n-18-64.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Methods for Calculating W-2 Wages for Purposes of Section 199A

Notice 2018-64

SECTION 1. PURPOSE
This notice (Notice) contains a proposed revenue procedure that provides
guidance on methods for calculating W-2 wages for purposes of section 199A of the
Internal Revenue Code (Code) and proposed §§ 1.199A-1 through 1.199A-6 of the
Income Tax Regulations (26 CFR part 1), which are contained in a notice of proposed
rulemaking (REG-107892-18) being published contemporaneously with this Notice.
Specifically, this Notice provides methods for calculating W-2 wages (1) for purposes of
section 199A(b)(2), which, for certain taxpayers, provides a limitation based on W-2
wages to the amount of the deduction for qualified business income under section
199A(a); and (2) for purposes of section 199A(b)(7), which, for certain specified
agricultural and horticultural cooperative patrons, provides a reduction to the section
199A(a) deduction based on W-2 wages.
SECTION 2. BACKGROUND
Section 199A was enacted on December 22, 2017 as part of the act entitled “An
Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on
the budget for fiscal year 2018,” P.L. 115-97 (Act), and was amended on March 23,
2018 retroactively to January 1, 2018, by H.R.1625 - Consolidated Appropriations Act,

2018, P.L. 115-141, (H.R. 1625). Congress enacted section 199A to provide a
deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s qualified
business income (QBI) from each of the taxpayer’s qualified trades or businesses,
including those operated through a partnership, S corporation, or sole proprietorship, as
well as a deduction of up to 20 percent of aggregate qualified REIT dividends and
qualified publicly traded partnership income. For each qualified trade or business,
section 199A(b)(2) limits the amount of the section 199A deduction to the lesser of (1)
20 percent of the taxpayer’s QBI with respect to the qualified trade or business, or (2)
the greater of (A) 50 percent of the W–2 wages with respect to the qualified trade or
business, or (B) the sum of 25 percent of the W–2 wages with respect to the qualified
trade or business plus 2.5 percent of the unadjusted basis immediately after acquisition
of all qualified property. Under section 199A(b)(3), this limitation is phased in above a
threshold amount of taxable income.
Section 199A(b)(7) provides that in the case of any qualified trade or business of
a patron of a specified agricultural or horticultural cooperative, the amount determined
under section 199A(b)(2) with respect to such trade or business shall be reduced by the
lesser of (A) 9 percent of so much of the qualified business income with respect to such
trade or business as is properly allocable to qualified payments received from such
cooperative, or (B) 50 percent of so much of the W-2 wages with respect to such trade
or business as are so allocable.
Section 199A(b)(4)(A) of the Code defines the term “W-2 wages” to mean, with
respect to any person for any taxable year of such person, the amounts described in

section 6051(a)(3) and (8) paid by such person with respect to employment of
employees by such person during the calendar year ending during such taxable year.
Proposed § 1.199A-2 further defines W-2 wages for purposes of section 199A. The
proposed revenue procedure included in this Notice would provide methods for
calculating the amount of W-2 wages, as defined in section 199A(b)(4) and proposed
§ 1.199A-2, for purposes of determining the deduction limitation in section 199A(b)(2)
and the reduction in section 199A(b)(7). Section 1.199A-2(b)(2)(iv)(A) of the proposed
regulations provides the Internal Revenue Service with authority to issue guidance
providing the methods that may be used to calculate W-2 wages.
SECTION 3. REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments on this proposed
revenue procedure. In particular, the Treasury Department and the IRS request
comments concerning the calculation of “W-2 wages” with respect to remuneration paid
for services performed in Puerto Rico. Section 199A(f)(1)(C)(ii) provides that in the
case of a taxpayer with qualified business income from sources within the
commonwealth of Puerto Rico, the determination of W-2 wages of such taxpayer shall
be made without regard to any exclusion under section 3401(a)(8) for remuneration paid
for services performed in the Commonwealth of Puerto Rico. Because bona fide
residents of the Commonwealth of Puerto Rico are not subject to federal income tax
and do not receive Forms W-2, the methods provided in the proposed revenue
procedure will be difficult to apply with respect to employees who are residents of
Puerto Rico. The Treasury Department and the IRS request comments concerning

