[Federal Register Volume 60, Number 58 (Monday, March 27, 1995)]
[Notices]
[Pages 15794-15797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7487]
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DEPARTMENT OF LABOR
Federal-State Unemployment Compensation Program: Unemployment
Insurance Program Letters Interpreting Federal Unemployment Insurance
Law
The Employment and Training Administration interprets Federal law
requirements pertaining to unemployment compensation as part of its
role in the administration of the Federal-State unemployment
compensation program. These interpretations are issued in Unemployment
Insurance Program Letters (UIPLs) to the State Employment Security
Agencies (SESAs). The UIPL described below is published in the Federal
Register in order to inform the public.
UIPL 17-95
Public Law 103-465, commonly known as the legislation on ``GATT''--
The General Agreement on Tariffs and Trade, included a provision that
affects the Federal-State unemployment compensation program. Under this
legislation, States will be required to deduct and withhold Federal
income tax from unemployment compensation if the individual so elects.
In addition, State will have the option of withholding State and local
income taxes from unemployment compensation if the individual elects to
have such actions taken. This UIPL explains the change in unemployment
compensation law, discusses its effective date and provides model
language for States to use in amending State unemployment compensation
law.
Dated: March 17, 1995.
Doug Ross,
Assistant Secretary of Labor.
U.S. Department of Labor
Employment and Training Administration, Washington, DC 20210
Classification UI
Correspondence Symbol TEURL
Date: February 28, 1995
Directive: Unemployment Insurance Program Letter No. 17-95
To: All State Employment Security Agencies
From: Mary Ann Wyrsch, Director, Unemployment Insurance Service
Subject: Withholding of Income Tax From Unemployment Compensation--
Amendments Made by Public Law 103-465
1. Purpose. To advise State agencies of the provisions of Public
Law (P.L.) 103-465 pertaining to the withholding of Federal, State and
local income taxes from unemployment compensation (UC).
2. References. The Internal Revenue Code of 1986 (IRC), as amended,
including the Federal Unemployment Tax Act (FUTA); Title III of the
Social Security Act (SSA); Section 702 of P.L. 103-465; Section 301 of
P.L. 102-318; 31 U.S.C. Section 6503 as amended by P.L. 101-453; 31
C.F.R. Part 205; and Unemployment Insurance Program Letters (UIPLs) 25-
89, 45-89 and 45-92.
3. Background. On December 8, 1994, the President signed into law
P.L. 103-465. Although the short title of this law is the ``Uruguay
Round Agreements Act,'' it is commonly known as the legislation on
``GATT''--the General Agreement on Tariffs and Trade. Under this
legislation, States will be required to deduct and withhold Federal
income tax from UC if the individual so elects. In addition, States
will have the option of withholding State and local income taxes if the
individual so elects. This UIPL addresses these new provisions
pertaining to income tax withholding.
Rescissions: None.
Expiration Date: February 28, 1996.
4. Discussion.
a. In General. The ``withdrawal standard'' of Section 3304(a)(4),
FUTA, and Section 303(a)(5), SSA, limits withdrawals (with specified
exceptions not relevant here) from a State's unemployment fund to
payments of ``compensation.'' The term ``compensation'' is defined in
Section 3306(h), FUTA, as ``cash benefits payable to individuals with
respect to their unemployment.'' Due to its restrictive nature, the
withdrawal standard has prohibited States from deducting and
withholding any form of income tax from payments of UC. For a detailed
discussion of the limitations on the use of unemployment fund moneys,
refer to UIPL 25-89 (54 FR 22973 (May 30, 1989)) which transmitted the
Secretary's decision in a conformity proceeding involving the deducting
and withholding of State UC taxes from UC and UIPL 45-89 (55 FR 1886
(January 19, 1990)) concerning permissible deductions from UC.
P.L. 103-465 amends Federal law to provide for ``voluntary
withholding''--that is, withholding at the taxpayer's election--of
income taxes from a variety of payments made pursuant to Federal
[[Page 15795]] law as well as from UC. The joint Senate report
describes the reason for this withholding:
Some taxpayers find it burdensome to make quarterly estimated tax
payments. These taxpayers may find it more convenient to elect to have
Federal taxes withheld at the time specified payments are made to them.
