An employer may, rather than withholding on the basis of an employee's actual wage payment, withhold federal tax on the basis of an average payment determined in accordance with the employee's estimated quarterly wages.
Under this method, the employer estimates the wages that will be paid to the employee during a calendar quarter and divides the estimated amount by the number of payroll periods in the quarter to determine the average payment. Withholding from any wage payment during the quarter would then be on the basis of the average payment and not on the amount of the actual payment. If the amounts withheld do not coincide with the amounts that would have been withheld from actual payments, an adjustment must be made sometime during the quarter so that the proper amount of federal tax based on the actual payment is withheld. Quarterly averaging may not be used if the only payments involved are tips.