresident alien individual (other than a 
resident of Puerto Rico) for services performed outside the United 
States is excepted from wages and hence is not subject to withholding.
    (c) Remuneration for services of residents of Canada or Mexico who 
enter and leave the United States at frequent intervals--(1) 
Transportation service. Remuneration paid to a nonresident alien 
individual who is a resident of Canada or Mexico and who, in the 
performance of his duties in transportation service between points in 
the United States and points in such foreign country, enters and leaves 
the United States at frequent intervals, is excepted from wages and 
hence is not subject to withholding. This exception applies to personnel 
engaged in railroad, bus, truck, ferry, steamboat, aircraft, or other 
transportation services and applies whether the employer is a domestic 
or foreign entity. Thus, the remuneration of a nonresident alien 
individual who is a resident of Canada and an employee of a

[[Page 161]]

domestic railroad, for services as a member of the crew of a train 
operating between points in Canada and points in the United States, is 
not subject to withholding under section 3402.
    (2) Service on international projects. Remuneration paid to a 
nonresident alien individual who is a resident of Canada or Mexico and 
who, in the performance of his duties in connection with the 
construction, maintenance, or operation of a waterway, viaduct, dam, or 
bridge traversed by, or traversing, the boundary between the United 
States and Canada or the boundary between the United States and Mexico, 
as the case may be, enters and leaves the United States at frequent 
intervals, is excepted from wages and hence is not subject to 
withholding. Thus, the remuneration of a nonresident alien individual 
who is a resident of Canada, for services as an employee in connection 
with the construction, maintenance, or operation of the Saint Lawrence 
Seaway and who, in the performance of such services, enters and leaves 
the United States at frequent intervals, is not subject to withholding 
under section 3402.
    (3) Limitation. The exceptions provided by this paragraph do not 
apply to the remuneration of a resident of Canada or of Mexico who is 
employed wholly within the United States as, for example, where such a 
resident is employed to perform service at a fixed point or points in 
the United States, such as a factory, store, office, or designated area 
or areas within the United States, and who commutes from his home in 
Canada or Mexico, in the pursuit of his employment within the United 
States.
    (4) Certificate required. In order for an exception provided by this 
paragraph to apply for any taxable year, the nonresident alien employee 
must furnish his employer a statement in duplicate for the taxable year 
setting forth the employee's name, address, and taxpayer identifying 
number, and certifying (i) that he is not a citizen or resident of the 
United States, (ii) that he is a resident of Canada or Mexico, as the 
case may be, and (iii) that he expects to meet the requirements of 
paragraph (c)(1) or (2) of this section with respect to remuneration to 
be paid during the taxable year in respect of which the statement is 
filed. The statement shall be dated, shall identify the taxable year to 
which it relates, shall be signed by the employee, and shall contain, or 
be verified by, a written declaration that it is made under the 
penalties of perjury. No particular form is prescribed for this 
statement. The duplicate copy of each statement filed during any 
calendar year pursuant to this paragraph shall be forwarded by the 
employer with, and attached to, the Form 1042S required by paragraph (c) 
of Sec. 1.1461-2 with respect to such remuneration for such calendar 
year.
    (d) Remuneration for services performed by residents of Puerto Rico. 
(1) Remuneration paid for services performed in Puerto Rico by a 
nonresident alien individual who is a resident of Puerto Rico for an 
employer (other than the United States or any agency thereof) is 
excepted from wages and hence is not subject to withholding.
    (2) Remuneration paid for services performed outside the United 
States but not in Puerto Rico by a nonresident alien individual who is a 
resident of Puerto Rico for an employer (other than the United States or 
any agency thereof) is excepted from wages and hence is not subject to 
withholding if such individual does not expect to be a resident of 
Puerto Rico during the entire taxable year. In order for the exception 
provided by this subparagraph to apply for any taxable year, the 
nonresident alien employee must furnish his employer a statement for the 
taxable year setting forth the employee's name and address and 
certifying (i) that he is not a citizen or resident of the United States 
and (ii) that he is a resident of Puerto Rico but does not expect to be 
a resident of Puerto Rico during the entire taxable year. The statement 
shall be dated, shall identify the taxable year to which it relates, 
shall be signed by the employee, and shall contain, or be verified by, a 
written declaration that it is made under the penalties of perjury. No 
particular form is prescribed for this statement.
    (3) Remuneration paid for services performed outside the United 
States by a nonresident alien individual who is a resident of Puerto 
Rico as an employee of the United States or any agency

[[Page 162]]

thereof is excepted from wages and hence is not subject to withholding 
if such individual does not expect to be a resident of Puerto Rico 
during the entire taxable year. In order for the exception provided by 
this subparagraph to apply for any taxable year, the nonresident alien 
employee must furnish his employer a statement for the taxable year 
setting forth the employee's name and address and certifying (i) that he 
is not a citizen or resident of the United States and (ii) that he is a 
resident of Puerto Rico but does not expect to be a resident of Puerto 
Rico during the entire taxable year. This statement shall be dated, 
shall identify the taxable year to which it relates, shall be signed by 
the employee, and shall contain, or be verified by, a written 
declaration that it is made under the penalties of perjury. No 
particular form is prescribed for this statement.
    (e) Exemption from income tax for remuneration paid for services 
performed before January 1, 1999. Remuneration paid for services 
performed within the United States by a nonresident alien individual 
before January 1, 1999, is excepted from wages and hence is not subject 
to withholding if such remuneration is, or will be, exempt from income 
tax imposed by chapter 1 of the Internal Revenue Code by reason of a 
provision of the Internal Revenue Code or an income tax convention to 
which the United States is a party. In order for the exception provided 
by this paragraph to apply for any taxable year, the nonresident alien 
employee must furnish his employer a statement in duplicate for the 
taxable year setting forth the employee's name, address, and taxpayer 
identifying number, and certifying (1) that he is not a citizen or 
resident of the United States, (2) that the remuneration to be paid to 
him during the taxable year is, or will be, exempt from the tax imposed 
by chapter 1 of the Code, and (3) the reason why such remuneration is so 
exempt from tax. If the remuneration is claimed to be exempt from tax by 
reason of a provision of an income tax convention to which the United 
States is a party, the statement shall also indicate the provision and 
tax convention under which the exemption is claimed, the country of 
which the employee is a resident, and sufficient facts to justify the 
claim to exemption. The statement shall be dated, shall identify the 
taxable year for which it is to apply and the remuneration to which it 
relates, shall be signed by the employee, and shall contain, or be 
verified by, a written declaration that it is made under the penalties 
of perjury. No particular form is prescribed for this statement. The 
duplicate copy of each statement filed during any calendar year pursuant 
to this paragraph shall be forwarded by the employer with, and attached 
to, the Form 1042S required by paragraph (c) of Sec. 1.1461-2 with 
respect to such remuneration for such calendar year.
    (f) Exemption from income tax for remuneration paid for services 
performed after December 31, 1998. Remuneration paid for services 
performed within the United States by a nonresident alien individual 
after December 31, 1998, is excepted from wages and hence is not subject 
to withholding if such remuneration is, or will be, exempt from the 
income tax imposed by chapter 1 of the Internal Revenue Code by reason 
of a provision of the Internal Revenue Code or an income tax convention 
to which the United States is a party. An employer may rely on a claim 
that the employee is entitled to an exemption from tax if it complies 
with the requirements of Sec. 1.1441-1(e)(1)(ii) of this chapter (for a 
claim based on a provision of the Internal Revenue Code) or Sec. 1.1441-
4(b)(2) of this chapter (for a claim based on an income tax convention).
[T.D. 6908, 31 FR 16775, Dec. 31, 1966, as amended by T.D. 7670, 45 FR 
6932, Jan. 31, 1980; T.D. 7977, 49 FR 36836, Sept. 20, 1984; T.D. 8734, 
62 FR 53493, Oct. 14, 1997]

    Effective Date Note: By T.D. 8734, 62 FR 53493, Oct. 14, 1997, 
Sec. 31.3401(a)(6)-1 was amended by revising the section heading; 
revising the paragraph heading and first sentence of paragraph (e); 
adding paragraph (f); and removing the authority citation at the end of 
the section, effective Jan. 1, 1999. For the convenience of the user, 
the superseded text is set forth as follows:

Sec. 31.3401(a)(6)-1  Remuneration for services of nonresident alien 
          individuals paid after December 31, 1966.

                                * * * * *

[[Page 163]]

    (e) Income exempt from income tax. Remuneration paid for services 
performed within the United States by a nonresident alien individual is 
excepted from wages and hence is not subject to withholding if such 
remuneration is, or will be, exempt from the income tax imposed by 
chapter 1 of the Code by reason of a provision of the Internal Revenue 
Code or an income tax convention to which the United States is a party.* 
* *

(Secs. 1441(c)(4) (80 Stat. 1553; 26 U.S.C. 1441(c)(4)), 3401(a)(6) (80 
Stat. 1554; 26 U.S.C. 3401(a)(6)), and 7805 (68A Stat. 917; 26 U.S.C. 
7805) of the Internal Revenue Code of 1954)

[T.D. 6908, 31 FR 16775, Dec. 31, 1966, as amended by T.D. 7670, 45 FR 
6932, Jan. 31, 1980; T.D. 7977, 49 FR 36836, Sept. 20, 1984]



Sec. 31.3401(a)(6)-1A  Remuneration for services of certain nonresident alien individuals paid before January 1, 1967.

    (a) Except in the case of certain nonresident alien individuals who 
are residents of Canada, Mexico, or Puerto Rico or individuals who are 
temporarily present in the United States as nonimmigrants under 
subparagraph (F) or (J) of section 101(a)(15) of the Immigration and 
Nationality Act (8 U.S.C. 1101), as amended, remuneration for services 
performed by nonresident alien individuals does not constitute wages 
subject to withholding under section 3402. For withholding of income tax 
on remuneration paid for services performed within the United States in 
the case of nonresident alien individuals generally, see Sec. 1.1441-1 
and following of this chapter (Income Tax Regulations).
    (b) Remuneration paid to nonresident aliens who are residents of a 
contiguous country (Canada or Mexico) and who enter and leave the United 
States at frequent intervals is not excepted from wages under section 
3401(a)(6). See, however, Sec. 31.3401(a)(7)-1, relating to remuneration 
paid to such nonresident alien individuals when engaged in 
transportation service.
    (c) Remuneration paid to a nonresident alien individual for services 
performed in Puerto Rico for an employer (other than the United States 
or any agency thereof) is excepted from wages and hence is not subject 
to withholding, even though such alien individual is a resident of 
Puerto Rico at the time when such services are performed. Wages paid for 
services performed by a nonresident alien individual who is a resident 
of Puerto Rico are subject to withholding if such services are performed 
as an employee of the United States or any agency thereof. The place of 
performance of such services is immaterial, provided such alien 
individual is a resident of Puerto Rico at the time of performance of 
the services. Wages representing retirement pay for services in the 
Armed Forces of the United States, the Coast and Geodetic Survey, or the 
Public Health Service, or a disability annuity paid under the provisions 
of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C. 
1081; 60 Stat. 1021), are subject to withholding, under the limitations 
specified in paragraph (b)(1)(ii) of Sec. 31.3401(a)-1, in the case of 
an alien resident of Puerto Rico.
    (d) (1) Remuneration paid after 1961 to a nonresident alien 
individual who is temporarily present in the United States as a 
nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the 
Immigration and Nationality Act (8 U.S.C. 1101), as amended, is not 
excepted from wages under section 3401(a)(6) if the remuneration is 
exempt from withholding under section 1441(a) by reason of section 
1441(c)(4)(B) and is not exempt from taxation under section 872(b)(3). 
See Secs. 1.872-2 and 1.1441-4 of this chapter (Income Tax Regulations). 
A nonresident alien individual who is temporarily present in the United 
States as a nonimmigrant under subparagraph (J) includes an alien 
individual admitted to the United States as an ``exchange visitor'' 
under section 201 of the United States Information and Educational 
Exchange Act of 1948 (22 U.S.C. 1446).
    (2) Section 101 of the Immigration and Nationality Act (8 U.S.C. 
1101), as amended, provides in part, as follows:

    Sec. 101. Definitions. [Immigration and Nationality Act (66 Stat. 
166)]
    (a) As used in this chapter--* * *
    (15) The term ``immigrant'' means every alien except an alien who is 
within one of the following classes of nonimmigrant aliens--

                                * * * * *

    (F) (i) An alien having a residence in a foreign country which he 
has no intention of

[[Page 164]]

abandoning, who is a bona fide student qualified to pursue a full course 
of study and who seeks to enter the United States temporarily and solely 
for the purpose of pursuing such a course of study at an established 
institution of learning or other recognized place of study in the United 
States, particularly designated by him and approved by the Attorney 
General after consultation with the Office of Education of the United 
States, which institution or place of study shall have agreed to report 
to the Attorney General the termination of attendance of each 
nonimmigrant student, and if any such institution of learning or place 
of study fails to make reports promptly the approval shall be withdrawn, 
and (ii) the alien spouse and minor children of any such alien if 
accompanying him or following to join him;

                                * * * * *

    (J) An alien having a residence in a foreign country which he has no 
intention of abandoning who is a bona fide student, scholar, trainee, 
teacher, professor, research assistant, specialist, or leader in a field 
of specialized knowledge or skill, or other person of similar 
description, who is coming temporarily to the United States as a 
participant in a program designated by the Secretary of State, for the 
purpose of teaching, instructing or lecturing, studying, observing, 
conducting research, consulting, demonstrating special skills, or 
receiving training, and the alien spouse and minor children of any such 
alien if accompanying him or following to join him.

    (e) This section shall not apply with respect to remuneration paid 
after December 31, 1966. For rules with respect to such remuneration see 
Sec. 31.3401(a)(6)-1.

[Sec. 101. Immigration and Nationality Act, as amended by sec. 101, Act 
of June 27, 1952, 66 Stat. 166; sec. 109, Act of Sept. 21, 1961, 75 
Stat. 534]

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5251, May 28, 1963; T.D. 6727, 29 FR 5869, May 5, 1964; T.D. 6908, 31 FR 
16775, Dec. 31, 1966]



Sec. 31.3401(a)(7)-1  Remuneration paid before January 1, 1967, for services performed by nonresident alien individuals who are residents of a contiguous 
          country and who enter and leave the United States at frequent 
          intervals.

    (a) Transportation service. Remuneration paid to nonresident aliens 
who are residents of a contiguous country (Canada or Mexico) and who, in 
the performance of their duties in transportation service between points 
in the United States and points in a contiguous country, enter and leave 
the United States at frequent intervals, is excepted from wages and 
hence is not subject to withholding. This exception applies to personnel 
engaged in railroad, bus, ferry, steamboat, and aircraft services and 
applies whether the employer is a domestic or foreign entity. Thus, the 
remuneration of a nonresident alien individual who is a resident of 
Canada and an employee of a domestic railroad, for services as a member 
of the crew of a train operating between points in Canada and points in 
the United States, is not subject to withholding under section 3402.
    (b) Service on international projects. Remuneration paid to 
nonresident aliens who are residents of a contiguous country (Canada or 
Mexico) and who, in the performance of their duties in connection with 
the construction, maintenance or operation of a waterway, viaduct, dam, 
or bridge traversed by or traversing the boundary between the United 
States and Canada or the boundary between the United States and Mexico, 
as the case may be, enter and leave the United States at frequent 
intervals, is excepted from wages and hence is not subject to 
withholding. Thus, the remuneration of a nonresident alien individual 
who is a resident of Canada, for services as an employee in connection 
with the construction, maintenance, or operation of the Saint Lawrence 
Seaway and who, in the performance of such services, enters and leaves 
the United States at frequent intervals, is not subject to withholding 
under section 3402.
    (c) Limitation on application of section. The exception provided by 
this section has no application to the remuneration of a resident of 
Canada or of Mexico who is employed wholly within the United States as, 
for example, where such a resident is employed to perform service at a 
fixed point or points in the United States, such as a factory, store, 
office, or designated area or areas within the United States, and who 
commutes from his home in Canada or Mexico in the pursuit of his 
employment within the United States.

[[Page 165]]

    (d) Certificate required. In order for the exception to apply, the 
nonresident alien employee must furnish his employer a statement setting 
forth the employee's name and address and certifying (1) that he is not 
a citizen of the United States, (2) that he is a resident of Canada or 
Mexico, as the case may be, and (3) the approximate period of time 
during which he has had such status. Such statement shall be dated, 
shall be signed by the employee, and shall contain, or be verified by, a 
written declaration that it is made under the penalties of perjury. No 
particular form is prescribed for this statement.
    (e) Effective date. This section shall not apply with respect to 
remuneration paid after December 31, 1966. For rules with respect to 
such remuneration see Sec. 31.3401(a)(6)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6908, 31 FR 
16776, Dec. 31, 1966]



Sec. 31.3401(a)(8)(A)-1  Remuneration for services performed outside the United States by citizens of the United States.

    (a) Remuneration excluded from gross income under section 911. (1) 
(i) Remuneration paid for services performed outside the United States 
for an employer (other than the United States or any agency thereof) by 
a citizen of the United States does not constitute wages and hence is 
not subject to withholding, if at the time of payment it is reasonable 
to believe that such remuneration will be excluded from gross income 
under the provisions of section 911. The reasonable belief contemplated 
by the statute may be based upon any evidence reasonably sufficient to 
induce such belief, even though such evidence may be insufficient upon 
closer examination by the district director or the courts finally to 
establish that the remuneration is excludable from gross income under 
the provisions of section 911. The reasonable belief shall be based upon 
the application of section 911 and the regulations thereunder in Part 1 
of this chapter (Income Tax Regulations).
    (ii) Remuneration paid by an employer to an employee constitutes 
wages, and hence is subject to withholding only to the extent that the 
remuneration is expected to exceed the aggregate amount which is 
excludable from the employee's gross income under section 911(a). For 
amounts paid after December 31, 1984, the determination of the amount 
subject to withholding shall be made by applying the excludable amount, 
on a pro rata basis, to each payment of remuneration to the employee. 
For this purpose, an employer is not required to ascertain information 
with respect to amounts received by his employee from any other source; 
but, if the employer has such information, he shall take it into account 
in determining whether the earned income of the employee is in excess of 
the applicable limitation. For purposes of section 911(d)(5) and 
Sec. 1.911-2(c), relating to an employee who states to the authorities 
of a foreign country that he is not a resident of that country, the 
employer is not required to ascertain whether such a statement has been 
made; but if an employer knows that such a statement has been made, he 
shall presume that the employee is not a bona fide resident of that 
country, unless the employer also knows that the authorities of the 
foreign country have determined, notwithstanding the statement that the 
employee is a resident of that country. For purposes of section 
911(d)(1) or Sec. 1.911-2(a) relating to the definition of a qualified 
individual, the reasonable belief contemplated by the statute may be 
based on a presumption as set forth in subparagraph (2) or (3) of this 
paragraph. For purposes of sections 911(a)(2) and 911(c)(2) and 
Sec. 1.911-4(b) and (d)(1), relating to the housing cost amount 
exclusion and the definition of housing expenses, the reasonable belief 
contemplated by the statute may be based on the presumption set forth in 
subparagraph (4) of this paragraph.
    (2)(i) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee will maintain a tax 
home in a foreign country or countries and be a bona fide resident of a 
foreign country or countries, within the meaning of section 911(d)(1), 
for an uninterrupted period which includes each taxable year of the 
employee, or applicable portion thereof, in respect of which the

[[Page 166]]

employee properly executes and delivers to the employer a statement that 
the employee meets or will meet the requirement of Sec. 1.911-2(a) 
relating to maintaining a tax home and a bona fide residence in a 
foreign country for the taxable year. This statement must set forth the 
facts alleged as the basis for this determination and contain a 
declaration by the employee that the statement is made under the 
penalties of perjury. Sample forms of acceptable statements may be 
obtained by writing to the Foreign Operations District, Internal Revenue 
Service, Washington, D.C. 20225 (Form IO-673).
    (ii) If the employer was entitled to presume for the two consecutive 
taxable years immediately preceding an employee's current taxable year 
that such employee was a bona fide resident of a foreign country or 
countries for an uninterrupted period which includes such preceding 
taxable years, he may, if such employee is residing in a foreign country 
on the first day of such current taxable year, presume, in the absence 
of cause for a reasonable belief to the contrary, and without obtaining 
from the employee the statement prescribed in subdivision (i) of this 
subparagraph, that the employee will be a bona fide resident of a 
foreign country or countries in such current taxable year.
    (3) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee will maintain a tax 
home in a foreign country or countries and be present in a foreign 
country or countries during at least 330 full days during any period of 
twelve consecutive months, within the meaning of section 911(d)(1), and 
that such period includes each taxable year of the employee, or 
applicable portion thereof, in respect of which the employee properly 
executes and delivers to the employer a statement that the employee 
meets or will meet the requirements of Sec. 1.911-2(a) relating to 
maintaining a tax home and being physically present in a foreign country 
for the taxable year. This statement must set forth the facts alleged as 
the basis for this determination and contain a declaration by the 
employee that the statement is made under the penalties of perjury. 
Sample forms of acceptable statements may be obtained by writing to the 
Foreign Operations District, Internal Revenue Service, Washington, D.C. 
20225 (Form IO-673).
    (4) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee's housing cost amount 
will be the amount shown on a statement properly executed and delivered 
to the employer. This statement must set forth the employee's estimation 
of the following items: housing expenses (as defined in Sec. 1.911-
4(b)), the housing cost amount exclusion (as defined in Sec. 1.911-
4(d)(1)), and the qualifying period (as defined in Sec. 1.911-2(a)). The 
statement must contain a declaration by the employee that it is made 
under the penalties of perjury. Sample forms of acceptable statements 
may be obtained by writing to the Foreign Operations District, Internal 
Revenue Service, Washington, D.C. 20225 (IO-673). The employer may not 
rely on a statement from an employee if the employer, based on his or 
her knowledge of housing costs in the vicinity of the employee's tax 
home (as defined in Sec. 1.911-2(b)), believes the employee's housing 
expenses are lavish or extravagant under the circumstances.
    (b) Remuneration subject to withholding of income tax under law of a 
foreign country or a possession of the United States. (1) Remuneration 
paid for services performed in a foreign country or in a possession of 
the United States for an employer (other than the United States or any 
agency thereof) by a citizen of the United States does not constitute 
wages and hence is not subject to withholding, if at the time of the 
payment of such remuneration the employer is required by the law of any 
foreign country or of any possession of the United States to withhold 
income tax upon such remuneration. This paragraph, insofar as it relates 
to remuneration paid for services performed in a possession of the 
United States, applies only with respect to remuneration paid on or 
after August 9, 1955.
    (2) Remuneration is not exempt from withholding under this paragraph 
if the employer is not required by the law of a foreign country or of a 
possession of the United States to withhold income tax upon such 
remuneration. Mere

[[Page 167]]

agreements between the employer and the employee whereby the estimated 
income tax of a foreign country or of a possession of the United States 
is withheld from the remuneration in anticipation of actual liability 
under the law of such country or possession will not suffice.
    (3) The exemption from withholding provided by this paragraph does 
not apply by reason of withholding of income tax pursuant to the law of 
a territory of the United States, of a political subdivision of a 
possession of the United States, or of a political subdivision of a 
foreign state.
    (4) For provisions relating to remuneration for services performed 
by a permanent resident of the Virgin Islands, see paragraph (b)(12) of 
Sec. 31.3401(a)-1.
    (c) Limitation on application of section. This section has no 
application to the remuneration paid to a citizen of the United States 
for services performed outside the United States as an employee of the 
United States or any agency thereof.

(Approved by the Office of Management and Budget under control number 
1545--0067)

(Sec. 911, 95 Stat. 194; 26 U.S.C. 911), sec. 7805 (68A Stat. 917; 26 
U.S.C. 7805) of the Internal Revenue Code of 1954)

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6697, 28 FR 
13745, Dec. 17, 1963; T.D. 8006, 50 FR 2977, Jan. 23, 1985]



Sec. 31.3401(a)(8)(B)-1  Remuneration for services performed in possession of the United States (other than Puerto Rico) by citizen of the United States.

    (a) Remuneration paid for services for an employer (other than the 
United States or any agency thereof) performed by a citizen of the 
United States within a possession of the United States (other than 
Puerto Rico) does not constitute wages and hence is not subject to 
withholding, if it is reasonable to believe that at least 80 percent of 
the remuneration to be paid to the employee by such employer during the 
calendar year will be for such services. The reasonable belief 
contemplated by section 3401(a)(8)(B) may be based upon any evidence 
reasonably sufficient to induce such belief, even though such evidence 
may be insufficient upon closer examination by the district director or 
the courts finally to establish that at least 80 percent of the 
remuneration paid by the employer to the employee during the calendar 
year was for services performed within such a possession of the United 
States.
    (b) This section has no application to remuneration paid to a 
citizen of the United States for services performed in any possession of 
the United States as an employee of the United States or any agency 
thereof.
    (c) For provisions relating to remuneration for services performed 
by a permanent resident of the Virgin Islands, see paragraph (b)(12) of 
Sec. 31.3401(a)-1.



Sec. 31.3401(a)(8)(C)-1  Remuneration for services performed in Puerto Rico by citizen of the United States.

    (a) Remuneration paid for services performed within Puerto Rico for 
an employer (other than the United States or any agency thereof) by a 
citizen of the United States does not constitute wages and hence is not 
subject to withholding, if it is reasonable to believe that during the 
entire calendar year the employee will be a bona fide resident of Puerto 
Rico. The reasonable belief contemplated by section 3401(a)(8)(C) may be 
based upon any evidence reasonably sufficient to induce such belief, 
even though such evidence may be insufficient upon closer examination by 
the district director or the courts finally to establish that the 
employee was a bona fide resident of Puerto Rico for the entire calendar 
year.
    (b) The employer may, in the absence of cause for a reasonable 
belief to the contrary, presume that an employee will be a bona fide 
resident of Puerto Rico during the entire calendar year.
    (1) Unless the employee is known by the employer to have maintained 
his abode at a place outside Puerto Rico at some time during the current 
or the preceding calendar year; or
    (2) In any case where the employee files with the employer a 
statement (containing a declaration under the penalties of perjury that 
such statement is true to the best of the employee's knowledge and 
belief) that such

[[Page 168]]

employee has at all times during the current calendar year been a bona 
fide resident of Puerto Rico and that he intends to remain a bona fide 
resident of Puerto Rico during the entire remaining portion of such 
current calendar year.
    (c) This section has no application to remuneration paid to a 
citizen of the United States for services performed in Puerto Rico as an 
employee of the United States or any agency thereof.



Sec. 31.3401(a)(9)-1  Remuneration for services performed by a minister of a church or a member of a religious order.

    (a) In general. Remuneration paid for services performed by a duly 
ordained, commissioned, or licensed minister of a church in the exercise 
of his ministry, or by a member of a religious order in the exercise of 
duties required by such order, is excepted from wages and hence is not 
subject to withholding.
    (b) Service by a minister in the exercise of his ministry. Except as 
provided in paragraph (c)(3) of this section, service performed by a 
minister in the exercise of his ministry includes the ministration of 
sacerdotal functions and the conduct of religious worship, and the 
control, conduct, and maintenance of religious organizations (including 
the religious boards, societies, and other integral agencies of such 
organizations), under the authority of a religious body constituting a 
church or church denomination. The following rules are applicable in 
determining whether services performed by a minister are performed in 
the exercise of his ministry:
    (1) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of sacerdotal functions depends 
on the tenents and practices of the particular religious body 
constituting his church or church denomination.
    (2) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenents and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (3) (i) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization.
    (ii) The rule in paragraph (b)(3)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.

    (4) (i) If a minister is performing service for an organization 
which is operated as an integral agency of a religious organization 
under the authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control, conduct, and maintenance of such organization (see 
paragraph (b)(2) of this section) is in the exercise of his ministry.
    (ii) The rule in paragraph (b)(4)(i) of this section may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as director of one of its departments. He performs no 
other service. The N Religious Board is an integral agency of O, a 
religious organization operating under the authority of a religious body 
constituting a church denomination. M is performing service in the 
exercise of his ministry.

    (5) (i) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such

[[Page 169]]

service may not involve the conduct of religious worship or the 
ministration of sacerdotal functions, is in the exercise of his 
ministry.
    (ii) The rule in subdivision (i) of this subparagraph may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. (1) 
Section 3401(a)(9) does not except from wages remuneration for service 
performed by a duly ordained, commissioned, or licensed minister of a 
church which is not in the exercise of his ministry.
    (2) (i) If a minister is performing service for an organization 
which is neither a religious organization nor operated as an integral 
agency of a religious organization and the service is not performed 
pursuant to an assignment or designation by his ecclesiastical 
superiors, then only the service performed by him in the conduct of 
religious worship or the ministration of sacerdotal functions is in the 
exercise of his ministry. See, however, paragraph (b)(3) of this 
section.
    (ii) The rule in subdivision (i) of this subparagraph may be 
illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M is not performing the service for N pursuant to an 
assignment or designation by his ecclesiastical superiors. The service 
performed by M for N University is not in the exercise of his ministry. 
However, service performed by M in performing marriages and conducting 
funerals is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the collection of income tax at source on wages, even 
though such service may involve the ministration of sacerdotal functions 
or the conduct of religious worship. Thus, for example, service 
performed by an individual as a chaplain in the Armed Forces of the 
United States is considered to be performed by a commissioned officer in 
his capacity as such, and not by a minister in the exercise of his 
ministry. Similarly, service performed by an employee of a State as a 
chaplain in a State prison is considered to be performed by a civil 
servant of the State and not by a minister in the exercise of his 
ministry.
    (d) Service in the exercise of duties required by a religious order. 
Service performed by a member of a religious order in the exercise of 
duties required by such order includes all duties required of the member 
by the order. The nature or extent of such service is immaterial so long 
as it is a service which he is directed or required to perform by his 
ecclesiastical superiors.



Sec. 31.3401(a)(10)-1  Remuneration for services in delivery or distribution of newspapers, shopping news, or magazines.

    (a) Services of individuals under age 18. Remuneration for services 
performed by an employee under the age of 18 in the delivery or 
distribution of newspapers, or shopping news, not including delivery or 
distribution (as, for example, by a regional distributor) to any point 
for subsequent delivery or distribution, is excepted from wages and 
hence is not subject to withholding. Thus, remuneration for services 
performed by an employee under the age of 18 in making house-to-house 
delivery or sale of newspapers or shopping news, including handbills and 
other similar types of advertising material, is excepted from wages. The 
remuneration is excepted irrespective of the form or method thereof. 
Remuneration for incidental services by the employee who makes the 
house-to-house delivery,

[[Page 170]]

such as services in assembling newspapers, is considered to be within 
the exception. The exception continues only during the time that the 
employee is under the age of 18.
    (b) Services of individuals of any age. Remuneration for services 
performed by an employee in, and at the time of, the sale of newspapers 
or magazines to ultimate consumers under an arrangement under which the 
newspapers or magazines are to be sold by him at a fixed price, his 
remuneration being based on the retention of the excess of such price 
over the amount at which the newspapers or magazines are charged to him, 
is excepted from wages and hence is not subject to withholding. The 
remuneration is excepted whether or not the employee is guaranteed a 
minimum amount or remuneration, or is entitled to be credited with the 
unsold newspapers or magazines turned back. Moreover, the remuneration 
is excepted without regard to the age of the employee. Remuneration for 
services performed other than at the time of sale to the ultimate 
consumer is not within the exception. Thus, remuneration for services of 
a regional distributor which are antecedent to but not immediately part 
of the sale to the ultimate consumer is not within the exception. 
However, remuneration for incidental services by the employee who makes 
the sale to the ultimate consumer, such as services in assembling 
newspapers or in taking newspapers or magazines to the place of sale, is 
considered to be within the exception.



Sec. 31.3401(a)(11)-1  Remuneration other than in cash for service not in the course of employer's trade or business.

    (a) Remuneration paid in any medium other than cash for services not 
in the course of the employer's trade or business is excepted from wages 
and hence is not subject to withholding. Cash remuneration includes 
checks and other monetary media of exchange. Remuneration paid in any 
medium other than cash, such as lodging, food, or other goods or 
commodities, for services not in the course of the employer's trade or 
business does not constitute wages. Remuneration paid in any medium 
other than cash for other types of services does not come within this 
exception from wages. For provisions relating to cash remuneration for 
service not in the course of employer's trade or business, see 
Sec. 31.3401(a)(4)-1.
    (b) As used in this section, the term ``services not in the course 
of the employer's trade or business'' has the same meaning as when used 
in Sec. 31.3401(a)(4)-1.



Sec. 31.3401(a)(12)-1  Payments from or to certain tax-exempt trusts, or under or to certain annuity plans or bond purchase plans, or to individual retirement 
          plans.

