Back in June, in the wake of the Tax Cuts and Jobs Act, the IRS issued a draft Form W-4, Employee’s Withholding Allowance Certificate, and instructions -- and received nothing but complaints. CPAs and others raised privacy concerns and posited that the new form created a substantial risk of underwithholding and would require taxpayers to forecast a number of tax-related items that are traditionally difficult to predict. As a result, in September the service postponed implementing the new instructions detailed on the “new” W-4. We didn’t hear much after that. Now, thanks to an announcement made this week, the IRS is providing some interim guidance on income tax withholding.
In short, the withholding rules in effect for 2018 will remain in effect for 2019, and overhaul of Form W-4 won’t happen until 2020. The IRS is asking for comments, by January 25, 2019, on some of the new withholding procedures. So, changes to withholding regulations will come -- just not this year. Note that the 2019 Form W-4 will look a lot like the 2018 Form.
Here are a few key items to note in the interim guidance, Notice 2018-92.
Change in status
Employees traditionally must fill out a new Form W-4 within 10 days when they have a change in status that would affect their withholding allowance (for example, the birth of a child). The new guidance states that, if a change is due solely to the effect of the TCJA, the employee does not need to notify the employer of that change within the 10 days. Instead, the employee will generally be required to furnish the employer a new Form W-4 by May 10, 2019. This rule will be in effect until April 30, 2019. Note that If a change in status is not due to the new tax law, the employee must still file a new form notifying the employer of the change within 10 days. Keep your employees up to speed on this.
Failure to furnish Form W-4
If an employee fails to provide a Form W-4 the default will be to treat that person as single with zero allowances.
Estimates of Sec. 199A deduction
Taxpayers may include an estimate of the deduction allowed under Sec. 199A, the deduction for Qualified Business Income, in determining the additional withholding allowance under Sec. 3402(m) to which they are entitled.
Taxpayers may use the online withholding calculator and IRS Publication 505, Tax Withholding and Estimated Tax, to determine the correct withholding. The notice says the IRS intends to amend the regulations to explicitly allow the use of the withholding calculator in lieu of completing the schedules included with Form W-4.
Combined withholding tables
The update announces that the IRS intends to eliminate the combined withholding tables for income tax and Federal Insurance Contributions Act tax withholding under Regs. Sec. 31.3402(h)(4)-1(b) because of its complexity, especially since employers are still required to report and pay over separate amounts.
For now, the IRS has suspended the requirement that an employer sends a written notice to the IRS that an employee, for whom the IRS has issued an employer a notice prescribing a maximum number of withholding allowances an employee may claim (a lock-in letter), is no longer employed by the employer.
We expect a new, shorter From W-4 in 2020 (per current IRS statements), and we’ll continue to provide updates on withholding guidelines and forms as they become available. Please reach out to us for assistance as you navigate the new withholding requirements.