Employees incurring no income tax liability

(a) In general. Notwithstanding any other provision of this subpart (except to the extent a payment of wages is subject to withholding under § 31.3402(g)-1(a)(2)), an employer shall not deduct and withhold any tax under chapter 24 of the Code upon a payment of wages made to an employee, if there is in effect with respect to the payment a withholding allowance certificate furnished to the employer by the employee which certifies that—

(1) The employee incurred no liability for income tax imposed under subtitle A of the Internal Revenue Code for the employee's preceding taxable year; and

(2) The employee anticipates that the employee will incur no liability for income tax imposed under subtitle A for the employee's current taxable year.

(b) Mandatory flat rate withholding. To the extent wages are subject to income tax withholding under § 31.3402(g)-1(a)(2), such wages are subject to such income tax withholding regardless of whether a withholding allowance certificate under section 3402(n) and this section has been furnished to the employer.

(c) Liability for income tax. For purposes of section 3402(n) and this section, an employee is not considered to incur liability for income tax imposed under subtitle A if the amount of such tax imposed is equal to or less than the total amount of credits against such tax which are allowable under chapter 1 of the Internal Revenue Code, other than those credits allowable under section 31 or 34. For purposes of this section, an employee who files a joint return under section 6013 is considered to incur liability for any tax shown on such return. An employee who is entitled to file a joint return under section 6013 shall not certify that the employee anticipates that he or she will incur no liability for income tax imposed by subtitle A for the employee's current taxable year if such statement would not be true in the event that the employee files a joint return for such year, unless the employee filed a separate return for the preceding taxable year and anticipates that the employee will file a separate return for the current taxable year.

(d) Rules about withholding allowance certificates. For rules relating to invalid withholding allowance certificates, see § 31.3402(f)(2)-1(h), and for rules relating to disregarding certain withholding allowance certificates on which an employee claims a complete exemption from withholding, see § 31.3402(f)(2)-1(i).

(e) Examples. The following examples illustrate this section:

(1) Example 1. A, an unmarried, calendar-year basis taxpayer, files an income tax return for 2020 on April 10, 2021, showing that A had adjusted gross income of $5,000 and is not liable for any income tax for 2020. A had $180 of income tax withheld during 2020. A anticipates that A's gross income for 2021 will be approximately the same amount, and that A will not incur income tax liability for that year. On April 20, 2021, A commences employment and furnishes the employer a withholding allowance certificate certifying that A incurred no liability for income tax imposed under subtitle A for 2020, and that A anticipates that A will incur no liability for income tax imposed under subtitle A for 2021. A's employer shall not deduct and withhold on payments of wages made to A on or after April 20, 2021. Under § 31.3402(f)(4)-1(b), unless A furnishes a new withholding allowance certificate including the certifications described in paragraph (a) of this section to the employer, the employer is required to deduct and withhold upon payments of wages to A made after February 15, 2022.

(2) Example 2. Assume the facts are the same as in paragraph (e)(1) of this section (Example 1) except that A had been employed by the employer prior to April 20, 2021, and had furnished the employer a withholding allowance certificate prior to furnishing the withholding allowance certificate including the certifications described in paragraph (a) of this section on April 20, 2021. Under § 31.3402(f)(3)-1(b), the employer would be required to give effect to the new withholding allowance certificate no later than the beginning of the first payroll period ending (or the first payment of wages made without regard to a payroll period) on or after May 20, 2021. However, under § 31.3402(f)(3)-1(b), the employer could, if it chose, make the new withholding allowance certificate effective with respect to any payment of wages made on or after April 20, 2021, and before the effective date mandated by section 3402(f)(3)(B)(i) and § 31.3402(f)(3)-1(b). Under § 31.3402(f)(4)-1(b), unless A furnishes a new withholding allowance certificate including the certifications described in § 31.3402(n)-1(a) to A's employer, the employer is required to deduct and withhold upon payments of wages to A made after February 15, 2022.

(3) Example 3. Assume the facts are the same as in paragraph (e)(1) of this section (Example 1) except that for 2020 A has taxable income of $8,000, income tax liability of $839, and income tax withheld of $1,195. Although A received a refund of $356 due to income tax withholding of $1,195, A may not certify on A's withholding allowance certificate that A incurred no liability for income tax imposed by subtitle A for 2020.

(f) Applicability date. The provisions of this section apply on and after October 6, 2020. Taxpayers may choose to apply paragraphs (a)(2) and (3) this section on or after January 1, 2020 and before October 6, 2020. For rules that apply before October 6, 2020, see 26 CFR part 31, revised as of April 1, 2020.