    (a) Payments from or to certain taxexempt trusts. The term ``wages'' 
does not include any payment made--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a trust, or
    (2) To, or on behalf of, an employee or his beneficiary from a 
trust,

if at the time of such payment the trust is exempt from tax under 
section 501(a) as an organization described in section 401(a). A payment 
made to an employee of such a trust for services rendered as an employee 
of the trust and not as a beneficiary thereof is not within this 
exclusion from wages. Also, since supplemental unemployment compensation 
benefits are treated under paragraph (b) (14) of Sec. 31.3401 (a)-1 as 
if they were wages for purposes of this chapter, this section does not 
apply to such benefits.
    (b) Payments under or to certain annuity plans. (1) The term 
``wages'' does not include any payment made after December 31, 1962--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity plan, if at the time of such payment the annuity plan is a plan 
described in section 403(a).
    (2) The term ``wages'' does not include any payment made before 
January 1, 1963--
    (i) By an employer, on behalf of an employee or his beneficiary, 
into an annuity plan, or
    (ii) To, or on behalf of, an employee or his beneficiary under an 
annuity

[[Page 171]]

plan, if at the time of such payment the annuity plan meets the 
requirements of section 401 (a) (3), (4), (5), and (6).
    (c) Payments under or to certain bond purchase plans. The term 
``wages'' does not include any payment made after December 31, 1962--
    (1) By an employer, on behalf of an employee or his beneficiary, 
into a bond purchase plan, or
    (2) To, or on behalf of, an employee or his beneficiary under a bond 
purchase plan,

if at the time of such payment the plan is a qualified bond purchase 
plan described in section 405(a).
    (d) Payment to individual retirement plans. (1) The term ``wages'' 
does not include any payment to an individual retirement plan described 
in section 7701(a)(37) by an employer after December 31, 1974, on behalf 
of an employee, if, at the time of such payment, it is reasonable for 
the employer to believe that the employee will be entitled to a 
deduction for such payment under section 219(a).
    (2) The term ``wages'' does not include any payment to an individual 
retirement plan described in section 7701(a)(37) by an employer after 
December 31, 1976, on behalf of an employee, if, at the time of such 
payment, it is reasonable for the employer to believe that the employee 
on whose behalf the payment is made will be entitled to a deduction for 
such payment under section 220(a).
    (3) The term ``wages'' does not include any payment to a simplified 
employee pension arrangement described in section 408(k) by an employer 
after December 31, 1978, on behalf of an employee, if, at the time of 
such payment, it is reasonable for the employer to believe that the 
employee on whose behalf the payment is made will be entitled to a 
deduction for such payment under section 219(a).
[T.D. 6654, 28 FR 5252, May 28, 1963, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970; T.D. 7730, 45 FR 72652, Nov. 3, 1980]



Sec. 31.3401(a)(13)-1  Remuneration for services performed by Peace Corps volunteers.

    (a) Remuneration paid after September 22, 1961, for services 
performed as a volunteer or volunteer leader within the meaning of the 
Peace Corps Act (22 U.S.C. 2501) is excepted from wages, and hence is 
not subject to withholding, unless the remuneration is paid pursuant to 
section 5(c) or section 6(1) of the Peace Corps Act.
    (b) Sections 5 and 6 of the Peace Corps Act (22 U.S.C. 2504, 2505) 
provide, in part, as follows:

    Sec. 5 Peace Corps Volunteers [Peace Corps Act (75 Stat. 613); as 
amended by sec. 2(b), Act of December 13, 1963 (P.L. 88-200, 77 Stat. 
359); sec. 2(a), Act of August 24, 1965, (P.L. 89-134, 79 Stat. 549); 
sec. 3(a), Act of July 24, 1970 (P.L. 91-352, 84 Stat. 464)]

                                * * * * *

    (c) Readjustment allowances. Volunteers shall be entitled to receive 
a readjustment allowance at a rate not to exceed $75 for each month of 
satisfactory service as determined by the President; except that, in the 
cases of volunteers who have one or more minor children at the time of 
their entering a period of pre-enrollment training, one parent shall be 
entitled to receive a readjustment allowance at a rate not to exceed 
$125 for each month of satisfactory service as determined by the 
President. The readjustment allowance of each volunteer shall be payable 
on his return to the United States: Provided, however, That, under such 
circumstances as the President may determine, the accrued readjustment 
allowance, or any part thereof, may be paid to the volunteer, members of 
his family or others, during the period of his service, or prior to his 
return to the United States. In the event of the volunteer's death 
during the period of his service, the amount of any unpaid readjustment 
allowance shall be paid in accordance with the provisions of section 
5582(b) of Title 5. For purposes of the Internal Revenue Code of 1954, a 
volunteer shall be deemed to be paid and to receive each amount of a 
readjustment allowance to which he is entitled after December 31, 1964, 
when such amount is transferred from funds made available under this 
chapter to the fund from which such readjustment allowance is payable.

                                * * * * *

    Sec. 6 Peace Corps Volunteer Leaders; number; applicability of 
chapter; benefits [Peace Corps Act (75 Stat. 615), as amended by sec. 3, 
Act of December 13, 1963 (P.L. 88-200, 77 Stat. 360)] The President may 
enroll in the Peace Corps qualified citizens or nationals of the United 
States whose services are required for supervisory or other special 
duties

[[Page 172]]

or responsibilities in connection with programs under this chapter 
(referred to in this Act as ``volunteer leaders''). The ratio of the 
total number of volunteer leaders to the total number of volunteers in 
service at any one time shall not exceed one to twenty-five. Except as 
otherwise provided in this Act, all of the provisions of this Act 
applicable to volunteers shall be applicable to volunteer leaders, and 
the term ``volunteers'' shall include ``volunteer leaders'': Provided, 
however, That--
    (1) Volunteer leaders shall be entitled to receive a readjustment 
allowance at a rate not to exceed $125 for each month of satisfactory 
service as determined by the President;

[T.D. 6654, 28 FR 5252, May 28, 1963, as amended by T.D. 7493, 42 FR 
33729, July 1, 1977]



Sec. 31.3401(a)(14)-1  Group-term life insurance.

    (a) The cost of group-term life insurance on the life of an employee 
is excepted from wages, and hence is not subject to withholding. For 
provisions relating generally to such remuneration, and for reporting 
requirements with respect to such remuneration, see sections 79 and 
6052, respectively, and the regulations thereunder in Part 1 of this 
chapter (Income Tax Regulations).
    (b) The cost of group-term life insurance on the life of an 
employee's spouse or children is not subject to withholding if it is 
excludable from the employee's gross income because it is merely 
incidental. See paragraph (d)(2)(ii)(b) of Sec. 1.61-2 in Part 1 of this 
chapter (Income Tax Regulations).
[T.D. 7493, 42 FR 33730, July 1, 1977]



Sec. 31.3401(a)(15)-1  Moving expenses.

    (a) An amount paid to or on behalf of an employee after March 4, 
1964, either as an advance or a reimbusement, specifically for moving 
expenses incurred or expected to be incurred is excepted from wages, and 
hence is not subject to withholding, if (and to the extent that) at the 
time of payment it is reasonable to believe that a corresponding 
deduction is or will be allowable to the employee under section 217. The 
reasonable belief contemplated by the statute may be based upon any 
evidence reasonably sufficient to induce such belief, even though such 
evidence may be insufficient upon closer examination by the district 
director or the courts finally to establish that a deduction is 
allowable under section 217. The reasonable belief shall be based upon 
the application of section 217 and the regulations thereunder in Part 1 
of this chapter (Income Tax Regulations). When used in this section, the 
term ``moving expenses'' has the same meaning as when used in section 
217. See Sec. 1.6041-2(a) in Part 1 of this chapter (Income Tax 
Regulations), relating to return of information as to payments to 
employees, and Sec. 31.6051-1(e), relating to the reporting of 
reimbursements of or payments of certain moving expenses.
    (b) Except as otherwise provided in paragraph (a) of this section, 
or in a numbered paragraph of section 3401(a), amounts paid to or on 
behalf of an employee for moving expenses constitute wages subject to 
withholding.
[T.D. 7493, 42 FR 33730, July 1, 1977]



Sec. 31.3401(a)(16)-1  Tips.

    Tips paid to an employee are excepted from wages and hence not 
subject to withholding if--
    (a) The tips are paid in any medium other than cash, or
    (b) The cash tips received by an employee in any calendar month in 
the course of his employment by an employer are less than $20.

However, if the cash tips received by an employee in a calendar month in 
the course of his employment by an employer amount to $20 or more, none 
of the cash tips received by the employee in such calendar month are 
excepted from wages under this section. The cash tips to which this 
section applies include checks and other monetary media of exchange. 
Tips received by an employee in any medium other than cash, such as 
passes, tickets, or other goods or commodities do not constitute wages. 
If an employee in any calendar month performs services for two or more 
employers and receives tips in the course of his employment by each 
employer, the $20 test is to be applied separately with respect to the 
cash tips received by the employee in respect of his services for each 
employer and not to the total cash tips received by the employee during 
the month. As to the time tips are deemed paid, see Sec. 31.3401(f)-1. 
For provisions relating to

[[Page 173]]

the treatment of tips received by an employee prior to 1966, see 
paragraph (b)(11) of Sec. 31.3401(a)-1.
[T.D. 7001, 34 FR 1001, Jan. 23, 1969]



Sec. 31.3401(a)(17)-1  Remuneration for services performed on a boat engaged in catching fish.

    (a) Remuneration for services performed on or after December 31, 
1954, by an individual on a boat engaged in catching fish or other forms 
of aquatic animal life (hereinafter ``fish'') is excepted from wages and 
hence is not subject to withholding if--
    (1) The individual receives a share of the boat's (or boats' for a 
fishing operation involved more than one boat) catch of fish or a share 
of the proceeds from the sale of the catch,
    (2) The amount of the individual's share depends solely on the 
amount of the boat's (or boats' for a fishing operation involving more 
than one boat) catch of fish,
    (3) The individual does not receive, and is not entitled to receive, 
any cash remuneration, other than remuneration that is described in 
subparagraph (1) of this paragraph, and
    (4) The crew of the boat (or of each boat from which the individual 
receives a share of the catch) normally is made up of fewer than 10 
individuals.
    (b) The requirement of paragraph (a)(2) of this section is not 
satisfied if there exists an agreement with the boat's (or boats') owner 
or operator by which the individual's remuneration is determined 
partially or fully by a factor not dependent on the size of the catch. 
For example, if a boat is operated under a remuneration arrangement, 
e.g., a union contract, which specifies that crew members, in addition 
to receiving a share of the catch, are entitled to an hourly wage for 
repairing nets, regardless of whether this wage is actually paid, then 
all the crew members covered by the arrangement are entitled to receive 
cash remuneration other than as a share of the catch and are not 
excepted from employment by section 3121(b)(20).
    (c) The operating crew of a boat includes all persons on the boat 
(including the captain) who receive any form of remuneration in exchange 
for services rendered while on a boat engaged in catching fish. See 
Sec. 1.6050A-1 for reporting requirements for the operator of a boat 
engaged in catching fish with respect to individuals performing services 
described in this section.
    (d) During the same return period, service performed by a crew 
member may be excepted from employment by section 3121(b)(20) and this 
section for one voyage and not so excepted on a subsequent voyage on the 
same or on a different boat.
[T.D. 7716, 45 FR 57124, Aug. 27, 1980]



Sec. 31.3401(a)(18)-1  Payments or benefits under a qualified educational assistance program.

    A payment made, or benefit furnished, to or for the benefit of an 
employee in a taxable year beginning after December 31, 1978, does not 
constitute wages and hence is not subject to withholding if, at the time 
of such payment or furnishing, it is reasonable to believe that the 
employee will be able to exclude such payment or benefit from income 
under section 127.
[T.D. 7898, 48 FR 31019, July 6, 1983]



Sec. 31.3401(a)(19)-1  Reimbursements under a self-insured medical reimbursement plan.

    Amounts reimbursed to or on behalf of an employee after December 31, 
1979, as a medical care reimbursement under a self-insured medical 
reimbursement plan (within the meaning of section 105(h)(6)) do not 
constitute wages and hence are not subject to withholding even though 
such reimbursement is includible in the gross income of an employee. For 
rules with respect to self-insured medical reimbursement plans, see 
section 105(h) and Sec. 1.105-11 of this Chapter (Income Tax 
Regulations).

(Secs. 105(h) and 7805 Internal Revenue Code of 1954; 94 Stat. 2855, 68A 
Stat. 917 (26 U.S.C. 105(h) and 7805))

[T.D. 7754, 46 FR 3509, Jan. 15, 1981. Redesignated by T.D. 7898, 48 FR 
31019, July 6, 1983]



Sec. 31.3401(b)-1  Payroll period.

    (a) The term payroll period means the period of service for which a 
payment of wages is ordinarily made to an employee by his employer. It 
is immaterial that the wages are not always paid at regular intervals. 
For example, if an

[[Page 174]]

employer ordinarily pays a particular employee for each calendar week at 
the end of the week, but if for some reason the employee in a given week 
receives a payment in the middle of the week for the portion of the week 
already elapsed and receives the remainder at the end of the week, the 
payroll period is still the calendar week; or if, instead, that employee 
is sent on a 3-week trip by his employer and receives at the end of the 
trip a single wage payment for three weeks' services, the payroll period 
is still the calendar week, and the wage payment shall be treated as 
though it were three separate weekly wage payments.
    (b) For the purpose of section 3402, an employee can have but one 
payroll period with respect to wages paid by any one employer. Thus, if 
an employee is paid a regular wage for a weekly payroll period and in 
addition thereto is paid supplemental wages (for example, bonuses) 
determined with respect to a different period, the payroll period is the 
weekly payroll period. For computation of tax on supplemental wage 
payments, see Sec. 31.3402(g)-1.
    (c) The term payroll period also means the period of accrual of 
supplemental unemployment compensation benefits for which a payment of 
such benefits is ordinarily made. Thus if benefits are ordinarily 
accrued and paid on a monthly basis, the payroll period is deemed to be 
monthly.
    (d) The term miscellaneous payroll period means a payroll period 
other than a daily, weekly, biweekly, semi-monthly, monthly, quarterly, 
semiannual, or annual payroll period.
[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970]



Sec. 31.3401(c)-1  Employee.

    (a) The term employee includes every individual performing services 
if the relationship between him and the person for whom he performs such 
services is the legal relationship of employer and employee. The term 
includes officers and employees, whether elected or appointed, of the 
United States, a State, Territory, Puerto Rico, or any political 
subdivision thereof, or the District of Columbia, or any agency or 
instrumentality of any one or more of the foregoing.
    (b) Generally the relationship of employer and employee exists when 
the person for whom services are performed has the right to control and 
direct the individual who performs the services, not only as to the 
result to be accomplished by the work but also as to the details and 
means by which that result is accomplished. That is, an employee is 
subject to the will and control of the employer not only as to what 
shall be done but how it shall be done. In this connection, it is not 
necessary that the employer actually direct or control the manner in 
which the services are performed; it is sufficient if he has the right 
to do so. The right to discharge is also an important factor indicating 
that the person possessing that right is an employer. Other factors 
characteristic of an employer, but not necessarily present in every 
case, are the furnishing of tools and the furnishing of a place to work 
to the individual who performs the services. In general, if an 
individual is subject to the control or direction of another merely as 
to the result to be accomplished by the work and not as to the means and 
methods for accomplishing the result, he is not an employee.
    (c) Generally, physicians, lawyers, dentists, veterinarians, 
contractors, subcontractors, public stenographers, auctioneers, and 
others who follow an independent trade, business, or profession, in 
which they offer their services to the public, are not employees.
    (d) Whether the relationship of employer and employee exists will in 
doubtful cases be determined upon an examination of the particular facts 
of each case.
    (e) If the relationship of employer and employee exists, the 
designation or description of the relationship by the parties as 
anything other than that of employer and employee is immaterial. Thus, 
if such relationship exists, it is of no consequence that the employee 
is designated as a partner, coadventurer, agent, independent contractor, 
or the like.
    (f) All classes or grades of employees are included within the 
relationship of

[[Page 175]]

employer and employee. Thus, superintendents, managers and other 
supervisory personnel are employees. Generally, an officer of a 
corporation is an employee of the corporation. However, an officer of a 
corporation who as such does not perform any services or performs only 
minor services and who neither receives nor is entitled to receive, 
directly or indirectly, any remuneration is not considered to be an 
employee of the corporation. A director of a corporation in his capacity 
as such is not an employee of the corporation.
    (g) The term employee includes every individual who receives a 
supplemental unemployment compensation benefit which is treated under 
paragraph (b)(14) of Sec. 31.3401(a)-1 as if it were wages.
    (h) Although an individual may be an employee under this section, 
his services may be of such a nature, or performed under such 
circumstances, that the remuneration paid for such services does not 
constitute wages within the meaning of section 3401(a).
[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970]



Sec. 31.3401(d)-1  Employer.

    (a) The term employer means any person for whom an individual 
performs or performed any service, of whatever nature, as the employee 
of such person.
    (b) It is not necessary that the services be continuing at the time 
the wages are paid in order that the status of employer exist. Thus, for 
purposes of withholding, a person for whom an individual has performed 
past services for which he is still receiving wages from such person is 
an employer.
    (c) An employer may be an individual, a corporation, a partnership, 
a trust, an estate, a joint-stock company, an association, or a 
syndicate, group, pool, joint venture, or other unincorporated 
organization, group or entity. A trust or estate, rather than the 
fiduciary acting for or on behalf of the trust or estate, is generally 
the employer.
    (d) The term employer embraces not only individuals and 
organizations engaged in trade or business, but organizations exempt 
from income tax, such as religious and charitable organizations, 
educational institutions, clubs, social organizations and societies, as 
well as the governments of the United States, the States, Territories, 
Puerto Rico, and the District of Columbia, including their agencies, 
instrumentalities, and political subdivisions.
    (e) The term employer also means (except for the purpose of the 
definition of wages) any person paying wages on behalf of a nonresident 
alien individual, foreign partnership, or foreign corporation, not 
engaged in trade or business within the United States (including Puerto 
Rico as if a part of the United States).
    (f) If the person for whom the services are or were performed does 
not have legal control of the payment of the wages for such services, 
the term employer means (except for the purpose of the definition of 
wages) the person having such control. For example, where wages, such as 
certain types of pensions or retired pay, are paid by a trust and the 
person for whom the services were performed has no legal control over 
the payment of such wages, the trust is the employer.
    (g) The term employer also means a person making a payment of a 
supplemental unemployment compensation benefit which is treated under 
paragraph (b)(14) of Sec. 31.3401(a)-1 as if it were wages. For example, 
if supplemental unemployment compensation benefits are paid from a trust 
which was created under the terms of a collective bargaining agreement, 
the trust shall generally be deemed to be the employer. However, if the 
person making such payment is acting solely as an agent for another 
person, the term employer shall mean such other person and not the 
person actually making the payment.
    (h) It is a basic purpose to centralize in the employer the 
responsibility for withholding, returning, and paying the tax, and for 
furnishing the statements required under section 6051 and Sec. 31.6051-
1. The special definitions of the term employer in paragraphs (e), (f), 
and (g) of this section are designed

[[Page 176]]

solely to meet special or unusual situations. They are not intended as a 
departure from the basic purpose.
[T.D. 6516, 25 FR 13096, Dec. 20, 1960, as amended by T.D. 7068, 35 FR 
17329, Nov. 11, 1970]



Sec. 31.3401(e)-1  Number of withholding exemptions claimed.

    (a) The term number of withholding exemptions claimed means the 
number of withholding exemptions claimed in a withholding exemption 
certificate in effect under section 3402(f) of the Internal Revenue Code 
of 1954 or in effect under section 1622(h) of the Internal Revenue Code 
of 1939. If no such certificate is in effect, the number of withholding 
exemptions claimed shall be considered to be zero. The number of 
withholding exemptions claimed must be taken into account in determining 
the amount of tax to be deducted and withheld under section 3402, 
whether the employer computes the tax in accordance with the provisions 
of subsection (a) or subsection (c) of section 3402.
    (b) The employer is not required to ascertain whether or not the 
number of withholding exemptions claimed is greater than the number of 
withholding exemptions to which the employee is entitled. For rules 
relating to invalid withholding exemption certificates, see 
Sec. 31.3402(f)(2)-1(e), and for rules relating to required submission 
of copies of certain withholding exemption certificates to the Internal 
Revenue Service, see Sec. 31.3402(f)(2)-1(g).
    (c) As to the number of withholding exemptions to which an employee 
is entitled, see Sec. 31.3402(f)(1)-1.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7423, 41 FR 
26217, June 23, 1976; T.D. 7682, 45 FR 15526, Mar. 11, 1980; T.D. 7803, 
47 FR 3547, Jan. 26, 1982]



Sec. 31.3401(f)-1  Tips.

    (a) Tips considered wages. Tips received after 1965 by an employee 
in the course of his employment are considered to be wages, and thus 
subject to withholding of income tax at source. For an exception to the 
rule that tips constitute wages, see Secs. 31.3401(a)(16) and 
31.3401(a)(16)-1, relating to tips paid in a medium other than cash and 
cash tips of less than $20. For definition of the term ``employee,'' see 
Secs. 31.3401(c) and 31.3401(c)-1.
    (b) When tips deemed paid. Tips reported by an employee to his 
employer in a written statement furnished to the employer pursuant to 
section 6053(a) (see Sec. 31.6053-1) shall be deemed to be paid to the 
employee at the time the written statement is furnished to the employer. 
Tips received by an employee which are not reported to his employer in a 
written statement furnished pursuant to section 6053(a) shall be deemed 
to be paid to the employee at the time the tips are actually received by 
the employee.
[T.D. 7001, 34 FR 1001, Jan. 23, 1969]



Sec. 31.3402(a)-1  Requirement of withholding.

    (a) Section 3402 provides alternative methods, at the election of 
the employer, for use in computing the amount of income tax to be 
collected at source on wages. Under the percentage method of withholding 
(see Sec. 31.3402(b)-1), the employer is required to deduct and withhold 
a tax computed in accordance with the provisions of section 3402(a). 
Under the wage bracket method of withholding (see Sec. 31.3402(c)-1), 
the employer is required to deduct and withhold a tax determined in 
accordance with the provisions of section 3402(c). The employer may 
elect to use the percentage method, the wage bracket method, or certain 
other methods (see Sec. 31.3402(h) (4)-1). Different methods may be used 
by the employer with respect to different groups of employees.
    (b) The employer is required to collect the tax by deducting and 
withholding the amount thereof from the employee's wages as and when 
paid, either actually or constructively. Wages are constructively paid 
when they are credited to the account of or set apart for an employee so 
that they may be drawn upon by him at any time although not then 
actually reduced to possession. To constitute payment in such a case, 
the wages must be credited to or set apart for the employee without any 
substantial limitation or restriction as to the time or manner of 
payment or condition upon which payment is to be made, and must be made

[[Page 177]]

available to him so that they may be drawn upon at any time, and their 
payment brought within his own control and disposition.
    (c) Except as provided in sections 3402 (j) and (k) (see 
Secs. 31.3402(j)-1 and 31.3402(k)-1, relating to noncash remuneration 
paid to retail commission salesman and to tips received by an employee 
in the course of his employment, respectively), an employer is required 
to deduct and withhold the tax notwithstanding the wages are paid in 
something other than money (for example, wages paid in stocks or bonds; 
see Sec. 31.3401 (a)-1) and to pay over the tax in money. If wages are 
paid in property other than money, the employer should make necessary 
arrangements to insure that the amount of the tax required to be 
withheld is available for payment in money.
    (d) For provisions relating to the circumstances under which tax is 
required to be deducted and withheld from certain amounts received under 
accident and health plans, see paragraph (b)(8) of Sec. 31.3401(a)-1.
    (e) As a matter of business administration, certain of the 
mechanical details of the withholding process may be handled by 
representatives of the employer. Thus, in the case of an employer having 
branch offices, the branch manager or other representative may actually, 
as a matter of internal administration, withhold the tax or prepare the 
statements required under section 6051. Nevertheless, the legal 
responsibility for withholding, paying, and returning the tax and 
furnishing such statements rests with the employer. For provisions 
relating to statements under section 6051, see Sec. 31.6051-1.
    (f) The amount of any tax withheld and collected by the employer is 
a special fund in trust for the United States. See section 7501.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 7001, 34 FR 
1001, Jan. 23, 1969; T.D. 7115, 36 FR 9209, May 21, 1971; T.D. 7888, 48 
FR 17588, Apr. 25, 1983]



Sec. 31.3402(b)-1  Percentage method of withholding.

    With respect to wages paid after April 30, 1975, the amount of tax 
to be deducted and withheld under the percentage method of withholding 
shall be determined under the applicable percentage method withholding 
table contained in Circular E (Employer's Tax Guide) according to the 
instructions contained therein.


(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(c)-1  Wage bracket withholding.

    (a) In general. (1) The employer may elect to use the wage bracket 
method provided in section 3402(c) instead of the percentage method with 
respect to any employee. The tax computed under the wage bracket method 
shall be in lieu of the tax required to be deducted and withheld under 
section 3402(a). With respect to wages paid after July 13, 1968, the 
correct amount of withholding shall be determined under the applicable 
wage bracket withholding table contained in the Circular E (Employer's 
Tax Guide) issued for use with respect to the period in which such wages 
are paid.
    (2) For provisions relating to the treatment of wages paid under 
accident and health plans and wages paid other than in cash to retail 
commission salesmen, see paragraph (b)(8) of Sec. 31.3401(a)-1 and 
Sec. 31.3402(j)-1, respectively.
    (b) Established payroll periods, other than daily or miscellaneous, 
covered by wage bracket withholding tables. The wage bracket withholding 
tables contained in Circular E for established periods other than daily 
or miscellaneous should be used in determining the tax to be withheld 
for any such period without reference to the time the employee is 
actually engaged in the performance of services during such payroll 
period.

    Example 1. On June 30, 1971, employee A is paid wages for a 
semimonthly payroll period. A has in effect a withholding exemption 
certificate indicating that he claims two withholding exemptions and 
that he is married. A's wages are determined at the rate of $2 per hour. 
During a certain payroll period he works only 24 hours and earns $48. 
Although A worked only 24 hours during the semimonthly payroll period, 
the applicable wage

[[Page 178]]

bracket withholding table contained in Circular E for a semimonthly 
payroll period for an employee who is married should be used in 
determining the tax to be withheld. Under this table it will be found 
that no tax is required to be withheld from a wage payment of $48 when 
two withholding exemptions are claimed.

    Example 2. On May 14, 1971, employee B is paid wages for a weekly 
payroll period. B has in effect a withholding exemption certification 
indicating that he claims one withholding exemption and that he is 
single. B's wages are determined at the rate of $2 per hour. During a 
certain payroll period B works 18 hours and earns $36. Although B worked 
only 18 hours during the weekly payroll period the applicable wage 
bracket withholding table for a weekly payroll period for an employee 
who is single should be used in determining the tax to be withheld. 
Under this table it will be found that $0.50 is the amount of tax to be 
withheld from a wage payment of $36 when one withholding exemption is 
claimed.

    (c) Periods to which the tables for a daily or miscellaneous payroll 
period are applicable--(1) In general. The tables applicable to a daily 
or miscellaneous payroll period show the tax for employees who are to be 
withheld from as single persons and for employees who are to be withheld 
from as married persons on the amount of wages for one day. Where the 
withholding is computed under the rules applicable to a miscellaneous 
payroll period, the wages and the amounts shown in the applicable table 
must be placed on a comparable basis. This may be accomplished by 
reducing the wages paid for the period to a daily basis by dividing the 
total wages by the number of days (including Sundays and holidays) in 
the period. The amount of the tax shown in the applicable table as the 
tax required to be withheld from the wages, as so reduced to a daily 
basis, should then be multiplied by the number of days (including 
Sundays and holidays) in the period.
    (2) Period not a payroll period. If wages are paid for a period 
which is not a payroll period, the amount to be deducted and withheld 
under the wage bracket method shall be the amount applicable in the case 
of a miscellaneous payroll period containing a number of days (including 
Sundays and holidays) equal to the number of days (including Sundays and 
holidays) in the period with respect to which such wages are paid.

    Example. An individual performs services for a contractor in 
connection with a construction project. He has in effect a withholding 
exemption certificate indicating that he claims two withholding 
exemptions and that he is married. Wages have been fixed at the rate of 
$36 per day, to be paid upon completion of the project. The project is 
completed before July 1, 1971, in 12 consecutive days, at the end of 
which period the individual is paid wages of $360 for 10 days' services 
performed during the period. Under the wage bracket method the amount to 
be deducted and withheld from such wages is determined by dividing the 
amount of the wages ($360) by the number of days in the period (12), the 
result being $30. The amount of tax required to be withheld is 
determined under the appropriate table applicable to a miscellaneous 
payroll period for an employee who is married. Under this table the tax 
required to be withheld is $47.40 (12  x  $3.95).

    (3) Wages paid without regard to any period. If wages are paid to an 
employee without regard to any particular period, as, for example, 
commissions paid to a salesman upon consummation of a sale, the amount 
of tax to be deducted and withheld shall be determined in the same 
manner as in the case of a miscellaneous payroll period containing a 
number of days (including Sundays and holidays) equal to the number of 
days (including Sundays and holidays) which have elapsed, beginning with 
the latest of the following days:
    (i) The first day after the last payment of wages to such employee 
by such employer in the calendar year, or
    (ii) The date on which such individual's employment with such 
employer began in the calendar year, or
    (iii) January 1 of such calendar year, and ending with (and 
including) the date on which such wages are paid.

    Example. On April 2, 1971, C is employed by the X Real Estate 
Company to sell real estate on a commission basis, commissions to be 
paid only upon consummation of sales. C has in effect a withholding 
exemption certificate indicating that he claims one withholding 
exemption and that he is not married. On May 22, 1971, C receives a 
commission of $300, his first commission since April 2, 1971. Again on 
June 19, 1971, C receives a commission of $420. Under the wage bracket 
method, the amount of tax to be deducted and withheld in respect of the 
commission paid on May 22, is $10, which amount is obtained by 
multiplying $0.20 (tax per day

[[Page 179]]

under the appropriate wage bracket table applicable to a daily or 
miscellaneous payroll period for an employee who is not married where 
wages are at least $6 but less than $6.25 a day) by 50 (number of days 
elapsed); and the amount of tax to be withheld with respect to the 
commission paid on June 19 is $54.60, which amount is obtained by 
multiplying $1.95 (tax under the appropriate wage bracket table for a 
daily or miscellaneous payroll period where wages are at least $15 but 
less than $15.50 a day) by 28 (number of days elapsed).

    (d) Period or elapsed time less than 1 week. (1) It is the general 
rule that if wages are paid for a payroll period or other period of less 
than 1 week, the tax to be deducted and withheld under the wage bracket 
method shall be the amount computed for a daily payroll period, or for a 
miscellaneous payroll period containing the same number of days 
(including Sundays and holidays) as the payroll period, or other period, 
for which such wages are paid. In the case of wages paid without regard 
to any period, if the elapsed time computed as provided in paragraph (c) 
of this section is less than 1 week, the same rule is applicable.

    Example 1. On May 14, 1971, an employee who has a daily payroll 
period is paid wages of $15 per day. The employee has in effect a 
withholding exemption certificate indicating that he claims one 
withholding exemption and that he is not married. Under the applicable 
table for a daily payroll period for an employee who is not married, the 
amount of tax to be deducted and withheld from each such payment of 
wages is $1.95.

    Example 2. An employee works for a certain employer on 4 consecutive 
days for which he is paid wages totalling $60 on July 25, 1971. The 
employee has in effect a withholding exemption certificate claiming two 
withholding exemptions and indicating that he is married. The amount of 
tax to be deducted and withheld under the wage bracket method is $5.60 
(4 x $1.40).

    (2) If the payroll period, other period or elapsed time where wages 
are paid without regard to any period, is less than one week, the 
employer may, under certain conditions, elect to deduct and withhold the 
tax determined by the application of the wage table for a weekly payroll 
period to the aggregate of the wages paid to the employee during the 
calendar week. The election to use the weekly wage table in such cases 
is subject to the limitations and conditions prescribed in Circular E 
with respect to employers using the percentage method in similar cases.
    (3) As used in this paragraph the term ``calendar week'' means a 
period of seven consecutive days beginning with Sunday and ending with 
Saturday.
    (e) Rounding off of wage payment. In determining the amount to be 
deducted and withheld under the wage bracket method the wages may, at 
the election of the employer, be computed to the nearest dollar, 
provided such wages are in excess of the highest wage bracket of the 
applicable table. For the purpose of the computation to the nearest 
dollar, the payment of a fractional part of a dollar shall be 
disregarded unless it amounts to one-half dollar or more, in which case 
it shall be increased to $1.00. Thus, if the payroll period of an 
employee is weekly and the wage payment of such employee is $255.49, the 
employer may compute the tax on the excess over $200 as if the excess 
were $55 instead of $55.49. If the weekly wage payment is $255.50, the 
employer may, in computing the tax, consider the excess over $200 to be 
$56 instead of $55.50.


(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6860, 30 FR 
13942, Nov. 4, 1965; T.D. 7115, 36 FR 9215, May 21, 1971; T.D. 7888, 48 
FR 17588, Apr. 25, 1983; T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(d)-1  Failure to withhold.

    If the employer in violation of the provisions of section 3402 fails 
to deduct and withhold the tax, and thereafter the income tax against 
which the tax under section 3402 may be credited is paid, the tax under 
section 3402 shall not be collected from the employer. Such payment does 
not, however, operate to relieve the employer from liability for 
penalties or additions to the tax applicable in respect of such failure 
to deduct and withhold. The employer will not be relieved of his 
liability for payment of the tax required to be withheld unless he can 
show that the tax against which the tax under section 3402 may be 
credited has been paid. See Sec. 31.3403-1, relating to liability for 
tax.

[[Page 180]]



Sec. 31.3402(e)-1  Included and excluded wages.

    (a) If a portion of the remuneration paid by an employer to his 
employee for services performed during a payroll period of not more than 
31 consecutive days constitutes wages, and the remainder does not 
constitute wages, all the remuneration paid the employee for services 
performed during such period shall for purposes of withholding be 
treated alike, that is, either all included as wages or all excluded. 
The time during which the employee performs services, the remuneration 
for which under section 3401(a) constitutes wages, and the time during 
which he performs services, the remuneration for which under such 
section does not constitute wages, determine whether all the 
remuneration for services performed during the payroll period shall be 
deemed to be included or excluded.
    (b) If one-half or more of the employee's time in the employ of a 
particular employer in a payroll period is spent in performing services 
the remuneration for which consititutes wages, then all the remuneration 
paid the employee for services performed in that payroll period shall be 
deemed to be wages.
    (c) If less than one-half of the employee's time in the employ of a 
particular employer in a payroll period is spent in performing services 
the remuneration for which constitutes wages, then none of the 
remuneration paid the employee for services performed in that payroll 
period shall be deemed to be wages.
    (d) The application of the provisions of paragraphs (a), (b), and 
(c) of this section may be illustrated by the following examples:

    Example 1. Employer B, who operates a store and a farm, employs A to 
perform services in connection with both operations. The remuneration 
paid A for services on the farm is excepted as remuneration for 
agricultural labor, and the remuneration for services performed in the 
store constitutes wages. Employee A is paid on a monthly basis. During a 
particular month, A works 120 hours on the farm and 80 hours in the 
store. None of the remuneration paid by B to A for services performed 
during the month is deemed to be wages, since the remuneration paid for 
less than one-half of the services performed during the month 
constitutes wages. During another month A works 75 hours on the farm and 
120 hours in the store. All of the remuneration paid by B to A for 
services performed during the month is deemed to be wages since the 
remuneration paid for one-half or more of the services performed during 
the month constitutes wages.

