IRS Form 945: Reporting Withholding on Non-Payroll Payments

Form 945 is the annual return for reporting federal income tax withheld from non-payroll payments. While Forms 941 and 944 handle taxes withheld from wages, Form 945 covers a different universe of payments: pensions, annuities, military retirement, gambling winnings, backup withholding, and other non-employment income. If your organization withholds federal tax from any of these payment types, Form 945 is how you report and reconcile those withholdings with the IRS.

History and Origin

Form 945 was introduced to separate non-payroll withholding from payroll withholding. Before its creation, payers who withheld tax from both wages and non-payroll payments had to combine everything on their employment tax returns. This mixing of payroll and non-payroll withholding created confusion, complicated reconciliation, and made it harder for the IRS to track different types of withholding.

The form was part of a broader effort to streamline the withholding system by creating dedicated reporting channels for different types of payments. Just as Form 941 handles quarterly payroll tax reporting and Form 940 handles unemployment tax, Form 945 carved out a specific space for non-payroll withholding.

The types of payments reported on Form 945 reflect the expanding scope of the federal withholding system. Over the decades, Congress has extended withholding requirements to more types of income; pensions, gambling winnings, certain government payments, and backup withholding on interest and dividends. Each expansion increased the need for a dedicated non-payroll reporting mechanism.

Who Files It and When

Form 945 must be filed by any person or entity that withholds federal income tax from non-payroll payments. Common filers include:

• Pension and annuity payers:Insurance companies, retirement plan administrators, and employers paying pension benefits withhold federal tax based on the recipient's W-4P elections
• Gambling establishments: Casinos, racetracks, lotteries, and sportsbooks that withhold from gambling winnings reported on Form W-2G
• Payers subject to backup withholding:Banks, brokerages, and other entities that must withhold 24% from payments to payees who haven't provided a valid TIN or have been notified by the IRS of underreporting
• Military retirement payers: The Defense Finance and Accounting Service (DFAS) and other agencies paying military retirement benefits
• Indian gaming operations: Tribal casinos that withhold from per-capita distributions to tribal members or from gaming winnings

The filing deadline is January 31 of the year following the tax year. If all deposits were made on time, the deadline extends to February 10. The deposit rules for Form 945 mirror those for Form 941; monthly or semi-weekly schedules based on the total withholding amount during the lookback period, with the same $100,000 next-day deposit rule.

A key distinction: Form 945 reports only federal income tax withholding, not Social Security or Medicare taxes. Non-payroll payments like pensions and gambling winnings are generally not subject to FICA.

Key Sections Explained

• Line 1; Federal Income Tax Withheld: The total federal income tax withheld from all non-payroll payments during the year. This single line aggregates withholding from pensions, gambling, backup withholding, and all other non-payroll sources.
• Line 2; Backup Withholding: The portion of Line 1 that represents backup withholding. Backup withholding is imposed at a flat 24% rate on certain payments when the payee has not provided a valid TIN.
• Lines 3-4; Adjustments: Adjustments for over-collected or under-collected withholding from prior periods, fractions-of-cents adjustments, and sick pay withholding.
• Line 5; Adjusted Total: The net amount of withholding after adjustments — this is the total tax that should have been deposited during the year.
• Line 6 — Total Deposits: The total amount deposited during the year through the Electronic Federal Tax Payment System (EFTPS) or other approved methods.
• Line 7-8 — Balance Due or Overpayment: The difference between adjusted total withholding and total deposits.
• Line 9 — Monthly Summary: For monthly depositors, a breakdown of the withholding liability by month, used to verify that deposits were timely.

Common Mistakes

Mixing payroll and non-payroll withholding is the most basic error. Federal income tax withheld from wages goes on Form 941 or 944, not Form 945. Similarly, withholding from pensions or gambling goes on Form 945, not Form 941. Employers who make both types of payments must file separate returns and make separate deposits. Depositing non-payroll withholding under a payroll tax account (or vice versa) creates matching problems that can take months to resolve.

Failing to apply backup withholding when required shifts liability to the payer. If a payee does not provide a valid TIN (as would be shown on a W-9) or the IRS has notified you that backup withholding is required, you must withhold 24% from reportable payments. If you fail to withhold, you may be liable for the tax yourself, plus penalties and interest.

Late or incorrect deposits are common because Form 945 filers often deal with irregular payment patterns. A casino may have large withholding on a weekend jackpot followed by weeks of minimal activity. The deposit schedule still applies, and the $100,000 next-day rule can be triggered by a single large jackpot.

Not filing at allis surprisingly common among small organizations. A small nonprofit that manages a pension plan for a retired founder, or a local lottery that withholds from prizes, may not realize that Form 945 exists or that they're required to file it. The penalties for failure to file and failure to deposit apply just as they would for payroll taxes.

Recent Changes

The expansion of legal sports betting has significantly increased the volume of gambling withholding reported on Form 945. Online sportsbooks like DraftKings, FanDuel, and BetMGM withhold federal tax from large payouts and report this withholding on Form 945. As more states legalize sports betting, the aggregate amount of gambling withholding continues to grow.

Backup withholdinghas become more prominent as the IRS increases enforcement of TIN matching. The IRS sends "B notices" to payers when the TIN provided by a payee doesn't match IRS records. After two B notices for the same payee, the payer must begin backup withholding at 24%. The IRS has stepped up its B notice program, resulting in more backup withholding across the board.

The growth of retirement distributions as baby boomers age has increased the volume of pension and annuity withholding. Required minimum distributions (RMDs), which were suspended in 2020 and subject to various rule changes since then, generate significant withholding that is reported on Form 945. The SECURE 2.0 Act raised the RMD age to 73 (and eventually 75), affecting the timing and amount of distributions.

Electronic filing requirements continue to expand. The IRS requires electronic filing for entities that file 10 or more information returns, and electronic deposit through EFTPS is mandatory for most payers.

For more information, see the official IRS page: About Form 945.

This article is educational and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.