Update: Following feedback from the payroll and tax communities, the Treasury Department and the IRS are postponing a release of substantial changes to the W-4, Employee’s Withholding Allowance Certificate, which were originally anticipated in 2019. Instead, the 2019 W-4 will remain largely consistent with the 2018 W-4, absent adjustments for inflation and should be available in the coming weeks. The IRS will work closely with stakeholders to make more substantive adjustments to the 2020 W-4 that will accurately reflect the changes encompassed in the new tax law. In the interim, the IRS strongly encourages taxpayers to review their withholding situation using the paycheck checkup to ensure withholding is not under- or over-withheld.
The Internal Revenue Service (IRS) has published an early draft of the 2019 Form W-4, Employee's Withholding Allowance Certificate, and corresponding instructions. Employers use the W-4 to withhold the proper amount of federal income tax from workers' paychecks. The IRS recommends that employees submit a new W-4 to their employer each year, or any time their personal or financial situations change.
The IRS will produce another version of this early draft, probably by the end of the summer. Typically, the agency makes minimal changes to first-draft forms and instructions in the final editions. The IRS published this early draft to generate feedback from stakeholders — a 30-day comment period extends to July 7. This could mean more extensive changes to the form and instructions than the process typically engenders.
Withholding more accurate when figured near tax time
You may recall that the federal tax overhaul significantly changed the calculation method for individual income tax — and thus the method for figuring withholding. Employers use Form W-4 to determine how much to reserve from paychecks based on the information that employees provide.
Ideally, an employee who follows the instructions on the W-4 will determine a withholding amount close to their income tax liability. If withholding is done accurately, at the end of the year, during tax filing time, the individual withheld taxes will more closely mirror their income tax liability. This has never been an exact science, as many factors play into an individual's tax liability.
Although the personal income tax changes under the federal tax overhaul took effect in 2018, the IRS did not make significant changes to the W-4 for that year, and designed withholding in a way that would generally work with W-4s filed previously.
Highlights of the proposed Form W-4 form and instructions
It was anticipated that the IRS would revise the 2019 withholding rules, including the W-4, to more closely mirror the new tax code. Again, keep in mind the early draft form/instructions are only a preliminary blueprint, and could be revised substantially as the IRS considers stakeholders’ comments. Nonetheless, this early draft indicates the direction the IRS is pursuing regarding withholding. Key changes proposed include:
- Method of structuring withholding — The approach to withholding would shift significantly, tying it directly to the calculation for individual income tax liability rather than the number of allowances. Such a system may be more accurate, but it's also more complicated on the front end. A taxpayer could calculate his/her withholding from the information that goes into filing Form 1040, but without the withholding brackets and withholding calculations, it's hard to see how the math works.
- Incremental tax rates — The draft W-4 asks for the highest paying job in the household to complete any additional income in the family, including tax credits that an individual anticipates claiming (e.g., the child tax credit and deductions above the standard deduction threshold). Withholding would look like personal income tax filing on a per-pay-period basis, essentially de-annualizing all additional income, deductions and credits.
- Online aids to figure withholding — The IRS would offer an online withholding calculator or other tools for taxpayers who don't wish to disclose their financial information to their employer, or have complex tax situations.
- New W-4s not required — To prevent disrupting the current withholding system, the IRS would encourage the use of a new Form W-4, but not mandate it. The IRS states that withholding will be designed to be backwards compatible with previously filed W-4s. This would allow the employers to use the W-4s currently on file to calculate withholding.
- New hires — Employees who do not sign a W-4 as new hires will calculate withholding as though single, claiming no adjustments.
- Detailed instructions — The IRS will provide a separate, comprehensive instruction page to assist taxpayers in filling out the W-4.
Questions remain about how withholding works for both the current and 2019 versions of Form W-4:
- How will disparate calculation methods, with the old W-4 and new version, function in the same payroll system to achieve similar withholding results?
- Should individuals complete a new Form W-4 every time their income changes? For example, is a refiling required if a spouse receives a raise or promotion? An individual's circumstances could call for frequent changes to the withholding form.
What should employers do?
- Wait on IRS guidance regarding withholding rules, and submitting and processing a new Form W-4 for 2019.
- Support the new methodology and supply the new 2019 W-4, even though the IRS does not yet require the adoption of new forms.
- Ensure they adjust withholding appropriately for employees who choose to complete a new W-4.
- Stay alert for the finalized withholding structure and Form W-4 for 2019, and ensure their payroll systems can support the requirements.
- Keep an eye on state actions. Many states use the federal tax code as a starting point for tax liability. With the major changes to the federal tax withholding structure, leaders in each state will have to decide how closely they adhere to the federal process.
Paychex will provide more updates as they occur.
A previous version of this article was published on June 8, 2018.