Rev. Proc. 78-8

Section 1. Purpose.

The purpose of this Revenue Procedure is to illustrate procedures relating to the computation of withholding of federal income tax on the basis of cumulative wages.

Section 2. Background.

.01 Because of the highly seasonal nature of many commission salespeople, either the percentage method or the wage bracket method of withholding can cause overwithholding in many instances.

.02 Section 3402(h)(3) of the Internal Revenue Code of 1954 permits the Secretary to authorize an employer, if an employee so requests, to withhold federal income tax on the basis of cumulative wages. Under section 31.3402(h)(3)-1(a) of the Employment Tax Regulations, this method of withholding is voluntary on the part of the employee and may be used only for employees who have a regular payroll period.

Section 3. Procedures.

.01 Employers may adopt this method of withholding for any employee having a regular payroll period who submits a written request to the employer. The request shall be in such form as the employer may prescribe, and is effective until an employee's written notice of revocation is effective.

.02 The steps to be followed in making the computation are as follows:

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. Using the percentage method of withholding under section 3402(a) of the Code, compute the total amount of tax that would have been required to be deducted and withheld if the average amount of wages (Step 2) had been paid to the employee for the number of payroll periods to which the aggregate amount of wages (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.

Section 4. Example of Computation.

The example shown below is provided as a guide in following the steps in section 3.

Payroll period: Monthly

Marital status: Married

Exemptions: Four Withholding Allowances.

          (a)     (b)    (c)   (d)    (e)/*/   (f)     (g)     (h)