Sec.

405.104 Employee.

405.105 Employer.

405.106 Number of withholding exemptions claimed.

405.107 General definitions and use of terms.

Subpart C-Determination of Tax

405.201 405.202 Application of withholding exemptions.

Requirement of withholding.

405.203 Wage bracket withholding. 405.204 Included and excluded wages. 405.205 Rights to claim withholding exemptions.

405.206 Withholding exemption certificates. 405.207 When withholding exemption certificates effective.

405.208 New certificates to be furnished on or before December 1, 1944.

405.209 Supplemental wage payments. 405.210 Wages paid for payroll period of more than one year.

405.211 Wages paid on behalf of two or more employers.

405.212 Withholding on basis of average wages.

Subpart D-Liability for Tax

405.301 Liability for tax.

Subpart E-Credit for Tax Withheld 405.401 Nondeductibility of tax and credit for tax withheld.

Internal Revenue, Dec. 9, 1944, 9 F.R. 14573, 14669, 15039.

PERTINENT ENACTING PROVISIONS OF THE INTERNAL REVENUE CODE

[Act February 10, 1939, 53 Stat., Part 1]

AN ACT

To consolidate and codify the internal revenue laws of the United States

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the laws of the United States hereinafter codified and set forth as a part of this act under the heading "Internal Revenue Title" are hereby enacted into law.

SEC. 2. CITATION. This act and the internal revenue title incorporated herein shall be known as the Internal Revenue Code and may be cited as "I. R. C.".

SEC. 6. ARRANGEMENT, CLASSIFICATION, AND CROSS REFERENCES. The arrangement and classification of the several provisions of the Internal Revenue Title have been made for the purpose of a more convenient and orderly arrangement of the same, and, therefore, no inference, implication or presumption of legislative construction shall be drawn or made by reason of the location or grouping of any particular section or provision or portion thereof, nor shall any outline, analysis, cross reference, or descriptive matter relating to the contents of said Title be given any legal effect.

Subpart A-Introductory Provisions

§ 405.0 Scope of part. The regulations in this part deal with the system of collection of income tax at source on wages paid on or after January 1, 1945, under Subchapter D, relating to collection of income tax at source on wages, and Subchapter E, general provisions, of Chapter 9 of the Internal Revenue Code.

Inasmuch as the regulations in this part constitute Part 405 of Title 26 of the Code of Federal Regulations, each section of the regulations bears a number commencing with 405 and a decimal point. References to sections not preceded by "405." are references to sections of law. References to sections of law are references to the Internal Revenue Code unless otherwise expressly indicated. Each section, subsection, or paragraph of the Internal Revenue Code set forth in the regulations in this part shall be con

sidered as a part of the respective regulations section to which it corresponds.

SEC. 21. EFFECTIVE DATE. (INDIVIDUAL INCOME TAX ACT OF 1944, PART II.)

The amendments made by this Part shall apply only with respect to wages paid on or after January 1, 1945.

§ 405.1 Wages paid on or after January 1, 1945. The regulations in this part apply to all wages (as defined in section 1621) paid on or after January 1, 1945, regardless of when such wages were earned. Thus, if an employee is paid wages on January 1, 1945, for services performed during 1944 or any preceding year, withholding of the tax at source on such wages shall be subject to the regulations in this part.

Wages are constructively paid within the meaning of the regulations in this part 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 or set apart to 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 control and disposition.

