The Tax Cuts and Jobs Act (“TCJA”) has created many changes for individuals and employers, including the way that employers calculate wage withholding for their employees. Employers need to be aware of the new methodologies for calculating individual income tax withholding, and need to prepare for the use of new forms. To that end, the IRS has published an “early release draft” of the 2019 IRS Form W-4, which incorporates a number of these changes and institutes a new withholding regime.
Background on W-4s
W-4s are the document that employees complete so that their employers can determine the amount of tax to withhold each pay period. Employees accurately completing a W-4 will help them from having either a large income tax balance due at tax time or from overpaying taxes and receiving a large refund. It is not to be confused with Form W-2, given to employees at the end of the year with total amounts of wages earned, federal and state taxes withheld, and contributions to Social Security for a given year.
Changes on the New Draft Form W-4
A significant change ushered in by the TCJA was the elimination of personal exemptions for tax years 2018 through 2025. The exemptions were the basis upon which the W-4 system of taking allowances was based.
This means that the W-4 has to employ a modified regime for determining withholding. Employees will generally need to disclose new items such as non-wage income, itemized deductions, and tax credits, in order to calculate individual income tax liability. While this system is likely to be more accurate than the allowance system, it is also more complex for individual employees and may lead to confusion.
To allay privacy concerns, the IRS will also provide an online calculator at IRS.gov so that employees are not required to disclose items like non-wage income that they may not want to share with employers. Employees can use the numbers from the online calculator to manually determine additional withholding.
The Four Things Employers Need to Know Now
- Until a new final W-4 is released, employees and employers should continue to use the same Form W-4, which was last revised in 2018.
- Employers should encourage employees who have not updated their withholding since 2018 to use the online calculator to check their tax withholding given the changes in the TCJA. It is not necessary to wait for the new Form W-4 to do so.
- Employers should closely monitor upcoming IRS guidance on withholding, as it is likely that a revised draft or final Form W-4 will be forthcoming in the next few weeks or months.
- Finally, employers should monitor updates to state income tax withholding requirements. Many states’ tax codes are based on federal statutes. These changes to federal procedures may cause some states to make changes to their withholding rules.