Military retirees.   Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes.

Household workers.   If you are a household worker, you can ask your employer to withhold income tax from your pay.

  Tax is withheld only if you want it withheld and your employer agrees to withhold it. If you do not have enough income tax withheld, you may have to pay estimated tax, as discussed later under Estimated Tax.

Farmworkers.   Income tax is generally withheld from your cash wages for work on a farm unless your employer both:

  You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. If your employer does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed later under Estimated Tax.

The amount of income tax your employer withholds from your regular pay depends on two things.

Form W-4 includes three types of information that your employer will use to figure your withholding.

When you start a new job, you must fill out Form W-4 and give it to your employer. Your employer should have copies of the form. If you need to change the information later, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid overwithholding if your employer agrees to use the part-year method. See Part-Year Method in chapter 1 of Publication 505 for more information.

Events during the year may change your marital status or the exemptions, adjustments, deductions, or credits you expect to claim on your return. When this happens, you may need to give your employer a new Form W-4 to change your withholding status or number of allowances.

If the event changes your withholding status or the number of allowances you are claiming, you must give your employer a new Form W-4 within 10 days after either of the following.

Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason.

After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. See Publication 919, later. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding.

Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Do not give them to your employer.

In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.

To make sure you are getting the right amount of tax withheld, get Publication 919. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much additional withholding, if any, is needed each payday to avoid owing tax when you file your return. If you do not have enough tax withheld, you may have to pay estimated tax, as explained under Estimated Tax, later.

It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill out your Form W-4 and how to handle problems that may arise.

If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption applies only to income tax, not to social security or Medicare tax.

You can claim exemption from withholding for 2006 only if both the following situations apply.

Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. The payer can figure withholding on supplemental wages using the same method used for your regular wages. If these payments are identified separately from your regular wages, your employer or other payer of supplemental wages can withhold income tax from these wages at a flat rate.

You may have to pay a penalty of $500 if both of the following apply.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error, an honest mistake, will not result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, will not be charged a W-4 penalty.

How employer figures amount to withhold.   The tips you report to your employer are counted as part of your income for the month you report them. Your employer can figure your withholding in either of two ways.

Not enough pay to cover taxes.   If your regular pay is not enough for your employer to withhold all the tax (including income tax, social security tax, Medicare tax, or railroad retirement tax) due on your pay plus your tips, you can give your employer money to cover the shortage. See Giving your employer money for taxes in chapter 6.

Allocated tips.   Your employer should not withhold income tax, social security tax, Medicare tax, or railroad retirement tax on any allocated tips. Withholding is based only on your pay plus your reported tips. Your employer should refund to you any incorrectly withheld tax. See Allocated Tips in chapter 6 for more information.

Union agreements.   If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement may determine the amount of income tax withholding. See your union representative or your employer for more information.

Form W-4S.   If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must fill out Form W-4S. Its instructions contain a worksheet you can use to figure the amount you want withheld. They also explain restrictions that may apply.

  Give the completed form to the payer of your sick pay. The payer must withhold according to your directions on the form.

  If you do not request withholding on Form W-4S, or if you do not have enough tax withheld, you may have to make estimated tax payments. If you do not pay enough estimated tax or have enough income tax withheld, you may have to pay a penalty.

More information.    For more information on taxation of annuities and distributions (including eligible rollover distributions) from qualified retirement plans, see chapter 10. For information on IRAs, see chapter 17. For more information on withholding on pensions and annuities, including a discussion of Form W-4P, see Pensions and Annuities in chapter 1 of Publication 505.

Form W-2G.   If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings, showing the amount you won and the amount withheld. Report the tax withheld on line 64 of Form 1040.

More information.   For more information about the tax treatment of social security and railroad retirement benefits, see chapter 11. Get Publication 225, Farmer's Tax Guide, for information about the tax treatment of commodity credit loans or crop disaster payments.

Penalties.   There are civil and criminal penalties for giving false information to avoid backup withholding. The civil penalty is $500. The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both.