[S. Rep. No. 412, 103rd Cong. 2d Sess. 137-138 (1994).]
b. Discussion of Amendments. Section 702(b) of P.L. 103-465 amended
Federal law to require State law to provide for the voluntary
withholding of Federal income tax from UC. Specifically, new paragraph
(18) of Section 3304(a), FUTA, was added to require, as a condition for
employers in a State to receive credit against the Federal unemployment
tax, that:
Federal individual income tax from unemployment compensation is to
be deducted and withheld if an individual receiving such compensation
voluntary requests such deduction and withholding.
Section 702(c) of P.L. 103-465 also amended the withdrawal standard
of FUTA and SSA (and the definition of ``unemployment fund'' in Section
3306(f), FUTA) to permit ``the withholding of Federal, State, or local
individual income tax.''\1\ As amended, the withdrawal standard in
Section 3304(a)(4)(C), FUTA, now reads: nothing in this paragraph shall
be construed to prohibit deducting an amount from unemployment
compensation otherwise payable to an individual and using the amount so
deducted to pay for health insurance, or the withholding of Federal,
State, or local individual income tax, if the individual elected to
have such deduction made and such deduction was made under a program
approved by the Secretary of Labor * * *.
\1\The amendment to the definition of ``unemployment fund'' also
contained a technical amendment concerning the exception pertaining
to the withholding of health insurance premiums. This exception was
already contained in the withdrawal standard. Another technical
amendment renumbered old subparagraph (18) of Section 3304(a), FUTA,
as (19).
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Section 303(a)(5), SSA, also reads similarly. These amendments to
the withdrawal standard and the definition of ``unemployment fund''
have an effect on the new voluntary withholding requirement of Section
3304(a)(18), FUTA. Under the withdrawal standard amendments, any
deducting and withholding from UC may be made only if ``such deduction
was made under a program approved by the Secretary of Labor.'' The
requirements necessary for approval of a program are contained in item
4.e of this UIPL.
c. Withholding of Federal Income Tax. New IRC Section 3402(p)(2),
which was added by Section 702(a) of P.L. 103-465, concerns voluntary
withholding of UC and affects the FUTA and SSA provisions concerning
deducting and withholding income tax. This section applies to payments
of UC ``as defined in section 85(b),'' IRC. Section 85(b) defines UC as
``any amount received under a law of the United States or of a State
which is in the nature of unemployment compensation.'' The effect of
this definition is that, if the payment of UC is taxable under the IRC,
then the State must provide for voluntary withholding of Federal tax
from that amount.
Section 3402(p)(2), IRC, also provides that the amount of Federal
income tax withheld from UC ``under this chapter [Chapter 24 of the
IRC, Collection of Income Tax at Source on Wages] * * * shall be an
amount equal to 15 percent of such payment.'' As a result, the amount
of Federal income tax to be withheld from UC by the States must be
equal to 15 percent of the UC payment.
Since Section 3402(p)(2), IRC, is administered by the Federal
Internal Revenue Service (IRS), the IRS has the authority to interpret
these provisions.
d. Withholding of State and Local Income Taxes. States will decide
whether to allow State and/or local income taxes to be deducted and
withheld from UC at an individual's election. A State may decide to
deduct and withhold only State income taxes, only local income taxes,
both, or neither. It is left to the State to decide whether the
percentage of the payment to be deducted and withheld shall be a
uniform amount established by the State law or determined by the
individual. The mechanisms for transferring amounts deducted and
withheld from the unemployment fund to the State or locality will also
be established by the State, subject to the requirements of items e.(2)
and e.(3) below.
Although a State has the authority to deduct and withhold State and
local income taxes from UC for other States and for localities outside
the State, Federal law does not require a State to do so. A State may,
therefore, restrict the taxes to be deducted and withheld to taxes
subject to its laws or to individuals who plan to file a tax return
against that State.
e. Approved Program. As noted in item 4.b, the amendments to the
withdrawal standard concerning the withholding of income tax require
that any deduction must be made under a program approved by the
Secretary. Rather than requiring each State to submit a plan describing
its program, the Department has determined that States using the draft
legislative language contained in Attachment II to this UIPL may
consider their withholding programs to be automatically approved.
(States are free to delete optional language, such as that pertaining
to State and local taxes and to make nonsubstantive modifications,
including taking into account State usage and formatting.) States not
using the draft language will need to submit a plan describing its
program to the appropriate regional office.