    Example 2. Employee C is employed as a maid by D, a physician, whose 
home and office are located in the same building. The remuneration paid 
C for services in the home is excepted as remuneration for domestic 
service, and the remuneration paid for her services in the office 
constitutes wages. C is paid on a weekly basis. During a particular week 
C works 20 hours in the home and 20 hours in the office. All of the 
remuneration paid by D to C for services performed during that week is 
deemed to be wages, since the remuneration paid for one-half or more of 
the services performed during the week constitutes wages. During another 
week C works 22 hours in the home and 15 hours in the office. None of 
the remuneration paid by D to C for services performed during that week 
is deemed to be wages, since the remuneration paid for less than one-
half of the services performed during the week constitutes wages.

    (e) The rules set forth in this section do not apply (1) with 
respect to any remuneration paid for services performed by an employee 
for his employer if the periods for which remuneration is paid by the 
employer vary to the extent that there is no period which constitutes a 
payroll period within the meaning of section 3401(b) (see 
Sec. 31.3401(b)-1), or (2) with respect to any remuneration paid for 
services performed by an employee for his employer if the payroll period 
for which remuneration is paid exceeds 31 consecutive days. In any such 
case withholding is required with respect to that portion of such 
remuneration which constitutes wages.



Sec. 31.3402(f)(1)-1  Withholding exemptions.

    (a) In general. (1) Except as otherwise provided in section 
3402(f)(6) (see Sec. 31.3402(f)(6)-1), an employee receiving wages shall 
on any day be entitled to withholding exemptions as provided in section 
3402(f)(1). In order to receive the benefit of such exemptions, the 
employee must file with his employer a withholding exemption certificate 
as provided in section 3402(f)(2). See Sec. 31.3402(f)(2)-1.

[[Page 181]]

    (2) The number of exemptions to which an employee is entitled on any 
day depends upon his status as single or married, upon his status as to 
old age and blindness, upon the number of his dependents, upon the 
number of exemptions claimed by his spouse (if he is married), and upon 
the number of withholding allowances to which he is entitled under 
section 3402(m).
    (b) Withholding exemptions to which an employee is entitled in 
respect of himself. An employee is entitled to one withholding exemption 
for himself. An employee shall on any day be entitled to an additional 
withholding exemption for himself if he will have attained the age of 65 
before the close of his taxable year which begins in, or with, the 
calendar year in which such day falls. If the employee is blind, he may 
claim an additional withholding exemption for blindness. For purposes of 
claiming a withholding exemption for blindness, an individual shall be 
considered blind only if his central visual acuity does not exceed 20/
200 in the better eye with correcting lenses or if his visual acuity is 
greater than 20/200 but is accompanied by a limitation in the fields of 
vision such that the widest diameter of the visual field subtends an 
angle no greater than 20 degrees. For definition of the term 
``blindness'', see section 151(d)(3). An employee may also be entitled 
under section 3402(m) to withholding exemptions with respect to 
withholding allowances (see Sec. 31.3402(m)-1).
    (c) Withholding exemptions to which an employee is entitled in 
respect to his spouse. (1) A married employee, whose spouse is an 
employee receiving wages, is entitled to claim any withholding exemption 
to which his spouse is entitled under paragraph (b) of this section, 
unless the spouse has in effect a withholding exemption certificate 
claiming such withholding exemption. A married employee, whose spouse is 
not an employee receiving wages, is entitled to claim any withholding 
exemption to which his spouse would be entitled under paragraph (b) of 
this section if the spouse were an employee receiving wages.

    Example 1. Assume that both the husband and wife have attained the 
age of 65 and are employees receiving wages. Each spouse is entitled 
under paragraph (b) of this section to claim 2 withholding exemptions in 
respect of himself or herself. Either spouse may claim, in addition to 
the withholding exemptions to which he or she is entitled in respect of 
himself or herself, any withholding exemption to which the other spouse 
is entitled under such paragraph (b) of this section but does not claim 
on a withholding exemption certificate.

    Example 2. Assume the same facts as in Example 1 except that only 
the husband is an employee receiving wages. The husband is entitled to 
claim 4 withholding exemptions, that is, the 2 withholding exemptions to 
which he is entitled in respect of himself and the 2 withholding 
exemptions to which his spouse would be entitled under paragraph (b) of 
this section if she were an employee receiving wages.

    (2) In determining the number of withholding exemptions to which an 
employee is entitled for himself and his spouse on any day, the 
employee's status as a single person or a married person and, if 
married, whether a withholding exemption is claimed by his spouse, shall 
be determined as of such day. However, in the case of an employee whose 
spouse dies in the taxable year of the employee which begins in, or 
with, the calendar year in which the spouse dies, any withholding 
exemption which would be allowable to the employee in respect of such 
spouse, if living and not an employee receiving wages, may be claimed by 
the employee for that portion of the calendar year which occurs after 
his spouse's death. For provisions applicable in the case of an employee 
whose taxable year is not a calendar year, and whose spouse dies in that 
portion of the calendar year which precedes the first day of the taxable 
year of the employee which begins in the calendar year, see paragraph 
(b) of Sec. 31.3402(f)(2)-1. An employee legally separated from his 
spouse under a decree of divorce or of separate maintenance or an 
employee who is a surviving spouse (as defined in section 2 and the 
regulations thereunder) shall not be entitled to any withholding 
exemptions in respect of his spouse.
    (d) Withholding exemptions to which an employee is entitled in 
respect of dependents. Subject to the limitations stated in this 
paragraph, an employee shall be entitled on any day to a withholding 
exemption for each individual who may

[[Page 182]]

reasonably be expected to be his dependent for his taxable year 
beginning in, or with, the calendar year in which such day falls. For 
purposes of the withholding exemption for an individual who may 
reasonably be expected to be a dependent, the following rules shall 
apply:
    (1) The determination that an individual may or may not reasonably 
be expected to be a dependent shall be made on the basis of facts 
existing at the beginning of the day for which a withholding exemption 
for such individual is to be claimed. The individual in respect of whom 
an exemption is claimed by an employee must, on the day in question, be 
in existence and be within one of the categories listed in section 
152(a), which defines the term ``dependent''. However, a withholding 
exemption for a dependent who dies continues for the portion of the 
calendar year which occurs after the dependent's death, except that, in 
the case of an employee whose taxable year is not a calendar year, the 
withholding exemption does not continue for a dependent, within the 
meaning of section 152(a) (9) or (10), whose death occurs before the 
first day of the employee's taxable year beginning in the calendar year 
of death.
    (2) The determination that an individual may or may not reasonably 
be expected to be a dependent shall be made for the taxable year of the 
employee in respect of which amounts deducted and withheld in the 
calendar year in which the day in question falls are allowed as a 
credit. In general, amounts deducted and withheld during any calendar 
year are allowed as a credit against the tax imposed by chapter 1 of the 
Code for the taxable year which begins in, or with, such calendar year. 
Thus, in order for an employee to be able to claim for a calendar year a 
withholding exemption with respect to a particular individual as a 
dependent there must be a reasonable expectation that the employee will 
be allowed an exemption with respect to such individual under section 
151(e) for his taxable year which begins in, or with, such calendar 
year.
    (3) For the employee to be entitled on any day of the calendar year 
to a withholding exemption for an individual as a dependent, such 
individual must on such day--
    (i) Be an individual referred to in one of the numbered paragraphs 
in section 152(a),
    (ii) Reasonably be expected to receive over one-half of his support, 
within the meaning of section 152, from the employee in the calendar 
year, and
    (iii) Either (a) reasonably be expected to have gross income of less 
than the amount determined pursuant to Sec. 1.151-2 of this chapter 
(Income Tax Regulations) applicable to the calendar year in which the 
taxable year of the taxpayer begins, or (b) be a child (son, stepson, 
daughter, stepdaughter, adopted son, or adopted daughter) of the 
employee who (1) will not have attained the age of 19 at the close of 
the calendar year or (2) is a student as defined in section 151.
    (4) An employee is not entitled to claim a withholding exemption for 
an individual otherwise reasonably expected to be a dependent of the 
employee if such individual is not a citizen of the United States, 
unless such individual (i) is at any time during the calendar year a 
resident of the United States (including, in regard to wages paid after 
February 28, 1979, and individual treated as a resident under section 
6013 (g) or (h)) Canada, Mexico, the Canal Zone, or the Republic of 
Panama, or (ii) is a child of the employee born to him, or legally 
adopted by him, in the Philippine Islands before January 1, 1956, and 
the child is a resident of the Republic of the Philippines, and the 
employee was a member of the Armed Forces of the United States at the 
time the child was born to him or legally adopted by him.
    (e) Additional withholding exemption to which an employee is 
entitled in respect of the standard deduction. After November 30, 1986, 
an employee is entitled to one additional withholding exemption unless:
    (1) The employee is married (as determined under section 143) and 
the employee's spouse is an employee receiving wages subject to 
withholding, or
    (2) The employee has withholding exemption certificates in effect 
with respect to more than one employer.

[[Page 183]]


These restrictions do not apply if the combined wages of the employee 
and the spouse (if any) from other than one employer is less than the 
amount specified in the instructions to Form W-4 or W-4A (Employee's 
Withholding Allowance Certificate).
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5252, May 28, 1963; T.D. 7065, 35 FR 16539, Oct. 23, 1970; T.D. 7114, 36 
FR 9020, May 18, 1971; T.D. 7115, 36 FR 9234, May 21, 1971; T.D. 7670, 
45 FR 6932, Jan. 31, 1980; T.D. 7915, 48 FR 44073, Sept. 27, 1983; T.D. 
8164, 52 FR 45633, Dec. 1, 1987]



Sec. 31.3402(f)(2)-1  Withholding exemption certificates.

    (a) On commencement of employment. On or before the date on which an 
individual commences employment with an employer, the individual shall 
furnish the employer with a signed withholding exemption certificate 
relating to his marital status and the number of withholding exemptions 
which he claims, which number shall in no event exceed the number to 
which he is entitled, or, if the statements described in 
Sec. 31.3402(n)-1 are true with respect to an individual, he may furnish 
his employer with a signed withholding exemption certificate which 
contains such statements. For form and contents of such certificates, 
see Sec. 31.3402(f)(5)-1. The employer is required to request a 
withholding exemption certificate from each employee, but if the 
employee fails to furnish such certificate, such employee shall be 
considered as a single person claiming no withholding exemptions.
    (b) Change in status which affects calendar year. (1) If, on any day 
during the calendar year, the number of withholding exemptions to which 
the employee is entitled is less than the number of withholding 
exemptions claimed by him on the withholding exemption certificate then 
in effect, the employee must within 10 days after the change occurs 
furnish the employer with a new withholding exemption certificate 
relating to the number of withholding exemptions which the employee then 
claims, which must in no event exceed the number to which he is entitled 
on such day. The number of withholding exemptions to which an employee 
is entitled decreases, for example, for any one of the following 
reasons:
    (i) The employee's wife (or husband) for whom the employee has been 
claiming a withholding exemption (a) is divorced or legally separated 
from the employee, or (b) claims her (or his) own withholding exemption 
on a separate certificate.
    (ii) In the case of an employee whose taxable year is not a calendar 
year, the employee's wife (or husband) for whom the employee has been 
claiming a withholding exemption dies in that portion of the calendar 
year which precedes the first day of the taxable year of the employee 
which begins in the calendar year in which the spouse dies.
    (iii) The employee finds that no exemption for his taxable year 
which begins in, or with, the current calendar year will be allowable to 
him under section 151(e) in respect of an individual claimed as a 
dependent on the employee's withholding exemption certificate.
    (iv) It becomes unreasonable for the employee to believe that his 
wages for an estimation year will not be more, or that the determinable 
additional amounts for each item under Sec. 31.3402(m)-1 for an 
estimation year will not be less, than the corresponding figure used in 
connection with a claim by him under section 3402 (m) of a withholding 
allowance to such an extent that the employee would no longer be 
entitled to such withholding allowance.
    (v) It becomes unreasonable for an employee who has in effect a 
withholding exemption certificate on which he claims a withholding 
allowance under section 3402(m), computed on the basis of the preceding 
taxable year, to believe that his wages and the determinable additional 
amounts for each item under Sec. 31.3402(m)-1 in such preceding taxable 
year or in his present taxable year will entitle him to such withholding 
allowance in the present taxable year.
    (2) If, on any day during the calendar year, the number of 
withholding exemptions to which the employee is entitled is more than 
the number of withholding exemptions claimed by him on the withholding 
exemption certificate then in effect, the employee may furnish the 
employer with a new withholding exemption certificate on which

[[Page 184]]

the employee must in no event claim more than the number of withholding 
exemptions to which he is entitled on such day.
    (3) If, on any day during the calendar year, the statements 
described in Sec. 31.3402(n)-1 are true with respect to an employee, 
such employee may furnish his employer with a withholding exemption 
certificate which contains such statements.
    (4) If, on any day during the calendar year, it is not reasonable 
for an employee, who has furnished his employer with a withholding 
exemption certificate which contains the statements described in 
Sec. 31.3402(n)-1, to anticipate that he will incur no liability for 
income tax imposed under subtitle A (as defined in Sec. 31.3402(n)-1) 
for his current taxable year, the employee must within 10 days after 
such day furnish the employer with a new withholding exemption 
certificate which does not contain such statements. If, on any day 
during the calendar year, it is not reasonable for such an employee 
whose liability for income tax imposed under subtitle A is determined on 
a basis other than the calendar year to so anticipate with respect to 
his taxable year following his current taxable year, the employee must 
furnish the employer with a new withholding exemption certificate which 
does not contain such statements within 10 days after such day or on or 
before the first day of the last month of his current taxable year, 
whichever is later.
    (c) Change in status which affects next calendar year. (1) If, on 
any day during the calendar year, the number of exemptions to which the 
employee will be, or may reasonably be expected to be, entitled under 
sections 151 and 3402(m) for his taxable year which begins in, or with, 
the next calendar year is different from the number to which the 
employee is entitled on such day, the following rules shall be 
applicable:
    (i) If such number is less than the number of withholding exemptions 
claimed by the employee on a withholding exemption certificate in effect 
in such day, the employee must, on or before December 1 of the year in 
which the change occurs, unless such change occurs in December, furnish 
his employer with a new withholding exemption certificate reflecting the 
decrease in the number of withholding exemptions. If the change occurs 
in December, the new certificate must be furnished within 10 days after 
the change occurs. The number of exemptions to which an employee is 
entitled for his taxable year which begins in, or with, the next 
calendar year decreases, for example, for any of the following reasons:
    (a) The spouse or a dependent of the employee dies.
    (b) The employee finds that is not reasonable to expect that an 
individual claimed as a dependent on the employee's withholding 
exemption certificate will qualify as a dependent of the employee for 
such taxable year.
    (c) It becomes unreasonable for an employee who has in effect a 
withholding exemption certificate on which he claims a withholding 
allowance under section 3402(m) to believe that his wages and the 
determinable additional amounts for each item under Sec. 31.3402(m)-1 
for his taxable year which begins in, or with, the next calendar year 
will entitle him to such withholding allowance for such taxable year.
    (ii) If such number is greater than the number of withholding 
exemptions claimed by the employee on a withholding exemption 
certificate in effect on such day, the employee may, on or before 
December 1 of the year in which such change occurs, unless such change 
occurs in December, furnish his employer with a new withholding 
exemption certificate reflecting the increase in the number of 
withholding exemptions. If the change occurs in December, the 
certificate may be furnished on or after the date on which the change 
occurs.
    (2) If, on any day during the calendar year, it is not reasonable 
for an employee, who has furnished his employer with a withholding 
exemption certificate which contains the statements described in 
Sec. 31.3402(n)-1 and whose liability for such tax is determined on a 
calendar-year basis, to anticipate that he will incur no liability for 
income tax imposed under subtitle A (as defined in Sec. 3l.3402(n)-1) 
for his taxable year which begins with the next calendar year, the 
employee must furnish his employer with a new withholding

[[Page 185]]

exemption certificate which does not contain such statements, on or 
before December 1 of the first-mentioned calendar year. If it first 
becomes unreasonable for the employee to so anticipate in December, the 
new certificate must be furnished within 10 days after the day on which 
it first becomes unreasonable for the employee to so anticipate.
    (3) Before December 1 of each year, every employer should request 
each of his employees to file a new withholding exemption certificate 
for the ensuing calendar year, in the event of change in the employee's 
exemption status since the filing of his latest certificate.
    (d) Inclusion of account number on withholding exemption 
certificate. Every individual to whom an account number has been 
assigned shall include such number of any withholding exemption 
certificate filed with an employer. For provisions relating to the 
obtaining of an account number, see Sec. 31.6011 (b)-2.
    (e) Invalid withholding exemption certificates. Any alteration of or 
unauthorized addition to a withholding exemption certificate shall cause 
such certificate to be invalid; see paragraph (b) of Sec. 31.3402(f)(5)-
1 for the definitions of alteration and unauthorized addition. Any 
withholding exemption certificate which the employee clearly indicates 
to be false by an oral statement or by a written statement (other than 
one made on the withholding exemption certificate itself) made by him to 
the employer on or before the date on which the employee furnishes such 
certificate is also invalid. For purposes of the preceding sentence, the 
term ``employer'' includes any individual authorized by the employer 
either to receive withholding exemption certificates, to make 
withholding computations, or to make payroll distributions. If an 
employer receives an invalid withholding exemption certificate, he shall 
consider it a nullity for purposes of computing withholding; he shall 
inform the employee who submitted the certificate that it is invalid, 
and shall request another withholding exemption certificate from the 
employee. If the employee who submitted the invalid certificate fails to 
comply with the employer's request, the employer shall withhold from the 
employee as from a single person claiming no exemptions (see 
Sec. 31.3402 (f)(2)-1(a)); if, however, a prior certificate is in effect 
with respect to the employee, the employer shall continue to withhold in 
accordance with the prior certificate.
    (f) Applicability of withholding exemption certificate to qualified 
State individual income taxes. The withholding exemption certificate 
shall be use for purposes of withholding with respect to qualified State 
individual income taxes as well as Federal tax. For provisions relating 
to the withholding exemption certificate with respect to such State 
taxes, see paragraph (d)(3)(i) of Sec. 301.6361-1 of this chapter 
(Regulation on Procedure and Administration).
    (g) Submission of certain withholding certificates--(1) General 
rule. With respect to withholding exemption certificates received after 
November 30, 1986, an employer shall submit, in accordance with 
paragraph (g)(3) of this section, a copy of any withholding exemption 
certificate, together with a copy of any written statement received from 
the employee in support of the claims made on the certificate, which is 
received from the employee during the reporting period (even if the 
certificate is not in effect at the end of the quarter) if the employee 
is employed by that employer on the last day of the reporting period and 
if--
    (i) The total number of withholding exemptions (within the meaning 
of section 3402(f)(1) and the regulations thereunder) claimed on the 
certificate exceeds 10, or
    (ii) The certificate indicates that the employee claims a status 
exempting the employee from withholding, and the exception provided by 
paragraph (g)(2) of this section does not apply.
    (2) Exception. A copy of the certificate shall not be submitted 
under paragraph (g)(1)(ii) of this section if the employer reasonably 
expects, at the time the certificate is received, that the employee's 
wages (under chapter 24 of the Code) from that employer shall not then 
usually exceed $200 per week.
    (3) Rules for submission--(i) In general. The reporting period is a 
calendar quarter. Copies required to be submitted under paragraph (g)(1) 
of this section shall be submitted at the time and place of filing Form 
941 or 941E for the

[[Page 186]]

reporting period, or Form 941-M for the last month of the reporting 
period. Form 941, 941E or 941-M shall be used, in accordance with the 
instructions for the form, to transmit the copies.
    (ii) Option. At the choice of the employer, copies required to be 
submitted under paragraph (g)(1) of this section may be submitted 
earlier and for shorter reporting periods than a calendar quarter. In 
such case, the employer shall submit the copies to the service center 
where the employer would file a Form 941 or 941E and shall include with 
the submission a statement showing the employer's name, address, 
employer identification number, and the number of copies of withholding 
exemption certificates submitted. However, in no event shall a copy be 
submitted later than the time for filing the report required to be 
submitted for the calendar quarter reporting period under subdivision 
(i) of this paragraph (g)(3).
    (iii) First report. The first submission of copies shall include a 
copy of any certificate required to be submitted under paragraph (g)(1) 
of this section which is received by the employer on or after April 1, 
1980.
    (4) Other withholding exemption certificates. An employer shall also 
submit a copy of any currently effective withholding exemption 
certificate (or make the original certificate available for inspection), 
together with a copy of any written statement received from the employee 
in support of the claims made on the certificate, upon written request 
of the Internal Revenue Service. This request of the Service may relate 
either to one or more named employees or to one or more reasonably 
segregable units of the employer. In this regard, the Service may, by 
written notice, advise the employer that a copy of each new withholding 
exemption certificate received from one or more named employees, or from 
one or more reasonably segregable units of the employer, which is 
required, under this paragraph (g) to be submitted to the Service is to 
be submitted to the District Director. The employer shall then submit to 
the District Director a copy of each such new certificate of each such 
employee immediately after the employer receives the new certificate 
from the named employee.
    (5) Computation of withholding. (i) Until receipt of written notice 
from the Internal Revenue Service that a certificate, a copy of which 
was submitted under this section, is defective, that certificate is 
effective and the employer shall withhold on the basis of the statements 
made in that certificate, unless that certificate must be disregarded 
under the provisions of paragraph (g)(5)(vi) of this section.
    (ii) The Internal Revenue Service may find that a copy of a 
withholding exemption certificate submitted contains a materially 
incorrect statement or it may determine, after written request to the 
employee for verification of the statements on the certificate, that it 
lacks sufficient information to determine if the certificate is correct. 
If the Internal Revenue Service so finds or determines and notifies the 
employer in writing that the certificate is defective, the employer 
shall then consider the certificate to be defective for purposes of 
computing amounts of withholding.
    (iii) If the Internal Revenue Service notifies the employer that the 
certificate is defective, the Internal Revenue Service will, based upon 
its findings, advise the employer that the employee either is not 
entitled to claim a status exempting the employee from withholding or is 
not entitled to claim a total number of withholding exemptions in excess 
of a number specified by the Internal Revenue Service in the notice, or 
both. The Internal Revenue Service will also specify the Internal 
Revenue Service office to be contacted for further information.
    (iv) The Internal Revenue Service will provide the employer with a 
copy for the employee of each notice it furnishes to the employer under 
this paragraph (g)(5) in addition to the notice furnished to the 
employer for his own use. The Internal Revenue Service will also mail a 
similar notice to the employee at the address of the employee as shown 
on the certificate under review.
    (v) The employer shall promptly furnish the employee who filed the 
defective certificate, if still in his employ, with a copy of the 
written notice of the

[[Page 187]]

Internal Revenue Service with respect to the certificate and may request 
another withholding exemption certificate from the employee. The 
employer shall withhold amounts from the employee on the basis of the 
maximum number specified in the written notice received from the 
Service.
    (vi) If and when the employee does file any new certificate (after 
an earlier certificate of the employee was considered to be defective), 
the employer shall withhold on the basis of that new certificate 
(whenever filed) as currently effective only if the new certificate does 
not make a claim of exempt status or of a number of withholding 
exemptions which claim is inconsistent with the advice earlier furnished 
by the Internal Revenue Service in its written notice to the employer. 
If any new certificate does make a claim which is inconsistent with the 
advice contained in the Service's written notice to the employer, then 
the employer shall disregard the new certificate, shall not submit that 
new certificate to the Service, and shall continue to withhold amounts 
from the employee on the basis of the maximum number specified in the 
written notice received from the Service.
    (vii) If the employee makes a claim on any new certificate that is 
inconsistent with the advice in the Service's written notice to the 
employer, the employee may specify on such new certificate, or by a 
written statement attached to that certificate, any circumstances of the 
employee which have changed since the date of the Service's earlier 
written notice, or any other circumstances or reasons, as justification 
or support for the claims made by the employee on the new certificate. 
The employee may then submit that new certificate and written statement 
either to (A) the Internal Revenue Service office specified in the 
notice earlier furnished to the employer under this paragraph (g)(5), or 
to (B) the employer, who must then submit a copy of that new certificate 
and the employee's written statement (if any) to the Internal Revenue 
Service office specified in the notice earlier furnished to the 
employer. The employer shall continue to disregard that new certificate 
and shall continue to withhold amounts from the employee on the basis of 
the maximum number specified in the written notice received from the 
Service unless and until the Internal Revenue Service by written notice 
(under paragraph (g)(5)(iii) of this section) advises the employer to 
withhold on the basis of that new certificate and revokes its earlier 
written notice.
    (6) Definition of employer. For purposes of this paragraph (g), the 
term ``employer'' includes any individual authorized by the employer to 
receive withholding exemption certificates, to make withholding 
computations, or to make payroll distributions.

(68A Stat. 731 (26 U.S.C. 6001); 68A Stat. 732 (26 U.S.C. 6011); 68A 
Stat. 917 (26 U.S.C. 7805))

[T.D. 6516, 25 FR 13105, Dec. 20, 1960, as amended by T.D. 6654, 28 FR 
5252, May 28, 1963; T.D. 7048, 35 FR 10291, June 24, 1970; T.D. 7065, 35 
FR 16539, Oct. 23, 1970; T.D. 7577, 43 FR 59359, Dec. 20, 1978; T.D. 
7598, 44 FR 14552, Mar. 13, 1979; T.D. 7682, 45 FR 15526, Mar. 11, 1980; 
T.D. 7772, 46 FR 17548, Mar. 19, 1981; T.D. 7803, 47 FR 3547, Jan. 26, 
1982; T.D. 7915, 48 FR 44073, Sept. 27, 1983; T.D. 8164, 52 FR 45633, 
Dec. 1, 1987]



Sec. 31.3402(f)(3)-1  When withholding exemption certificate takes effect.

    (a) A withholding exemption certificate furnished the employer in 
any case in which no previous withholding exemption certificate is in 
effect with such employer, shall take effect as of the beginning of the 
first payroll period ending, or the first payment of wages made without 
regard to a payroll period, on or after the date on which such 
certificate is so furnished.
    (b) A withholding exemption certificate furnished the employer in 
any case in which a previous withholding exemption certificate is in 
effect with such employer shall, except as hereinafter provided, take 
effect with respect to the first payment of wages made on or after the 
first status determination date which occurs at least 30 days after the 
date on which such certificate is so furnished. However, at the election 
of the employer, except as hereinafter provided, such certificate may be 
made effective with respect to any payment of wages made on or after the 
date on which such certificate is so furnished and before such status 
determination date.

[[Page 188]]

    (c) A withholding exemption certificate furnished the employer 
pursuant to section 3402(f)(2)(C) (see paragraph (c) of 
Sec. 31.3402(f)(2)-1 or paragraph (b)(2)(ii) of Sec. 31.3402(1)-1) which 
effects a change for the next calendar year, shall not take effect, and 
may not be made effective, with respect to the calendar year in which 
the certificate is furnished. A withholding exemption certificate 
furnished the employer by an employee who determines his income tax 
liability on a basis other than a calendar- year basis, as required by 
paragraph (b)(4) of Sec. 31.3402(f)(2)-1, which effects a change for the 
employee's next taxable year, shall not take effect, and may not be made 
effective, with respect to the taxable year of the employee in which the 
certificate is furnished.
    (d) For purposes of this section, the term ``status determination 
date'' means January 1, May 1, July 1, and October 1 of each year.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 6516, 25 FR 13106, Dec. 20, 1960, as amended by T.D. 7048, 35 FR 
10291, June 24, 1970; T.D. 7065, 35 FR 16539, Oct. 23, 1970; T.D. 7115, 
36 FR 9234, May 21, 1971; T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(f)(4)-1  Period during which withholding exemption certificate remains in effect.

    (a) In general. Except as provided in paragraphs (b) and (c) of this 
section, a withholding exemption certificate which takes effect under 
section 3402(f) of the Internal Revenue Code of 1954, or which on 
December 31, 1954, was in effect under section 1622(h) of the Internal 
Revenue Code of 1939, shall continue in effect with respect to the 
employee until another withholding exemption certificate takes effect 
under section 3402(f). Paragraphs (b) and (c) of this section are 
applicable only for withholding exemption certificates furnished by the 
employee to the employer before January 1, 1982. See Sec. 31.3402(f)(4)-
2 for the rules applicable to withholding exemption certificates 
furnished by the employee to the employer after December 31, 1981.
    (b) Withholding allowances under section 3402(m) for itemized 
deductions. In no case shall the portion of a withholding exemption 
certificate relating to withholding allowances under section 3402(m) for 
itemized deductions be effective with respect to any payment of wages 
made to an employee--
    (1) In the case of an employee whose liability for tax under 
subtitle A of the Code is determined on a calendar-year basis, after 
April 30 of the calendar year immediately following the calendar year 
which was his estimation year for purposes of determining the 
withholding allowance or allowances claimed on such exemption 
certificate, or
    (2) In the case of an employee to whom paragraph (c)(1) of this 
section does not apply, after the last day of the fourth month 
immediately following his taxable year which was his estimation year for 
purposes of determining the withholding allowance or allowances claimed 
on such exemption certificate.
    (c) Statements under section 3402(n) eliminating requirement of 
withholding. The statements described in Sec. 31.3402(n)-1 made by an 
employee with respect to his preceding taxable year and current taxable 
year shall be deemed to have been made also with respect to his current 
taxable year and his taxable year immediately thereafter, respectively, 
until either a new withholding exemption certificate furnished by the 
employee takes effect or the existing certificate which contains such 
statements expires. In no case shall a withholding exemption certificate 
which contains such statements be effective with respect to any payment 
of wages made to an employee--
    (1) In the case of an employee whose liability for tax under 
subtitle A is determined on a calendar-year basis, after April 30 of the 
calendar year immediately following the calendar year which was his 
original current taxable year for purposes of such statements, or
    (2) In the case of an employee to whom paragraph (c)(1) of this 
section does not apply, after the last day of the fourth month 
immediately following his original current taxable year for purposes of 
such statements.


[[Page 189]]


(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7048, 35 FR 10291, June 24, 1970, as amended by T.D. 7065, 35 FR 
16539, Oct. 23, 1970; T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(f)(4)-2  Effective period of withholding exemption certificate.

    (a) In general. Except as provided in paragraphs (b) and (c) of this 
section, a withholding exemption certificate that takes effect under 
section 3402(f) of the Internal Revenue Code of 1954, or that on 
December 31, 1954, was in effect under section 1622(h) of the Internal 
Revenue Code of 1939, shall continue in effect with respect to the 
employee until another withholding exemption certificate takes effect 
under section 3402(f). Paragraphs (b) and (c) of this section are 
applicable only for withholding exemption certificates furnished by the 
employee to the employer after December 31, 1981. See 
Sec. 31.3402(f)(4)-1 for the rules applicable to withholding exemption 
certificates furnished by the employee to the employer before January 1, 
1982.
    (b) Withholding allowances under section 3402(m). See paragraphs (b) 
and (c) of Sec. 31.3402(f)(2)-1 (relating to withholding exemption 
certificates) for information as to when an employee claiming 
withholding allowances under section 3402(m) and the regulations 
thereunder must file a new withholding exemption certificate with his 
employer.
    (c) Statements under section 3402(n) eliminating requirement of 
withholding. The statements described in Sec. 31.3402(n)-1 made by an 
employee with respect to his preceding taxable year and current taxable 
year shall be effective until either a new withholding exemption 
certificate furnished by the employee takes effect or the existing 
certificate that contains such statements expires. In no case shall a 
withholding exemption certificate that contains such statements be 
effective with respect to any payment of wages made to an employee:
    (1) In the case of an employee whose liability for tax under 
subtitle A is determined on a calendar year basis, after February 15 of 
the calendar year following the estimation year, or
    (2) In the case of an employee to whom paragraph (c)(1) of this 
section does not apply, after the 15th day of the 2nd calendar month 
following the last day of the estimation year.
    (d) Estimation year. The estimation year is the taxable year 
including the day on which the employee files the withholding exemption 
certificate with his employer, except that if the employee files the 
withholding exemption certificate with his employer and specifies on the 
certificate that the certificate is not to take effect until a specified 
future date, the estimation year shall be the taxable year including 
that specified future date.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7915, 48 FR 44073, Sept. 27, 1983]



Sec. 31.3402(f)(5)-1  Form and contents of withholding exemption certificates.

