Withholding from certain types of employees and incomes

Authority: IC 6-8.1-3-3

Affected: IC 6-3-4-8 ; IC 6-3-4-8.1 ; IC 6-3-4-9 ; IC 6-8-8-1

Sec. 100. Withholding Information For Part-Time Employees and Other Miscellaneous Withholding Requirements. WITHHOLDING FROM INCOME OF PART-TIME OR "SUMMER" EMPLOYEES

Withholding agents are required to withhold tax, at the applicable rate stated on the rate schedules, from the income of part-time or "summer" employees just as though they were full-time or permanent employees. The fact that the employer or the employee are reasonably, or even absolutely, certain that the employee will not earn income in excess of his or her $1,000.00 exemption has no bearing on withholding the tax by the withholding agent. Similarly, the Internal Revenue Service rules which allow the employee to waive withholding, for federal tax purposes, when the income is not expected to be in excess of the Federal filing requirements and income allowances, have no bearing on withholding taxes from the income of part-time employees for Indiana tax purposes. WITHHOLDING FROM SUPPLEMENTAL UNEMPLOYMENT COMPENSATION BENEFIT INCOME

Supplemental Unemployment Compensation Benefits paid to an individual are treated as if they were income, to the extent such benefits are includable in the gross income of such individuals, and therefore are subject to withholding by the withholding agent for Indiana tax purposes. WITHHOLDING FROM PENSION INCOME AND ANNUITY PAYMENTS

Withholding is not required on pension and annuity payments that meet certain qualifications of the Internal Revenue Service, unless the recipient requests that federal income tax be withheld. If such a request is made, the payor must also withhold and remit Indiana adjusted gross income tax.

Pensions and annuities that do not meet the Internal Revenue Service qualifications are considered to be deferred compensation and, therefore, require withholding in the same manner as for wages and salaries. WITHHOLDING FROM AGRICULTURAL OR CASUAL EMPLOYEES

Withholding agents are not required to withhold Indiana state income tax from payments made to agricultural laborers or casual laborers, such as yardworkers, or domestic employees. Withholding of taxes in such cases must be agreed to by both employer and employee. If the employer does not withhold taxes he should report total annual payments made to each such employee on the Federal Form 1099, or the Indiana Form IT-12A. WITHHOLDING FROM ATHLETES AND ENTERTAINERS

Athletes and entertainers generally perform under one of the three following types of contracts: (1) Employees of the promoter or organizer (2) "Independent contractors" (3) Employees of a "production company"

The different types of contracts have different withholding requirements and thus, must be treated separately.

(1) The first situation involves athletes and entertainers performing on a salaried basis for example, basketball, hockey, and baseball players. These performers are under contract for a specific time period and they receive a predetermined salary regardless of the number or the location of performances.

Based on these facts, athletes employed by an Indiana professional sports team or an Indiana promoter incur a tax liability on their entire salary. No apportionment will be permitted for out-of-state appearances because the athlete's compensation is unaffected by such appearances.

Because these performers are considered to be employees, withholding is required on their salaries in accordance with the provisions of Regulation 6-3-4-8(010) [ 45 IAC 3.1-1-97 ] . Because this compensation is considered to be salary, the reciprocal agreements defined in Regulation 6-3-5-1 (010) [ 45 IAC 3.1-1-115 ] are applicable.

(2) The second situation involves performers who directly receive payment for Indiana performances. This situation might include performers in tennis and golf tournaments, nightclubs, and concerts. These performers are not engaged in an employer-employee relationship.

Based on these facts, "independent contractors" incur a tax liability by performing within Indiana. Independent contractors who are Indiana residents are taxable on their entire income, but may receive a credit for taxes paid to other states in accordance with Regulation 6-3-3-3(a)(010) [ 45 IAC 3.1-1-74 ] . Because this income is not wages or salary, reciprocity will not apply.

Withholding is not required on this income since it is not wages or salary. These individuals are, however, required to make estimated tax payments if they expect to have an Indiana income tax liability of $100 or more. (See Regulation 6-3-4-4(010) [ 45 IAC 3.1-1-92 ] .

There are several means of enforcing the income tax liability of an independent contractor. The Department may issue a jeopardy assessment against a taxpayer in accordance with the provisions of Regulation 6-3-6-1(g)(010). This same regulation allows the Department to accept a surety bond from the taxpayer. In addition, the Reciprocal Full Faith and Credit Act ( IC 6-8-8-1 et seq.) authorizes the Department to bring suit against a taxpayer in his or her state of residence.

(3) The third situation arises when a performer organizes a "production company" to receive payment for his performances rather than receiving payment directly. The production company then pays the performer a salary.

The withholding requirements for payments made to a production company vary. If the company is incorporated, gross income tax must be withheld from any payments, as provided in IC 6-2-1-22 (f) [Repealed by P.L.77-1981, SECTION 22. Recodified as IC 6-2.1-6-1 .] If the company is a partnership or a sole proprietorship, withholding is not required; however, the partners or proprietor are required to make estimated tax payments as provided in Regulation 6-3-4-4(010) [ 45 IAC 3.1-1-91 ] . Enforcement of the tax liability in case of a failure to make estimated tax payments is accomplished through the means outlined above for enforcing the liability of an independent contractor.

The withholding requirements for payments made by a production company to its employees vary. If the employees are paid on a salaried basis, their situation is analogous to that of professional team athletes explained above, and withholding is required if the production company has an Indiana business situs, or if the employee is an Indiana resident. Payments made to those who are not employees i.e., payments made on a per-performance basis, do not require withholding because this income is not wages. The recipient must make estimated tax payments, and enforcement is identical to the enforcement of the liability of independent contractors.