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Notice 2020-3: Default rate of withholding, periodic payments

Default rate of withholding, periodic payments

The IRS today released an advance version of Notice 2020-3 as interim guidance for the 2020 calendar year on tax withholding from periodic payments for pensions, annuities, and certain other deferred income.

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Notice 2020-3 [PDF 52 KB] also includes rules for withholding from periodic payments when no withholding certificate has been furnished (the “default rate of withholding”). According to the notice, the IRS and Treasury Department are considering whether the 2020 default rate of withholding will continue to be appropriate for calendar years after 2020, and comments are requested relating to the potential adoption of a new default rate of withholding.

Notice 2020-3

The U.S. tax law enacted in December 2017 (Pub. L. No. 115-97)—the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA)—amended section 3405(a)(4) to provide that the withholding rate for periodic payments when no withholding certificate has been furnished will be determined “under rules prescribed by the Secretary.” Temporary regulations that were issued before the 2017 tax law provide (and continue to provide) that if no withholding certificate has been furnished with respect to periodic payments, then the payor must base the withholding on the rates for a married person claiming three withholding allowances. 

With the TCJA, the IRS issued notices that generally continued the default rate of withholding for 2018 and 2019. Read TaxNewsFlash

Notice 2020-3 states that when no withholding certificate has been furnished with respect to periodic payments, the rules will “continue to parallel the rules for prior years.” Again, the IRS and Treasury intend to consider whether the default rate of withholding from periodic payments will continue to be appropriate for calendar years after 2020. Comments are requested concerning whether a new default rate of withholding from period payments would “present any administrative challenges.” Comments are due by February 17, 2020.

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