appropriate methods for calculating W-2 wages with respect to remuneration paid for
services performed in Puerto Rico by bona fide residents of Puerto Rico.
Interested parties are invited to submit comments on this Notice by [INSERT
DATE 45 DAYS AFTER DATE THE SECTION 199A PROPOSED REGULATIONS
ARE PUBLISHED IN THE FEDERAL REGISTER]. Comments should be submitted to:
CC:PA:LPD:PR (Notice 2018-64), Room 5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington, D.C., 20044. Submissions may be hand-
delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (Notice 2018-64), Courier’s Desk, Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington, D.C. 20224. Alternatively, taxpayers may
submit comments electronically to Notice.comments@irscounsel.treas.gov. Please
include “Notice 2018-64” in the subject line of any electronic submission.
SECTION 4. EFFECTIVE DATE AND IMMEDIATE RELIANCE
This Notice is effective on [INSERT DATE THIS DOCUMENT IS PUBLISHED IN
THE INTERNAL REVENUE BULLETIN]. The proposed revenue procedure is
proposed to apply generally to taxable years ending after December 31, 2017.
Until such time that the proposed revenue procedure is published in final form,
taxpayers may use the methods described in the proposed revenue procedure in
calculating W-2 wages, as defined in section 199A(b)(4)(A), for purposes of determining
the limitation in section 199A(b)(2) and the reduction in section 199A(b)(7) .
SECTION 5. DRAFTING INFORMATION
The principal authors of this Notice are Andrew Holubeck and Mikhail Zhidkov of

the Office of the Associate Chief Counsel (Tax Exempt and Government Entities)
and Frank J. Fisher and Benjamin H. Weaver of the Office of the Associate Chief
Counsel (Passthroughs & Special Industries). However, other personnel from the
Treasury Department and the IRS participated in its development. For further
information regarding this Notice, contact Andrew Holubeck or Mikhail Zhidkov at (202)
317-4774, or Frank J. Fisher or Benjamin H. Weaver at (202) 317-6850.
SECTION 6. FORM OF PROPOSED REVENUE PROCEDURE
Set forth below is the form of the proposed revenue procedure that is proposed in
this Notice:

FORM OF PROPOSED REVENUE PROCEDURE
Part III
Administrative, Procedural, and Miscellaneous

26 CFR 1.199A-2: Determination of W-2 Wages
(Also: [XX, XXX, XXX])

Rev. Proc. 2018-XX

SECTION 1. PURPOSE
This revenue procedure provides methods for calculating W-2 wages, as defined
in section 199A(b)(4) and § 1.199A-2 of the Income Tax Regulations, (1) for purposes
of section 199A(b)(2) of the Internal Revenue Code (Code) which, for certain taxpayers,
provides a limitation based on W-2 wages to the amount of the deduction for qualified
business income (QBI); and (2) for purposes of section 199A(b)(7), which, for certain
specified agricultural and horticultural cooperative patrons, provides a reduction to the
section 199A deduction based on W-2 wages.
SECTION 2. BACKGROUND
For taxpayers above a certain amount of taxable income, section 199A(b)(2)

limits the amount of a taxpayer’s section 199A deduction for each qualified trade or
business to the lesser of (1) 20 percent of the taxpayer’s QBI with respect to the
qualified trade or business, or (2) the greater of (A) 50 percent of the W–2 wages with
respect to the qualified trade or business, or (B) the sum of 25 percent of the W–2
wages with respect to the qualified trade or business plus 2.5 percent of the unadjusted
basis immediately after acquisition of all qualified property. Section 199A(b)(7) provides
that in the case of any qualified trade or business of a patron of a specified agricultural
or horticultural cooperative, the amount determined under section 199A(b)(2) with
respect to such trade or business shall be reduced by the lesser of (A) 9 percent of so
much of the qualified business income with respect to such trade or business as is
properly allocable to qualified payments received from such cooperative, or (B) 50
percent of so much of the W-2 wages with respect to such trade or business as are so
allocable.
Section 199A(b)(4)(A) defines the term “W-2 wages” to mean, with respect to any
person for any taxable year of such person, the amounts described in section
6051(a)(3) and (8) paid by such person with respect to employment of employees by
such person during the calendar year ending during such taxable year. Section
199A(b)(4)(B) provides that W-2 wages does not include any amount which is not
properly allocable to qualified business income for purposes of section 199A(c)(1).
Section 199A(b)(4)(C) provides that W-2 wages shall not include any amount that is not
properly included in a return filed with the Social Security Administration (SSA) on or
before the 60th day after the due date (including extensions) for such return.