    (a) Form W-4. Form W-4 is the form prescribed for the withholding 
exemption certificate required to be filed under section 3402(f)(2). A 
withholding exemption certificate shall be prepared in accordance with 
the instructions and regulations applicable thereto, and shall set forth 
fully and clearly the data therein called for. A withholding exemption 
certificate that does not set forth fully and clearly the data therein 
called for is an invalid withholding exemption certificate under 
Sec. 31.3402(f)(2)-1(e) (relating to withhholding exemption 
certificates). Blank copies of paper Forms W-4 will be supplied to 
employers upon request to the Internal Revenue Service. In lieu of the 
prescribed form, employers may prepare and use a form the provisions of 
which are identical with those of the prescribed form, but only if 
employers also provide employees with all the tables and instructions 
contained in the Form W-4 in effect at that time and only if employers 
comply with all revenue procedures relating to substitute forms in 
effect at that time.
    (b) Invalid Form W-4. A Form W-4 does not meet the requirements of 
section 3402(f)(5) or this section and is invalid if it contains an 
alteration or unauthorized addition. For purposes of Sec. 31.3402(f)(2)-
1(e) and this paragraph--

[[Page 190]]

    (1) An alteration of a withholding exemption certificate is any 
deletion of the language of the jurat or other similar provision of such 
certificate by which the employee certifies or affirms the correctness 
of the completed certificate, or any material defacing of such 
certificate;
    (2) An unauthorized addition to a withholding exemption certificate 
is any writing on such certificate other than the entries requested 
(e.g., name, address, and number of exemptions claimed).
    (c) Electronic Form W-4--(1) In general. An employer may establish a 
system for its employees to file withholding exemption certificates 
electronically.
    (2) Requirements--(i) In general. The electronic system must ensure 
that the information received is the information sent, and must document 
all occasions of employee access that result in the filing of a Form W-
4. In addition, the design and operation of the electronic system, 
including access procedures, must make it reasonably certain that the 
person accessing the system and filing the Form W-4 is the employee 
identified in the form.
    (ii) Same information as paper Form W-4. The electronic filing must 
provide the employer with exactly the same information as the paper Form 
W-4.
    (iii) Jurat and signature requirements. The electronic filing must 
be signed by the employee under penalties of perjury.
    (A) Jurat. The jurat (perjury statement) must contain the language 
that appears on the paper Form W-4. The electronic program must inform 
the employee that he or she must make the declaration contained in the 
jurat and that the declaration is made by signing the Form W-4. The 
instructions and the language of the jurat must immediately follow the 
employee's income tax withholding selections and immediately precede the 
employee's electronic signature.
    (B) Electronic signature. The electronic signature must identify the 
employee filing the electronic Form W-4 and authenticate and verify the 
filing. For this purpose, the terms ``authenticate'' and ``verify'' have 
the same meanings as they do when applied to a written signature on a 
paper Form W-4. An electronic signature can be in any form that 
satisfies the foregoing requirements. The electronic signature must be 
the final entry in the employee's Form W-4 submission.
    (iv) Copies of electronic Forms W-4. Upon request by the Internal 
Revenue Service, the employer must supply a hardcopy of the electronic 
Form W-4 and a statement that, to the best of the employer's knowledge, 
the electronic Form W-4 was filed by the named employee. The hardcopy of 
the electronic Form W-4 must provide exactly the same information as, 
but need not be a facsimile of, the paper Form W-4.
    (3) Effective date--(i) In general. This paragraph applies to all 
withholding exemption certificates filed electronically by employees on 
or after January 2, 1997.
    (ii) Special rule for certain Forms W-4. In the case of an 
electronic system that precludes the filing of Forms W-4 required on 
commencement of employment and Forms W-4 claiming more than 10 
withholding exemptions or exemption from withholding, the requirements 
of paragraph (c)(2)(iii) of this section will be treated as satisfied if 
the Form W-4 is filed electronically before January 1, 1999.
[T.D. 7423, 41 FR 26217, June 25, 1976, as amended by T.D. 7915, 48 FR 
44074, Sept. 27, 1983; T.D. 8706, 62 FR 24, Jan. 2, 1997]



Sec. 31.3402(f)(6)-1  Withholding exemptions for nonresident alien individuals.

    A nonresident alien individual (other than, in regard to wages paid 
after February 28, 1979, a nonresident alien individual treated as a 
resident under section 6013(g) or (h)) subject to withholding under 
section 3402 is on any 1 day entitled under section 3402(f)(1) and 
Sec. 31.3402(f)(1)-1 to the number of withholding exemptions 
corresponding to the number of personal exemptions to which he is 
entitled on such day by reason of the application of section 873(b)(3) 
or section 876, whichever applies. Thus, a nonresident alien individual 
who is not a resident of Canada or Mexico and who is not a resident of 
Puerto Rico during the entire taxable

[[Page 191]]

year, is allowed under section 3402(f)(1) only one withholding 
exemption.
[T.D. 6908, 31 FR 16776, Dec. 31, 1966, as amended by T.D. 7670, 45 FR 
6932, Jan. 31, 1980]



Sec. 31.3402(g)-1  Supplemental wage payments.

    (a) In general. (1) An employee's remuneration may consist of wages 
paid for a payroll period and supplemental wages, such as bonuses, 
commissions, and overtime pay, paid for the same or a different period, 
or without regard to a particular period. When such supplemental wages 
are paid (whether or not at the same time as the regular wages) the 
amount of the tax required to be withheld under section 3402(a) (the 
percentage method) or under section 3402(c) (the wage bracket method) 
shall be determined in accordance with this paragraph or paragraph (b) 
of this section.
    (2) The supplemental wages, if paid concurrently with wages for a 
payroll period, shall be aggregated with the wages paid for such payroll 
period. If not paid concurrently, the supplemental wages shall be 
aggregated with the wages paid or to be paid within the same calendar 
year for the last preceding payroll period or for the current payroll 
period. The amount of tax to be withheld shall be determined as if the 
aggregate of the supplemental wages and the regular wages constituted a 
single wage payment for the regular payroll period.

    Example 1. A, a single person, is employed as a salesman at a 
monthly salary of $130 plus commissions on sales made during the month. 
The number of withholding exemptions claimed is one. During May 1966 A 
earns $300 in commissions, which together with the salary of $130 is 
paid on June 10, 1966. Under the wage bracket method the amount of the 
tax required to be withheld is shown in the table applicable to a 
monthly payroll period with respect to an employee who is not married. 
Under this table it will be found that the amount of tax required to be 
withheld is $58.40.

    Example 2. B, a married person, is employed at a salary of $3,600 
per annum paid semimonthly on the 15th day and the last day of each 
month, plus a bonus and commission determined at the end of each 3-month 
period. The bonus and commission for the 3-month period ending on 
September 30, 1966, amount to $250, which is paid on October 10, 1966. B 
has in effect a withholding exemption certificate on which he claimed 
four withholding exemptions and disclosed that he is married. Under the 
wage bracket method, the amount of tax required to be withheld on the 
aggregate of the bonus of $250 and the last preceding semimonthly wage 
payment of $150, or $400, is shown in the table applicable to a married 
person with a semimonthly payroll period to be $44.50. However, since 
tax in the amount of $3.50 was withheld on the semimonthly wage payment 
of $150, the amount to be withheld on October 10, 1966, is $41.00.

If, however, supplemental wages are paid and tax has been withheld from 
the employee's regular wages, the employer may determine the tax to be 
withheld--
    (i) From supplemental wages paid prior to May 1, 1966, by using the 
rate in effect under section 3402(a) at the time the wages are paid, and
    (ii) From supplemental wages paid after April 30, 1966, by using a 
flat percentage rate of 20 percent,

without allowance for exemption and without reference to any regular 
payment of wages.
    (3) For provisions relating to the treatment of wages paid other 
than in cash to retail commission salesmen, see Sec. 31.3402(j)-1.
    (b) Special rule where aggregate withholding exemption exceeds wages 
paid. (1) If supplemental wages are paid to an employee during a 
calendar year for a period which involves two or more consecutive 
payroll periods, for which other wages also are paid during such 
calendar year, and the aggregate of such other wages is less than the 
aggregate of the amounts determined under the table provided in section 
3402(b) (1) as the withholding exemptions applicable for such payroll 
periods, the amount of the tax required to be withheld on the 
supplemental wages shall be computed as follows:

    Step 1. Determine an average wage for each of such payroll periods 
by dividing the sum of the supplemental wages and the wages paid for 
such payroll periods by the number of such payroll periods.
    Step 2. Determine a tax for each payroll period as if the amount of 
the average wage constituted the wages paid for such payroll period.
    Step 3. From the sum of the amounts of tax determined in Step 2 
subtract the total

[[Page 192]]

amount of tax withheld, or to be withheld, from the wages, other than 
the supplemental wages, for such payroll periods. The remainder, if any 
shall constitute the amount of the tax to be withheld upon the 
supplemental wages.
    Example. An employee has a weekly payroll period ending on Saturday 
of each week, the wages for which are paid on Friday of the succeeding 
week. On the 10th day of each month he is paid a bonus based upon 
production during the payroll periods for which wages were paid in the 
preceding month. The employee is paid a weekly wage of $64 on each of 
the five Fridays occurring in July 1966. On August 10, 1966, the 
employee is paid a bonus of $125 based upon production during the five 
payroll periods covered by the wages paid in July. On the date of 
payment of the bonus, the employee, who is married and has three 
children, has a withholding exemption certificate in effect indicating 
that he is married and claiming five withholding exemptions. The amount 
of the tax to be withheld from the bonus paid on August 10, 1966, is 
computed as follows:

Wages paid in July 1966 for 5 payroll periods (5 x $64).....     $320.00
Bonus paid August 10, 1966..................................      125.00
                                                             -----------
      Aggregate of wages and bonus..........................      445.00
                                                             ===========
Average wage per payroll period ($4455).............       89.00
Computation of tax under percentage method: Withholding                 
 exemptions (5 x $13.50)....................................       67.50
                                                             -----------
      Remainder subject to tax..............................       21.50
                                                             ===========
Tax on average wage for 1 week under percentage method of               
 withholding (married person with weekly payroll period) 14             
 percent of $17.50 (excess over $4))........................        2.45
                                                             ===========
Tax on average wage for 5 weeks.............................       12.25
Less: Tax previously withheld on weekly wage payments of $64        None
  Tax to be withheld on supplemental wages..................       12.25
                                                             ===========
Computation of tax under wage bracket method: Tax on $89                
 wage under weekly wage table for married person ($2.50 per             
 week for 5 weeks)..........................................       12.50
Less: Tax previously withheld on weekly wage payments of $64        None
Tax to be withheld on supplemental wages....................       12.50
                                                                        


    (2) The rules prescribed in this paragraph shall, at the election of 
the employer, be applied in lieu of the rules prescribed in paragraph 
(a) of this section except that this paragraph shall not be applicable 
in any case in which the payroll period of the employee is less than one 
week.
    (c) Vacation allowances. Amounts of so-called ``vacation 
allowances'' shall be subject to withholding as though they were regular 
wage payments made for the period covered by the vacation. If the 
vacation allowance is paid in addition to the regular wage payment for 
such period, the rules applicable with respect to supplemental wage 
payments shall apply to such vacation allowance.
[T.D. 6516, 25 FR 13032, Dec. 20, 1960, as amended by T.D. 6860, 30 FR 
13947, Nov. 4, 1965; T.D. 6882, 31 FR 5661, Apr. 12, 1966]



Sec. 31.3402(g)-2  Wages paid for payroll period of more than one year.

    If wages are paid to an employee for a payroll period of more than 
one year, for the purpose of determining the amount of tax required to 
be deducted and withheld in respect of such wages--
    (a) Under the percentage method, the amount of the tax shall be 
determined as if such payroll period constituted an annual payroll 
period, and
    (b) Under the wage bracket method, the amount of the tax shall be 
determined as if such payroll period constituted a miscellaneous payroll 
period of 365 days.



Sec. 31.3402(g)-3  Wages paid through an agent, fiduciary, or other person on behalf of two or more employers.

    (a) If a payment of wages is made to an employee by an employer 
through an agent, fiduciary, or other person who also has the control, 
receipt, custody, or disposal of, or pays the wages payable by another 
employer to such employee, the amount of the tax required to be withheld 
on each wage payment made through such agent, fiduciary, or person 
shall, whether the wages are paid separately on behalf of each employer 
or paid in a lump sum on behalf of all such employers, be determined 
upon the aggregate amount of such wage payment or payments in the same 
manner as if such aggregate amount had been paid by one employer. Hence, 
under either the percentage method or the wage bracket method the tax 
shall be determined upon the aggregate amount of the wage payment.
    (b) In any such case, each employer shall be liable for the return 
and payment of a pro rata portion of the tax so determined, such portion 
to be determined in the ratio which the amount contributed by the 
particular employer bears to the aggregate of such wages.

[[Page 193]]

    (c) For example, three companies maintain a central management 
agency which carries on the administrative work of the several 
companies. The central agency organization consists of a staff of 
clerks, bookkeepers, stenographers, etc., who are the common employees 
of the three companies. The expenses of the central agency, including 
wages paid to the foregoing employees, are borne by the several 
companies in certain agreed proportions. Company X pays 45 percent, 
Company Y pays 35 percent and Company Z pays 20 percent of such 
expenses. The amount of tax required to be withheld on the wages paid to 
persons employed in the central agency should be determined in 
accordance with the provisions of this section. In such event, Company X 
is liable as an employer for the return and payment of 45 percent of the 
tax required to be withheld, Company Y is liable for the return and 
payment of 35 percent of the tax and Company Z is liable for the return 
and payment of 20 percent of the tax. (See Sec. 31.3504-1, relating to 
acts to be performed by agents.)



Sec. 31.3402(h)(1)-1  Withholding on basis of average wages.

    (a) In general. An employer may determine the amount of tax to be 
deducted and withheld upon a payment of wages to an employee on the 
basis of the employee's average estimated wages, with necessary 
adjustments, for any quarter. This paragraph applies only where the 
method desired to be used includes wages other than tips (whether or not 
tips are also included).
    (b) Withholding on the basis of average estimated tips--(1) In 
general. Subject to certain limitations and conditions, an employer may, 
at his discretion, withhold the tax under section 3402 in respect of 
tips reported by an employee to the employer on an estimated basis. An 
employer who elects to make withholding of the tax on an estimated basis 
shall:
    (i) In respect of each employee, make an estimate of the amount of 
tips that will be reported, pursuant to section 6053, by the employee to 
the employer in a calendar quarter.
    (ii) Determine the amount which must be deducted and withheld upon 
each payment of wages (exclusive of tips) which are under the control of 
the employer to be made during the quarter by the employer to the 
employee. The total amount which must be deducted and withheld shall be 
determined by assuming that the estimated tips for the quarter represent 
the amount of wages to be paid to the employee in the form of tips in 
the quarter and that such tips will be ratably (in terms of pay periods) 
paid during the quarter.
    (iii) Deduct and withhold from any payment of wages (exclusive of 
tips) which are under the control of the employer, or from funds 
referred to in section 3402(k) (see Secs. 31.3402(k) and 31.3402(k)-1), 
such amount as may be necessary to adjust the amount of tax withheld on 
the estimated basis to conform to the amount required to be withheld in 
respect of tips reported by the employee to the employer during the 
calendar quarter in written statements furnished to the employer 
pursuant to section 6053(a). If an adjustment is required, the 
additional tax required to be withheld may be deducted upon any payment 
of wages (exclusive of tips) which are under the control of the employer 
during the quarter and within the first 30 days following the quarter or 
from funds turned over by the employee to the employer for such purpose 
within such period. For provisions relating to the repayment to an 
employee, or other disposition, of amounts deducted from an employee's 
remuneration in excess of the correct amount of tax, see 
Sec. 31.6413(a)-1.
    (2) Estimating tips employee will report--(i) Initial estimate. The 
initial estimate of the amount of tips that will be reported by a 
particular employee in a calendar quarter shall be made on the basis of 
the facts and circumstances surrounding the employment of that employee. 
However, if a number of employees are employed under substantially the 
same circumstances and working conditions, the initial estimate 
established for one such employee may be used as the initial estimate 
for other employees in that group.

[[Page 194]]

    (ii) Adjusting estimate. If the quarterly estimate of tips in 
respect of a particular employee continues to differ substantially from 
the amount of tips reported by the employee and there are no unusual 
factors involved (for example, an extended absence from work due to 
illness) the employer shall make an appropriate adjustment of his 
estimate of the amount of tips that will be reported by the employee.
    (iii) Reasonableness of estimate. The employer must be prepared, 
upon request of the district director, to disclose the factors upon 
which he relied in making the estimate, and his reasons for believing 
that the estimate is reasonable.
[T.D. 7053, 35 FR 11626, July 21, 1970]



Sec. 31.3402(h)(2)-1  Withholding on basis of annualized wages.

    An employer may determine the amount of tax to be deducted and 
withheld upon a payment of wages to an employee by taking the following 
steps:

    Step 1. Multiply the amount of the employee's wages for the payroll 
period by the number of such periods in the calendar year.
    Step 2. Determine the amount of tax which would be required to be 
deducted and withheld upon the amount determined in Step 1 if that 
amount constituted the actual wages for the calendar year and the 
payroll period of the employee were an annual payroll period.
    Step 3. Divide the amount of tax determined in Step 2 by the number 
of periods by which the employee's wages were multiplied in Step 1.
    Example. On July 1, 1970, A, a single person who is on a weekly 
payroll period and claims one exemption, receives wages of $100 from X 
Co., his employer. X Co. multiplies the weekly wage of $100 by 52 weeks 
to determine an annual wage of $5,200. It then subtracts $650 for A's 
withholding exemption and arrives at a balance of $4,550. The applicable 
table in section 3402(a) for annual payroll periods indicates that the 
amount of tax to be withheld thereon is $376 plus $314.50 (17 percent of 
excess over $2,700), or a total of $690.50. The annual tax of $690.50, 
when divided by 52 to arrive at the portion thereof attributable to the 
weekly payroll period, equals $13.28. X Co. may, if it chooses, withhold 
$13.28 rather than the amount specified in section 3402 (a) or (c) for a 
weekly payroll period.

[T.D. 7053, 35 FR 11627, July 21, 1970]



Sec. 31.3402(h)(3)-1  Withholding on basis of cumulative wages.

    (a) In general. In the case of an employee who has in effect a 
request that the amount of tax to be withheld from his wages be computed 
on the basis of his cumulative wages, and whose wages since the 
beginning of the current calendar year have been paid with respect to 
the same category of payroll period (e.g., weekly or semimonthly), the 
employer may determine the amount of tax to be deducted and withheld 
upon a payment of wages made to the employee after December 31, 1969, by 
taking the following steps:

    Step 1. Add the amount of the wages to be paid the employee for the 
payroll period to the total amount of wages paid by the employer to the 
employee during the calendar year.
    Step 2. Divide the aggregate amount of wages computed in Step 1 by 
the number of payroll periods to which that amount relates.
    Step 3. Compute the total amount of tax that would have been 
required to be deducted and withheld under section 3402(a) if the 
average amount of wages (as computed in Step 2) had been paid to the 
employee for the number of payroll periods to which the aggregate amount 
of wages (computed in Step 1) relates.
    Step 4. Determine the excess, if any, of the amount of tax computed 
in Step 3 over the total amount of tax already deducted and withheld by 
the employer from wages paid to the employee during the calendar year.
    Example. On July 1, 1970, Y Co. employs B, a single person claiming 
one exemption. Y Co. pays B the following amounts of wages on the basis 
of a biweekly payroll period on the following pay days:

July 20.......................................................    $1,000
August 3......................................................       300
August 17.....................................................       300
August 31.....................................................       300
September 14..................................................       300
September 28..................................................       300
                                                                        


On October 5, B requests that Y Co. withhold on the basis of his 
cumulative wages with respect to his wages to be paid on October 12 and 
thereafter. Y Co. adds the $300 in wages to be paid to B on October 12 
to the payments of wages already made to B during the calendar year, and 
determines that the aggregate amount of wages is $2,800. The average 
amount of wages for the 7 biweekly payroll periods is $400. The total 
amount of tax required to be deducted and withheld for payments of $400 
for each of 7 biweekly payroll periods is $485.87 under section 3402(a). 
Since the total amount of tax which has

[[Page 195]]

been deducted and withheld by Y Co. through September 28 is $484.86, Y 
Co. may, if it chooses, deduct and withhold $1.01 (the amount by which 
$485.87 exceeds the total amount already withheld by Y Co.) from the 
payment of wages to B on October 12 rather than the amount specified in 
section 3402 (a) or (c).

    (b) Employee's request and revocation of request. An employee's 
request that his employer withhold on the basis of his cumulative wages 
and a notice of revocation of such request shall be in writing and in 
such form as the employer may prescribe. An employee's request furnished 
to his employer pursuant to this section shall be effective, and may be 
acted upon by his employer, after the furnishing of such request and 
before a revocation thereof is effective. A revocation of such request 
may be made at any time by the employee furnishing his employer with a 
notice of revocation. The employer may give immediate effect to a 
revocation, but, in any event, a revocation shall be effective with 
respect to payments of wages made on or after the first ``status 
determination date'' (see section 3402(f)(3)(B)) which occurs at least 
30 days after the date on which such notice is furnished.
    (c) Requests due to increases or decreases in allowances. An 
employee may request pursuant to this section that his employer withhold 
on the basis of the employee's cumulative wages when the employee is 
entitled to claim an increased or decreased number of withholding 
allowances under Sec. 31.3402(m)-1 during the estimation year (as 
defined in Sec. 31.3402(m)-1(c)(1)).

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7053, 35 FR 11627, July 21, 1970, as amended by T.D. 7915, 48 FR 
44074, Sept. 27, 1983]



Sec. 31.3402(h)(4)-1  Other methods.

    (a) Maximum permissible deviations. An employer may use any other 
method of withholding under which the employer will deduct and withhold 
upon wages paid to an employee after December 31, 1969, for a payroll 
period substantially the same amount as would be required to be deducted 
and withheld by applying section 3402(a) with respect to the payroll 
period. For purposes of section 3402(h)(4) and this section, an amount 
is substantially the same as the amount required to be deducted and 
withheld under section 3402(a) if its deviation from the latter amount 
is not greater than the maximum permissible deviation prescribed in this 
paragraph. The maximum permissible deviation under this paragraph is 
determined by annualizing wages as provided in Step 1 of 
Sec. 31.3402(h)(2)-1 and applying the following table to the amount of 
tax required to be deducted and withheld under section 3402(a) with 
respect to such annualized wages, as determined under Step 2 of 
Sec. 31.3402(h)(2)-1:

                                                                        
 If the tax required to be withheld under      The maximum permissible  
 the annual percentage rate schedule is--       annual deviation is--   
                                                                        
$10 to $100...............................  $10, plus 10 percent of     
                                             excess over $10.           
$100 to $1,000............................  $19, plus 3 percent of      
                                             excess over $100.          
$1,000 or over............................  $46, plus 1 percent of      
                                             excess over $1,000.        
                                                                        


In any case, an amount which is less than $10 more or less per year than 
the amount required to be deducted and withheld under section 3402(a) is 
substantially the same as the latter amount. If any method produces 
results which are not greater than the prescribed maximum deviations 
only with respect to some of his employees, the employer may use such 
method only with respect to such employees. An employer should 
thoroughly test any method which he contemplates using to ascertain 
whether it meets the tolerances prescribed by this paragraph. An 
employer may not use any method, one of the principal purposes of which 
is to consistently produce amounts to be deducted and withheld which are 
less (though substantially the same) than the amount required to be 
deducted and withheld by applying section 3402(a).
    (b) Combined FICA and income tax withholding. In addition to the 
methods authorized by paragraph (a) of this section, an employer may 
determine the amount of tax to be deducted and withheld under section 
3402 upon a payment

[[Page 196]]

of wages to an employee by using tables prescribed by the Commissioner 
which combine the amounts of tax to be deducted under sections 3102 and 
3402. Such tables shall provide for the deduction of the sum of such 
amounts, computed on the basis of the midpoints of the wage brackets in 
the tables prescribed under section 3402(c). The portion of such sum 
which is to be treated as the tax deducted and withheld under section 
3402 shall be the amount obtained by subtracting from such sum the 
amount of tax required to be deducted by section 3102. Such tables may 
be used only with respect to payments which are wages under both 
sections 3121(a) and 3401(a).
    (c) Part-year employment method of withholding--(1) In general. In 
addition to the methods authorized by other paragraphs of this section, 
in the case of part-year employment (as defined in subparagraph (4) of 
this paragraph) of an employee who determines his liability for tax 
under subtitle A of the Code on a calendar-year basis and who has in 
effect a request that the amount of tax to be withheld from his wages be 
computed according to the part-year employment method described in this 
paragraph, the employer may determine the amount of tax to be deducted 
and withheld upon a payment of wages made to the employee on or after 
January 5, 1973, by taking the following steps:

    Step 1. Add the amount of wages to be paid to the employee for the 
current payroll period to the total amount of wages paid by the employer 
to the employee for all preceding payroll periods included in the 
current term of continuous employment (as defined in subparagraph (3) of 
this paragraph) of the employee by the employer;
    Step 2. Divide the aggregate amount of wages computed in Step 1 by 
the total of the number of payroll periods to which that amount relates 
plus the equivalent number of payroll periods (as defined in 
subparagraph (2) of this paragraph) in the employee's term of continuous 
unemployment immediately preceding the current term of continuous 
employment, such term of continuous unemployment to be exclusive of any 
days prior to the beginning of the current calendar year;
    Step 3. Determine the total amount of tax that would have been 
required to be deducted and withheld under section 3402 if the average 
amount of wages (as computed in Step 2) had been paid to the employee 
for the number of payroll periods determined in Step 2 (including the 
equivalent number of payroll periods); and
    Step 4. Determine the excess, if any, of the amount of tax computed 
in Step 3 over the total amount of tax already deducted and withheld by 
the employer from wages paid to the employee for all payroll periods 
during the current term of continuous employment.

The use of the method described in this paragraph does not preclude the 
employee from claiming additional withholding allowances pursuant to 
section 3402(m) or the standard deduction allowance pursuant to section 
3402(f)(1)(G).
    (2) Equivalent number of payroll periods. For purposes of this 
paragraph, the equivalent number of payroll periods shall be determined 
by dividing the number of calendar days contained in the current payroll 
period into the number of calendar days between the later of (i) the day 
certified by the employee as his last day of employment prior to his 
current term of continuous employment during the calendar year in which 
such term commenced, or (ii) the last day of the calendar year 
immediately preceding the current calendar year, and the first day of 
the current term of continuous employment. For purposes of the preceding 
sentence, the term ``calendar days'' includes holidays, Saturdays, and 
Sundays. In determining the equivalent number of payroll periods, any 
fraction obtained in the division described in the first sentence of 
this subparagraph shall be disregarded. An employee paid for a 
miscellaneous payroll period shall be considered to have a daily payroll 
period for purposes of this subparagraph. In a case in which an employee 
is paid for a daily or miscellaneous payroll period and the employer 
elects under Circular E to compute the tax to be withheld as if the 
aggregate of the wages paid to the employee during the calendar week 
were paid for a weekly period, the employer shall determine the 
equivalent number of payroll periods for purposes of the computation of 
the tax to be withheld for the calendar week on the basis of a weekly 
payroll period (notwithstanding the fact that a determination of the 
equivalent number of payroll periods for purposes of

[[Page 197]]

the computation of the tax to be withheld upon wages paid for daily or 
miscellaneous payroll periods within such calendar week has been made on 
the basis of a daily or miscellaneous payroll period).
    (3) Term of continuous employment. For purposes of this paragraph, a 
term of employment is continuous if it is either a single term of 
employment or two or more consecutive terms of employment with the same 
employer. A term of continuous employment begins on the first day on 
which any services are performed by the employee for the employer for 
which compensation is paid or payable. Such term ends on the earlier of 
(i) the last day during the current term of continuous employment on 
which any services are performed by the employee for the employer, or 
(ii) if the employee performs no services for the employer for a period 
of more than 30 calendar days, the last day preceding such period on 
which any services are performed by the employee for the employer. For 
example, a professional athlete who signs a contract on December 31, 
1973, to perform services from July 1 through December 31 for the 
calendar years 1974, 1975, and 1976 has a new term of employment 
beginning each July 1 and accordingly may qualify for use of the part-
year withholding method in each of such years. Likewise, a term of 
continuous employment is not broken by a temporary layoff of no more 
than 30 days. On the other hand, when an employment relationship is 
actually terminated the term of continuous employment is ended even 
though a new employment relationship is established with the same 
employer within 30 days. A ``term of continuous employment'' includes 
all days on which an employee performs any services for an employer and 
includes days on which services are not performed because of illness or 
vacation, or because such days are holidays or are regular days off 
(such as Saturdays and Sundays, or days off in lieu of Saturdays and 
Sundays), or other days for which the employee is not scheduled to work. 
For example, an employee who is employed 2 days a week for the same 
employer from March 1 through December 31 has a term of continuous 
employment of 306 days.
    (4) Part-year employment. For purposes of this paragraph, ``part-
year employment'' means one or more terms of continuous employment with 
all employers which term or terms will not aggregate more than 245 days 
within a calendar year. For example, A graduates from college in May and 
was not employed from January through May. A accepts a permanent 
position with X Co., beginning June 1. Since the total duration of A's 
term of continuous employment will, during the current calendar year, 
not exceed 245 days it does qualify as part-year employment for purposes 
of this section.

If, however, A had also worked for Y Co. from December 15 of the 
previous year through February 5 of the current calendar year, the total 
duration of A's terms of continuous employment will, during the current 
calendar year, exceed 245 days (36 days (January 1 through February 5) 
plus 214 days (June 1 through December 31) equals 250 days). This year's 
employment does not therefore qualify as part-year employment for 
purposes of this section.
    (5) Employee's request. (i) An employee's request that his employer 
withhold according to the part-year employment method shall be in 
writing and in such form as the employer may prescribe. Such request 
shall be made under the penalties of perjury and shall contain the 
following information--
    (a) The last day of employment (if any) by any employer prior to the 
current term of continuous employment during the calendar year in which 
such term commenced.
    (b) A statement that the employee reasonably anticipates that he 
will be employed for an aggregate of no more than 245 days in all terms 
of continuous employment during the current calendar year, and
    (c) The employee uses a calendar-year accounting period.

An employee's request furnished to his employer pursuant to this section 
shall be effective, and may be acted upon by his employer, with respect 
to wages paid after the furnishing of such request, and shall cease to 
be effective with respect to any wages paid on or

[[Page 198]]

after the beginning of the payroll period during which the current 
calendar year will end.
    (ii) If, on any day during the calendar year, any of the 
anticipations stated by the employee in his statement provided pursuant 
to subdivision (i)(b) of this subparagraph becomes unreasonable, the 
employee shall revoke the request described in this subparagraph before 
the end of the payroll period during which it becomes unreasonable. The 
revocation shall be effective as of the beginning of the payroll period 
during which it is made.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7053, 35 FR 11627, July 21, 1970, as amended by T.D. 7251, 38 FR 
867, Jan 5, 1973; T.D. 7915, 48 FR 44074, Sept. 27, 1983]



Sec. 31.3402(i)-1  Additional withholding.

    (a) In addition to the tax required to be deducted and withheld in 
accordance with the provisions of section 3402, the employer and 
employee may agree that an additional amount shall be withheld from the 
employee's wages. The agreement shall be in writing and shall be in such 
form as the employer may prescribe. The agreement shall be effective for 
such period as the employer and employee mutually agree upon. However, 
unless the agreement provides for an earlier termination, either the 
employer or the employee, by furnishing a written notice to the other, 
may terminate the agreement effective with respect to the first payment 
of wages made on or after the first ``status determination date'' (see 
paragraph (d) of Sec. 31.3402(f)(3)-1) which occurs at least 30 days 
after the date on which such notice if furnished.
    (b) The amount deducted and withheld pursuant to an agreement 
between the employer and employee shall be considered as tax required to 
be deducted and withheld under section 3402. All provisions of law and 
regulations applicable with respect to the tax required to be deducted 
and withheld under section 3402 shall be applicable with respect to any 
amount deducted and withheld pursuant to the agreement.
    (c) This section is applicable only to agreements made before 
October 1, 1981. Any such agreement shall remain in effect in accordance 
with paragraph (a). See Sec. 31.3402 (i)-2 for rules relating to 
increases in withholding after September 30, 1981.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 65l6, 25 FR 13108, Dec. 20, 1960, as amended by T.D. 7065, 35 FR 
16540, Oct. 23, 1970; T.D. 7915, 48 FR 44074, Sept. 27, 1983]



Sec. 31.3402(i)-2  Increases or decreases in withholding.

    (a) Increases in withholding--(1) In general. In addition to the tax 
required to be deducted and withheld in accordance with the provisions 
of section 3402, the employee may request, after September 30, 1981, 
that the employer deduct and withhold an additional amount from the 
employee's wages. The employer must comply with the employee's request, 
except that the employer shall comply with the employee's request only 
to the extent that the amount that the employee requests to be deducted 
and withheld under this section does not exceed the amount that remains 
after the employer has deducted and withheld all amounts otherwise 
required to be deducted and withheld by Federal law (other than by 
section 3402(i) and this section), State law, and local law (other than 
by State or local law that provides for voluntary withholding). The 
employer must comply with the employee's request in accordance with the 
time limitations of Sec. 31.3402(f)(3)-1 (relating to when withholding 
exemption certificate takes effect). The employee must make his request 
on Form W-4 as provided in Sec. 31.3402(f)(5)-1 (relating to form and 
contents of withholding exemption certificates), and this Form W-4 shall 
take effect and remain effective in accordance with section 3402(f) and 
the regulations thereunder.
    (2) Amount deducted considered to be tax. The amount deducted and 
withheld pursuant to paragraph (a)(1) of this section shall be 
considered to be tax required to be deducted and withheld under section 
3402. All provisions of

[[Page 199]]

law and regulations applicable with respect to the tax required to be 
deducted and withheld under section 3402 shall be applicable with 
respect to any amount deducted and withheld under paragraph (a)(1) of 
this section.
    (b) Decreases in withholding. [Reserved]

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7915, 48 FR 44074, Sept. 27, 1983]



Sec. 31.3402(j)-1  Remuneration other than in cash for service performed by retail commission salesman.

