The IRS has issued final regulations guiding for the 2021 calendar year on income tax withholding from periodic payments for pensions, annuities, and certain other deferred income, including the rules for withholding from periodic payments when no withholding certificate has been furnished (default withholding rates). The guidance implements changes made by the Tax Cuts and Jobs Act and apply to periodic payments made after December 31, 2020.

Background. The payor of certain payments for pensions, annuities, and certain other deferred income are required to withhold amounts from the payments as if the payments were wages paid by an employer to an employee unless an individual has elected not to have withholding apply.

Form W-4 and publications. An individual’s withholding election (or election not to have withholding apply, if available) is generally is made using Form W-4P, Withholding Certificate for Pension, or Annuity Payments. Information requests on the 2021 Form W-4P will continue to be in line with the 2020 Form W-4P. Payees of periodic payments can use either the Form W-4P worksheets or the IRS Tax Withholding Estimate to determine their withholding entries on the 2021 Form W-4P.

Default withholding rule. For 2021, the default withholding rate on periodic payments made after December 31, 2020, is based on the IRS’s guidance in the applicable forms, instructions, publications, and other guidance. Under the current default rule, the payor will treat the payee as a married individual claiming three withholding allowances. It will apply that status to the applicable withholding tables and related computational procedures in the 2021 Publication 15-T. There is flexibility for the IRS to change the default rate in the future and provide time for plan administrators to implement changes to their systems.

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Please call our office to discuss the impact of this guidance on your annual reporting and withholding for pension, annuity, or other deferred income payments in your employee benefit plan.