Subpart B-Definitions

SUBCHAPTER D-COLLECTION OF INCOME TAX AT SOURCE ON WAGES

SEC. 1621. DEFINITIONS [AS ADDED BY SEC. 2 (a), CURRENT TAX PAYMENT ACT OF 1943]. As used in this subchapter [Subchapter D of Chapter 9]

(a) Wages. The term "wages" means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash; except that such term shall not include remuneration paid

(1) for services performed as a member of the military or naval forces of the United States, other than pensions and retired pay includible in gross income under Chapter 1, or

(2) for agricultural labor (as defined in section 1426 (h)), or

(3) for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority, or

(4) for casual labor not in the course of the employer's trade or business, or

(5) for services by a citizen or resident of the United States for a foreign government

or for the government of the Commonwealth of the Philippines, or

(6) for services performed by a nonresident alien individual, other than a resident of a contiguous country who enters and leaves the United States at frequent intervals, or

(7) for such services, performed by a nonresident alien individual who is a resident of a contiguous country and who enters and leaves the United States at frequent intervals, as may be designated by regulations prescribed by the Commissioner with the approval of the Secretary, or

(8) for services for an employer performed by a citizen or resident of the United States while outside the United States (as defined in section 3797 (a) (9) if the major part of the services for such employer during the calendar year is to be performed outside the United States, or

(9) for services performed as a minister of the gospel.

For the purpose of paragraph (8) services performed on or in connection with an American vessel (as defined in section 1426 (g)) under a contract of service which is entered into within the United States or during the performance of which the vessel touches at a port in the United States, or on or in connection with any vessel as an employee of the United States employed through the War Shipping Administration, shall not constitute services performed outside the United States.

Section 1426 (g) and (h) of the Internal
Revenue Code

(g) American vessel. The term "American vessel" means any vessel documented or numbered under the laws of the United States; and includes any vessel which is neither documented or numbered under the laws of the United States nor documented under the laws of any foreign country, if its crew 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.

(h) Agricultural labor. The term "agricultural labor" includes all services performed

(1) On a farm, in the employ of any person, in connection with cultivating the soil, or in connection with raising or harvesting any agricultural or horticultural commodity, including the raising, shearing, feeding, caring for, training, and management of livestock, bees, poultry, and fur-bearing animals and wildlife.

(2) In the employ of the owner or tenant or other operator of a farm, in connection with the operation, management, conservation, improvement, or maintenance of such farm and its tools and equipment, or in salvaging timber or clearing land of brush and other debris left by a hurricane, if the major part of such service is performed on a farm.

(3) In connection with the production or harvesting of maple sirup or maple sugar or any commodity defined as an agricultural commodity in section 15 (g) of the Agricultural Marketing Act, as amended, or in connection with the raising or harvesting of mushrooms, or in connection with the hatching of poultry, or in connection with the ginning of cotton, or in connection with the operation or maintenance of ditches, canals, reservoirs, or waterways used exclusively for supplying and storing water for farming purposes.

(4) In handling, planting, drying, packing, packaging, processing, freezing, grading, storing, or delivering to storage or to market or to a carrier for transportation to market, any agricultural or horticultural commodity; but only if such service is performed as an incident to ordinary farming operations or, in the case of fruits and vegetables, as an incident to the preparation of such fruits or vegetables for market. The provisions of this paragraph shall not be deemed to be applicable with respect to service performed in connection with commercial canning or commercial freezing or in connection with any agricultural or horticultural commodity after its delivery to a terminal market for distribution for consumption.

As used in this subsection, the term “farm” includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards.

Section 15 (g) of the Agricultural Marketing Act, as Amended

As used in this Act, the term "agricultural commodity" includes * * crude gum (oleoresin) from a living tree, and the following products as processed by the original producer of the crude gum (oleoresin) from which derived: Gum spirits of turpentine and gum rosin, as defined in the Naval Stores Act, approved March 3, 1923.

Section 2 (c) and (h) of the Naval Stores Act

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.

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.

Wages may be paid in money or in some medium other than money. as, for example, stocks, bonds, or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken in payment is the amount to be included as wages subject to withholding. 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. If a person receives as remuneration for services rendered a salary and in addition thereto living quarters or meals, the value to such person of the quarters and meals so furnished shall be added to the remuneration otherwise paid for the purpose

of determining the amount of wages subject to withholding. If, however, living quarters or meals are furnished to an employee for the convenience of the employer, the value thereof need not be included as wages subject to withholding.

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.

Where 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 to the collector.

Tips or gratuities paid 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.