    (a) In general. (1) An employer, in computing the amount to be 
deducted and withheld as tax in accordance with section 3402, may, at 
his election, disregard any wages paid, after August 9, 1955, in a 
medium other than cash for services performed for him by an employee if 
(i) the noncash remuneration is paid for services performed by the 
employee as a retail commission salesman and (ii) the employer 
ordinarily pays the employee remuneration solely by way of cash 
commissions for services performed by him as a retail commission 
salesman.
    (2) Section 3402(j) and this section are not applicable with respect 
to noncash wages paid to a retail commission salesman for services 
performed by him in a capacity other than as such a salesman. Such 
sections are not applicable with respect to noncash wages paid by an 
employer to an employee for services performed as a retail commission 
salesman if the employer ordinarily pays the employee remuneration other 
than by way of cash commissions for such services. Thus, noncash 
remuneration may not be disregarded in computing the amount to be 
deducted and withheld in a case where the employee, for services 
performed as a retail commission salesman, is paid both a salary and 
cash commissions on sales, or is ordinarily paid in something other than 
cash (stocks, bonds, or other forms of property) notwithstanding that 
the amount of remuneration paid to the employee is measured by sales.
    (b) Retail commission salesman. For purposes of section 3402(j) and 
this section, the term ``retail commission salesman'' includes an 
employee who is engaged in the solicitation of orders at retail, that 
is, from the ultimate consumer, for merchandise or other products 
offered for sale by his employer. The term does not include an employee 
salesman engaged in the solicitation on behalf of his employer of orders 
from wholesalers, retailers, or others, for merchandise for resale. 
However, if the salesman solicits orders for more than one principal, he 
is not excluded from the term solely because he solicits orders from 
wholesalers or retailers on behalf of one or more principals. In such 
case the salesman may be a retail commission salesman with respect to 
services performed for one or more principals and not with respect to 
services performed for his other principals.
    (c) Noncash remuneration. The term ``noncash remuneration'' includes 
remuneration paid in any medium other than cash, such as goods or 
commodities, stocks, bonds, or other forms of property. The term does 
not include checks or other monetary media of exchange.
    (d) Cross reference. For provisions relating to records required to 
be kept and statements which must be furnished an employee with respect 
to wage payments, see sections 6001 and 6051 and the regulations 
thereunder in Subpart G of this part.



Sec. 31.3402(k)-1  Special rule for tips.

    (a) Withholding of income tax in respect of tips--(1) In general. 
Subject to the limitations set forth in paragraph (a)(2) of this 
section, an employer is required to deduct and withhold from each of his 
employees tax in respect of those tips received by the employee which 
constitute wages. (For provisions relating to the treatment of tips as 
wages, see Secs. 3401(a)(16) and 3401(f).) The employer shall make the 
withholding by deducting or causing to be deducted the amount of the tax 
from wages (exclusive of tips) which are under the control of the 
employer or other funds turned over by the employee to the employer (see 
paragraph (a)(3) of this section). For purposes of this section the 
terms ``wages (exclusive of tips) which

[[Page 200]]

are under the control of the employer'' means, with respect to a payment 
of wages, an amount equal to wages as defined in section 3401(a) except 
that tips and noncash remuneration which are wages are not included, 
less the sum of--
    (i) The tax under section 3101 required to be collected by the 
employer in respect of wages as defined in section 3121(a) (exclusive of 
tips);
    (ii) The tax under section 3402 required to be collected by the 
employer in respect of wages as defined in section 3401(a) (exclusive of 
tips); and
    (iii) The amount of taxes imposed on the remuneration of an employee 
withheld by the employer pursuant to State and local law (including 
amounts withheld under an agreement between the employer and the 
employee pursuant to such law) except that the amount of taxes taken 
into account in this subdivision shall not include any amount 
attributable to tips.
    (2) Limitations. An employer is required to deduct and withhold the 
tax on tips which constitute wages only in respect of those tips which 
are reported by the employee to the employer in a written statement 
furnished to the employer pursuant to section 6053(a). The employer is 
responsible for the collection of the tax on tips reported to him only 
to the extent that the emloyer can, during the period beginning at the 
time the written statement is submitted to him and ending at the close 
of the calendar year in which the statement was submitted, collect the 
tax by deducting it or causing it to be deducted as provided in 
subparagraph (1) of this paragraph.
    (3) Furnishing of funds to employer. If the amount of the tax in 
respect of tips reported by the employee to the employer in a written 
statement furnished pursuant to section 6053(a) exceeds the wages 
(exclusive of tips) which are under the control of the employer from 
which the employer is required to withhold the tax in respect of such 
tips, the employee may furnish to the employer, within the period 
specified in subparagraph (2) of this paragraph, an amount of money 
equal to the amount of such excess.
    (b) Less than $20 of tips. Notwithstanding the provisions of 
paragraph (a) of this section, if an employee furnishes to his employer 
a written statement--
    (1) Covering a period of less than 1 month, and
    (2) The statement is furnished to the employer prior to the close of 
the 10th day of the month following the month in which the tips were 
actually received by the employee, and
    (3) The aggregate amount of tips reported in the statement and in 
all other statements previously furnished by the employee covering 
periods within the same month is less than $20, and such statements, 
collectively, do not cover the entire month,

the employer may deduct amounts equivalent to the tax on such tips from 
wages (exclusive of tips) which are under the control of the employer or 
other funds turned over by the employee to the employer. For provisions 
relating to the repayment to an employee, or other disposition, of 
amounts deducted from an employee's remuneration in excess of the 
correct amount of tax, see Sec. 31.6413(a)-1. (As to the exclusion from 
wages of tips of less than $20, see Sec. 31.3401(a)(16)-1.)
    (c) Priority of tax collection--(1) In general. In the case of a 
payment of wages (exclusive of tips), the employer shall deduct or cause 
to be deducted in the following order:
    (i) The tax under section 3101 and the tax under section 3402 with 
respect to such payment of wages.
    (ii) Any tax under section 3101 which, at the time of payment of the 
wages, the employer is required to collect--
    (a) In respect of tips reported by the employee to the employer in a 
written statement furnished to the employer pursuant to section 6053(a), 
or
    (b) By reason of the employer's election to make collection of the 
tax under section 3101 in respect of tips on an estimated basis,

but which has not been collected by the employer and which cannot be 
deducted from funds turned over by the employee to the employer for such 
purpose. (See Sec. 31.3102-3, relating to collection of, and liability 
for, employee tax on tips.)
    (iii) Any tax under section 3402 which, at the time of the payment 
of

[[Page 201]]

the wages, the employer is required to collect--
    (a) In respect of tips reported by the employee to the employer in a 
written statement furnished to the employer pursuant to section 6053(a), 
or
    (b) By reason of the employer's election to make collection of the 
tax under section 3402 in respect of tips on an estimated basis,

but which has not been collected by the employer and which cannot be 
deducted from funds turned over by the employee to the employer for such 
purpose. For provisions relating to the witholding of tax on the basis 
of average estimated tips, see paragraph (b) of Sec. 31.3402(h)(1)-1.
    (2) Examples. The application of paragraph (b)(1) of this section 
may be illustrated by the following examples (The amounts used in the 
following examples are intended for illustrative purposes and do not 
necessarily reflect currently effective rates or amounts.):

    Example 1. W is a waiter employed by R restaurant. W's principal 
remuneration for his services is in the form of tips received from 
patrons of R; however, he also receives a salary from R of $40 per week, 
which is paid to him every Friday. W is a member of a labor union which 
has a contract with R pursuant to which R is to collect dues for the 
union by withholding from the wages of its employees at the rate of $1 
per week. In addition to the taxes required to be withheld under the 
Internal Revenue Code, W's wages are subject to withholding of a state 
income tax imposed upon both his regular wage and his tips received and 
reported to R.
    On Monday of a given week W furnishes a written statement to R 
pursuant to section 6053(a) in which he reports the receipt of $160 in 
tips. The $40 wage to be paid to W on Friday of the same week is subject 
to the following items of withholding:

------------------------------------------------------------------------
                                           Taxes                        
                                            with      Taxes             
                                          respect      with             
                                             to      respect     Total  
                                          regular    to tips            
                                            wage                        
------------------------------------------------------------------------
Section 3101 (F.I.C.A.)................      $1.76      $7.04      $8.80
Section 3402 (income tax at source)....       5.65      28.30      33.95
State income tax.......................       1.20       4.80       6.00
Union dues.............................  .........  .........       1.00
                                                              ----------
  Total................................  .........  .........      49.75
------------------------------------------------------------------------


W does not turn over any funds to R. R should satisfy the taxes imposed 
by sections 3101 and 3402 out of W's $40 wage as follows: The taxes 
imposed with respect to the regular wage (a total of $74l) should be 
satisfied first. The taxes imposed with respect to tips are to be 
withheld only out of ``wages (exclusive of tips) which are under the 
control of the employer'' as that phrase is defined in Secs. 31.3102-
3(a)(1) and 31.3402(k)-1(a)(1). The amount of such wages under the 
control of employer in this example is $31.39, or $40, less the amounts 
applied in satisfaction of the Federal and State withholding taxes 
imposed with respect to the regular $40 wage ($8.61). This $31.39 is 
applied first in satisfaction of the tax under section 3101 with respect 
to tips ($7.04) in the balance of $24.35 is applied in partial 
satisfaction of the withholding of income tax at source under section 
3402 with respect to tips. The amount of the tax with respect to tips 
under section 3402 which remains unsatisfied ($3.95) should be withheld 
from wages under the control of the employer the following week.

    Example 2. During the week following the week dealt with in example 
1, W furnishes a written statement to R pursuant to withholding:

------------------------------------------------------------------------
                                           Taxes                        
                                            with      Taxes             
                                          respect      with             
                                             to      respect     Total  
                                          regular    to tips            
                                            wage                        
------------------------------------------------------------------------
Section 3101 (F.I.C.A.)................      $1.76      $5.72      $7.48
Section 3402 (Income tax at source):                                    
  Current week.........................       5.65      22.30      27.95
  Carryover from prior week............  .........       3.95       3.95
State income tax.......................       1.20       3.90       5.10
Union dues.............................  .........  .........       1.00
Garnishment............................  .........  .........      10.00
                                                              ----------
  Total................................  .........  .........      55.48
------------------------------------------------------------------------


As in example 1, the amount of ``wages (exclusive of tips) which are 
under the control of the employer'' is $31.39. This amount is applied 
first in satisfaction of the tax under section 3101 with respect to tips 
($5.72) and the balance is applied in partial satisfaction of the 
withholding of income tax at source under section 3402 with respect to 
tips (a total of $26.25), including that portion of the amount required 
to be withheld from the prior week's wages which remained unsatisfied. 
The amount of the tax with respect to tips under section 3402 which 
remains unsatisfied ($0.58) should be withheld from wages under the 
control of the employer the following week.
[T.D. 7001, 34 FR 1002, Jan. 23, 1969, as amended by T.D. 7053, 35 FR 
11628, July 21, 1970]



Sec. 31.3402(l)-1  Determination and disclosure of marital status.

    (a) Determination of status by employer. An employer in computing 
the tax to

[[Page 202]]

be deducted and withheld from an employee's wages paid after April 30, 
1966, shall apply the applicable percentage method or wage bracket 
method withholding table (see section 3402 (a), (b), and (c) and the 
regulations thereunder) for the pertinent payroll period which relates 
to employees who are single persons, unless there is in effect with 
respect to such payment of wages a withholding exemption certificate 
furnished to the employer by the employee after March 15, 1966, 
indicating that the employee is married in which case the employer shall 
apply the applicable table relating to employees who are married 
persons.
    (b) Disclosure of status by employee. (1) An employee shall be 
entitled to furnish the employer with a withholding exemption 
certificate indicating he is married only if, on the day of such 
furnishing, he is married (determined by application of the rules in 
paragraph (c) of this section). Thus, an employee who is contemplating 
marriage may not, prior to the actual marriage, furnish the employer 
with a withholding exemption certificate indicating that he is a married 
person.
    (2) (i) If, on any day during the calendar year, the marital status 
(as determined by application of the rules in paragraph (c) of this 
section) of an employee who has in effect a withholding exemption 
certificate indicating that he is a married person, changes from married 
to single, the employee must within 10 days after the change occurs 
furnish the employer with a new withholding exemption certificate 
indicating that the employee is a single person.
    (ii) If an employee who has in effect a withholding exemption 
certificate indicating that he is a married person, is considered 
married solely because of the application of subparagraph (2)(ii) of 
paragraph (c) of this section, and his spouse died during the taxable 
year which precedes by 2 years the current taxable year, the employee 
must, on or before December 1 of the current taxable year, furnish the 
employer with a new withholding exemption certificate indicating that he 
is a single person. Such certificate shall not, however become effective 
until the next calendar year (see paragraph (c) of Sec. 31.3402(f)(3)-
1).
    (3) If, on any day during the calendar year, the marital status (as 
determined by application of the rules in paragraph (c) of this section) 
of an employee who has in effect a withholding exemption certificate 
indicating that he is a single person changes from single to married, 
the employee may furnish the employer with a new withholding exemption 
certificate indicating that the employee is a married person.
    (c) Determination of marital status. For the purposes of section 
3402(l)(2) and paragraph (b) of this section, the following rules shall 
be applied in determining whether an employee is a married person or a 
single person--
    (1) An employee shall on any day be considered as a single person 
if--
    (i) He is legally separated from his spouse under a decree of 
divorce or separate maintenance, or
    (ii) Either he or his spouse is, or on any preceding day within the 
same calendar year was, a nonresident alien.
    (2) An employee shall on any day be considered as a married person 
if--
    (i) His spouse (other than a spouse referred to in paragraph (c)(1) 
of this section) died within the portion of his taxable year which 
precedes such day, or
    (ii) His spouse died during one of the two taxable years immediately 
preceding the current taxable year and, on the basis of facts existing 
at the beginning of such day, he reasonably expects, at the close of his 
taxable year, to be a surviving spouse as defined in section 2 and the 
regulations thereunder.
[T.D. 7115, 36 FR 9234, May 21, 1971]



Sec. 31.3402(m)-1  Withholding allowances.

    (a) General rule. An employee may claim, with respect to wages paid 
after December 31, 1981, a number of withholding allowances determined 
in accordance with this section. In order to receive the benefit of such 
allowances, the employee must have in effect with his employer a 
withholding exemption certificate claiming such allowances.
    (b) Items that may be taken into account. The following items may be 
taken into account in determining the

[[Page 203]]

number of withholding allowances an employee may claim:
    (1) Estimated itemized deductions allowable under chapter 1,
    (2) The estimated tax credits allowable under Subpart A of Part IV 
of Subchapter A of Chapter 1, except:
    (i) For the credit for tax withheld on wages under section 31(a) 
(relating to wage withholding),
    (ii) For the credit for tax withheld at source on nonresident aliens 
and foreign corporations and on tax-free covenant bonds under section 
32,
    (iii) That the employee may claim the credit for certain uses of 
gasoline and special fuels under section 39 only to the extent the 
employee has not filed for a quarterly tax refund of the credit on Form 
843,
    (iv) That the employee may claim the credit for earned income under 
section 43 only to the extent the employee has not filed for advance 
payments of the credit on Form W-5, and
    (v) For the credit for overpayment of tax under section 45,
    (3) The estimated trade and business deductions of employees 
described in section 62 (2) and allowed by Part VI of Subchapter B of 
Chapter 1,
    (4) The estimated deduction for payments to pension, profit-sharing, 
annuity, and bond purchase plans of self-employed individuals described 
in section 62(7) and allowed by section 404 and section 405(c),
    (5) The estimated deduction for penalties forfeited because of 
premature withdrawal of funds from time savings accounts or deposits 
described in section 62(12) and allowed by section 165,
    (6) The estimated direct charitable deduction under section 170(i),
    (7) The estimated deduction for net operating loss carryovers under 
section 172,
    (8) The estimated deduction for alimony, etc., payments under 
section 215,
    (9) The estimated deduction for moving expenses under section 217 
but only to the extent that the amount of such deduction is not excluded 
from the definition of wages by section 3401(a)(15),
    (10) The estimated deduction for certain retirement savings under 
section 219 but only to the extent that the amount of such deduction is 
not excluded from the definition of wages by section 3401(a)(12)(D),
    (11) The estimated deduction for two-earner married couples under 
section 221,
    (12) The estimated net losses from schedules C (Profit or (Loss) 
From Business or Profession), D (Capital Gains and Losses), E 
(Supplemental Income Schedule), and F (Farm Income and Expenses) of Form 
1040 and from the last line of Part II of Form 4797 (Supplemental 
Schedule of Gains and Losses),
    (13) The estimated amount of decrease of tax due attributable to 
income averaging under sections 1301 through 1305.

The employee must first use these items ((1) through (13) of this 
paragraph (b)) to eliminate any payment of estimated tax (as defined in 
section 6015(d)). Only amounts of these items remaining after the 
employee has done this may be taken into account in determining the 
number of withholding allowances the employee may claim.
    (c) Definitions--(1) Estimated. The term ``estimated'' as used in 
this section to modify the terms ``deduction'', ``deductions'', 
``credits'', ``losses'', and ``amount of decrease'' means with respect 
to an employee the aggregate dollar amount of a particular item that the 
employee reasonably expects will be allowable to him for the estimation 
year under the section of the Code specified for each item. In no event 
shall that amount exceed the sum of:
    (i) The amount shown for that particular item on the income tax 
return that the employee has filed for the taxable year preceding the 
estimation year (or, if such return has not yet been filed, then the 
income tax return that the employee filed for the taxable year preceding 
such year), which amount the employee also reasonably expects to show on 
the income tax return for the estimation year, plus
    (ii) The determinable additional amounts for each item for the 
estimation year.

The determinable additional amounts are amounts that are not included in 
paragraph (c)(1)(i) of this section and that are demonstrably 
attributable to indentifiable events during the estimation year or the 
preceding year.

[[Page 204]]

Amounts are demonstrably attributable to identifiable events if they 
relate to payments already made during the estimation year, to binding 
obligations to make payments (including the payment of taxes) during the 
year, and to other transactions or occurrences, the implementation of 
which has begun and is verifiable at the time the employee files a 
withholding exemption certificate claiming withholding allowances 
relating thereto. The estimation year is the taxable year including the 
day on which the employee files the withholding exemption certificate 
with his employer, except that if the employee files the withholding 
exemption certificate with his employer and specifies on the certificate 
that the certificate is not to take effect until a specified future 
date, the estimation year shall be the taxable year including that 
specified future date. It is not reasonable for an employee to include 
in his or her withholding computation for the estimation year any amount 
that is shown for a particular item on the income tax return that the 
employee has filed for the taxable year preceding the estimation year 
(or, if such return has not yet been filed, then the income tax return 
that the employee filed for the taxable year preceding such year) and 
that has been disallowed by the Service as part of a proposed adjustment 
described in Sec. 601.103(b) (relating to examination and determination 
of tax liability) and Sec. 601.105(b) (relating to examination of 
returns).
    (2) Amount of decrease of tax due. The term ``amount of decrease of 
tax due'' as used in paragraph (b)(13) of this section means:
    (i) The amount of tax that the taxpayer would owe on his taxable 
income without using Schedule G (Form 1040), minus
    (ii) The amount of tax that the taxpayer would owe on his taxable 
income using Schedule G (Form 1040).
    (3) Itemized deductions. The term ``itemized deductions'' as used in 
paragraph (b)(1) of this section has the same meaning as ascribed 
thereto by section 63(f) and the regulations thereunder.
    (d) Computing allowances. (1) The employee shall compute the number 
of allowances he may claim for the items specified in paragraph (b) of 
this section in accordance with the tables and instructions on Form W-4.
    (2) If the employee:
    (i) Pays or accrues amounts demonstrably attributable to 
identifiable events (as defined in paragraph (c)(1) of this section) 
that are:
    (A) Interest attributable to ownership of real property and 
deductible under section 163(a), or
    (B) Taxes deductible under section 164(a)(1), or
    (C) Interest or taxes deductible under section 216(a), and
    (ii) Is obligated to pay or accrue such amounts for at least 2 years 
subsequent to the estimation year,

then the employee may compute the portion of estimated itemized 
deductions attributable to such amounts for purposes of paragraph (b)(1) 
of this section by multiplying the total of such amounts to be paid or 
accrued in the estimation year by 12 and by then dividing that result by 
the number of months from the 1st month in the estimation year in which 
the employee pays or accrues such amounts through the last month of the 
estimation year. If such amounts decrease during the term of obligation, 
the employee must, at the beginning of each subsequent calendar year, 
recompute the number of allowances being claimed as required by 
paragraph (c)(1) of this section. If the employee uses the computation 
described in this subparagraph (2), the employee may not request that 
his employer withhold on the basis of the employee's cumulative wages as 
provided in Sec. 31.3402 (h)(3)-1.
    (e) Examples. The application of this section may be illustrated by 
the following examples:

    Example 1. Employee A has an estimated net loss from a partnership 
of $2,000 which would be reported on Schedule E. Employee A is not 
required to make any payments of estimated tax. Employee A may take her 
$2,000 partnership loss into consideration in determining the number of 
withholding allowances to which she is entitled in accordance with the 
tables and instructions on Form W-4.

    Example 2. Employee B has an estimated net loss from a business of 
$3,000 which would be reported on Schedule C. Employee B would also 
otherwise be required to make

[[Page 205]]

payments of estimated tax on income of $3,000. Employee B may not take 
his business loss into consideration in determining the number of 
withholding allowances to which he is entitled in accordance with the 
tables and instructions on Form W-4.

    Example 3. Employee C has an estimated net loss from a farm of 
$5,000 which would be reported on Schedule F. Employee C would also 
otherwise be required to make payments of estimated tax on income of 
$4,000. Employee C may only take her farm loss into consideration to the 
extent of $1,000 ($5,000-4,000) in determining the number of withholding 
allowances to which she is entitled in accordance with the tables and 
instructions on Form W-4.

    (f) Special rules--(1) Married individuals. (i) Except as provided 
in subdivision (ii) of this subparagraph, a husband and wife shall 
determine the number of withholding allowances to which they are 
entitled under section 3402(m) on the basis of their combined wages and 
allowable items. The withholding allowances to which a husband and wife 
are entitled may be claimed by the husband, by the wife, or they may be 
allocated between them. However, they may not both have withholding 
exemption certificates in effect claiming the same withholding 
allowance.
    (ii) If a husband and wife filed separate income tax returns for the 
taxable year preceding the estimation year and reasonably expect to file 
separate returns for the estimation year, the husband and wife shall 
determine the number of withholding exemptions to which they are 
entitled under section 3402(m) on the basis of their individual wages 
and allowable items, and they shall be considered to be single for 
purposes of the tables on Form W-4.
    (2) Only one certificate to be in effect. An employee who is 
entitled to one or more withholding allowances under section 3402(m) and 
who has, at the same time, two or more employers, may claim such 
withholding allowance or allowances with only one of his employers.

(Secs. 3402(i) and (m) and 7805 of the Internal Revenue Code of 1954 (26 
U.S.C. 3402 (i) and (m), 95 Stat. 172, 184; 26 U.S.C. 7805, 68A Stat. 
917))

[T.D. 7915, 48 FR 44075, Sept. 27, 1983]



Sec. 31.3402(n)-1  Employees incurring no income tax liability.

    Notwithstanding any other provision of this subpart, an employer 
shall not deduct and withhold any tax under chapter 24 upon a payment of 
wages made to an employee after April 30, 1970, if there is in effect 
with respect to the payment a withholding exemption certificate 
furnished to the employer by the employee which contains statements 
that--
    (a) The employee incurred no liability for income tax imposed under 
subtitle A of the Code for his preceding taxable year; and
    (b) The employee anticipates that he will incur no liability for 
income tax imposed by subtitle A for his current taxable year.

For purposes of section 3402(n) and this section, an employee is not 
considered to incur liability for income tax imposed under subtitle A if 
the amount of such tax is equal to or less than the total amount of 
credits against such tax which are allowable to him under part iv of 
subchapter A of chapter 1 of the Code, other than those allowable under 
section 31 or 39. For purposes of section 3402(n) and this section, 
``liability for income tax imposed under subtitle A'' shall include 
liability for a qualified State individual income tax which is treated 
pursuant to section 6361(a) as if it were imposed by chapter 1 of the 
Code. An employee is not considered to incur liability for such a State 
income tax if the amount of such tax does not exceed the total amount of 
the credit against such tax which is allowable to him under section 
6362(b)(2) (B) or (C) or section 6362(c)(4). For purposes of this 
section, an employee who files a joint return under section 6013 is 
considered to incur liability for any tax shown on such return. An 
employee who is entitled to file a joint return under such section shall 
not certify that he anticipates that he will incur no liability for 
income tax imposed by subtitle A for his current taxable year if such 
statement would not be true in the event that he files a joint return 
for such year, unless he filed a separate return for his preceding 
taxable year and anticipates that he will file a separate return for his 
current taxable year.

[[Page 206]]


For rules relating to invalid withholding exemption certificates, see 
Sec. 31.3402(f)(2)-1(e), and for rules relating to submission to the 
Internal Revenue Service of withholding exemption certificates claiming 
a complete exemption from withholding, see Sec. 31.3402(f)(2)-1(g).

    Example 1. Employee A, an unmarried, calendar-year basis taxpayer, 
files his income tax return for 1970 on April 15, 1971. A has adjusted 
gross income of $1,200 and is not liable for any tax. He had $180 of 
income tax withheld during 1970. A anticipates that his gross income for 
1971 will be approximately the same amount, and that he will not incur 
income tax liability for that year. On April 20, 1971, A commences 
employment and furnishes his employer an exemption certificate stating 
that he incurred no liability for income tax imposed under subtitle A 
for 1970, and that he anticipates that he will incur no liability for 
income tax imposed under subtitle A for 1971. A's employer shall not 
deduct and withhold on payments of wages made to A on or after April 20, 
1971. Under paragraph (c) of Sec. 31.3402(f)(4)-1, unless A files a new 
exemption certificate with his employer, his employer is required to 
deduct and withhold upon payments of wages to A made on or after May 1, 
1972. (Under Sec. 31.3402(f)(3)-1(b), if A had been employed by his 
employer prior to April 20, 1971, and had furnished his employer a 
withholding exemption certificate not containing the statements 
described in Sec. 31.3402(n)-1 prior to furnishing the withholding 
exemption certificate containing such statements on April 20, 1971, his 
employer would not be required to give effect to the new certificate 
with respect to payments of wages made by him prior to July 1, 1971 (the 
first status determination date which occurs at least 30 days after 
April 20, 1971). However his employer could, if he chose, make the new 
certificate effective with respect to any payment of wages made on or 
after April 20 and before July 1, 1971.)

    Example 2. Assume the facts are the same as in example 1 except that 
for 1970 A has taxable income of $8,000, income tax liability of $1,630, 
and income tax withheld of $1,700. Although A received a refund of $70 
due to income tax withholding of $1,700, he may not state on his 
exemption certificate that he incurred no liability for income tax 
imposed by subtitle A for 1970.

(86 Stat. 944, 26 U.S.C. 6364; and 68A Stat. 917, 26 U.S.C. 7805, 68A 
Stat. 731, 26 U.S.C. 6001; 68A Stat. 732, 26 U.S.C. 6011)

[T.D. 7048, 35 FR 10292, June 24, 1970, as amended by T.D. 7577, 43 FR 
59359, Dec. 20, 1978; T.D. 7598, 44 FR 14553, Mar. 13, 1979; T.D. 7682, 
45 FR 15527, Mar. 11, 1980; T.D. 7803, 47 FR 3547, Jan. 26, 1982]



Sec. 31.3402(o)-1  Extension of withholding to supplemental unemployment compensation benefits.

    (a) In general. Withholding of income tax is required under section 
3402(o) with respect to payments of supplemental unemployment 
compensation benefits made after December 31, 1970, which are treated 
under paragraph (b)(14) of Sec. 31.3401(a)-1 as if they were wages.
    (b) Withholding exemption certificates. For purposes of section 
3402(f) (2) and (3) and the regulations thereunder (relating to 
withholding exemption certificates), in the case of supplemental 
unemployment compensation benefits an employment relationship shall be 
considered to commence with either the date on which such benefits begin 
to accrue or January 1, 1971, whichever is later, and the withholding 
exemption certificate furnished the employer with respect to such 
commencement of employment shall be considered the first certificate 
furnished the employer. The withholding exemption certificate furnished 
by the employee to his former employer (with whom his employment has 
been involuntarily terminated, within the meaning of paragraph 
(b)(14)(ii) of Sec. 31.3401(a)-1) shall be treated as meeting the 
requirements of section 3402(f)(2)(A) and the regulations thereunder if 
such former employer furnishes such certificate to the employee's 
current employer, as defined in paragraph (g) of Sec. 31.340(d)-1, or if 
such former employer is the agent of such current employer with respect 
to the employee's withholding exemption certificate. However, the 
preceding sentence shall not be applicable if such employee furnishes a 
new withholding exemption certificate to such current employer (or his 
agent), provided that

[[Page 207]]

such withholding exemption certificate meets the requirements of section 
3402(f)(2)(A) and the regulations thereunder. See the definitions of 
payroll period in paragraph (c) of Sec. 31.3401(b)-1 and of employee in 
paragraph (g) of Sec. 31.3401(c)-1.
[T.D. 7068, 35 FR 17329, Nov. 11, 1970, as amended by T.D. 7803, 47 FR 
3546, Jan. 26, 1982]



Sec. 31.3402(o)-2  Extension of withholding to annuity payments if requested by payee.

    (a) In general. Under section 3402(o) of the Internal Revenue Code 
of 1954 and this section, the payee (as defined in paragraph (g)(2) of 
this section) of an annuity (as defined in paragraph (g)(1) of this 
section) may request the payor (as defined in paragraph (g)(3) of this 
section) of the annuity to withhold income tax with respect to payments 
of the annuity made after December 31, 1970. If such a request is made, 
the payor shall deduct and withhold as requested.
    (b) Manner of making request. A payee who wishes a payor to deduct 
and withhold income tax from annuity payments shall file a request with 
the payor to deduct and withhold a specific whole dollar amount from 
each annuity payment. Such specific dollar amount requested shall be at 
least $5 per month and shall not reduce the net amount of any annuity 
payment received by the payee below $10. The request shall be made on 
Form W-4P (annuitant's withholding exemption certificate and request) in 
accordance with the instructions applicable thereto, and shall set forth 
fully and clearly the data therein called for. In lieu of Form W-4P, 
payors may prepare and use a form the provisions of which are identical 
with those of Form W-4P.

For the requirements relating to Form W-4P with respect to qualified 
State individual income taxes, see paragraph (d)(3)(i) of Sec. 301.6361-
1 of this chapter (Regulations on Procedure and Administration).
    (c) When request takes effect. Upon receipt of a request under this 
section the payor of the annuity with respect to which such request was 
made shall deduct and withhold the amount specified in such request from 
each annuity payment commencing with the first annuity payment made on 
or after the date which occurs--
    (1) In a case in which no previous request is in effect, 3 calendar 
months after the date on which such request is furnished to such payor, 
and
    (2) In a case in which a previous request is in effect, the first 
status determination date (see section 3402(f)(3)(B) and paragraph (d) 
of Sec. 31.3402(f)(3)-1 of this chapter) which occurs at least 30 days 
after the date on which such request is so furnished.

However, the payor may, at his election, commence to deduct and withhold 
such specified amount with respect to an annuity payment which is made 
prior to the annuity payment described in the preceding sentence with 
respect to which the payor must commence to deduct and withhold.
    (d) Duration and termination of request. A request under this 
section shall continue in effect until terminated. The payee may 
terminate the request by furnishing the payor a signed written notice of 
termination. Such notice of termination shall, except as hereinafter 
provided, take effect with respect to the first payment of an amount in 
respect of which the request is in effect which is made on or after the 
first status determination date (see section 3402(f)(3)(B) and paragraph 
(d) of Sec. 31.3402(f)(3)-1 of this chapter) which occurs at least 30 
days after the date on which such notice is so furnished. However, at 
the election of such payor, such notice may be made effective with 
respect to any payment of an amount in respect of which the request is 
in effect which is made on or after the date on which such notice is so 
furnished and before such status determination date.
    (e) Special rules. For purposes of chapter 24 of subtitle C of the 
Internal Revenue Code of 1954 (relating to collection of income tax at 
source on wages) and of subtitle F of such Code (relating to procedure 
and administration), and the regulations thereunder--
    (1) An amount which is requested to be withheld pursuant to this 
section shall be deemed a tax required to be deducted and withheld under 
section 3402.
    (2) An amount deducted and withheld pursuant to this section shall 
be

[[Page 208]]

deemed an amount deducted and withheld under section 3402.
    (3) The term ``wages'' includes the gross amount of an annuity 
payment with respect to which there is in effect a request for 
withholding under this section. However, references to the definition of 
wages in section 3401(a) which are made in section 6014 (relating to 
election by the taxpayor not to compute the tax on his annual return) 
and section 6015(a) (relating to declaration of estimated tax by 
individuals) shall not be deemed to include any portion of such an 
annuity payment.
    (4) The term ``employer'' includes a payor with respect to whom a 
request for withholding is in effect under this section.
    (5) The term ``employee'' includes a payee with respect to whom a 
request for withholding is in effect under this section.
    (6) The term ``payroll period'' includes the period of accrual with 
respect to which payments of an annuity which is subject to withholding 
under this section are ordinarily made.
    (f) Returns of income tax withheld and statements for payees. (1) 
Form W-2P is to be used in lieu of Form W-2, which is required to be 
furnished by an employer to an employee under Sec. 31.6051-1 of this 
chapter and to the Social Security Administration under paragraph (a) of 
Sec. 31.6051-2 of this chapter, with respect to an annuity subject to 
withholding under this section. If an amount is required to be deducted 
and withheld under this section from any or all of the payments made to 
a payee under an annuity contract during a calendar year, all payments 
with respect to that annuity contract are required to be reported on 
Form W-2P, in lieu of Form 1099, as prescribed in Secs. 1.6041-1, 
1.6041-2, and 1.6047-1 of this chapter; any other annuity payments made 
by the same payor to the same payee may, at the option of the payor, be 
reported on Form W-2P.
    (2) Each statement on Form W-2P shall show the following:
    (i) The gross amount of annuity payments made during the calendar 
year, whether or not income tax withholding under this section was in 
effect with respect to all such payments,
    (ii) The total amount deducted and withheld as tax under section 
3402 of this section, and
    (iii) The information required to be shown by Form W-2P and the 
instructions applicable thereto.