The following necessary elements of the program are discussed
within the context of the draft language:
(1) Notification. Section 301 of P.L. 102-318, the Unemployment
Compensation Amendments of 1992, already requires State agencies to
provide to each individual filing a claim a written explanation of
Federal and State income taxation of UC and the requirements pertaining
to estimated tax payments. See UIPL 45-92 (57 Fed. Reg. 47871, 47875-
47876 (October 20, 1992)). To assure that the individual has the
opportunity to have amounts withheld from all payments, the individual
is to be advised in writing at the time of filing the initial claim
that UC is subject to Federal income tax as well as (if applicable)
State and local income taxes; that requirements exist pertaining to
estimated tax payments; and that income tax may be withheld at the
individual's option.\2\ States will need to revise their initial claims
processes to obtain information concerning whether the individual
elects or declines to have income tax withheld.
\2\UIPL 45-92 interpreted the notice requirement of Section 301
of P.L. 102-318 to provide that the information ``must be provided
at the time the initial claim is filed or at the time the individual
files a claim for the first week.'' UIPL 45-92 also provided that
the notice requirement would be satisfied if the information was
provided at the time of the first payment. Once Section 3304(a)(18),
FUTA, becomes effective, this position becomes obsolete as the
notice must be given at the time of filing the initial claim.
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Section (1) of the draft language addresses notification and other
matters. It permits the deduction and withholding of Federal, State and
local income taxes. The general reference in Section (1)(C) to the IRC
assures that State law will always correspond to whatever percentage
Federal law authorizes for deductions. Since the States are not
required to deduct and withhold State and local income taxes from UC,
the draft language pertaining to such withholding is at the State's
option. The language permits specified percentages of State and local
income taxes to be withheld under State law [[Page 15796]] since this
method will likely be the easiest to administer. The State may,
however, modify the draft language to allow the individual the option
of electing the percentage or dollar amount to be deducted and
withheld. As discussed in item 4.d. above, the State may also add
language restricting the State and local withholding option.
The final issue addressed in Section (1) is the individual's option
to change withholding status. The individual's anticipated tax
liabilities may change due to, for example, a change in the tax year or
due to work performed during the benefit year, or the individual may
determine that amounts being withheld are needed to meet current living
expenses. Therefore, individuals must also be notified of and provided
an opportunity to change their withholding status.
Although the Department encourages States to allow the individual
to change his or her withholding status several times, it will only
require the States to permit this change at least once during each
benefit year. States are not required to amend their continued claims
forms or processes to accommodate this change in withholding. Instead,
it will be sufficient for the agency to notify the individual at the
time of filing the initial claim that withholding status may be changed
at the individual's request.
Section (1)(G) of the draft language permits an unlimited number of
changes by the claimant. The State may, however, modify the language to
restrict the number of changes to any number greater than or equal to
one.
(2) Amounts to Remain in Unemployment Fund until Transferred to
Taxing Authority. Amounts deducted and withheld from unemployment
compensation must remain in the State's unemployment fund until
transferred to the Federal, State or local taxing authority as a
payment of income tax. Such amounts will remain in the State's account
in the Unemployment Trust Fund (UTF) until such time as they are drawn
down to the State's benefit payment account in accordance with the
State's agreement implementing 31 U.S.C. 6503, as amended by the Cash
Management Improvement Act of 1990, P.L. 101-453, and the implementing
regulations at 31 CFR Part 205.
The Department is currently exploring an alternative to the draw
down approach with the U.S. Department of the Treasury. Under this
alternative, amounts deducted and withheld would be transferred
directly from the State's account in the UTF to the IRS.
(3) Federal Procedures. The State must follow all procedures
specified by this Department and the IRS related to withholding.
The inclusion of the provision in Section (3) of the draft language
assures the Department that States will comply with any IRS procedures
concerning the deducting and withholding of Federal income tax. It also
gives States the authority to follow any procedures concerning
deducting and withholding income tax which the Department or IRS may at
some future date deem necessary. States may change the reference to
``commissioner'' to reference the title of the appropriate State
official or agency.
(4) Priorities. Since UC overpayments, child support obligations
and food stamp overissuances may also be deducted and withheld from UC,
States will need to address the priority of withholding when the
claimant also elects to have income tax withheld. The Department has
previously left to the States the matter of determining priorities when
there are two or more deductions made from UC. The Department is
currently discussing with the IRS whether the provisions of the IRC
which it administers have any bearing on this issue.
