- As of Jan. 1, 2018, the new tax law suspends the personal exemption deduction through Dec. 31, 2025.
- The Internal Revenue Service (IRS) will design the 2018 income tax withholding tables and percentage method to work with the current Form W-4, which indicates the amount of federal income tax to withhold from employees' paychecks.
- The IRS can administer the income tax withholding rules without regard to this provision for tax years before 2019.
- Employers may expect to process a large volume of Form W-4 changes for tax year 2019.
The Republican tax reform bill, signed into law by President Trump on Dec. 22, 2017, suspends the personal exemption deduction from Jan. 1, 2018, through Dec. 31, 2025. Before this tax bill, individual taxpayers could claim $4,050 as a personal exemption, and the same amount for a spouse and each dependent, lowering the household's taxable income. Some families may find that the loss of the personal exemption will reduce or eliminate any tax relief from tax reform.
However, the law allows the IRS to administer the income tax withholding rules under section 3042 of the Internal Revenue Code (IRC) without regard to this provision for tax years before 2019.
The IRS maintains discretion over changing the wage withholding rules for 2018 according to the personal exemption.
On Jan. 2, 2018, the IRS stated that it will design the 2018 income tax withholding tables and percentage method to work with the current Form W-4. Employers use the W-4 to withhold the correct amount of federal income tax from employees' paychecks. It's likely that the agency will redesign Form W-4 for tax year 2019 to reflect the suspension of the personal exemption deduction.
The IRS has indicated that it will issue the 2018 income tax withholding tables and related guidance in Notice 1036 sometime in January 2018. Those changes could be reflected in wage payments as soon as February 2018.
Employers may expect to process numerous W-4 changes
Once the IRS issues a revised Form W-4 (likely for tax year 2019), each employee who has claimed additional allowances for the personal exemption deduction may need to submit a revised W-4. This could present a significant task for employers, who can expect to process a large volume of Form W-4 changes. It is unknown at this juncture if employers will be required to ascertain new W-4s from all employees, a certain subset of employees or if it will be up to the employee to determine when to submit a new W-4.
Employers await guidance on tax withholding changes
Businesses will need IRS guidance regarding any employer requirement to solicit revised W-4 forms from employees. From there, companies will need to adjust their processes to meet the deadline for employees to submit their forms and implement those Form W-4 changes in the company payroll system. Additionally, for 2018, employers will need guidance on how the old W-4 will interact with the new withholding tables. Employers may receive questions from employees wishing to adjust their withholding in 2018. Given the current W-4 format does not correspond to how the new tax law is structured, employees may seek further guidance how to appropriately fill out the W-4. As the IRS works to develop withholding guidance to implement the tax reform bill, Paychex will keep you up to date with developments as they occur.