The massive changes set forth in the Tax Cuts and Jobs Act (TCJA) signed by the President on December 22, 2017, and effective for tax year 2018, continue to be a challenge for employers facing withholding responsibilities. It seems that few employees have expressed an interest in modifying their Forms W-4, Employee’s Withholding Allowance Certificate, and even fewer are aware of the impact of the changes on their required withholdings or how to calculate the necessary number of withholding allowances. These problems are adding to employer tax compliance issues already exacerbated by other “non-employee-related changes” in the TCJA.
On January 29, 2018, the Internal Revenue Service (IRS) issued Notice 2018-14, I.R.B. 2018-7 to ease the administrative burden of employer compliance with new and revised withholding tables previously issued by the IRS. Notice 2018-14 moves the compliance date back from February 15 to February 28, 2018 and adds to the newly-revised withholding tables and other employer payroll information set forth in Notice 1036. Some of the main points in the most-recent notice are listed below.
- extends the effective period of Forms W-4, Employee’s Withholding Allowance Certificate, furnished to claim exemption from income tax withholding under the Internal Revenue Code (the Code) for 2017 until February 28, 2018, and permits employees to claim exemption from withholding for 2018 by temporarily using the 2017 Form W-4;
- temporarily suspends the requirement that employees must furnish their employers new Forms W-4 within 10 days of changes in status that reduce the withholding allowances they are entitled to claim;
- provides that the optional withholding rate on supplemental wage payments to 22% for 2018 through 2025; and
- provides that, for 2018, withholding on periodic payments when no withholding certificate is in effect is based on treating the payee as a married individual claiming three withholding allowances.
The IRS is currently working on revising Form W-4 to reflect the changes made by the TCJA, such as changes in available itemized deductions, increases in the child tax credit, the new dependent credit, and the repeal of dependent exemptions. As a result, the 2018 Form W-4 may not be released until after February 15, 2018.
The TCJA does NOT mandate that employees furnish new Forms W-4 for 2018 and expressly permits the IRS to administer income tax withholding for 2018 without regard to the changes in the withholding rules and the suspension of personal exemptions. Accordingly, and in order to minimize burden on employees and employers, the Internal Revenue Service and the Department of the Treasury (Treasury Department) designed the 2018 withholding tables to work with the Forms W-4 that employees have already furnished their employers.
The most important elements an employer can have at this time are patience and flexibility. It is likely that the IRS will struggle throughout 2018 to fully incorporate the changes made by the TCJA into its operating and administrative protocols.
To help businesses apply recent law changes to withholding, the Treasury Department and the IRS issued Publication 15, Employer’s Tax Guide. These materials are designed to help employers and employees with a variety of withholding matters during and after the transition to new, reduced tax rates and updated withholding tables. More information is available in the IRS Withholding Tables Frequently Asked Questions.