Since the issue of priority of withholding has not yet been
resolved, Section (4) of the draft language provides that the priority
for deductions from UC shall be determined in accordance with State
regulations. This will permit the State to accommodate any Federal
position on this matter.
f. Funding. Costs incurred in withholding Federal, State or local
income taxes from UC administrative grants provided under Section 302,
SSA.
g. Effective Date. Under subsection (d) of Section 702 of P.L. 103-
465, the provisions of that section relating to voluntary withholding
``shall apply to payments made after December 31, 1996.'' This means
that, as of January 1, 1997, States must have provisions of law in
effect providing for the voluntary withholding of Federal income tax
and must be permitting the withholding Federal income tax in accordance
with this UIPL.
States should note that the effective date refers to ``payments.''
Therefore, as of January 1, 1997, amounts are to be deducted and
withheld from payments of UC for Federal income tax, if the individual
so elects, even if the payment is for a week of unemployment beginning
before January 1, 1997.
States may not implement the withholding of Federal, State or local
income taxes prior to January 1, 1997, since the withdrawal standard's
limitations remain in effect until that date. We recommend, however,
that States advise individuals filing new claims in the fourth calendar
quarter of 1996 that voluntary holding will become available and that
the State would, if the claimant so elected, begin deducting and
withholding of income taxes as for payments made on and after January
1, 1997.
5. Action Required. States must take appropriate action to assure
legislation authorizing the voluntary withholding of Federal income tax
is enacted by and implemented on January 1, 1997. As noted above in
item 4.e., States not enacting legislation using the draft language
attached to this UIPL will need to submit a plan to the appropriate
Regional Office. To provide adequate time for review and comment, these
plans are due on September 30, 1996.
6. Inquiries. Inquiries should be directed to the appropriate
Regional Office.
7. Attachments.
I. Relevant Sections of P.L. 103-465
II. Draft Language to Implement a Voluntary Withholding Program
Attachment I--Relevant Sections of P.L. 103-465
An Act to approve and implement the trade agreements concluded in
the Uruguay Round of multilateral trade negotiations.
Section 1. Short Title and Table of Contents.
(a) SHORT TITLE.--This Act may be cited as the ``Uruguay Round
Agreements Act''.
* * * * *
TITLE VII--REVENUE PROVISION
Subtitle A--Withholding Tax Provisions
* * * * *
Sec. 702 Voluntary Withholding on Certain Federal Payments and on
Unemployment Compensation.
(a) IN GENERAL.--Subsection (p) of section 3402 (relating to
voluntary withholding agreements) is amended to read as follows:
``(p) VOLUNTARY WITHHOLDING AGREEMENTS.--
``(1) CERTAIN FEDERAL PAYMENTS.--
``(A) IN GENERAL.--If, at the time a specified Federal payment is
made to any person, a request by such person is in effect that such
payment be subject to withholding under this chapter, then for purposes
of this chapter and so much of subtitle F as relates to this chapter,
such payment shall be treated as if it were a payment of wages by an
employer to an employee.
``(B) AMOUNT WITHHELD.--The amount to be deducted and withheld
[[Page 15797]] under this chapter from any payment to which any request
under subparagraph (A) applies shall be an amount equal to the
percentage of such payment specified in such request. Such a request
shall apply to any payment only if the percentage specified is 7, 15,
28, or 31 percent or such other percentage as is permitted under
regulations prescribed by the Secretary.
``(C) SPECIFIED FEDERAL PAYMENTS.--For purposes of this paragraph,
the term `specified Federal payment' means--
``(i) any payment of a social security benefit (as defined in
section 86(d),
``(ii) any payment referred to in the second sentence of section
451(d) which is treated as insurance proceeds,
``(iii) any amount which is includible in gross income under
section 77(a), and
``(iv) any other payment made pursuant to Federal law which is
specified by the Secretary for purposes of this paragraph.''
``(D) REQUESTS FOR WITHHOLDING.--Rules similar to the rules that
apply to annuities under subsection (o)(4) shall apply to requests
under this paragraph and paragraph (2).
