Witholding Under 409A

[Randy Watson]

Assuming that there is a 409A violation and that the additional 20% income tax is imposed, would this additional income tax be witheld by payroll, or would it need to be paid/resolved by the employee when they file their tax return? I was unable to locate any guidance that addresses this issue. Thanks.

[mbozek]

Amount includible as gross income under 409A in a taxable year is subject to wage withholding rules. - IRC 3401(a) last sentance. See notice 2005-1 Q31-33. The 20% tax will be due when the 1040 is filed so employee should pay estimated taxes to avoid the underwithholding penalty or increase withholding on wages.

[Randy Watson]

So the employer does not have to withhold the 20% additional income tax...it continues to withhold under the employee's current withholding elections. Thank you.