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Rev. Rul. 67-131


Rev. Rul. 67-131; 1967-1 C.B. 291

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Citations: Rev. Rul. 67-131; 1967-1 C.B. 291

Obsoleted by Rev. Rul. 2008-29

Rev. Rul. 67-131

Advice has been requested by an agency of the Federal Government concerning the computation of tax for purposes of the Collection of Income Tax at Source on Wages (chapter 24, subtitle C, Internal Revenue Code of 1954) on lump-sum payments which the agency makes to employees who retire or who are otherwise separated from the Federal service.

In general, Civil Service employees of the Federal Government earn specified hours of annual leave each 80-hour biweekly pay period, dependent on the length of the employee's service. Employees, under usual circumstances, are permitted to accumulate earned but unused annual leave from year to year, up to a specified maximum number of hours. When an employee leaves the service of the Federal Government, he receives him final payment of regular wages and, either in the same check or in a separate check, receives payment for his unused accumulated annual leave, computed at his former regular pay rate. The procedure for payment is determined by the employing agency.

The individual in the instant case retired from the service of his agency and received a check for wages due him for his final payroll period. Shortly thereafter, he received a separate check of 100 x dollars as a lump-sum payment for 160 hours of unused accumulated annual leave.

Section 31.3402(g)-1 of the Employment Tax Regulations relating to the collection of income tax at source on wages 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. The treatment of the supplemental wages for income tax withholding purposes depends, in part, on whether income tax has been withheld from the regular wages paid to the employee. Revenue Ruling 66-190, C.B. 1966-2, 457, sets forth guidelines which an employer should follow in determining the amount of income tax to be withheld where an employee receives both regular wages and supplemental wages. See also Rev. Rul. 66-294, C.B. 1966-2, 459.

In the instant case, the Federal agency should treat the lump-sum payment for unused accumulated annual leave as a supplemental wage payment within the meaning of section 31.3402(g)-1 of the regulations and should withhold income tax thereon pursuant to the guidelines in Revenue Ruling 66-190.

In accordance with these guidelines, if the Federal agency has withheld income tax from the regular wages paid the employee for his last preceding payroll period (in this instance, his final payroll period), it may choose to withhold income tax on the lump-sum payment by either of two methods, method a or method b described in Revenue Ruling 66-190.

Under method a , the agency may withhold on the lump-sum payment at a flat percentage rate of 20 percent, without allowance for any withholding exemptions the individual had claimed on his Form W-4, Employee's Withholding Exemption Certificate. See Treasury Decision 6882, C.B. 1966-1, 244.

Under method b , the agency may aggregate the lump-sum payment with the regular wages paid to the employee in the same calendar year for the last preceding payroll period, determine the income tax to be withheld as if the aggregate amount were a single payment, subtract the tax already withheld from the regular wages, and withhold the remaining tax from the lump-sum payment.

If the agency has not withheld income tax on the employee's regular wages (as, for exemple, where the employee's withholding exemptions exceeded his wages), then the agency, in withholding income tax on the lump-sum payment, must use method b , described above. In such case, the agency must aggregate the lump-sum payment with the regular wages paid the employee during the same calendar year for the last preceding payroll period and withhold income tax thereon at the regular graduated rates as if the aggregate of the lump-sum payment and the regular wages were a single payment for the regular payroll period.

If, instead of giving a separate check in payment for the accumulated annual leave, the employing agency gives one check for a single payment combining both regular wages and the amount due for accumulated annual leave, the income tax to be withheld is determined under the standard wage bracket or percentage method, using the aggregate amount and the biweekly pay period as the basis for the determination. See Rev. Rul. 67-88, page 289, this Bulletin.

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