``(2) VOLUNTARY WITHHOLDING ON UNEMPLOYMENT BENEFITS.--If, at the
time a payment of unemployment compensation (as defined in section
85(b)) is made to any person, a request by such person is in effect
that such payment be subject to withholding under this chapter, then
for purposes of this chapter and so much of subtitle F as relates to
this chapter, such payment shall be treated as if it were a payment of
wages by an employer to an employee. The amount to be deducted and
withheld under this chapter from any payment to which any request under
this paragraph applies shall be an amount equal to 15 percent of such
payment.
``(3) AUTHORITY FOR OTHER VOLUNTARY WITHHOLDING.--The Secretary is
authorized by regulations to provide for withholding--
``(A) from remuneration for services performed by an employee for
the employee's employer which (without regard to this paragraph) does
not constitute wages, and
``(B) from any other type of payment with respect to which the
Secretary finds that withholding would be appropriate under the
provisions of this chapter, if the employer and employee, or the person
making and the person receiving such other type of payment, agree to
such withholding. Such agreement shall be in such form and manner as
the Secretary may by regulation prescribe. For purposes of this chapter
(and so much of subtitle F as relates to this chapter), remuneration or
other payments with respect to which such agreement is made shall be
treated as if they were wages paid by an employer to an employee to the
extent that such remuneration is paid or other payments are made during
the period for which the agreement is in effect.''
(b) STATE LAW MUST PERMIT VOLUNTARY WITHHOLDING OF FEDERAL INCOME
TAX FROM UNEMPLOYMENT COMPENSATION.--Section 3304(a) is amended by
striking ``and'' at the end of paragraph (17), by redesignating
paragraph (18) as paragraph (19), and by inserting after paragraph (17)
the following new paragraph:
``(18) Federal individual income tax from unemployment compensation
is to be deducted and withheld if an individual receiving such
compensation voluntarily requests such deduction and withholding;
and''.
(c) WITHHOLDING FROM UNEMPLOYMENT COMPENSATION OF FEDERAL, STATE,
AND LOCAL INCOME TAXES PERMITTED.--
(1) Subparagraph (C) of section 3304(a)(4) is amended by inserting
after ``health insurance'' the following: ``, or the withholding of
Federal, State, or local individual income tax,''.
(2) Subsection (f) of section 3306 is amended by redesignating
paragraphs (3) and (4) as paragraphs (4) and (5), respectively, and by
inserting after paragraph (2) the following new paragraph:
``(3) nothing in this subsection shall be construed to prohibit
deducting any amount from unemployment compensation otherwise payable
to an individual and using the amount so deducted to pay for health
insurance, or the withholding of Federal, State, or local individual
income tax, if the individual elected to have such deduction made and
such deduction was made under a program approved by the Secretary of
Labor;''.
(3) Paragraph (5) of section 303(a) of the Social Security Act is
amended by inserting after ``health insurance'' the following: ``, or
the withholding of Federal, State, or local individual income tax,''.
(d) EFFECTIVE DATE.--The amendments made by this section shall
apply to payments made after December 31, 1996.
Attachment II--Draft Language to Implement a Voluntary Withholding
Program
(1) An individual filing a new claim for unemployment compensation
shall, at the time of filing such claim, be advised that:
(A) Unemployment compensation is subject to Federal, State and
local income tax;
(B) Requirements exist pertaining to estimated tax payments;
(C) The individual may elect to have Federal income tax deducted
and withheld from the individual's payment of unemployment compensation
at the amount specified in the Federal Internal Revenue Code;
(D) The individual may elect to have State income tax deducted and
withheld from the individual's payment of unemployment compensation at
the rate of ____ percent;
(E) The individual may elect to have local income tax deducted and
withheld from the individual's payment of unemployment compensation at
the rate of ____ percent; and
(F) The individual may elect to have State and local income taxes
deducted and withheld from the individual's payment of unemployment
compensation for other States and localities outside this State at the
percentage established by such State or locality.
(G) The individual shall be permitted to change a previously
elected withholding status.
(2) Amounts deducted and withheld from unemployment compensation
shall remain in the unemployment fund until transferred to the Federal,
State or local taxing authority as a payment of income tax.
(3) The commissioner shall follow all procedures specified by the
United States Department of Labor and the Federal Internal Revenue
Service pertaining to the deducting and withholding of income tax.
(4) Amounts shall be deducted and withheld in accordance with the
priorities established in regulations developed by the commissioner.
[FR Doc. 95-7487 Filed 3-24-95; 8:45 am]
BILLING CODE 4510-30-M