For the requirements relating to Form W-2P with respect to qualified 
State individual income taxes, see paragraph (d)(3)(ii) of 
Sec. 301.6361-1 of this chapter (Regulations on Procedure and 
Administration).
    (3) The provisions of Sec. 1.9101-1 of this chapter (relating to 
permission to submit information required by certain returns and 
statements on magnetic tape) shall be applicable to the information 
required to be furnished on Form W-2P.
    (4) The provisions of Sec. 31.6109-1 of this chapter (relating to 
supplying of identifying numbers) shall be applicable to Form W-2P and 
to any payee of an annuity to whom a statement on Form W-2P is required 
to be furnished.
    (g) Definitions. For purposes of this section--
    (1) The term ``annuity'' means periodic payments which are payable 
over a period greater than 1 year and which are treated under section 72 
as amounts received as an annuity, whether or not such periodic payments 
are variable in amount. Also, periodic payments to an individual who is 
retired before the normal retirement age for reasons of disability, to 
which the provisions of section 105(d) apply, shall be deemed to be an 
annuity for purposes of this section. A lump-sum payment (including a 
total distribution under section 72(n)) is not an annuity.
    (2) The term ``payee'' means an individual who is a citizen or 
resident of the United States and who receives an annuity payment.
    (3) The term ``payor'' means a person making an annuity payment 
except that, if the person making the payment is acting soley as an 
agent for another person, the term ``payor'' shall mean such other 
person and not the person actually making the payment. For example, if a 
bank makes an annuity payment only as agent for an employees' trust, the 
trust shall be deemed to be the ``payor.'' Notwithstanding the preceding 
two sentences, any person who, under section 3401(a) (5) or (8),

[[Page 209]]

would not be required to deduct and withhold the tax under section 3402 
if the annuity payment were remuneration for services shall not be 
considered a ``payor.''

(Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805; 86 Stat. 944, 26 U.S.C. 6364; 
68A Stat. 747, 26 U.S.C. 6051)

[T.D. 7056, 35 FR 13436, Aug. 22, 1970, as amended by T.D. 7577, 43 FR 
59360, Dec. 20, 1978: T.D. 7580, 43 FR 60160, Dec. 26, 1978. 
Redesignated by T.D. 7803, 47 FR 3546, Jan. 26, 1982]



Sec. 31.3402(o)-3  Extension of withholding to sick pay.

    (a) In general. Under section 3402(o) of the Internal Revenue Code 
of 1954 and this section, the payee (as defined in paragraph (h)(2) of 
this section) of sick pay (as defined in paragraph (h)(1) of this 
section) may request the payor (as defined in paragraph (h)(3) of this 
section) of the sick pay to withhold income tax with respect to payments 
of sick pay made on or after May 1, 1981. If such a request is made, the 
payor must deduct and withhold as requested.
    (b) Manner of making request. A payee who wishes a payor to deduct 
and withhold income tax from sick pay shall file a written request with 
the payor to deduct and withhold a specific whole dollar amount (subject 
to the limitations of paragraph (c) of this section) from each sick pay 
payment. The request shall be made on Form W-4S in accordance with the 
instructions applicable thereto, and shall set forth fully and clearly 
the data therein called for. In lieu of Form W-4S, payors may prepare 
and use a form the provisions of which are identical to those of Form W-
4S. The payee must include his social security account number in the 
request.
    (c) Amount requested to be withheld. The payee shall request that 
the payor withhold a specific whole dollar amount. The specific whole 
dollar amount shall be at least $20 per weekly payment of sick pay. If 
the payee is paid sick pay computed on a daily basis, the specific whole 
dollar amount shall be at least $4 per daily payment of sick pay. If the 
payee is paid sick pay on a biweekly basis, the specific whole dollar 
amount shall be at least $40 per 2 week payment of sick pay. If the 
payee is paid sick pay on a semat least $4 per day, assuming a 5 day 
work week of 8 hours per day (40 hours total) in each 7 day calendar 
week. In the case of a payment which is greater or less than a full 
payment, the amount withheld is to bear the same relation to the 
specific whole dollar amount requested to be withheld as such payment 
bears to a full payment. For example, assume an individual receives sick 
pay of $100 per week and requests that $25 per week be withheld for 
taxes. After 4 full weeks of absence, the individual returns to work on 
a Wednesday (having been absent on sick leave Monday and Tuesday). For 
the week the individual returns to work, the individual would be 
entitled to $40 of sick pay, $10 of which would be withheld for taxes. 
The payor may, at his option, permit the payee to request that the payor 
withhold a specific percentage from each payment. The specific 
percentage shall be at least 10 percent. If the payor so opts, the payor 
must also accept requests under the whole dollar method. If the amount 
requested to be withheld under either the whole dollar method or the 
optional percentage method reduces the net amount of a sick pay payment 
received by the payee to below $10, no income tax shall be withheld from 
that payment by the payor.
    (d) When request takes effect. The payor must deduct and withhold 
the amount specified in the request with respect to payments made more 
than 7 days after the date on which the request is received by the 
payor. At the election of the payor, the request may take effect before 
this deadline.
    (e) Duration and termination of request. A request under this 
section shall continue in effect until changed or terminated. The payee 
may change the request by filing a new written request that meets all of 
the requirements of paragraphs (b) and (c) of this section. The new 
request shall take effect as specified in paragraph (d) of this section 
and the old request shall be deemed terminated when the new request 
takes effect. The payee may terminate the request by furnishing the 
payor a signed written notice of termination containing both a request 
to

[[Page 210]]

terminate withholding and all the information contained in the request 
to withhold. This written notice of termination shall take effect with 
respect to payments made more than 7 days after the date on which the 
notice of termination is received by the payor. At the election of the 
payor, the request may take effect before this deadline.
    (f) Special rules. For purposes of chapter 24 on subtitle C of the 
Internal Revenue Code of 1954 (relating to collection of income tax at 
source on wages) and of subtitle F of the Code (relating to procedure 
and administration), and the regulations thereunder--
    (1) An amount which is requested to be withheld pursuant to this 
section shall be deemed a tax required to be deducted and withheld under 
section 3402.
    (2) An amount deducted and withheld pursuant to this section shall 
be deemed an amount deducted and withheld under section 3402.
    (3) The term ``wages'' includes the gross amount of a sick pay 
payment with respect to which there is in effect a request for 
withholding under this section. However, references to the definition of 
wages in section 3401(a) which are made in section 6014 (relating to 
election by the taxpayer not to compute the tax on his annual return) 
and section 6015(a) (relating to declaration of estimated tax by 
individuals) shall not be deemed to include any portion of such a sick 
pay payment.
    (4) The term ``employer'' includes a payor with respect to whom a 
request for withholding is in effect under this section.
    (5) The term ``employee'' includes a payee with respect to whom a 
request for withholding is in effect under this section.
    (6) The term ``payroll period'' includes the period of accrual with 
respect to which payments of sick pay which are subject to withholding 
under this section are ordinarily made.
    (g) Statements required to be furnished to payees. See section 
6051(f) and the regulations thereunder for requirements relating to 
statements required to be furnished to payees.
    (h) Definitions. (1) (i) The term ``sick pay'' means any payment 
made to an individual which does not constitute wages (determined 
without regard to section 3402(o) and this section), which is paid to an 
employee pursuant to a plan to which the employer is a party, and which 
constitutes remuneration or a payment in lieu of remuneration for any 
period during which the employee is temporarily absent from work on 
account of personal injuries or sickness. The term ``personal injuries 
or sickness'' shall have the same meaning as ascribed thereto by section 
105(a) and the regulations thereunder. The term ``sick pay'' does not 
include any amounts either excludable from gross income under section 
104(a) (1), (2), (4) or (5) or section 105(b) or (c) or paid under 
section 3402(o)(1)(B). The term ``sick pay'' does not include amounts 
paid under a plan if all amounts paid under the plan are paid to 
individuals who are described in the first sentence of section 105(d)(4) 
(relating to the definition of permanent and total disability) and the 
regulations thereunder. Amounts paid under any other plan shall be 
deemed to be paid for a period during which the employee is temporarily 
absent from work. For sick pay paid in 1981 only, however, the payor may 
opt not to follow the rules of the two preceding sentences but to follow 
instead the rule that an employee is temporarily absent if his absence 
is not described in section 105(d)(4) (relating to the definition of 
permanent and total disability) and the regulations thereunder. An 
employer is not a party to the plan if the plan is a contract between 
only employees and a third party payor or the employer makes no 
contributions to provide sick pay benefits under the plan, even if the 
employer withholds amounts from the employees' salaries and pays the 
amounts over to the third party payor.
    (ii) This paragraph (h)(1) may be illustrated by the following 
examples:

    Example 1. Employee A works for P Company and Employee B works for Q 
Company. P Company has contracted with R Insurance Company for R to pay 
P's employees the equivalent of their normal wages when they are 
temporarily absent from work because of sickness or personal injury. Q 
Company has neither entered into such a contract, nor will it make such 
payments directly from it own funds. B consequently goes to S Insurance 
Company and purchases directly an insurance policy which will pay him 
the equivalent of his normal wages when he is unable

[[Page 211]]

to work because of sickness or personal injury. Both A and B are 
subsequently temporarily absent from work on account of sickness or 
personal injuries. A receives payments from R and B receives payments 
from S. Neither the payments made by R to A nor the payments made by S 
to B constitute wages (determined without regard to section 3402(o) and 
this section). A may request that R withhold income taxes under section 
3402(o) and this section from the payments he receives because the 
payments are sick pay as defined in section 3402(o) and this section. B 
may not request that S withhold income taxes under section 3402(o) and 
this section from the payments he receives because the payments are not 
paid pursuant to a plan to which Q Company is a party and thus are not 
sick pay as defined in section 3402(o) and this section.

    Example 2. Employees C and D both work for T Company , which has 
contracted with U Insurance Company for U to pay T's employees for all 
sickness or injury claims Employee C is sick and out from work for a 
month. U pays C the equivalent of C's regular pay. Employee D loses his 
arm in an accident and U pays D $10,000. C may request that U withhold 
income taxes under section 3402(o) and this section from the payments he 
receives because the payments constitute remuneration or a payment in 
lieu of remuneration for any period during which the employee is 
temporarily absent from work on account of sickness or personal 
injuries. D may not request that U withhold income taxes from the 
payments he receives because the payments do not constitute remuneration 
or a payment in lieu of remuneration for any period during which the 
employee is temporarily absent from work on account of sickness or 
personal injuries.

    (2) The term ``payee'' means an individual who is a citizen or 
resident of the United States and who receives a sick pay payment.
    (3) (i) The term ``payor'' means any person making a sick pay 
payment who is not the employer (as defined in section 3401 and in 
Sec. 31.3401(d)-1 (except paragraph (f) thereof)) of the payee. If 
however the person making the payment is acting solely as an agent for 
another person, the term ``payor'' shall mean the other person and not 
the person actually making the payment.
    (ii) This paragraph (h)(3) may be illustrated by the following 
examples:

    Example 1. X Company contracts with Y Insurance Company for Y to pay 
X's employees the equivalent of their normal wages when they are 
temporarily absent from work because of sickness or personal injury. Y 
computes the amount to be paid and determines the date payment is to be 
made for each of X's employees. Y then instructs Z Bank to issue a check 
for that amount on that date. Y reimburses Z for the amount of the check 
plus Z's administrative costs. Under these circumstances, Z is the agent 
of Y and Y is the payor under section 3402(o) and this section.

    Example 2. V Company contracts with W Company for W to pay V's 
employees the equivalent of their normal wages when they are temporarily 
absent from work on account of sickness or personal injury. Under the 
contractual arrangement, V advises W of the wages normally paid to each 
of V's employees. V tells W when an employee of V is temporarily absent 
from work on account of sickness or personal injury, and W computes the 
amount to be paid the employee and makes payments of sick pay to the 
employee during the period of the employee's absence. V subsequently 
reimburses W for the amount of those payments and pays W a fee for W's 
services. Under these circumstances, W is acting solely as the agent of 
V, and a payee may not request under section 3402(o) and these 
regulations that W withhold income taxes from his payments. However, see 
section 3401 and the regulations thereunder for the obligation of V to 
withhold income taxes from the payments that W makes as the agent of V, 
which are not excluded from income under section 105 and the regulations 
thereunder and which are wages under section 3401 and the regulations 
thereunder. See also Sec. 31.3402(g)-1 (relating to supplemental wage 
payments) for the conditions under which a flat percentage rate of 
withholding may be used.

    Example 3. Assume the same facts as in Example 2, except that the 
consideration for W's services is a set insurance premium rather than 
reimbursement for costs plus a fee. Under these circumstances W is the 
payor and is not acting solely as the agent of V. An employee of V to 
whom W makes payments under the agreement may request under section 
3402(o) and the regulations thereunder that W withhold income taxes from 
those payments.

    (i) Special rules for sick pay paid pursuant to certain collective-
bargaining agreements. (1) Special rules (enumerated in subparagraph 
(2)) apply to sick pay where all of the following tests are met.
    (i) The sick pay must be paid pursuant to a collective-bargaining 
agreement between employee representatives and one or more employers.
    (ii) The agreement must contain a provision that section 3402(o)(5) 
is to

[[Page 212]]

apply to sick pay paid pursuant to the agreement.
    (iii) The agreement must contain a provision for determining the 
amount to be deducted and withheld from each payment of sick pay.
    (iv) The social security number of the payee must be furnished to 
the payor. The agreement may provide that the employer will furnish this 
or the payee may furnish his social security number directly to the 
payor.
    (v) The payor must be furnished with information that is necessary 
for the payor to determine whether the payment is pursuant to the 
agreement and to determine the amount to be deducted and withheld. The 
agreement may provide that the employer will furnish this information 
directly to the payor.
    (2) The following special rules apply to sick pay where all of the 
tests of subparagraph (1) are met.
    (i) The requirement of section 3402(o)(1)(c) and this section that a 
request for withholding be in effect does not apply.
    (ii) The amount to be deducted and withheld from the sick pay shall 
be determined according to the provisions of the agreement and not 
according to this section. This rule shall not however apply--
    (A) To payments enumerated in section 3402(n) (relating to employees 
incurring no income tax liability) and the regulations thereunder, or
    (B) To payments made to a payee more than 7 days after the date that 
the payor receives a statement from the payee that the payee expects to 
claim an exclusion from gross income under section 105(d). Such 
statement must include adequate verification of disability. A 
certificate from a qualified physician attesting that the employee is 
permanently and totally disabled (within the meaning of section 105(d)) 
shall be deemed to constitute adequate verification. If the payor 
receives such a statement, the payor shall not withhold any income tax 
from the payments made to the payee, regardless of the provisions of the 
collective bargaining agreement. This exception from withholding does 
not affect the requirements of Sec. 31.6051-3.

(Secs. 3402(o), 7805, Internal Revenue Code of 1954 (94 Stat. 3495, (26 
U.S.C. 3402(o)); 68A Stat. 917 (26 U.S.C. 7805)))

[T.D. 7813, 47 FR 11277, Mar. 16, 1982, as amended by T.D. 7915, 48 FR 
44076, Sept. 27, 1983]



Sec. 31.3402(p)-1  Voluntary withholding agreements.

    (a) In general. An employee and his employer may enter into an 
agreement under section 3402(b) to provide for the withholding of income 
tax upon payments of amounts described in paragraph (b)(1) of 
Sec. 31.3401(a)-3, made after December 31, 1970. An agreement may be 
entered into under this section only with respect to amounts which are 
includible in the gross income of the employee under section 61, and 
must be applicable to all such amounts paid by the employer to the 
employee. The amount to be withheld pursuant to an agreement under 
section 3402(p) shall be determined under the rules contained in section 
3402 and the regulations thereunder. See Sec. 31.3405(c)-1, Q&A-3 
concerning agreements to have more than 20-percent Federal income tax 
withheld from eligible rollover distributions within the meaning of 
section 402.
    (b) Form and duration of agreement. (1)(i) Except as provided in 
subdivision (ii) of this subparagraph, an employee who desires to enter 
into an agreement under section 3402(p) shall furnish his employer with 
Form W-4 (withholding exemption certificate) executed in accordance with 
the provisions of section 3402(f) and the regulations thereunder. The 
furnishing of such Form W-4 shall constitute a request for withholding.
    (ii) In the case of an employee who desires to enter into an 
agreement under section 3402(p) with his employer, if the employee 
performs services (in addition to those to be the subject of the 
agreement) the remuneration for which is subject to mandatory income tax 
withholding by such employer, or if the employee wishes to specify that 
the agreement terminate on a specific date, the employee shall furnish 
the employer with a request for withholding which shall be signed by the 
employee, and shall contain--

[[Page 213]]

    (a) The name, address, and social security number of the employee 
making the request,
    (b) The name and address of the employer,
    (c) A statement that the employee desires withholding of Federal 
income tax, and applicable, of qualified State individual income tax 
(see paragraph (d)(3)(i) of Sec. 301.6361-1 of this chapter (Regulations 
on Procedures and Administration)), and
    (d) If the employee desires that the agreement terminate on a 
specific date, the date of termination of the agreement.

If accepted by the employer as provided in subdivision (iii) of this 
subparagraph, the request shall be attached to, and constitute part of, 
the employee's Form W-4. An employee who furnishes his employer a 
request for withholding under this subdivision shall also furnish such 
employer with Form W-4 if such employee does not already have a Form W-4 
in effect with such employer.
    (iii) No request for withholding under section 3402(p) shall be 
effective as an agreement between an employer and an employee until the 
employer accepts the request by commencing to withhold from the amounts 
with respect to which the request was made.
    (2) An agreement under section 3402 (p) shall be effective for such 
period as the employer and employee mutually agree upon. However, either 
the employer or the employee may terminate the agreement prior to the 
end of such period by furnishing a signed written notice to the other. 
Unless the employer and employee agree to an earlier termination date, 
the notice shall be effective with respect to the first payment of an 
amount in respect of which the agreement is in effect which is made on 
or after the first ``status determination date'' (January 1, May 1, July 
1, and October 1 of each year) that occurs at least 30 days after the 
date on which the notice is furnished. If the employee executes a new 
Form W-4, the request upon which an agreement under section 3402 (p) is 
based shall be attached to, and constitute a part of, such new Form W-4.

(86 Stat. 944, 26 U.S.C. 6364; 68A Stat. 917, 26 U.S.C. 7805)

[T.D. 7096, 36 FR 5216, Mar. 18, 1971, as amended by T.D. 7577, 43 FR 
59359, Dec. 20, 1978; T.D. 8619, 60 FR 49215, Sept. 22, 1995]



Sec. 31.3402(q)-1  Extension of withholding to certain gambling winnings.

    (a)(1) General rule. Every person, including the Government of the 
United States, a State, or a political subdivision thereof, or any 
instrumentality of any of the foregoing making any payment of ``winnings 
subject to withholding'' (defined in paragraph (b) of the section) shall 
deduct and withhold a tax in an amount equal to 20 percent of the 
payment. The tax shall be deducted and withheld upon payment of the 
winnings by the person making such payment (``payer''). See paragraph 
(c)(5)(ii) of this section for a special rule relating to the time for 
making deposits of withheld amounts and filing the return with respect 
to those amounts. Any person receiving a payment of winnings subject to 
withholding must furnish the payer a statement as required in paragraph 
(e) of this section. Payers of winnings subject to withholding must file 
a return as required in paragraph (f) of this section. With respect to 
reporting requirements for certain payments of gambling winnings not 
subject to withholding, see section 6041 and the regulations thereunder.
    (2) Exceptions. The tax imposed under section 3402(q)(1) and this 
section shall not apply (i) with respect to a payment of winnings which 
is made to a nonresident alien individual or foreign corporation under 
the circumstances described in paragraph (c)(4) of this section or (ii) 
with respect to a payment of winnings from a slot machine play, or a 
keno or bingo game.
    (b) Winnings subject to withholding. Winnings subject to withholding 
means any payment from--
    (1) A wager placed in a State-conducted lottery (defined in 
paragraph (c)(2) of this section) but only if the proceeds from the 
wager exceed $5,000;
    (2) A wager placed in a sweepstakes, wagering pool, or lottery other 
than a State-conducted lottery but only if the proceeds from the wager 
exceed $1,000; or

[[Page 214]]

    (3) Any other wagering transaction (as defined in paragraph (c)(3) 
of this section) but only if the proceeds from the wager (i) exceed 
$1,000 and (ii) are at least 300 times as large as the amount of the 
wager.

If proceeds from the wager qualify as winnings subject to withholding, 
then the total proceeds from the wager, and not merely amounts in excess 
of $1,000 (or $5,000 in the case of winnings from a State-conducted 
lottery), are subject to withholding.
    (c) Definitions; special rules--(1) Rules for determining amount of 
proceeds from a wager. (i) The amount of ``proceeds from a wager'' is 
the amount paid after January 2, 1977, with respect to the wager, less 
the amount of the wager. However, for any wagering transaction in a 
parimutuel pool with respect to horse races, dog races, or jai alai, 
only amounts paid after April 30, 1977, are taken into account.
    (ii) Amounts paid after December 31, 1983, with respect to identical 
wagers are treated as paid with respect to a single wager for purposes 
of calculating the amount of proceeds from a wager. For example, amounts 
paid on two bets placed in a parimutuel pool on a particular horse to 
win a particular race are treated as paid with respect to the same 
wager. However, those two bets would not be identical were one ``to 
win'' and the other ``to place'', or if the bets were placed in 
different parimutuel pools, e.g., a pool conducted by the racetrack and 
a separate pool conducted by an off-track betting establishment in which 
the wagers are not pooled with those placed at the track. Tickets 
purchased in a lottery generally are not identical wagers, because the 
designation of each ticket as a winner generally would not be based on 
the occurrence of the same event, e.g., the drawing of a particular 
number. If the recipient makes the statement which may be required 
pursuant to Sec. 1.6011-3, indicating whether or not the recipient (and 
any other persons entitled to a portion of the winnings) is entitled to 
winnings from identical wagers and indicating the amount of such 
winnings, if any, then the payer may rely upon such statement in 
determining the total amount of proceeds from the wager under paragraph 
(c)(1) of this section attributable to identical wagers.
    (iii) In determining the amount paid with respect to a wager, 
proceeds which are not money shall be taken into account at the fair 
market value.
    (iv) Periodic payments, including installment payments or payments 
which are to be made periodically for the life of a person, are 
aggregated for purposes of determining the proceeds from a wager. The 
aggregate amount of periodic payments to be made for a person's life 
shall be based on that person's life expectancy. See Secs. 1.72-5 and 
1.72-9 for rules used in computing the expected return on annuities. For 
purposes of determining the amount subject to withholding, the first 
periodic payment shall be reduced by the amount of the wager.
    (2) Wager placed in a State-conducted lottery. The term ``wager 
placed in a State-conducted lottery'' means a wager placed in a lottery 
conducted by an agency of a State acting under authority of State law 
provided that the wager is placed with the State agency conducting such 
lottery or with its authorized employees or agents. This term includes 
wagers placed in State-conducted lotteries in which the amount of 
winnings is determined by a parimutuel system.
    (3) Other wagering transaction. The term ``other wagering 
transaction'' means any wagering transaction other than one in a 
lottery, sweepstakes, or wagering pool. This term includes a wagering 
transaction in a parimutuel pool with respect to horse races, dog races, 
or jai alai.
    (4) Certain payments to nonresident aliens or foreign corporations. 
A payment of winnings subject to withholding made to a nonresident alien 
individual or a foreign corporation is not subject to the tax imposed by 
section 3402(q) and this section if such payment is subject to 
withholding of tax under section 1441(a) (relating to withholding on 
nonresident aliens) or 1442(a) (relating to withholding on foreign 
corporations) and the payer complies with the requirements of those 
sections. For purposes of this section, a payment is treated as being 
subject to tax under section 1441(a) or 1442(a) notwithstanding that the 
rate of such tax is reduced

[[Page 215]]

(even to zero) as may be provided by an applicable treaty with another 
country. However, a reduced or zero rate of withholding of tax shall not 
be applied by the payer in lieu of the rate imposed by sections 1441 and 
1442 unless the person receiving the winnings has completed, signed, and 
furnished the payer Form 1001 as required by Sec. 1.1441-6. See sections 
1441 and 1442 and the regulations thereunder for rules regarding the 
withholding of tax on nonresident aliens and foreign corporations.
    (5) Gambling winnings treated as payments by employer to employee. 
(i) Except as provided in subdivision (ii), for purposes of sections 
3403 and 3404 and the regulations thereunder and for purposes of so much 
of subtitle F (except section 7205) and the regulations thereunder as 
relate to chapter 24, payments to any person of winnings subject to 
withholding under this section shall be treated as if they are wages 
paid by an employer to an employee.
    (ii) Solely for purposes of applying the deposit rules under 6302(c) 
and the return requirement of section 6011, the withholding from 
winnings shall be deemed to have been made no earlier than at the time 
the winner's identity is known to the payer. Thus, for example, winnings 
from a State-conducted lottery are subject to withholding when actually 
or constructively paid, whichever is earlier; however, the time for 
depositing the withheld taxes and filing a return with respect thereto 
shall be determined by reference to the date on which the winner's 
identity is known to the State, if such date is later than the date on 
which the winnings are actively or constructively paid. If a payer's 
obligation to pay winnings terminates other than by payment, all 
liabilities and requirements resulting from the requirement that the 
payer deduct and withhold with respect to such winnings shall also 
terminate.
    (d) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. A purchases a lottery ticket for $1 in the State W 
lottery from an authorized agent of State W. On February 1, 1977, the 
drawing is held and A wins $5,001. Since the proceeds of the wager 
($5,001--$1) are not greater than $5,000, State W is not required to 
withhold or deduct any amount from A's winnings.

    Example 2. Assume the same facts as in example 1 except that A 
purchases two $1 tickets and that A wins $5,002 when one of the tickets 
is drawn. State W must deduct and withhold tax at a rate of 20% from 
$5,001 ($5,002 less the $1 wager), or $1,000.20.

    Example 3. On January 1, 1984, B makes two $2 bets in a parimutuel 
pool for a horse race. Each bet is on the same horse to win a particular 
race. B wins a total of $1,300 on those bets. B cashes the tickets at 
different cashier windows indicating on the statement demanded by each 
cashier the amount of winnings from identical wagers. Although the 
payment by each cashier ($650) is less than the $1,000 floor for the 
withholding requirement on payments of winnings from horse race 
parimutuel pools, each cashier is required to deduct and withhold tax 
from B's winnings equal to $129.60 (($650-$2)  x  20 percent = $129.60) 
based on the information B submitted indicating that the aggregated 
proceeds from the identical wagers ($1,300-$4=$1,296) exceed $1,000 and 
the amount is at least 300 times as great as the amount wagered 
($4 x 300=$1,200). Had B refused to make the statements, the payer would 
have no basis provided by the payee upon which to rely in determining 
whether the payment is subject to withholding. Under these 
circumstances, the payer would be required to deduct and withhold tax 
from the payment.

    Example 4. C purchases a lottery ticket for $1. On June 1, 1979, the 
lottery drawing is held and C wins the grand prize of $50,000, payable 
$500 monthly. The payer must deduct and withhold tax at a rate of 20% 
from each payment of winnings. Therefore, $99.80 must be withheld from 
the first monthly payment to B ($500-$1) x 20%=$99.80) and $100 
($500 x 20%) must be withheld from each monthly payment thereafter.

    Example 5. Assume the same facts as in example 4, except that C wins 
an automobille rather than the grand prize. The fair market value of the 
automobile on the date on which it is made available to C is $10,000. 
the payer must deduct and withhold a tax of $2,000 (($10,001-$1) x 20%). 
This may be accomplished, for example, if C pays $2,000 to the payer. 
Alternatively, if the payer, as part of the prize, pays all taxes 
required to be duducted and withheld, the payer must deduct and withhold 
tax not only on the fair market value of the automobile less the wager, 
but also on the taxes it pays that are required to be deducted and 
withheld. This results in a pyramiding of taxes requiring the use of an 
algebraic formula. Under this formula, the payer must deduct and 
withhold a tax of 25 percent of the fair market value of the automobile 
less the wager ($2,500) and,

[[Page 216]]

in addition, the payer must indicate on Form W-2G the amount of such 
winnings as $12,501 ($10,001+25%($10,001-$1)).

    Example 6. D purchases a ticket for $1 in the State Y lottery from 
an authorized agent of State Y On January 1, 1976, a drawing is held and 
D wins $100 a month for the rest of D's life. It is actuarially 
determined that, on January 3, 1977, D's life expectancy is 5 years. 
Based on that determination, the proceeds from the wager paid to D on or 
after January 3, 1977, will exceed $5,000. Therefore, State Y must 
deduct and withhold $20 from each monthly payment made on or after 
January 3, 1977. (None of such payments is reduced by the amount of the 
wager because the amount of the wager was offset by the first payment of 
winnings which was made before January 3, 1977)).

    Example 7. Assume the same facts as in example 6 except that State Y 
purchases in its own name, as owner, an annuity of $100 a month for D's 
life from E Corporation, in order to fund its own obligation to make the 
payments. Although State Y remains liable for the withholding of tax, E 
Corporation as paying agent for State Y, making payments directly to D, 
should deduct and withhold from each monthly payment in the manner 
described in example 6.

    Example 8. E purchases a sweepstakes ticket for $1 in a sweepstakes 
conducted by W. E purchases the ticket on behalf of himself and on 
behalf of F and G, who have contributed equal amounts toward the 
purchase of the ticket and who have agreed to share equally in any 
prizes won. The ticket which E purchases wins $1,002. Since the proceeds 
of the wager ($1,002--$1) are greater than $1,000 W is required to 
withhold and deduct 20 percent of such proceeds.

    Example 9. On February 1, 1977, a drawing is held in the State X 
lottery in which a winning ticket is selected. The person holding the 
winning ticket is entitled to proceeds of $100,000 payable either as a 
lump sum upon demand or $10,000 a year for 10 years. Under State law, 
the winning ticket must be presented to an authorized agent of State X 
before February 1, 1978. Until the ticket is presented, State X does not 
know the identity of the winner. On December 1, 1977, H, the winner, 
presents the winning ticket to an authorized agent of the State X 
lottery. The winnings are constructively paid to H on February 1, 1977. 
Since H, has the option of receiving the entire proceeds upon demand, 
State X is required to deduct and withhold $20,000 ($100,000 x 20%) from 
the proceeds of H's winnings on February 1, 1977; but for purposes of 
determining the time at which the deposit and inclusion on Form 941 of 
these taxes is to be made, the withholding shall be deemed to have beem 
made on December 1, 1977.

    Example 10. J purchases a subscription to N magazine, at the regular 
subscription price. All new subscribers are automatically eligible for a 
special drawing. The drawing is held and J wins $50,000. Since J has not 
paid any more than the regular subscription price, J has not placed a 
wager or entered a wagering transaction. Therefore, N is not required to 
deduct and withhold J's winnings.

    Example 11. C makes two $2 bets in the same parimutuel pool for a 
horse race. One bet is an ``exacta'' in which C bets on horse M to win 
and horse N to ``place''. The other bet is a ``trifecta''. C bets on 
horse M to win, horse N to ``place'' and horse O to ``show''. C wins 
both bets and is paid $600 with respect to the ``exacta'' and $900 with 
respect to the ``trifecta''. The bets are not identical wagers, however, 
and on these facts neither payment is subject to withholding.

    (e) Statement by recipient. Each person who is to receive a payment 
of winnings subject to withholding shall furnish the payer a statement 
on Form W-2G or 5754 (whichever is applicable) made under the penalties 
of perjury containing--
    (1) The name, address, and taxpayer identification number of the 
winner accompanied by a declaration that no other person is entitled to 
any portion of such payment, or
    (2) The name, address, and taxpayer identification number of the 
recipient and of every person entitled to any portion of such payment.

If more than one payment of winnings subject to withholding is to be 
made with respect to a single wager, for example in the case of an 
annuity, the recipient is required by paragraph (e) of this section to 
furnish the payer a statement with respect to the first such payment 
only, provided that such other payments are taken into account in a 
return required by paragraph (f) of this section.
    (f) Return of payer--(1) In general. Every person making payment of 
winnings for which a statement is required under paragraph (e) of this 
section shall file a return on Form W-2G with the Internal Revenue 
Service Center serving the district in which is located the principal 
place of business of the person making the return on or before February 
28 of the calendar year following the calendar year in which the payment 
of winnings is made. The return required by this paragraph (f) of

[[Page 217]]

the section, need not include the statement by the recipient required by 
paragraph (e) of this section and, therefore, need not be signed by the 
recipient, provided such statement is retained as long as the contents 
thereof may become material in the administration of any internal 
revenue law. For payments to more than one winner, a separate Form W-2G, 
which in no event need be signed by the winner, shall be filed with 
respect to each such winner. Each Form W-2G shall contain the following:
    (i) The name, address, and employer identification number of the 
payer;
    (ii) The name, address, and social security account number of the 
winner;
    (iii) The date, amount of the payment, and amount withheld;
    (iv) The type of wagering transaction;
    (v) Except with respect to winnings from a wager placed in a State-
conducted lottery, a specific description of two types of 
identification, e.g., driver's license number and issuing State, social 
security account number of voter registration number and jurisdiction, 
furnished the payer for verification of the recipient's name, address, 
and social security account number; and
    (vi) With respect to amounts paid after December 31, 1983, the 
amount of winnings from identical wagers.

