Rev. Rul. 67-88

Advice has been requested whether an employer whose payment of wages to an employee includes both the regular amount of wages and an additional amount may (a) treat the additional amount as a supplemental wage payment within the meaning of section 31.3402(g)-1 of the Employment Tax Regulations relating to the Collection of Income Tax at Source on Wages (chapter 24, subtitle C, Internal Revenue Code of 1954), and (b) apply to the additional amount a flat withholding rate of 20 percent (without allowance for exemptions and without reference to any regular payment of wages) for the purpose of determining the amount of income tax to be withheld.

The employer in the instant case pays any employee who leaves his service in full as of his final day of actual employment. Certain employees, in addition to regular wages, may at that time be entitled to overtime pay and accumulated or bonus vacation pay. In these instances the employer does not make separate payments to the employee for regular wages and for additional amounts due him but instead includes all amounts due the employee in a single final payment.

The issue here is whether, under the circumstances stated, the employer may treat that part of the final payment which represents amounts other than regular wages as a supplemental wage payment within the meaning of section 31.3402(g)-1 of the regulations and whether, accordingly, the flat percentage rate of 20 percent can be used to determine the amount to be withheld with respect to that part of the final payment.

Section 31.3402(g)-1 of the regulations provides that 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. It is provided in section 31.3402(g)-1(a)(2) of the regulations that, under certain circumstances, the employer may determine the tax to be withheld from supplemental wages by using a flat percentage rate of 20 percent if supplemental wages are paid and tax has been withheld from the employee's regular wages. Where this provision is appropriate, the withholding exemptions which an employee has claimed on his Form W-4, Employee's Withholding Exemption Certificate, are not taken into consideration.

In the instant case, since the regular amount of wages of the employee has not actually been paid and tax withheld thereon (because both the regular amount of wages and the additional amount are included in the payment of a single amount), the employer is not entitled to use the alternative method of computation applying a flat percentage rate of 20 percent.

Accordingly, pursuant to section 31.3402(g)-1(a)(2) of the regulations, the additional amount of wages paid concurrently in a single amount with the regular wages for a payroll period will be aggregated with the regular wages, and the amount of tax to be withheld will be determined under the standard wage bracket or percentage method using the aggregate amount as the basis for the determination.