Section 1.199A-2(b)(2)(iv)(A) of the regulations provides the Internal Revenue
Service with authority to issue guidance providing the methods that may be used to
calculate W-2 wages.
This revenue procedure provides three methods for calculating W-2 wages, as
defined in section 199A(b)(4) and § 1.199A-2, for purposes of section 199A(b) and the
regulations thereunder. The first method (the unmodified Box method) allows for a
simplified calculation while the second and third methods (the modified Box 1 method
and the tracking wages method) provide greater accuracy.
W-2 wages calculated under this revenue procedure are not necessarily eligible
for use in computing the section 199A limitations. As mentioned above, only W-2
wages which are properly allocable to QBI may be taken into account in computing the
section 199A(b) W-2 wage limitations. Under § 1.199A-2(g), the taxpayer must
determine the extent to which the W-2 wages calculated under this revenue procedure
are properly allocable to QBI. Then, the properly allocable W-2 wages amount is used
in determining the W-2 wages limitation under section 199A(b)(2) for that trade or
business as well as any reduction for income received from cooperatives under section
199A(b)(7).
SECTION 3. RULES OF APPLICATION
.01 In general. In calculating W-2 wages for a taxable year under the methods
described in this revenue procedure, include only wages properly reported on Forms W-
2 that meet the applicable rules of § 1.199A-2(b). Specifically, § 1.199A-2(b)(2)(i)
provides that, except as provided in § 1.199A-2(b)(2)(iv) (C)(2) (concerning short taxable

years that do not include December 31) and § 1.199A-2(b)(2)(iv)(D) (concerning
remuneration for services performed in the Commonwealth of Puerto Rico), the Forms
W-2, “Wage and Tax Statement,” or any subsequent form or document used in
determining the amount of W-2 wages are those issued for the calendar year ending
during the person's taxable year for wages paid to employees (or former employees) of
the person for employment by the person. Section 1.199A-2(b)(2)(i) also provides that,
for purposes of § 1.199A-2, employees of the person are limited to employees of the
person as defined in section 3121(d)(1) and (2) (that is, officers of a corporation and
employees of the person under the common law rules). Therefore, Forms W-2 provided
to statutory employees described in section 3121(d)(3) (that is, Forms W-2 in which the
“Statutory Employee” box in Box 13 is checked) should not be included in calculating
W-2 wages under any of the methods described in this revenue procedure.
.02 No application in determining whether amounts are wages for employment
tax purposes. The discussions of “wages” in this revenue procedure and in the
regulations under section 199A are for purposes of section 199A only and have no
application in determining whether amounts are wages under section 3121(a) for
purposes of the Federal Insurance Contributions Act, under section 3306(b) for
purposes of the Federal Unemployment Tax Act, or under section 3401(a) for purposes
of the Collection of Income Tax at Source on Wages (federal income tax withholding), or
any other wage-related determination. See § 1.199A-2 of the regulations.
SECTION 4. DEFINITION OF W-2 WAGES AND CORRELATION WITH BOXES ON

FORM W-2
.01 Definition of W-2 wages. Section 199A(b)(4)(A) provides that W-2 wages
means, with respect to any person for any taxable year of such person, the sum of the
amounts described in section 6051(a)(3) and (8) paid by such person with respect to
employment of employees by such person during the calendar year ending during such
taxable year. Thus, W-2 wages include: (i) the total amount of wages as defined in
section 3401(a); (ii) the total amount of elective deferrals (within the meaning of section
402(g)(3)); (iii) the compensation deferred under section 457; and (iv) the amount of
designated Roth contributions (as defined in section 402A).
.02 Correlation with Form W-2. Under the 2018 Forms W-2, the elective
deferrals under section 402(g)(3) and the amounts deferred under section 457 directly
correlate to coded items reported in Box 12 on Form W-2. Box 12, Code D is for
elective deferrals to a section 401(k) cash or deferred arrangement plan (including a
SIMPLE 401(k) arrangement); Box 12, Code E is for elective deferrals under a section
403(b) salary reduction agreement; Box 12, Code F is for elective deferrals under a
section 408(k)(6) salary reduction Simplified Employee Pension (SEP); Box 12, Code G
is for elective deferrals and employer contributions (including nonelective deferrals) to
any governmental or nongovernmental section 457(b) deferred compensation plan; Box
12, Code S is for employee salary reduction contributions under a section 408(p)
SIMPLE (simple retirement account); Box 12, Code AA is for designated Roth
contributions (as defined in section 402A) under a section 401(k) plan; and Box 12,
Code BB is for designated Roth contributions (as defined in section 402A) under a