Estimated tax not required.   You do not have to pay estimated tax for 2006 if you meet all three of the following conditions.

  You had no tax liability for 2005 if your total tax was zero or you did not have to file an income tax return.

General rule.   You must pay estimated tax for 2006 if both of the following apply.

Special rules for farmers, fishermen, and higher income taxpayers.   There are exceptions to the general rule for farmers, fishermen, and certain higher income taxpayers. See Figure 4-A and chapter 2 of Publication 505 for more information.

Aliens.    Resident and nonresident aliens may also have to pay estimated tax. Resident aliens should follow the rules in this chapter unless noted otherwise. Nonresident aliens should get Form 1040-ES(NR), U.S. Estimated Tax for Nonresident Alien Individuals.

Married taxpayers.   To figure whether you must pay estimated tax, apply the rules discussed here to your separate estimated income. If you can make joint estimated tax payments, you can apply these rules on a joint basis.

  You and your spouse can make joint estimated tax payments even if you are not living together.

  You and your spouse cannot make joint estimated tax payments if:

  Whether you and your spouse make joint estimated tax payments or separate payments will not affect your choice of filing a joint tax return or separate returns for 2006.

2005 separate returns and 2006 joint return.   If you plan to file a joint return with your spouse for 2006, but you filed separate returns for 2005, your 2005 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.

2005 joint return and 2006 separate returns.   If you plan to file a separate return for 2006, but you filed a joint return for 2005, your 2005 tax is your share of the tax on the joint return. You file a separate return if you file as single, head of household, or married filing separately.

  To figure your share of the tax on the joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2005 using the same filing status as for 2006. Then multiply the tax on the joint return by the following fraction.

Saturday, Sunday, holiday rule.   If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. For example, a payment due Monday, January 15, 2007, will be on time if you make it by Tuesday, January 16, 2007. January 15 is a legal holiday.

January payment.   If you file your 2006 Form 1040 or Form 1040A by January 31, 2007, and pay the rest of the tax you owe, you do not need to make the payment due on January 16, 2007.

Fiscal year taxpayers.   If your tax year does not start on January 1, see the Form 1040-ES instructions for your payment due dates.

You do not have to make estimated tax payments until you have income on which you will owe the tax. If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. You can pay all your estimated tax at that time, or you can pay it in installments. If you choose to pay in installments, make your first payment by the due date for the first payment period. Make your remaining installment payments by the due dates for the later periods.

Underpayment penalty.   If your estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be charged a penalty for underpayment of estimated tax for that period when you file your tax return. See chapter 4 of Publication 505 for more information.

Change in estimated tax.   After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods.

You do not have to pay estimated tax if your withholding in each payment period is at least as much as:

You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you owe with your return under $1,000.

When you file your Form 1040 or Form 1040A for 2005 and you have an overpayment of tax, you can apply part or all of it to your estimated tax for 2006. On line 74 of Form 1040, or line 46 of Form 1040A, enter the amount you want credited to your estimated tax rather than refunded. The amount you have credited should be taken into account when figuring your estimated tax payments.

The credit will be applied to your payments in the order necessary to avoid the penalty for underpayment of estimated tax. You cannot have any of that amount refunded to you until the close of that tax year. You also cannot use that overpayment in any other way.

Each payment of estimated tax must be accompanied by a payment voucher from Form 1040-ES. If you made estimated tax payments last year, you should receive a copy of the 2006 Form 1040-ES in the mail. It will have payment vouchers preprinted with your name, address, and social security number. Using the preprinted vouchers will speed processing, reduce the chance of error, and help save processing costs.

If you did not pay estimated tax last year, you will have to get Form 1040-ES. After you make your first payment, a Form 1040-ES package with the preprinted vouchers will be mailed to you. Follow the instructions in the package to make sure you use the vouchers correctly.

Use the window envelopes that came with your Form 1040-ES package. If you use your own envelope, make sure you mail your payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live.

Do not use the address shown in the Form 1040 or Form 1040A instructions.