The return of the payer need not contain the information required by 
subdivision (v) of this paragraph (f)(1) provided such information is 
obtained with respect to the recipient of such winnings and retained as 
long as the contents thereof may become material in the administration 
of any internal revenue law.
    (2) Transmittal form. Persons making payments of winnings subject to 
withholding shall use Form W-3G to transmit Forms W-2G to the Internal 
Revenue Service Centers.

(Secs. 6011 and 7805 of the Internal Revenue Code of 1954 (68A Stat. 
732, 917; 26 U.S.C. 6011, 7805)

[T.D. 7787, 46 FR 46908, Sept. 23, 1981, as amended by T.D. 7919, 48 FR 
46298, Oct. 12, 1983; 48 FR 55728, Dec. 15, 1983; T.D. 7943, 49 FR 5345, 
Feb. 13, 1984; 49 FR 8437, Mar. 7, 1984]



Sec. 31.3402(r)-1  Withholding on distributions of Indian gaming profits to tribal members.

    (a) (1) General rule. Section 3402(r)(1) requires every person, 
including an Indian tribe, making a payment to a member of an Indian 
tribe from the net revenues of any class II or class III gaming 
activity, as defined in 25 U.S.C. 2703, conducted or licensed by such 
tribe to deduct and withhold from such payment a tax in an amount equal 
to such payment's proportionate share of the annualized tax, as that 
term is defined in section 3402(r)(3).
    (2) Withholding tables. Except as provided in paragraph (a)(4) of 
this section, the amount of a payment's proportionate share of the 
annualized tax shall be determined under the applicable table provided 
by the Commissioner.
    (3) Annualized amount of payment. Section 3402(r)(5) provides that 
payments shall be placed on an annualized basis under regulations 
prescribed by the Secretary. A payment may be placed on an annualized 
basis by multiplying the amount of the payment by the total number of 
payments to be made in a calendar year. For example, a monthly payment 
may be annualized by multiplying the amount of the payment by 12. 
Similarly, a quarterly payment may be annualized by multiplying the 
amount of the payment by 4.
    (4) Alternate withholding procedures--(i) In general. Any procedure 
for determining the amount to be deducted and withheld under section 
3402(r) may be used, provided that the amount of tax deducted and 
withheld is substantially the same as it would be using the tables 
provided by the Commissioner under paragraph (a)(2) of this section. At 
the election of an Indian tribe, the amount to be deducted and withheld 
under section 3402(r) shall be determined in accordance with this 
alternate procedure.
    (ii) Method of election. It is sufficient for purposes of making an 
election under this paragraph (a)(4) that an Indian tribe evidence the 
election in any reasonable way, including use of a particular method. 
Thus, no written election is required.

[[Page 218]]

    (5) Additional withholding permitted. Consistent with the provisions 
of section 3402(p), a tribal member and a tribe may enter into an 
agreement to provide for the deduction and withholding of additional 
amounts from payments in order to satisfy the anticipated tax liability 
of the tribal member. The agreement may be made in a manner similar to 
that described in Sec. 31.3402(p)-1 (with respect to voluntary 
withholding agreements between employees and employers).
    (b) Effective date. This section applies to payments made after 
December 31, 1994.
[T.D. 8634, 60 FR 65238, Dec. 19, 1995]



Sec. 31.3403-1  Liability for tax.

    Every employer required to deduct and withhold the tax under section 
3402 from the wages of an employee is liable for the payment of such tax 
whether or not it is collected from the employee by the employer. If, 
for example, the employer deducts less than the correct amount of tax, 
or if he fails to deduct any part of the tax, he is nevertheless liable 
for the correct amount of the tax. See, however, Sec. 31.3402(d)-1. The 
employer is relieved of liability to any other person for the amount of 
any such tax withheld and paid to the district director or deposited 
with a duly designated depositary of the United States.



Sec. 31.3404-1  Return and payment by governmental employer.

    If the United States, or a State, Territory, Puerto Rico, or a 
political subdivision thereof, or the District of Columbia, or any 
agency or instrumentality of any one or more of the foregoing, is an 
employer required to deduct and withhold tax under Chapter 24, the 
return of the amount deducted and withheld as such tax may be made by 
the officer or employee having control of the payment of the wages or 
other officer or employee appropriately designated for that purpose. 
(For provisions relating to the execution and filing of returns, see 
Subpart G of the regulations in this part.)



Sec. 31.3405(c)-1  Withholding on eligible rollover distributions; questions and answers.

    The following questions and answers relate to withholding on 
eligible rollover distributions under section 3405(c) of the Internal 
Revenue Code of 1986, as added by section 522(b) of the Unemployment 
Compensation Amendments of 1992 (Public Law 102- 318, 106 Stat. 290) 
(UCA). For additional UCA guidance under sections 401(a)(31), 402(c), 
402(f), and 403(b)(8) and (10), see Secs. 1.401(a)(31)-1, 1.402(c)-2, 
1.402(f)-1, and 1.403(b)-2 of this chapter, respectively.

                            List of Questions

    Q-1: What are the withholding requirements under section 3405 for 
distributions from qualified plans and section 403(b) annuities?
    Q-2: May a distributee elect under section 3405(c) not to have 
Federal income tax withheld from an eligible rollover distribution?
    Q-3: May a distributee be permitted to elect to have more than 20-
percent Federal income tax withheld from an eligible rollover 
distribution?
    Q-4: Who has responsibility for complying with section 3405(c) 
relating to the 20-percent income tax withholding on eligible rollover 
distributions?
    Q-5: May the plan administrator shift the withholding responsibility 
to the payor and, if so, how?
    Q-6: How does the 20-percent withholding requirement under section 
3405(c) apply if a distributee elects to have a portion of an eligible 
rollover distribution paid to an eligible retirement plan in a direct 
rollover and to have the remainder of that distribution paid to the 
distributee?
    Q-7: Will the plan administrator be subject to liability for tax, 
interest, or penalties for failure to withhold 20 percent from an 
eligible rollover distribution that, because of erroneous information 
provided by a distributee, is not paid to an eligible retirement plan 
even though the distributee elected a direct rollover?
    Q-8: Is an eligible rollover distribution that is paid to a 
qualified defined benefit plan subject to 20-percent withholding?
    Q-9: If property other than cash, employer securities, or plan loans 
is distributed, how is the 20-percent income tax withholding required 
under section 3405(c) accomplished?
    Q-10: What assumptions may a plan administrator make regarding 
whether a benefit is an eligible rollover distribution for purposes of 
determining the amount of a distribution that is subject to 20-percent 
mandatory withholding?

[[Page 219]]

    Q-11: Are there special rules for applying the 20-percent 
withholding requirement to employer securities and a plan loan offset 
amount distributed in an eligible rollover distribution?
    Q-12: How does the mandatory withholding rule apply to net 
unrealized appreciation from employer securities?
    Q-13: Does the 20-percent withholding requirement apply to eligible 
rollover distributions from a qualified plan distributed annuity 
contract?
    Q-14: Must a payor or plan administrator withhold tax from an 
eligible rollover distribution for which a direct rollover election was 
not made if the amount of the distribution is less than $200?
    Q-15: If eligible rollover distributions are made from a qualified 
plan, who has responsibility for making the returns and reports required 
under these regulations?
    Q-16: What eligible rollover distributions must be reported on Form 
1099-R?
    Q-17: Must the plan administrator, trustee or custodian of the 
eligible retirement plan report amounts received in a direct rollover?

                          Questions and Answers

    Q-1: What are the withholding requirements under section 3405 for 
distributions from qualified plans and section 403(b) annuities?
    A-1: (a) General rule. Section 3405(c), added by UCA, provides that 
any designated distribution that is an eligible rollover distribution 
(as defined in section 402(f)(2)(A)) from a qualified plan or a section 
403(b) annuity is subject to income tax withholding at the rate of 20 
percent unless the distributee of the eligible rollover distribution 
elects to have the distribution paid directly to an eligible retirement 
plan in a direct rollover. See Sec. 1.402(c)-2, Q&A-2 of this chapter 
for the definition of a qualified plan and Sec. 1.403(b)-2, Q&A-1 of 
this chapter for the definition of a section 403(b) annuity. For 
purposes of section 3405 and this section, with respect to a 
distribution from a qualified plan, an eligible retirement plan is a 
trust qualified under section 401(a), an annuity plan described in 
section 403(a), or an individual retirement plan (as described in 
Sec. 1.402(c)-2, Q&A-2 of this chapter). For purposes of section 3405 
and this section, with respect to a distribution from a section 403(b) 
annuity, an eligible retirement plan is an annuity contract, a custodial 
account, a retirement income account described in section 403(b), or an 
individual retirement plan. If a designated distribution is not an 
eligible rollover distribution, it is subject to the elective 
withholding provisions of section 3405(a) and (b) and Sec. 35.3405-1 of 
this chapter and is not subject to the mandatory withholding provisions 
of section 3405(c) and this section.
    (b) Application of other statutory provisions. See 
Sec. 1.401(a)(31)-1 of this chapter concerning the requirements and the 
procedures for electing a direct rollover under section 401(a)(31). See 
section 402(c)(2) and (4), and Sec. 1.402(c)-2, Q&A-3 through Q&A-10 and 
Q&A-14 of this chapter for rules to determine what constitutes an 
eligible rollover distribution. See Sec. 1.402(f)-1, Q&A-1 through Q&A-3 
and Sec. 1.403(b)-2, Q&A-3 of this chapter concerning the notice that 
must be provided to a distributee, within a reasonable period of time 
before making an eligible rollover distribution. See Sec. 1.403(b)-2, 
Q&A-1 and Q&A-2 of this chapter for guidance concerning the rollover 
provisions and direct rollover requirements for distributions from 
annuities described in section 403(b).
    (c) Effective date--(1) Statutory effective date--(i) General rule. 
Section 3405(c), as added by UCA, applies to eligible rollover 
distributions made on or after January 1, 1993, even if the employee's 
employment with the employer maintaining the plan terminated before 
January 1, 1993 and even if the eligible rollover distribution is part 
of a series of payments that began before January 1, 1993.
    (ii) Special rule for governmental section 403(b) annuities. Section 
522 of UCA provides a special effective date for governmental section 
403(b) annuities. This special effective date appears in Sec. 1.403(b)-
2T of this chapter (as it appeared in the April 1, 1995 edition of 26 
CFR part 1).
    (2) Regulatory effective date. This section applies to eligible 
rollover distributions made on or after October 19, 1995. For eligible 
rollover distributions made on or after January 1, 1993 and before 
October 19, 1995, Sec. 31.3405(c)-1T (as it appeared in the April 1, 
1995 edition of 26 CFR part 1), applies. However, for any distribution 
made on or after January 1, 1993 but before October 19, 1995, a plan 
administrator or payor may comply with the withholding requirements of 
section 3405(c) by substituting any or all provisions of this section 
for the corresponding provisions of Sec. 31.3405(c)-1T, if any.
    Q-2: May a distributee elect under section 3405(c) not to have 
Federal income tax withheld from an eligible rollover distribution?
    A-2: No. The 20-percent income tax withholding imposed under section 
3405(c)(1) applies to an eligible rollover distribution unless the 
distributee elects under section 401(a)(31) to have the eligible 
rollover distribution paid directly to an eligible retirement plan in a 
direct rollover. See Sec. 1.401(a)(31)-1 and Sec. 1.403(b)-2, Q&A-2 of 
this chapter for provisions concerning the requirement that a 
distributee of an eligible rollover distribution be permitted to elect a 
distribution in the form of a direct rollover.
    Q-3: May a distributee be permitted to elect to have more than 20-
percent Federal

[[Page 220]]

income tax withheld from an eligible rollover distribution?
    A-3: Yes. Under section 3402(p), a distributee of an eligible 
rollover distribution and the plan administrator or payor are permitted 
to enter into an agreement to provide for withholding in excess of 20 
percent from an eligible rollover distribution. Any agreement must be 
made in accordance with applicable forms and instructions. However, no 
request for withholding will be effective between the plan administrator 
or payor and the distributee until the plan administrator or payor 
accepts the request by commencing to withhold from the amounts with 
respect to which the request was made. An agreement under section 
3402(p) shall be effective for such period as the plan administrator or 
payor and the distributee mutually agree upon. However, either party to 
the agreement may terminate the agreement prior to the end of such 
period by furnishing a signed written notice to the other.
    Q-4: Who has responsibility for complying with section 3405(c) 
relating to the 20-percent income tax withholding on eligible rollover 
distributions?
    A-4: Section 3405(d) generally requires the plan administrator of a 
qualified plan and the payor of a section 403(b) annuity to withhold 
under section 3405(c)(1) an amount equal to 20 percent of the portion of 
an eligible rollover distribution that the distributee does not elect to 
have paid in a direct rollover. When an amount is paid under a qualified 
plan distributed annuity contract as defined in Sec. 1.402(c)-2, Q&A-10 
of this chapter, the payor is treated as the plan administrator. See 
Q&A-13 of this section concerning eligible rollover distributions from a 
qualified plan distributed annuity contract.
    Q-5: May the plan administrator shift the withholding responsibility 
to the payor and, if so, how?
    A-5: Yes. The plan administrator may shift the withholding 
responsibility to the payor by following the procedures set forth in 
Sec. 35.3405-1, Q&A E-2 through E-5 of this chapter (relating to 
elective withholding on pensions, annuities and certain other deferred 
income) with appropriate adjustments, including the plan administrator's 
identification of amounts that constitute required minimum 
distributions.
    Q-6: How does the 20-percent withholding requirement under section 
3405(c) apply if a distributee elects to have a portion of an eligible 
rollover distribution paid to an eligible retirement plan in a direct 
rollover and to have the remainder of that distribution paid to the 
distributee?
    A-6: If a distributee elects to have a portion of an eligible 
rollover distribution paid to an eligible retirement plan in a direct 
rollover and to receive the remainder of the distribution, the 20-
percent withholding requirement under section 3405(c) applies only to 
the portion of the eligible rollover distribution that the distributee 
receives and not to the portion that is paid in a direct rollover.
    Q-7: Will the plan administrator be subject to liability for tax, 
interest, or penalties for failure to withhold 20 percent from an 
eligible rollover distribution that, because of erroneous information 
provided by a distributee, is not paid to an eligible retirement plan 
even though the distributee elected a direct rollover?
    A-7: (a) General rule. If the plan administrator reasonably relied 
on adequate information provided by the distributee (as described in 
paragraph (b) of this Q&A), the plan administrator will not be subject 
to liability for taxes, interest, or penalties for failure to withhold 
income tax from an eligible rollover distribution solely because the 
distribution is paid to an account or plan that is not an eligible 
retirement plan (as defined, with respect to distributions from 
qualified plans, in section 402(c)(8)(B) and Sec. 1.402(c)-2, Q&A-2 of 
this chapter and, with respect to a distributions from section 403(b) 
annuities, in Sec. 1.403(b)-2), Q&A-1 of this chapter. Although the plan 
administrator is not required to verify independently the accuracy of 
information provided by the distributee, the plan administrator's 
reliance on the information furnished must be reasonable. For example, 
it is not reasonable for the plan administrator to rely on information 
that is clearly erroneous on its face.
    (b) Adequate information. The plan administrator has obtained from 
the distributee adequate information on which to rely in making a direct 
rollover if the distributee furnishes to the plan administrator: the 
name of the eligible retirement plan; a representation that the 
recipient plan is an individual retirement plan, a qualified plan, or a 
section 403(b) annuity, as appropriate; and any other information that 
is necessary in order to permit the plan administrator to accomplish the 
direct rollover by the means it has selected. This information must 
include any information needed to comply with the specific requirements 
of Sec. 1.401(a)(31)-1, Q&A-3 and Q&A-4 of this chapter. For example, if 
the direct rollover is to be made by mailing a check to the trustee of 
an individual retirement account, the plan administrator must obtain, in 
addition to the name of the individual retirement account and the 
representation described above, the name and address of the trustee of 
the individual retirement account.
    Q-8: Is an eligible rollover distribution that is paid to a 
qualified defined benefit plan subject to 20-percent withholding?
    A-8: No. If an eligible rollover distribution is paid in a direct 
rollover to an eligible retirement plan within the meaning of section 
402(c)(8), including a qualified defined benefit

[[Page 221]]

plan, it is reasonable to believe that the distribution is not 
includible in gross income pursuant to section 402(c)(1). Accordingly, 
pursuant to section 3405(e)(1)(B), the distribution is not a designated 
distribution and is not subject to 20-percent withholding.
    Q-9: If property other than cash, employer securities, or plan loans 
is distributed, how is the 20-percent income tax withholding required 
under section 3405(c) accomplished?
    A-9: When all or a portion of an eligible rollover distribution 
subject to 20-percent income tax withholding under section 3405(c) 
consists of property other than cash, employer securities, or plan loan 
offset amounts, the plan administrator or payor must apply Sec. 35.3405-
1, Q&A F-2 of this chapter and may apply Sec. 35.3405-1, Q&A F-3 of this 
chapter in determining how to satisfy the withholding requirements.
    Q-10: What assumptions may a plan administrator make regarding 
whether a benefit is an eligible rollover distribution for purposes of 
determining the amount of a distribution that is subject to 20-percent 
mandatory withholding?
    A-10: (a) In general. For purposes of determining the amount of a 
distribution that is subject to 20-percent mandatory withholding, a plan 
administrator may make the assumptions described in paragraphs (b), (c), 
and (d) of this Q&A in determining the amount of a distribution that is 
an eligible rollover distribution and a designated distribution. Q&A-17 
of Sec. 1.401(a)(31)-1 of this chapter provides assumptions for purposes 
of complying with section 401(a)(31). See Sec. 1.402(c)-2, Q&A-15 of 
this chapter concerning the effect of these assumptions for purposes of 
section 402(c).
    (b) $5,000 death benefit. A plan administrator may assume that a 
distribution that qualifies for the $5,000 death benefit exclusion under 
section 101(b) is the only death benefit being paid with respect to a 
deceased employee that qualifies for that exclusion. Thus, in such a 
case, the plan administrator may assume that the distribution is not an 
eligible rollover distribution to the extent that it would be excludible 
from gross income based on this assumption.
    (c) Required minimum distributions. The plan administrator is 
permitted to determine the amount of the minimum distribution required 
to satisfy section 401(a)(9)(A) for any calendar year by assuming that 
there is no designated beneficiary.
    (d) Valuation of property. In the case of a distribution that 
includes property, in calculating the amount of the distribution for 
purposes of applying section 3405(c), the value of the property may be 
determined in accordance with Sec. 35.3405-1, Q&A F-1 of this chapter.
    Q-11: Are there special rules for applying the 20-percent 
withholding requirement to employer securities and a plan loan offset 
amount distributed in an eligible rollover distribution?
    A-11: Yes. The maximum amount to be withheld on any designated 
distribution (including any eligible rollover distribution) under 
section 3405(c) must not exceed the sum of the cash and the fair market 
value of property (excluding employer securities) received in the 
distribution. The amount of the sum is determined without regard to 
whether any portion of the cash or property is a designated distribution 
or an eligible rollover distribution. For purposes of this rule, any 
plan loan offset amount, as defined in Sec. 1.402(c)-2, Q&A-9 of this 
chapter, is treated in the same manner as employer securities. Thus, 
although employer securities and plan loan offset amounts must be 
included in the amount that is multiplied by 20-percent, the total 
amount required to be withheld for an eligible rollover distribution is 
limited to the sum of the cash and the fair market value of property 
received by the distributee, excluding any amount of the distribution 
that is a plan loan offset amount or that is distributed in the form of 
employer securities. For example, if the only portion of an eligible 
rollover distribution that is not paid in a direct rollover consists of 
employer securities or a plan loan offset amount, withholding is not 
required. In addition, if a distribution consists solely of employer 
securities and cash (not in excess of $200) in lieu of fractional 
shares, no amount is required to be withheld as income tax from the 
distribution under section 3405 (including section 3405(c) and this 
section). For purposes of section 3405 and this section, employer 
securities means securities of the employer corporation within the 
meaning of section 402(e)(4)(E)(ii).
    Q-12: How does the mandatory withholding rule apply to net 
unrealized appreciation from employer securities?
    A-12: An eligible rollover distribution can include net unrealized 
appreciation from employer securities, within the meaning of section 
402(e)(4), even if the net unrealized appreciation is excluded from 
gross income under section 402(e)(4). However, to the extent that it is 
excludable from gross income pursuant to section 402(e)(4), net 
unrealized appreciation is not a designated distribution pursuant to 
section 3405(e)(1)(B) because it is reasonable to believe that it is not 
includable in gross income. Thus, to the extent that net unrealized 
appreciation is excludable from gross income pursuant to section 
402(e)(4), net unrealized appreciation is not included in the amount of 
an eligible rollover distribution that is subject to 20-percent 
withholding.
    Q-13: Does the 20-percent withholding requirement apply to eligible 
rollover distributions from a qualified plan distributed annuity 
contract?

[[Page 222]]

    A-13: The 20-percent withholding requirement applies to eligible 
rollover distributions from a qualified plan distributed annuity 
contract as defined in Q&A-10 of Sec. 1.402(c)-2 of this chapter. In the 
case of an eligible rollover distribution from such an annuity contract, 
the payor is treated as the plan administrator for purposes of section 
3405. See Sec. 1.401(a)(31)-1, Q&A-16 of this chapter concerning the 
direct rollover requirements that apply to distributions from such an 
annuity contract and see Sec. 1.402(c)-2, Q&A-10 of this chapter 
concerning the treatment of distributions from such annuity contracts as 
eligible rollover distributions.
    Q-14: Must a payor or plan administrator withhold tax from an 
eligible rollover distribution for which a direct rollover election was 
not made if the amount of the distribution is less than $200?
    A-14: No. However, all eligible rollover distributions received 
within one taxable year of the distributee under the same plan must be 
aggregated for purposes of determining whether the $200 floor is 
reached. If the plan administrator or payor does not know at the time of 
the first distribution (that is less than $200) whether there will be 
additional eligible rollover distributions during the year for which 
aggregation is required, the plan administrator need not withhold from 
the first distribution. If distributions are made within one taxable 
year under more than one plan of an employer, the plan administrator or 
payor may, but need not, aggregate distributions for purposes of 
determining whether the $200 floor is reached. However, once the $200 
threshold has been reached, the sum of all payments during the year must 
be used to determine the applicable amount to be withheld from 
subsequent payments during the year.
    Q-15: If eligible rollover distributions are made from a qualified 
plan, who has responsibility for making the returns and reports required 
under these regulations?
    A-15: Generally, the plan administrator, as defined in section 
414(g), is responsible for maintaining the records and making the 
required reports with respect to eligible rollover distributions from 
qualified plans. However, if the plan administrator fails to keep the 
required records and make the required reports, the employer maintaining 
the plan is responsible for the reports and returns.
    Q-16: What eligible rollover distributions must be reported on Form 
1099-R?
    A-16: Each eligible rollover distribution, including each eligible 
rollover distribution that is paid directly to an eligible retirement 
plan in a direct rollover, must be reported on Form 1099-R in accordance 
with the instructions for Form 1099-R. For purposes of the reporting 
required under section 6047(e), a direct rollover is treated as a 
distribution that is immediately rolled over to an eligible retirement 
plan. Distributions that are not eligible rollover distributions are 
subject to the reporting requirements set forth in Sec. 35.3405-1 of 
this chapter and applicable forms and instructions.
    Q-17: Must the plan administrator, trustee or custodian of the 
eligible retirement plan report amounts received in a direct rollover?
    A-17: (a) Individual retirement plan. If a distributee elects to 
have an eligible rollover distribution paid to an individual retirement 
plan in a direct rollover, the eligible rollover distribution is 
reported on Form 5498 as a rollover contribution to the individual 
retirement plan, in accordance with the instructions for Form 5498.
    (b) Qualified plan or section 403(b) annuity. If a distributee 
elects to have an eligible rollover distribution paid to a qualified 
plan or section 403(b) annuity, the recipient plan or annuity is not 
required to report the receipt of the rollover contribution.
[T.D. 8619, 60 FR 49215, Sept. 22, 1995]



Sec. 31.3406-0  Outline of the backup withholding regulations.

    This section lists paragraphs contained in Secs. 31.3406(a)-1 
through 31.3406(i)-1.

    Sec. 31.3406(a)-1  Backup withholding requirement on reportable 
                                payments.

    (a) Overview.
    (b) Conditions that invoke the backup withholding requirement.
    (1) Conditions applicable to all reportable payments.
    (2) Conditions applicable only to reportable interest or dividend 
payments.
    (c) Exceptions.
    (d) Cross references.

  Sec. 31.3406(a)-2  Definition of payors obligated to backup withhold.

    (a) In general.
    (b) Middlemen treated as payors.
    (c) Persons not treated as payors.

   Sec. 31.3406(a)-3  Scope and extent of accounts subject to backup 
                              withholding.

  Sec. 31.3406(a)-4  Time when payments are considered to be paid and 
                     subject to backup withholding.

    (a) Timing.
    (1) In general.
    (2) Special rules for dividends.
    (b) Amounts reportable under section 6045.
    (1) In general.
    (2) Special rule for interest accrued on bonds.
    (c) Middlemen.
    (1) In general.
    (2) Special rule for common trust funds.
    (3) Special rule for certain grantor trusts.

[[Page 223]]

           Sec. 31.3406(b)(2)-1  Reportable interest payment.

    (a) Interest subject to backup withholding.
    (1) In general.
    (2) Special rule for tax-exempt interest.
    (b) Amount subject to backup withholding.
    (1) In general.
    (2) Special rule to adjust for premature withdrawal penalty.

             Sec. 31.3406(b)(2)-2  Original issue discount.

    (a) Original issue discount subject to backup withholding.
    (b) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to short-term obligations.
    (c) Transferred short-term obligations.
    (1) Subsequent holder may establish purchase price.
    (2) Subsequent holder unable (or not permitted) to establish 
purchase price.
    (3) Transferred obligation.
    (d) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to long-term obligations.
    (1) No cash payments prior to maturity.
    (2) Registered long-term obligations with cash payments prior to 
maturity.
    (3) Transferred registered long-term obligations with payments prior 
to maturity.
    (e) Bearer long-term obligations.
    (1) Payments prior to maturity.
    (2) Payments at maturity.

               Sec. 31.3406(b)(2)-3  Window transactions.

    (a) Requirement to backup withhold.
    (b) Window transaction defined.
    (c) Manner of furnishing taxpayer identification number in the case 
of a window transaction.

           Sec. 31.3406(b)(2)-4  Reportable dividend payment.

    (a) Dividends subject to backup withholding.
    (b) Dividends not subject to backup withholding.
    (c) Amount subject to backup withholding.
    (1) In general.
    (2) Reasonable estimate of amount of dividend subject to backup 
withholding.
    (3) Reinvested dividends.

      Sec. 31.3406(b)(2)-5  Reportable patronage dividend payment.

    (a) Patronage dividends subject to backup withholding.
    (b) Amount subject to backup withholding.
    (1) Failure to provide taxpayer identification number or 
notification of incorrect taxpayer identification number.
    (2) Notified payee underreporting or payee certification failure.

    Sec. 31.3406(b)(3)-1  Reportable payments of rents, commissions, 
                     nonemployee compensation, etc.

    (a) Section 6041 and 6041A(a) payments subject to backup 
withholding.
    (b) Amount subject to backup withholding.
    (1) In general.
    (2) Net commissions.
    (3) Payments aggregating $600 or more for the calendar year.

Sec. 31.3406(b)(3)-2  Reportable barter exchanges and gross proceeds of 
             sales of securities or commodities by brokers.

    (a) Transactions subject to backup withholding.
    (b) Amount subject to backup withholding.
    (1) In general.
    (2) Forward contracts, including foreign currency contracts, and 
regulated futures contracts.
    (3) Security sales made through a margin account.
    (4) Security short sales.
    (5) Fractional shares.

   Sec. 31.3406(b)(3)-3  Reportable payments by certain fishing boat 
                               operators.

    (a) Payments subject to backup withholding.
    (b) Amount subject to backup withholding.

         Sec. 31.3406(b)(3)-4  Reportable payments of royalties.

    (a) Royalty payments subject to backup withholding.
    (b) Amount subject to backup withholding.

      Sec. 31.3406(b)(4)-1  Exemption for certain minimal payments.

    (a) In general.
    (b) Manner of making the election.
    (c) How to annualize.
    (1) In general.
    (2) Special aggregation rule for reportable interest and dividends.
    (d) Exception for window transactions and original issue discount.

Sec. 31.3406(c)-1  Notified payee underreporting of reportable interest 
                          or dividend payments.

    (a) Overview.
    (b) Definitions.
    (1) Notified payee underreporting.
    (2) Payee underreporting.
    (c) Notice to payors regarding backup withholding due to notified 
payee underreporting.
    (1) In general.
    (2) Additional requirements for payors that are also brokers.
    (3) Payor identification of accounts of the payee subject to backup 
withholding due to notified payee underreporting.
    (d) Notice from payors of backup withholding due to notified payee 
underreporting.

[[Page 224]]

    (1) In general.
    (2) Procedures.
    (e) Period during which backup withholding is required.
    (1) In general.
    (2) Stop withholding.
    (3) Dormant accounts.
    (f) Notice to payees from the Internal Revenue Service.
    (1) Notice period.
    (2) Payee subject to backup withholding.
    (3) Disclosure of names of payors and brokers.
    (4) Backup withholding certification.
    (g) Determination by the Internal Revenue Service that backup 
withholding should not start or should be stopped.
    (1) In general.
    (2) Date notice to stop backup withholding will be provided.
    (3) Grounds for determination.
    (4) No underreporting.
    (5) Correcting any payee underreporting.
    (6) Undue hardship.
    (7) Bona fide dispute.
    (h) Payees filing a joint return.
    (1) In general.
    (2) Exceptions.
    (i) [Reserved.]
    (j) Penalties.

      Sec. 31.3406(d)-1  Manner required for furnishing a taxpayer 
                         identification number.

    (a) Requirement to backup withhold.
    (b) Reportable interest or dividend account.
    (1) Manner required for furnishing a taxpayer identification number 
with respect to a pre-1984 account or instrument.
    (2) Determination of pre-1984 account or instrument.
    (3) Manner required for furnishing a taxpayer identification number 
with respect to an account or instrument that is not a pre-1984 account.
    (4) Special rule with respect to the acquisition of a readily 
tradable instrument in a transaction between certain parties acting 
without the assistance of a broker.
    (c) Brokerage account.
    (1) Manner required for furnishing a taxpayer identification number 
with respect to a brokerage relationship that is not a post-1983 
brokerage account.
    (2) Manner required for furnishing a taxpayer identification number 
with respect to a post-1983 brokerage account.
    (d) Rents, commissions, nonemployee compensation, and certain 
fishing boat operators, etc.--Manner required for furnishing a taxpayer 
identification number.

             Sec. 31.3406(d)-2  Payee certification failure.

    (a) Requirement to backup withhold.
    (b) Exceptions.

Sec. 31.3406(d)-3  Special 30-day rules for certain reportable payments.

    (a) Accounts or readily tradable instruments acquired directly from 
the payor (including a broker who holds an instrument in street name) by 
electronic transmission or by mail.
    (b) Sale of an instrument for a customer by electronic transmission 
or by mail.
    (c) Application to foreign payees.

   Sec. 31.3406(d)-4  Special rules for readily tradable instruments 
                       acquired through a broker.

    (a) Readily tradable instruments acquired through post-1983 
brokerage accounts with a broker who is not a payor.
    (1) In general.
    (2) Additional requirements.
    (3) Transactions entered into through a brokerage account that is 
not a post-1983 brokerage account.
    (4) Payor must notify payee.
    (b) Notices.
    (1) Form of notice by broker to payor.
    (2) Form of notice by payor to payee.
    (c) Payor's reliance on information from broker.
    (1) In general.
    (2) Amount subject to backup withholding.

   Sec. 31.3406(d)-5  Backup withholding when the Service or a broker 
      notifies the payor to withhold because the payee's taxpayer 
                   identification number is incorrect.

    (a) Overview.
    (b) Definitions and special rules.
    (1) Definition of an incorrect name/TIN combination.
    (2) Definition of account.
    (3) Definition of business day.
    (4) Certain exceptions.
    (c) Notice regarding an incorrect name/TIN combination.
    (1) In general.
    (2) Additional requirements for payors that are also brokers.
    (3) Payor identification of the account or accounts of the payee 
that have the incorrect taxpayer identification number.
    (4) Special rule for joint accounts.
    (5) Date of receipt.
    (d) Notice from payors of backup withholding due to an incorrect 
name/TIN combination.
    (1) In general.
    (2) Procedures.
    (e) Period during which backup withholding is required due to 
notification of an incorrect name/TIN combination.
    (1) In general.
    (2) Grace periods.
    (3) Dormant accounts.
    (f) Manner required for payee to furnish certified taxpayer 
identification number.
    (g) Receipt of two notices within a 3-year period.

[[Page 225]]

    (1) In general.
    (2) Notice to payee who has provided two incorrect name/TIN 
combinations within 3 calendar years.
    (3) Period during which backup withholding is required due to a 
second notice of an incorrect name/TIN combination within 3 calendar 
years.
    (4) Receipt of two notices in one calendar year.
    (5) Notification from the Social Security Administration (or the 
Internal Revenue Service) validating a name/TIN combination.
    (h) Payors must use newly provided certified number.
    (i) Effective date.
    (j) Examples.

 Sec. 31.3406(e)-1  Period during which backup withholding is required.

