[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: 26CFR31.3406(b)(4)-1]

[Page 272-273]
 
                       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. 31.3406(b)(4)-1  Exemption for certain minimal payments.

    (a) In general. A payor of reportable interest or dividends (as 
described in section 3406(b)(2)) or of royalties (as described in 
section 3406(b)(3)(E)) may elect not to withhold from a payment that 
does not exceed $10 and that on an annualized basis does not exceed $10 
(see paragraph (c) of this section). A broker or barter exchange may 
elect not to withhold on gross proceeds of $10 or less without regard to 
the annualization requirement. See Sec. 31.6051-4 for the requirement 
to furnish a statement to the payee if tax is withheld under section 
3406.
    (b) Manner of making the election. The election not to withhold from 
payments that do not exceed $10 can be made only for payments described 
in paragraph (a) of this section. The election may be made on a payment-
by-payment basis.
    (c) How to annualize--(1) In general. To annualize a reportable 
interest payment, dividend payment, or royalty payment, a payor must 
calculate what the amount of the payment would be if it were paid for a 
1-year period (instead of the period for which it actually is paid). The 
annualized amount is determined by dividing the amount of the payment by 
the number of days in the period for which it is being paid and then 
multiplying that result by the number of days in the year. If the 
annualized amount is $10 or less, the payor may elect not to withhold on

[[Page 273]]

that payment regardless of whether more than $10 may be or has been paid 
to the payee in other reportable payments during the calendar year. 
Conversely, if the annualized amount is more than $10, withholding 
applies even if $10 or less is actually paid to the payee during the 
calendar year. For purposes of computing the annualized amount, the 
payor may assume that February always consists of 28 days and that the 
year always consists of 360 days. For amounts that are deposited with a 
payor in a new account or certificate between the dates on which the 
payor customarily pays or credits interest, the payor may assume that 
the period for which the interest is paid is the payor's customary 
period for paying or crediting interest.
    (2) Special aggregation rule for reportable interest and dividends. 
If a payor maintains records that reflect multiple holdings of one payee 
and the payor makes an aggregate payment of reportable interest or 
dividends (as defined in section 3406(b)(2)) with respect to those 
multiple holdings (such as a dividend check that reflects payment on all 
stock owned by the payee), the payor must annualize the aggregate 
payment.
    (d) Exception for window transactions and original issue discount. A 
payor is not required to annualize payments made in window transactions 
(as defined in Sec. 31.3406(b)(2)-3(b)) or payments of original issue 
discount. With respect to a window transaction, however, the payor is 
required to aggregate all payments made in the same transaction (e.g., 
payments made with respect to coupons or obligations presented for 
payment at the same time as described in Sec. 1.6049-4(e)(4) of this 
chapter).

[T.D. 8637, 60 FR 66119, Dec. 21, 1995]