If you file a joint return and you are making joint estimated tax payments, please enter the names and social security numbers on the payment voucher in the same order as they will appear on the joint return.

If you want to make estimated payments by electronic funds withdrawal or by credit card, see the Form 1040-ES instructions or How To Pay Estimated Tax in Publication 505.

Forms W-2 and W-2G.   You file Form W-2 with your income tax return. File Form W-2G with your return if it shows any federal income tax withheld from your winnings.

  You should get at least two copies of each form you receive. Attach one copy to the front of your federal income tax return. Keep one copy for your records. You should also receive copies to file with your state and local returns.

Your employer should send you a Form W-2 for 2005 by January 31, 2006. You should receive a separate Form W-2 from each employer you worked for.

If you stopped working before the end of the year, your employer could have given you your Form W-2 at any time after you stopped working. However, your employer must send it to you by January 31, 2006.

If you ask for the form, your employer must send it to you within 30 days after receiving your written request or within 30 days after your final wage payment, whichever is later.

If you have not received your Form W-2 on time, you should ask your employer for it. If you do not receive it by February 15, call the IRS.

Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. Include the federal income tax withheld (as shown on Form W-2) on:

Form W-2 is also used to report any taxable sick pay you received and any income tax withheld from your sick pay.

If you had gambling winnings in 2005, the payer may have withheld income tax. If tax was withheld, the payer will give you a Form W-2G showing the amount you won and the amount of tax withheld.

Report the amounts you won on line 21 of Form 1040. Take credit for the tax withheld on line 64 of Form 1040. If you had gambling winnings, you must use Form 1040; you cannot use Form 1040A or Form 1040EZ.

Most forms in the 1099 series are not filed with your return. You should be sent these forms by January 31, 2006. Keep these forms for your records. There are several different forms in this series, including:

If you received the types of income reported on some forms in the 1099 series, you may not be able to use Form 1040A or Form 1040EZ. See the instructions to these forms for details.

If you receive a form with incorrect information on it, you should ask the payer for a corrected form. Call the telephone number or write to the address given for the payer on the form. The corrected Form W-2G or Form 1099 you receive will be marked “Corrected.” A special form, Form W-2c, Corrected Wage and Tax Statement, is used to correct a Form W-2.

If you file your return and you later receive a form for income that you did not include on your return, you should report the income and take credit for any income tax withheld by filing Form 1040X, Amended U.S. Individual Income Tax Return.

If you are married but file a separate return, you can take credit only for the tax withheld from your own income. Do not include any amount withheld from your spouse's income. However, different rules may apply if you live in a community property state.

Community property states are listed in chapter 2. For more information on these rules, and some exceptions, see Publication 555, Community Property.

If you file your tax return on the basis of a fiscal year (a 12-month period ending on the last day of any month except December), you must follow special rules to determine your credit for federal income tax withholding. For a discussion of how to take credit for withholding on a fiscal year return, see Fiscal Years in chapter 3 of Publication 505.

Name changed.   If you changed your name, and you made estimated tax payments using your old name, attach a brief statement to the front of your tax return indicating: The statement should cover payments you made jointly with your spouse as well as any you made separately.

If you and your spouse made separate estimated tax payments for 2005 and you file separate returns, you can take credit only for your own payments.

If you made joint estimated tax payments, you must decide how to divide the payments between your returns. One of you can claim all of the estimated tax paid and the other none, or you can divide it in any other way you agree on. If you cannot agree, you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for 2005.

If you made joint estimated tax payments for 2005, and you were divorced during the year, either you or your former spouse can claim all of the joint payments, or you each can claim part of them. If you cannot agree on how to divide the payments, you must divide them in proportion to each spouse's individual tax as shown on your separate returns for 2005.

If you claim any of the joint payments on your tax return, enter your former spouse's social security number (SSN) in the space provided on the front of Form 1040 or Form 1040A. If you divorced and remarried in 2005, enter your present spouse's SSN in that space and write your former spouse's SSN, followed by “DIV,” to the left of line 65, Form 1040, or line 40, Form 1040A.