    (a) In general.
    (b) Failure to furnish a taxpayer identification number in the 
manner required.
    (1) Start withholding.
    (2) Stop withholding.
    (c) Notification of an incorrect taxpayer identification number.
    (d) Notified payee underreporting.
    (e) Payee certification failure.
    (1) Start withholding.
    (2) Stop withholding.
    (f) Rule for determining when the payor receives a taxpayer 
identification number or certificate from a payee.

           Sec. 31.3406(f)-1  Confidentiality of information.

    (a) Confidentiality and liability for violation.
    (b) Permissible use of information.
    (1) In general.
    (2) Window transactions.
    (c) Specific restrictions on the use of information.

Sec. 31.3406(g)-1  Exception for payments to certain payees and certain 
                             other payments.

    (a) Exempt recipients.
    (1) In general.
    (2) Nonexclusive list.
    (b) Determination of whether a person is described in paragraph 
(a)(1) of this section.
    (c) Prepaid or advance premium life-insurance contracts.

 Sec. 31.3406(g)-2  Exception for reportable payments for which backup 
                   withholding is otherwise required.

    (a) In general.
    (b) Payment of wages.
    (c) Distribution from a pension, annuity, or other plan of deferred 
compensation.
    (d) Gambling winnings.
    (1) In general.
    (2) Definition of a reportable gambling winning and determination of 
amount subject to backup withholding.
    (3) Special rules.
    (e) Certain real estate transactions.
    (f) Certain payments after an acquisition of accounts or 
instruments.
    (g) Certain gross proceeds.

   Sec. 31.3406(g)-3  Exemption while payee is waiting for a taxpayer 
                         identification number.

    (a) In general.
    (1) Backup withholding not required for 60 days.
    (2) Reserve method.
    (3) Alternative rule; 7-day grace period.
    (b) Special rule for readily tradable instruments.
    (c) Exceptions.
    (1) In general.
    (2) Special rule for amounts subject to reporting under section 6045 
other than proceeds of redemptions of bearer obligations.
    (d) Awaiting-TIN certificate.
    (e) Form for awaiting-TIN certificate.

                     Sec. 31.3406(h)-1  Definitions.

    (a) In general.
    (b) Taxpayer identification number.
    (1) In general.
    (2) Obviously incorrect number.
    (c) Broker.
    (d) Readily tradable instrument.
    (e) Day.
    (f) Business day.

                    Sec. 31.3406(h)-2  Special rules.

    (a) Joint accounts.
    (1) Relevant name and taxpayer identification number combination.
    (2) Optional rule for accounts subject to backup withholding under 
section 3406(a)(1)(B) or (C) where the names are switched.
    (3) Joint foreign payees.
    (b) Backup withholding from an alternative source.
    (1) In general.
    (2) Exceptions for payments made in property.
    (c) Trusts.
    (d) Adjustment of prior withholding by middleman.
    (e) Conversion of amounts paid in foreign currency into United 
States dollars.
    (1) Convertible foreign currency.
    (2) Nonconvertible foreign currency. [Reserved]
    (f) Coordination with other sections.
    (g) Tax liabilities and penalties.
    (h) To whom payor is liable for amount withheld.

                    Sec. 31.3406(h)-3  Certificates.

    (a) Prescribed form to furnish information under penalties of 
perjury.
    (1) In general.
    (2) Use of a single or multiple Forms W-9 for accounts of the same 
payee.

[[Page 226]]

    (b) Prescribed form to furnish a noncertified taxpayer 
identification number.
    (c) Forms prepared by payors or brokers.
    (1) Substitute forms; in general.
    (2) Form for exempt recipient.
    (d) Special rule for brokers.
    (e) Reasonable reliance on certificate.
    (1) In general.
    (2) Circumstances establishing reasonable reliance.
    (f) Who may sign certificate.
    (1) In general.
    (2) Notified payee underreporting.
    (g) Retention of certificates.
    (1) Accounts or instruments that are not pre-1984 accounts and 
brokerage relationships that are post-1983 brokerage accounts.
    (2) Accounts or instruments that are pre-1984 accounts and brokerage 
relationships that are not post-1983 brokerage accounts.
    (h) Cross references.

                   Sec. 31.3406(i)-1  Effective date.

[T.D. 8637, 60 FR 66112, Dec. 21, 1995, as amended by T.D. 8734, 62 FR 
53493, Oct. 14, 1997]

    Effective Date Note: By T.D. 8734, 62 FR 53493, Oct. 14, 1997, 
Sec. 31.3406-0 was amended by removing the entries in the table for 
Sec. 31.3406(h)-2, paragraphs (e)(1) and (e)(2), effective Jan. 1, 1999.



Sec. 31.3406(a)-1  Backup withholding requirement on reportable payments.

    (a) Overview. Under section 3406, a payor must deduct and withhold 
31 percent of a reportable payment if a condition for withholding 
exists. Reportable payments mean interest and dividend payments (as 
defined in section 3406(b)(2)) and other reportable payments (as defined 
in section 3406(b)(3)). The conditions described in paragraph (b)(1) of 
this section apply to all reportable payments, including reportable 
interest and dividend payments. The conditions described in paragraph 
(b)(2) of this section apply only to reportable interest and dividend 
payments.
    (b) Conditions that invoke the backup withholding requirement--(1) 
Conditions applicable to all reportable payments. A payor of a 
reportable payment must deduct and withhold under section 3406 if--
    (i) The payee of the reportable payment does not furnish the payee's 
taxpayer identification number to the payor, as required in section 
3406(a)(1)(A) and Sec. 31.3406(d)-1; or
    (ii) The Internal Revenue Service or a broker notifies the payor 
that the taxpayer identification number furnished by its payee for a 
reportable payment is incorrect, as described in section 3406(a)(1)(B) 
and Sec. 31.3406(d)-5.
    (2) Conditions applicable only to reportable interest or dividend 
payments. A payor of a reportable interest or dividend payment must 
deduct and withhold under section 3406 if--
    (i) The Internal Revenue Service or a broker notifies the payor that 
its payee has underreported interest or dividend income, as described in 
section 3406(a)(1)(C) and Sec. 31.3406(c)-1; or
    (ii) The payee fails to certify to the payor or broker that the 
payee is not subject to withholding due to notified payee 
underreporting, as described in section 3406(a)(1)(D) and 
Sec. 31.3406(d)-2.
    (c) Exceptions. The requirement to withhold does not apply to 
certain minimal payments as described in Sec. 31.3406(b)(4)-1 or to 
payments exempt from withholding under Secs. 31.3406(g)-1 through 
31.3406(g)-3.
    (d) Cross references. For the definition of payor, see 
Sec. 31.3406(a)-2. For the definition of taxpayer identification number, 
see Sec. 31.3406(h)-1(b).
[T.D. 8637, 60 FR 66114, Dec. 21, 1995]



Sec. 31.3406(a)-2  Definition of payors obligated to backup withhold.

    (a) In general. Payor means any person who is required to make an 
information return with respect to any reportable payment (as described 
in section 3406(b)) under section 6041, 6041A(a), 6042, 6044, 6045, 
6049, 6050A, or 6050N, including any middleman as described in paragraph 
(b) of this section.
    (b) Middlemen treated as payors. A person who receives or collects a 
reportable payment on behalf of or for the account of a payee is a 
middleman and is treated as the payor of the payment. These persons 
include, but are not limited to--
    (1) A custodian of a payee's account, such as a bank, financial 
institution, or brokerage firm acting as custodian of an account;
    (2) A nominee, including the joint owner of an account or 
instrument, except if the joint owners are husband and wife or if the 
payment is actually owned by another person whose name is also shown on 
the information return filed with respect to the payment;

[[Page 227]]

    (3) A broker holding a security (including stock) for a customer in 
street name;
    (4) A grantor trust established after December 31, 1995, all of 
which is owned by two or more grantors, and for this purpose spouses 
filing a joint return are considered to be one grantor;
    (5) A common trust fund; and
    (6) A partnership or an S corporation that makes a reportable 
payment.
    (c) Persons not treated as payors. The following persons are not 
treated as payors for purposes of section 3406 if the person does not 
have a reporting obligation under the section on information reporting 
to which the payment relates:
    (1) An agent of the payor who is acting on behalf of the payor in 
making the payment and who has not entered into an agreement with the 
payor (for further guidance see Rev. Proc. 84-33 (1984-1 C.B. 502), and 
Sec. 601.601(d)(2) of this chapter), such as a bank that acts as a 
paying agent in making a payment of dividends on behalf of a corporation 
(although payments made by the agent are considered to be payments made 
by the payor, and thus are subject to withholding, reporting, and the 
depositing requirements pertaining to section 3406 as if they were made 
by the payor itself, and failure by the agent so to withhold, report, or 
deposit is considered to be failure by the payor);
    (2) A trust (other than a grantor trust as described in paragraph 
(b)(4) of this section) that files a Form 1041 and furnishes each 
beneficiary a Form K-1 containing information required to be shown on an 
information return, including amounts withheld under section 3406; or
    (3) A partnership making a payment of a distributive share or an S 
corporation making a similar distribution.
[T.D. 8637, 60 FR 66114, Dec. 21, 1995]



Sec. 31.3406(a)-3  Scope and extent of accounts subject to backup withholding.

    A payor who is required to withhold under Sec. 31.3406(a)-1 must 
withhold--
    (a) On the accounts subject to withholding under Sec. 31.3406(a)-1 
(b)(1)(i) or (b)(2)(ii); and
    (b) On the accounts subject to withholding under Sec. 31.3406(a)-
1(b)(1)(ii) or (b)(2)(i), as described under Sec. 31.3406(d)-5 (relating 
to notification of incorrect TIN) or Sec. 31.3406(c)-1 (relating to 
notified payee underreporting), respectively.
[T.D. 8637, 60 FR 66114, Dec. 21, 1995]



Sec. 31.3406(a)-4  Time when payments are considered to be paid and subject to backup withholding.

    (a) Timing--(1) In general. If backup withholding is required under 
section 3406 on a reportable payment (as defined in section 3406(b)), 
the payor must withhold at the time it makes the payment to the payee or 
to the payee's account that is subject to withholding. Amounts are 
considered paid when they are credited to the account of, or made 
available to, the payee. Amounts are not considered paid solely because 
they are posted (e.g., an informational notation on the payee's 
passbook) if they are not actually credited to the payee's account or 
made available to the payee. See paragraph (c) of this section for the 
timing of withholding by a middleman.
    (2) Special rules for dividends. For purposes of section 3406 and 
this section--
    (i) Record date earlier than payment date. In the case of stock for 
which the record date is earlier than the payment date, the dividends 
are considered paid on the payment date.
    (ii) Dividends paid in corporate reorganizations. In the case of a 
corporate reorganization, if a payee is required to exchange stock held 
in the former corporation for stock in the new corporation before the 
dividends that have been paid with respect to the stock in the new 
corporation will be provided to the payee, the dividend is considered 
paid on the date the payee actually exchanges the stock and receives the 
dividend.
    (b) Amounts reportable under section 6045--(1) In general. 
Notwithstanding paragraph (a) of this section, in the case of a 
transaction reportable under section 6045 (except in the case of forward 
contracts (including foreign currency contracts), regulated futures 
contracts, and security short sales), the obligation to withhold under 
section 3406 arises on the date the sale is entered on the books of the 
broker or

[[Page 228]]

the date the exchange occurs as provided in Sec. 1.6045-1(f)(3) of this 
chapter. A broker (in its capacity as payor) is not required, however, 
to satisfy its withholding liability until payment is made. See 
Sec. 31.3406(b)(3)-2(b)(2) for special rules applicable to forward 
contracts (including foreign currency contracts), regulated futures 
contracts, and security short sales.
    (2) Special rule for interest accrued on bonds. For purposes of 
determining the time that interest is considered paid and subject to 
withholding under section 3406 when bonds are sold between interest 
payment dates, the portion of the sales price representing interest 
accrued to the date of sale is considered a portion of a reportable 
payment of gross proceeds under section 6045 (provided that the accrued 
interest is not tax-exempt as described in section 103(a), relating to 
certain governmental obligations), and is not considered to be a payment 
of interest for purposes of section 6049.
    (c) Middlemen--(1) In general. Any middleman (as defined in 
Sec. 31.3406(a)-2(b)) must withhold under section 3406 at the time the 
reportable payment is received by or credited to the middleman. If the 
middleman makes or credits the reportable payment to the payee prior to 
the middleman's receipt of the corresponding payment, the middleman may 
withhold at the time the reportable payment is made or credited to the 
payee.
    (2) Special rule for common trust funds. A common trust fund (as 
defined in section 584) must withhold either--
    (i) At the time the reportable payment is received by or credited to 
the common trust fund as provided in paragraph (c)(1) of this section;
    (ii) On the date on which the assets of the common trust fund are 
valued; or
    (iii) At the time the common trust fund pays or credits the 
reportable payment to a participant of the common trust fund.
    (3) Special rule for certain grantor trusts. For grantor trusts 
described in Sec. 31.3406(a)-2(b)(4), reportable payments made to the 
trust are treated as paid by the trust to each grantor, in an amount 
equal to the distribution made by the trust to each grantor, on the date 
that the reportable payment is paid to the trust (except for gross 
proceeds reportable under section 6045). Paragraph (b)(2) of this 
section applies to a grantor trust making a payment of gross proceeds 
under section 6045 subject to withholding under section 3406. For 
purposes of this paragraph (c)(3) a husband and wife filing a joint 
return are considered to be one grantor.
[T.D. 8637, 60 FR 66115, Dec. 21, 1995]



Sec. 31.3406(b)(2)-1  Reportable interest payment.

    (a) Interest subject to backup withholding--(1) In general. A 
payment of a kind, and to a payee, that is required to be reported under 
section 6049 (relating to returns regarding interest and original issue 
discount) is a reportable payment for purposes of section 3406, subject 
to the special rules of Sec. 31.3406(b)(2)-2 (relating to original issue 
discount) and Sec. 31.3406(b)(2)-3 (relating to window transactions). 
See Sec. 31.6051-4 for the requirement to furnish a statement to the 
payee if tax is withheld under section 3406.
    (2) Special rule for tax-exempt interest. When an issuer is required 
to make an information return under Sec. 1.6049-4(d)(8) of this chapter 
because a payee provided a signed written statement on the envelope or 
shell incorrectly claiming that the interest was exempt from taxation 
under section 103(a) (as described in Sec. 1.6049-5(b)(1)(ii) of this 
chapter), the issuer is not required to impose withholding under section 
3406.
    (b) Amount subject to backup withholding--(1) In general. The amount 
of interest subject to withholding under section 3406 is the amount 
subject to reporting under section 6049.
    (2) Special rule to adjust for premature withdrawal penalty. Solely 
for purposes of computing the amount subject to withholding under 
section 3406, the payor may elect not to withhold from the portion of 
any interest payment that is not received by the payee because a penalty 
is in fact imposed for premature withdrawal of funds deposited in a time 
savings account, certificate of deposit, or similar class of deposit.
[T.D. 8637, 60 FR 66115, Dec. 21, 1995]


[[Page 229]]





Sec. 31.3406(b)(2)-2  Original issue discount.

    (a) Original issue discount subject to backup withholding. The 
amount of original issue discount, treated as interest, subject to 
withholding under section 3406 is the amount subject to reporting under 
section 6049, but is limited to the amount of cash paid. In addition, if 
an original issue discount obligation, subject to reporting under 
section 6045, is sold prior to maturity and with respect to the seller a 
condition exists for imposing withholding under section 3406 on the 
gross proceeds, then withholding under Sec. 31.3406(b)(3)-2 applies to 
the gross proceeds of the sale reportable under section 6045, and not to 
the amount of any original issue discount includible in the gross income 
of the seller for the calendar year of the sale. See Sec. 31.6051-4 for 
the requirement to furnish a statement to the payee if tax is withheld 
under section 3406.
    (b) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to short-term obligations. In the 
case of an obligation with a fixed maturity date not exceeding one year 
from the date of issue (a short-term obligation), withholding under 
section 3406 applies to any payment of original issue discount on the 
obligation includible in the gross income of the holder to the extent of 
the cash amount of the payment. See Sec. 1.1273-1 of this chapter to 
determine the amount of original issue discount on a short-term 
obligation. See Sec. 1.446-2(e)(1) of this chapter to determine the 
amount of a payment treated as original issue discount.
    (c) Transferred short-term obligations--(1) Subsequent holder may 
establish purchase price--(i) In general. At maturity of a short-term 
obligation, a subsequent holder (i.e., any person who purchased or 
otherwise obtained the obligation after the obligation was issued to the 
original holder) may establish the price of the obligation. The price 
established by the subsequent holder must then be treated as the 
original issue price for purposes of computing the amount of the 
original issue discount subject to withholding under section 3406. The 
price of a short-term obligation may be established by confirmation 
receipt or other record of a similar type or, if the obligation is 
redeemed by or through the person from whom the obligation was purchased 
or otherwise obtained, by the records of the person from whom or through 
whom the obligation was purchased or otherwise obtained. The subsequent 
holder is not required to certify under penalties of perjury that the 
price determined under this paragraph (c)(1)(i) is correct.
    (ii) Exception. A payor may elect to disregard the price at which 
the subsequent holder purchased or otherwise obtained the obligation if 
the payor's computer or recordkeeping system on which the details of the 
obligation are stored is not able to accept that price without 
significant manual intervention.
    (2) Subsequent holder unable (or not permitted) to establish 
purchase price. If a subsequent holder fails (or is unable, pursuant to 
paragraph (c)(1)(ii) of this section) to establish the purchase price of 
the obligation, then the person redeeming the obligation must determine 
the amount subject to withholding under section 3406 as though the 
obligation had been purchased by the holder on the date of issue. If the 
person redeeming the obligation is the issuer of the obligation, then 
the issuer must determine the amount subject to withholding from its 
records. If a person other than the issuer of the obligation redeems the 
obligation and the obligation is listed in Internal Revenue Service 
Publication 1212, List of Original Issue Discount Obligations, that 
person must determine the amount subject to withholding by using the 
issue price indicated in Publication 1212.
    (3) Transferred obligation. If a short-term obligation is 
transferred, no part of the purchase price is considered a reportable 
interest payment under section 6049. Withholding under section 3406 
applies, however, to the gross proceeds of the sale of the obligation if 
the transfer is subject to reporting under section 6045 and a condition 
exists for imposing withholding. For the rules regarding withholding for 
amounts subject to reporting under section 6045, see Sec. 31.3406(b)(3)-
2.
    (d) Amount subject to backup withholding and time when backup 
withholding is

[[Page 230]]

imposed with respect to long-term obligations--(1) No cash payments 
prior to maturity. In the case of an obligation with a fixed maturity 
date that is more than one year from the date of issue (a long-term 
obligation) and with no cash payments prior to maturity, withholding 
under section 3406 applies at the maturity of the obligation to the 
amount of original issue discount includible in the gross income of the 
holder for the calendar year in which the obligation matures. The amount 
required to be withheld must not exceed the amount of the cash payment.
    (2) Registered long-term obligations with cash payments prior to 
maturity. In the case of a long-term obligation in registered form that 
provides for cash payments prior to maturity, withholding under section 
3406 applies at the time cash payments are made to the sum of the 
amounts of qualified stated interest and original issue discount 
includible in the gross income of the holder for the calendar year in 
which the cash payments are made. The amount required to be withheld at 
the time of any cash payment, however, must not exceed the amount of the 
cash payment. If more than one cash payment is made during a calendar 
year, the tax that is required to be withheld with respect to original 
issue discount must be allocated among all the expected cash payments in 
the ratio that each cash payment bears to the total of the expected cash 
payments.
    (3) Transferred registered long-term obligations with payments prior 
to maturity. In the case of a long-term obligation that is transferred 
after its issuance from the original holder, the amount subject to 
withholding under section 3406 with respect to a subsequent holder is 
the amount of original issue discount includible in the gross income of 
all holders during the calendar year (without regard to any amount paid 
by a subsequent holder at the time of transfer). If the person redeeming 
the obligation at maturity is the issuer of the obligation, the issuer 
must determine the amount subject to withholding through its records by 
treating the holder as if he were the original holder. If a person 
redeeming the obligation at maturity is a person other than the issuer 
of the obligation, and the obligation is listed in Internal Revenue 
Service Publication 1212, List of Original Issue Discount Obligations, 
the person must determine the amount subject to withholding by using the 
issue price indicated in Publication 1212.
    (e) Bearer long-term obligations. In the case of a bearer long-term 
obligation with cash payments prior to maturity--
    (1) Payments prior to maturity. Withholding under section 3406 
applies prior to maturity only to the payment of qualified stated 
interest (and not to any amount of original issue discount) includible 
in the gross income of the holder for the calendar year.
    (2) Payments at maturity. At maturity of the obligation, withholding 
applies to the sum of any qualified stated interest payment made at 
maturity and the total amount of original issue discount includible in 
the gross income of the holder during the calendar year of maturity. The 
amount required to be withheld at the time of the cash payment, however, 
must not exceed the amount of the cash payment.
[T.D. 8637, 60 FR 66115, Dec. 21, 1995; 61 FR 12135, Mar. 25, 1996]



Sec. 31.3406(b)(2)-3  Window transactions.

    (a) Requirement to backup withhold. Withholding under section 3406 
applies to a window transaction (as defined in paragraph (b) of this 
section) only if the payee does not furnish a taxpayer identification 
number to the payor in the manner required in paragraph (c) of this 
section or furnishes an obviously incorrect number as described in 
Sec. 31.3406(h)-1(b)(2). Withholding does not apply to a window 
transaction even though the Internal Revenue Service notifies the payor 
of the payee's incorrect taxpayer identification number under section 
3406(a)(1)(B) or of notified payee underreporting under section 
3406(a)(1)(C). The payee in a window transaction is not required to 
certify under penalties of perjury that the payee is not subject to 
withholding due to notified payee underreporting (as described in 
Sec. 31.3406(d)-2(b)(2)).
    (b) Window transaction defined. Window transaction means a payment 
of interest with respect to any of the following obligations:

[[Page 231]]

    (1) An interest coupon in bearer form that is subject to taxation 
(i.e., other than exempt interest described in Sec. 1.6049-5(b)(1)(ii) 
of this chapter);
    (2) A United States savings bond; or
    (3) A discount obligation having a maturity at issue of one year or 
less, including commercial paper and bankers' acceptances that are in 
definitive form (i.e., evidenced by a paper document other than a 
confirmation receipt) but not including short-term government 
obligations (as defined in section 1271(a)(3)(B)).
    (c) Manner of furnishing taxpayer identification number in the case 
of a window transaction. A payee must furnish the payee's taxpayer 
identification number to the payor with respect to a window transaction 
either orally or in writing at the time that the window transaction 
occurs. See Sec. 31.3406(g)-3(c)(1)(i), which provides that a payee may 
not claim the payee is awaiting receipt of a taxpayer identification 
number with respect to a window transaction. The payee is not required 
to certify, under penalties of perjury, that the taxpayer identification 
number provided is correct.
[T.D. 8637, 60 FR 66116, Dec. 21, 1995]



Sec. 31.3406(b)(2)-4  Reportable dividend payment.

    (a) Dividends subject to backup withholding. A payment of a kind, 
and to a payee, that is required to be reported under section 6042 
(relating to returns regarding payments of dividends and corporate 
earnings and profits) is a reportable payment for purposes of section 
3406. See paragraph (b) of this section for certain dividends not 
subject to withholding under section 3406. See Sec. 31.6051-4 for the 
requirement to furnish a statement to the payee if tax is withheld under 
section 3406.
    (b) Dividends not subject to backup withholding. Except as provided 
in Sec. 31.3406(b)(3)-2 (relating to transactions reportable under 
section 6045), withholding under section 3406 does not apply to--
    (1) Any amount treated as a taxable dividend by reason of section 
302 (relating to redemptions of stock), section 304 (relating to 
redemptions through the use of related corporations), section 306 
(relating to disposition of certain stock), section 356 (relating to 
receipt of additional consideration in connection with certain 
reorganizations), or section 1081(e)(2) (relating to certain 
distributions pursuant to an order of the Securities and Exchange 
Commission);
    (2) Any exempt-interest dividend, as defined in section 
852(b)(5)(A), paid by a regulated investment company; or
    (3) Any amount paid or treated as paid during a year by a regulated 
investment company, provided that the payor reasonably estimates, as 
provided in paragraph (c)(2) of this section, that 95 percent or more of 
all dividends paid or treated as paid during the year are exempt-
interest dividends.
    (c) Amount subject to backup withholding--(1) In general. The amount 
of a dividend subject to withholding under section 3406 is the amount 
subject to reporting under section 6042, including any dividend that is 
reinvested pursuant to a plan under which a shareholder may elect to 
receive stock as a dividend instead of property. Except as otherwise 
provided in this paragraph (c), withholding applies to the entire amount 
of the distribution.
    (2) Reasonable estimate of amount of dividend subject to backup 
withholding. Pursuant to section 6042(b)(3) and Sec. 1.6042-3(c) of this 
chapter, if the payor is unable to determine the portion of a 
distribution that is a dividend, the entire amount of the distribution 
must be treated as a dividend for information reporting under section 
6042. Hence, withholding applies to the entire amount of the 
distribution. If a payor is able reasonably to estimate under section 
6042 and Sec. 1.6042-3(c) of this chapter the portion of a distribution 
that is not a dividend, however, the payor must not withhold on that 
portion (which is not considered a dividend). A payor making a payment, 
all or a portion of which may not be a dividend, may use previous 
experience to estimate the portion of a distribution that is not a 
dividend. The payor's estimate is considered reasonable if--
    (i) The estimate does not exceed the proportion of the distributions 
made by the payor during the most recent calendar year for which a Form 
1099 was required to be filed that was not reported by the payor as a 
dividend; and

[[Page 232]]

    (ii) The payor has no reasonable basis to expect that the proportion 
of the distribution that is not a dividend will be substantially 
different for the current year.
    (3) Reinvested dividends. In the case of a dividend paid pursuant to 
a dividend reinvestment plan, withholding under section 3406 applies, 
pursuant to Sec. 31.3406(a)-4(a), at the time and to the amount made 
available to the shareholder or credited to the shareholder's account. 
At the discretion of the payor, withholding under section 3406 need not 
be applied to any excess of the fair market value of the shares of stock 
received by the shareholder or credited to the shareholder's account 
over the purchase price of the shares (including shares acquired by the 
shareholder at a discount in connection with the dividend distribution) 
or to any fee that is paid by the payor in the nature of a broker's fee 
for purchase of the stock or service charge for maintenance of the 
shareholder's account. The payor must, however, treat any excess amounts 
and fees on a consistent basis for each calendar year.
[T.D. 8637, 60 FR 66117, Dec. 21, 1995]



Sec. 31.3406(b)(2)-5  Reportable patronage dividend payment.

    (a) Patronage dividends subject to backup withholding. A payment of 
a kind, and to a payee, that is required to be reported under section 
6044 (relating to returns regarding patronage dividends) is a reportable 
payment for purposes of section 3406. See Sec. 31.6051-4 for the 
requirement to furnish a statement to the payee if tax is withheld under 
section 3406.
    (b) Amount subject to backup withholding--(1) Failure to provide 
taxpayer identification number or notification of incorrect taxpayer 
identification number. For purposes of sections 3406(a)(1) (A) and (B), 
the amount of a payment described in paragraph (a) of this section that 
is subject to withholding under section 3406 is the amount subject to 
reporting under section 6044, but only to the extent the payment is made 
in money. For purposes of this paragraph (b), money includes cash or a 
qualified check (as defined in section 1388(c)(4)).
    (2) Notified payee underreporting or payee certification failure. 
For purposes of sections 3406(a)(1) (C) and (D), the amount of a payment 
described in paragraph (a) of this section that is subject to 
withholding under section 3406 is the amount subject to withholding 
under paragraph (b)(1) of this section, but only if 50 percent or more 
of that reportable amount is paid in money. Thus, a payor is required to 
withhold according to this paragraph (b)(2) on a payment if--
    (i) There has been a notified payee underreporting described in 
section 3406(a)(1)(C) and Sec. 31.3406(c)-1 or there has been a payee 
certification failure described in section 3406(a)(1)(D) and 
Sec. 31.3406(d)-2;
    (ii) The payor makes a reportable payment subject to reporting under 
section 6044 to the payee; and
    (iii) Fifty percent or more of the payment is in cash or by 
qualified check.
[T.D.8637, 60 FR 66117, Dec. 21, 1995]



Sec. 31.3406(b)(3)-1  Reportable payments of rents, commissions, nonemployee compensation, etc.

    (a) Section 6041 and 6041A(a) payments subject to backup 
withholding. A payment of a kind, and to a payee, that is required to be 
reported under section 6041 (relating to information reporting of rents, 
commissions, nonemployee compensation, etc.) or a payment that is 
required to be reported under section 6041A(a) (relating to information 
reporting of payments to nonemployees for services) is a reportable 
payment for purposes of section 3406. See paragraph (b) of this section 
for an exception concerning payments aggregating less than $600. See 
Sec. 31.6051-4 for the requirement to furnish a statement to the payee 
if tax is withheld under section 3406.
    (b) Amount subject to backup withholding--(1) In general. The amount 
of a payment described in paragraph (a) of this section subject to 
withholding under section 3406 is the amount subject to reporting under 
section 6041 or section 6041A(a).
    (2) Net commissions. Withholding under section 3406 does not apply 
to net commissions paid to unincorporated special agents with respect to 
insurance policies that are subject to reporting under section 6041, 
provided that no

[[Page 233]]

cash is actually paid by the payor to the special agent.
    (3) Payments aggregating $600 or more for the calendar year--(i) In 
general. A payment is a reportable payment under paragraph (a) of this 
section only if the aggregate amount of the current payment and all 
previous payments to the payee during the calendar year aggregate $600 
or more. The amount subject to withholding is the entire amount of the 
payment that causes the total amount paid to the payee to equal $600 or 
more and the amount of any subsequent payments made to the payee during 
the calendar year. This paragraph (b)(3)(i) does not apply to gambling 
winnings (as provided in Sec. 31.3406(g)-2(e)(1)).
    (ii) Exceptions--(A) The $600 aggregation rule. The $600 aggregation 
rule of paragraph (b)(3)(i) of this section does not apply if the payor 
was required to make an information return under section 6041 or 
6041A(a) for the preceding calendar year with respect to payments to the 
payee, or the payor was required to withhold under section 3406 during 
the preceding calendar year with respect to payments to the payee that 
were reportable under section 6041 or 6041A(a).
    (B) Determination of whether payments aggregate $600 or more. In 
determining whether payments to a payee aggregate $600 or more during a 
calendar year for purposes of withholding under section 3406, the payor 
must aggregate only payments of the same kind made to the same payee. 
For this purpose, payments are of the same kind if they are of the same 
type, regardless of whether they are reportable under the same section. 
However, a payor with different paying departments making reportable 
payments of the same kind is not required to aggregate payments made by 
all those departments unless it is the payor's customary method to 
aggregate those payments. A payor may, in its discretion, aggregate--
    (1) Payments not of the same kind to the same payee, reportable 
under either section 6041 or 6041A(a); and
    (2) Payments reportable under section 6041 with payments reportable 
under section 6041A(a).
[T.D. 8637, 60 FR 66117, Dec. 21, 1995]



Sec. 31.3406(b)(3)-2  Reportable barter exchanges and gross proceeds of sales of securities or commodities by brokers.

    (a) Transactions subject to backup withholding. A payment of a kind, 
and to a payee, that any broker (as defined in section 6045(c) and 
Sec. 1.6045-1(a)(1) of this chapter) or any barter exchange (as defined 
in section 6045(c) and Sec. 1.6045-1(a)(4) of this chapter) is required 
to report under section 6045 is a reportable payment for purposes of 
section 3406. See Sec. 31.6051-4 for the requirement to furnish a 
statement to the payee if tax is withheld under section 3406.
    (b) Amount subject to backup withholding--(1) In general. The amount 
subject to withholding under section 3406 is the amount subject to 
reporting under section 6045. The amount subject to withholding with 
respect to broker reporting is the amount of gross proceeds (as 
determined under Sec. 1.6045-1(d)(5) of this chapter). The amount 
subject to withholding with respect to barter exchanges is the amount 
received by any member or client (as determined under Sec. 1.6045-
1(f)(4) of this chapter).
    (2) Forward contracts, including foreign currency contracts, and 
regulated futures contracts--(i) In general. If a customer is subject to 
withholding under section 3406 with respect to a forward contract 
(subject to information reporting under Sec. 1.6045-1(c)(5) of this 
chapter), including a foreign currency contract (as defined in section 
1256(g)(2)), or a regulated futures contract (as defined in section 
1256(g)(1)), or with respect to an account through which those contracts 
are disposed of or acquired, the broker must withhold on both of the 
following amounts:
    (A) All cash or property withdrawn from the account by the customer 
during the relevant year; and
    (B) The amount of cash in the account available for withdrawal by 
the customer at the relevant year-end (including both gross proceeds and 
variation margin).
    (ii) Rules concerning withdrawals. A withdrawal includes the use of 
money (including both gross proceeds and variation margin) or property 
in the account to purchase any property other than property acquired in 
connection

[[Page 234]]

with the closing of a contract. For this purpose, the acceptance of a 
warehouse receipt or other taking of delivery to close a contract is in 
connection with the closing of a contract only if the property acquired 
is disposed of by the close of the seventh trading day following the 
trading day that the customer takes delivery under the contract. In 
addition, making delivery to close a contract is in connection with the 
closing of a contract only if the broker is able to determine that the 
property used to close the contract was acquired no earlier than the 
seventh trading day prior to the trading day on which delivery is made. 
Withdrawals do not include repayments of debt incurred in connection 
with making or taking delivery that meets the requirements of this 
paragraph (b)(2). Withdrawals also do not include payments of 
commissions, fees, transfers of cash from the account to another futures 
account that is subject to this paragraph (b)(2) or cash withdrawals 
traceable to dispositions of property other than futures (not including 
profit on the contract separately r