[Code of Federal Regulations]
[Title 26, Volume 15]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR31.3402(h)(1)-1]

[Page 230-231]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 31_EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE--Table of Contents
 
              Subpart E_Collection of Income Tax at Source
 
Sec. 31.3402(h)(1)-1  Withholding on basis of average wages.

    (a) In general. An employer may determine the amount of tax to be 
deducted and withheld upon a payment of wages to an employee on the 
basis of the employee's average estimated wages, with necessary 
adjustments, for any quarter. This paragraph applies only where the 
method desired to be used includes wages other than tips (whether or not 
tips are also included).
    (b) Withholding on the basis of average estimated tips--(1) In 
general. Subject to certain limitations and conditions, an employer may, 
at his discretion, withhold the tax under section 3402 in respect of 
tips reported by an employee to the employer on an estimated basis. An 
employer who elects to make withholding of the tax on an estimated basis 
shall:

[[Page 231]]

    (i) In respect of each employee, make an estimate of the amount of 
tips that will be reported, pursuant to section 6053, by the employee to 
the employer in a calendar quarter.
    (ii) Determine the amount which must be deducted and withheld upon 
each payment of wages (exclusive of tips) which are under the control of 
the employer to be made during the quarter by the employer to the 
employee. The total amount which must be deducted and withheld shall be 
determined by assuming that the estimated tips for the quarter represent 
the amount of wages to be paid to the employee in the form of tips in 
the quarter and that such tips will be ratably (in terms of pay periods) 
paid during the quarter.
    (iii) Deduct and withhold from any payment of wages (exclusive of 
tips) which are under the control of the employer, or from funds 
referred to in section 3402(k) (see Sec. Sec. 31.3402(k) and 
31.3402(k)-1), such amount as may be necessary to adjust the amount of 
tax withheld on the estimated basis to conform to the amount required to 
be withheld in respect of tips reported by the employee to the employer 
during the calendar quarter in written statements furnished to the 
employer pursuant to section 6053(a). If an adjustment is required, the 
additional tax required to be withheld may be deducted upon any payment 
of wages (exclusive of tips) which are under the control of the employer 
during the quarter and within the first 30 days following the quarter or 
from funds turned over by the employee to the employer for such purpose 
within such period. For provisions relating to the repayment to an 
employee, or other disposition, of amounts deducted from an employee's 
remuneration in excess of the correct amount of tax, see Sec. 
31.6413(a)-1.
    (2) Estimating tips employee will report--(i) Initial estimate. The 
initial estimate of the amount of tips that will be reported by a 
particular employee in a calendar quarter shall be made on the basis of 
the facts and circumstances surrounding the employment of that employee. 
However, if a number of employees are employed under substantially the 
same circumstances and working conditions, the initial estimate 
established for one such employee may be used as the initial estimate 
for other employees in that group.
    (ii) Adjusting estimate. If the quarterly estimate of tips in 
respect of a particular employee continues to differ substantially from 
the amount of tips reported by the employee and there are no unusual 
factors involved (for example, an extended absence from work due to 
illness) the employer shall make an appropriate adjustment of his 
estimate of the amount of tips that will be reported by the employee.
    (iii) Reasonableness of estimate. The employer must be prepared, 
upon request of the district director, to disclose the factors upon 
which he relied in making the estimate, and his reasons for believing 
that the estimate is reasonable.

[T.D. 7053, 35 FR 11626, July 21, 1970]