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 B during the month of January 1945 and is entitled to receive remuneration of $100 for the services performed for B, the employer, during the month. A leaves the employ of Bat the close of business on January 31, 1945. On February 15, 1945 (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 within the meaning of the statute.

(b) Pensions, retired pay, and employees' trusts. 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 22 (b) (2). So-called pensions awarded by one to whom no services have been rendered are mere gifts or gratuities and do not constitute wages.

No withholding is required with respect to an employer's contributions to. or with respect to distributions under, a pension, stock bonus, profit-sharing, annuity plan, or other plan deferring the receipt of compensation by the employee, including amounts paid or contributed by an employer in conjunction with such a plan in respect of life insurance or death benefits, if the contributions of the employer to such plan are of the character for which a deduction is allowable under section 23 (p). As to information at the source with respect to payments referred to in this paragraph, see section 147 and the regulations thereunder.

Wages representing retired pay for service in the military or naval forces of the United States are subject to withholding unless the individual receiving such pay has been retired because of personal injuries or sickness resulting from active service with such forces. Where such retired pay is paid to a nonresident alien individual no withholding is required. See section 1621 (a) (6). Payments of pensions or other benefits under the War Risk Insurance Act, as amended, the World War Veterans' Act, 1924, as amended, the Emergency Officers' Retirement Act, as amended, the World War Adjusted Compensation Act, as amended, the pension laws in effect prior to March 20, 1933, Public Law Numbered 2, Seventy-third Congress, as amended, Public Law Numbered 484, Seventy-third Congress, and any act or acts amendatory of such acts, are not includible in gross income under Chapter 1 of the Internal Revenue Code and hence are not subject to withholding.

(c) 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.

(d) 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.

(e) Dismissal payments. Any payments made by an employer to any 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.

(f) Deductions by employer from wages of employee. The amount of any tax which is required by law to be deducted by the employer from the wages of an employee is considered to be a part of the employee's wages and is deemed to be paid to the employee as wages at the time the deduction is made. Other amounts deducted from the wages of an employee by an employer also constitute wages paid to the employee at the time of the deduction. It is immaterial that the Internal Revenue Code, or any act of Congress, or the law of any State, requires or permits such deductions and the payment of the amounts thereof to the United States, a State, a Territory, or the District of Columbia, or any political subdivision of any one or more of the foregoing.

(g) 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 reimbursements 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 1400 and 1500.

(h) 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 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, is

subject to all the provisions of law and regulations applicable with respect to an employer. See § 405.105.

§ 405.102 Exclusions from wages(a) Fees paid to a public official. 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 the definition of the term "wages" and hence are not subject to withholding. However, salaries paid such officials by the Government, or Government agency or instrumentality, are subject to withholding.

(b) Compensation of military and naval forces. Remuneration paid for services performed as a member of the military or naval forces of the United States is excepted from the definition of the term "wages." Pensions and retired pay, if includible in gross income under Chapter 1 of the Internal Revenue Code, are not within the exception and hence constitute wages subject to withholding. For the purpose of the exception, the military and naval forces of the United States include (but are not necessarily limited to) the Army, the Navy, the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, the Navy Nurse Corps, Female, the Women's Army Corps (the "WACS"), the Women's Reserve Branch of the Naval Reserve (the "WAVES"), the Women's Reserve Branch of the Coast Guard Reserve (the "SPARS"), and the Marine Corps Women's Reserve.

(c) Remuneration paid for agricultural labor-(1) In general. The term "wages" does not include remuneration for services which constitute agricultural labor as defined in section 1426 (h). The term "agricultural labor" as so defined includes services of a character described in subparagraphs (2), (3), (4), and (5) of this paragraph. In general, however, the term "agricultural labor" does not include services performed in connection with forestry, lumbering, or landscaping.

(2) Services described in section 1426 (h) (1). Remuneration paid for services performed on a farm by an employee of any person in connection with any of the following activities is excepted as remuneration for agricultural labor: (i) The cultivation of the soil;