Revised Withholding Guide: An IRS Move Under The New Tax Law

A recent update to income tax withholding for 2018 was announced by the IRS in their IR-2018-5 news released. The Tax Cuts and Jobs Act (TCJA) created changes which led to the updates. The changes are encouraged to be observed by employers as soon as possible but no later than February 15. 

There is a different impact on payroll withholding for 2018 due to the many changes made by the TCJA to individual taxes, new tax rates, and brackets, higher standard deductions, and the removal of personal exemptions. IRS Notice 1036 is an advanced release of 2018 withholding tables for the purpose of incorporating these changes.

At this point in time, the IRS’s guidance states that employers are not mandated to complete a new Form W-4, Employee Withholding Allowance Certificate. The numbers of allowance on existing Forms W-4 to produce the correct amount of withholding for the rest of 2018 will be based upon the updated withholding tables. This may serve as a great opportunity for employed individuals to double check current allowances claimed on Forms W-4 make necessary updates to make sure withholding for 2018 is correct.

Take a look at these examples:

• If you previously itemized your deductions and you want to claim the standard deduction in 2018, it may be best to lower your allowances.
• If you were phased out of the child tax credit in the past and you want to claim it in 2018, you may want to increase your allowances.

Understanding How Withholding Works

Form W-4 may often use “allowance” and “exemption” interchangeably as well as meetings about paycheck withholding, the terms do not really have the same meaning. 

• The amount taken away from employees pay results to each allowance. 
• To calculate federal income tax withholding for that employee, a tax formula is used to the remainder.
• Therefore, more allowance leads to more subtracted from the employee’s pay and a smaller taxable remainder. On the other hand, fewer allowances lead to less subtracted from the employee’s pay and a bigger taxable remainder.
• The allowance amount and the formula will base on pay frequency such as weekly, semi-monthly, etch. It also depends on whether the employee applies the single or married withholding rate.

Since  W-4 does not ask the employed individual regarding how many exemptions he or she plans to claim, it asks questions about the employee’s spouse and dependent, filing status, itemized deductions, tax credits instead in order to get the number of allowances.

In the end, the correct number of allowances and resulting tax withheld are for the purpose of getting the employee as close as possible to breaking even, considering the tax law implemented each year.

IRS Providing Information

The IRS promises to work with the business and payroll community to push workers into filing new Forms W-4 next year. They will also share information on changes in the new tax law that will affect withholding.

David Kautter, Acting IRS Commissioner said in a statement that the IRS is thankful for the assistance from the payroll community working with them on the important changes. He says he understands the complexity of payroll withholding and the taxpayers need to be based on their personal financial situation. The IRS will be giving more information to help people understand and the changes made he added.

Bottomline

Employees who end up having an exact match of withholding and a tax liability is very rare. You may not need the new W-4 form right now but you may still want to revise the number of allowances if they have personal changes such as marriage, divorce, having a new baby, among others. Also included is when you start a second job, is earning other types of income including dividends and capital gain, and so on.

A new Form W-4 and withholding calculator is being worked on including a Frequently Asked Questions regarding the new law which is related to 2018 withholding and Form W-4. Due to the delayed Form W-4, Notice 2018-14 eliminates the requirement that employees must provide a revised Form W-4 within 10 days within 10 days of any change to their tax status that would decrease the allowance to which they are qualified.