section 403(b) salary reduction agreement. However, designated Roth contributions
are also reported in Box 1, Wages, tips, other compensation and are subject to income
tax withholding.
SECTION 5. METHODS FOR CALCULATING W-2 WAGES
For any taxable year, a taxpayer must calculate W-2 wages for purposes of
section 199A(b)(2) using one of the three methods described in section 5.01, 5.02, and
5.03 of this revenue procedure. For a taxpayer with a short taxable year, see Section 6
of this revenue procedure. In calculating W-2 wages for a taxable year under the
methods below, the taxpayer includes only those Forms W-2 that arefor the calendar
year ending with or within the taxable year of the taxpayer and that meet the rules of
application described in section 3 of this revenue procedure..01 Unmodified box
method. Under the unmodified box method, W-2 wages are calculated by taking,
without modification, the lesser of—
(A) The total entries in Box 1 of all Forms W-2 filed with SSA by the taxpayer
with respect to employees of the taxpayer for employment by the taxpayer; or
(B) The total entries in Box 5 of all Forms W-2 filed with SSA by the taxpayer
with respect to employees of the taxpayer for employment by the taxpayer.
.02 Modified Box 1 method. Under the Modified Box 1 method, the taxpayer
makes modifications to the total entries in Box 1 of Forms W-2 filed with respect to
employees of the taxpayer. W-2 wages under this method are calculated as follows—
(A) Total the amounts in Box 1 of all Forms W-2 filed with SSA by the
taxpayer with respect to employees of the taxpayer for employment by the

taxpayer;
(B) Subtract from the total in paragraph .02(A) of this section amounts
included in Box 1 of Forms W-2 that are not wages for Federal income tax
withholding purposes, including amounts that are treated as wages for
purposes of income tax withholding under section 3402(o) (for example,
supplemental unemployment compensation benefits within the meaning of
Rev. Rul. 90-72); and
(C) Add to the amount obtained after paragraph .02(B) of this section the
total of the amounts that are reported in Box 12 of Forms W-2 with respect to
employees of the taxpayer for employment by the taxpayer and that are
properly coded D, E, F, G, and S.
.03 Tracking wages method. Under the tracking wages method, the taxpayer
actually tracks total wages subject to Federal income tax withholding and makes
appropriate modifications. W-2 wages under this method are calculated as follows—
(A) Total the amounts of wages subject to Federal income tax withholding that
are paid to employees of the taxpayer for employment by the taxpayer and
that are reported on Forms W-2 filed with SSA by the taxpayer for the
calendar year; and
(B) Add to the amount obtained after paragraph .03(B) of this section the total
of the amounts that are reported in Box 12 of Forms W-2 with respect to
employees of the taxpayer for employment by the taxpayer and that are
properly coded D, E, F, G, and S.

SECTION 6. APPLICATION IN CASE OF SHORT TAXABLE YEAR
.01 Special rule for taxpayers with a short taxable year. In the case of a
taxpayer with a short taxable year, subject to the rules of application described in
section 3 of this revenue procedure, the W-2 wages of the taxpayer for the short taxable
year shall include only those wages paid during the short taxable year to employees of
the taxpayer, only those elective deferrals (within the meaning of section 402(g)(3))
made during the short taxable year by employees of the taxpayer, and only
compensation actually deferred under section 457 during the short taxable year with
respect to employees of the taxpayer. See §1.199A-2(b)(2)(iv)(C) of the regulations.
.02 Method required for a short taxable year and modifications required in
application of method. The W-2 wages of a taxpayer with a short taxable year shall be
determined under the tracking wages method described in section 5.03 of this revenue
procedure. In applying the tracking wages method in the case of a short taxable year,
the taxpayer must apply the method as follows—
(A) For purposes of section 5.03(A), the total amount of wages subject to Federal
income tax withholding and reported on Form W-2 must include only those
wages subject to Federal income tax withholding that are actually or
constructively paid to employees during the short taxable year and reported on
Form W-2 for the calendar year ending with or within that short taxable year (or,
for a short taxable year that does not contain a calendar year ending with or
within such short taxable year, wages subject to Federal income tax withholding
that are actually or constructively paid to employees during the short taxable year

and reported on Form W-2 for the calendar year containing such short taxable
year); and
(B) For purposes of section 5.03(B), only the portion of the total amounts
reported in Box 12, Codes D, E, F, G, and S on Forms W-2, that are actually
deferred or contributed during the short taxable year are included in W-2 wages.
SECTION 7. EFFECTIVE DATE
This revenue procedure applies to taxable years ending after December 31,
2017.
SECTION 8. DRAFTING INFORMATION
The principal authors of this revenue procedure are Andrew Holubeck and
Mikhail Zhidkov of the Office of the Associate Chief Counsel (Tax Exempt and
Government Entities) and Frank J. Fisher and Benjamin H. Weaver of the Office of the
Associate Chief Counsel (Passthroughs & Special Industries). However, other
personnel from the Treasury Department and the IRS participated in its development.
For further information regarding this revenue procedure contact Andrew Holubeck or
Mikhail Zhidkov at (202) 317-4774, or Frank J. Fisher or Benjamin H. Weaver at (202)
317-6850.