Employer Solutions / HRMS Newsletter – September 2018
Keeping You Up-To-Date With Information About Employer Solutions / HRMS
Preparing for Changes to the 2019 Form W-4
By: Net at Work Team
On June 6, 2018, the Internal Revenue Service (IRS) released a draft Form W-4, Employee’s Withholding Allowance Certiﬁcate, for 2019. Several changes are fundamental in nature, potentially requiring significant reprogramming of payroll operations. State and local tax authorities are also expected to respond with similar changes.
Employees use IRS Form W-4 to establish marital status and withholding allowances for federal income tax withholding calculations. Many states use the Federal Form W-4 for state withholding purposes.
The Tax Cuts and Jobs Act (TCJA) made signiﬁcant changes to tax rates, deductions, tax credits, and withholding calculations, beginning in 2018. New IRS withholding tables were published in January, and the 2018 Form W-4 was released in February. The IRS made few changes for 2018 and determined that employees would not be required to complete a new Form W-4 for 2018. However, it was strongly recommended and for some people it may be advisable.
The IRS has recently published a draft of the 2019 Form W-4 and instructions containing information concerning the proposed changes in the federal income tax withholding calculation starting next year. Additional revisions to the draft are expected in November.
2019 W-4 Form Proposed Changes
Employees will be “strongly encouraged, but not required” to complete a new W-4 for 2019. Employers will still be able to use 2018 and prior Forms W-4 for employees that don’t complete a 2019 W-4. New Hires after January 1, 2019 will be required to use the new version of the W-4.
Number of Allowances Eliminated
Perhaps the most prominent change on the 2019 Form W-4 is that Line 5, “Total number of allowances you’re claiming,” is eliminated. In lieu of claiming withholding allowances, the draft Form W-4 would give employees the option of providing annual dollar amounts for:
(1) Additional nonwage income such as interest and dividends,
(2) Deductions from income for the household, such as itemized or other deductions,
(3) Income tax credits expected for the tax year
(4) For employees with multiple jobs, total annual taxable wages for all lower paying jobs in the employee’s household.
New Marital Status Box – Head of Household
A third IRS withholding calculation/table will be added to correspond with this new marital status, in addition to the existing tables for Single and Married Filing Jointly.
New Line 5. Additions to Income
This line asks employees to enter estimated nonwage income not subject to withholding (such as interest and dividends). Previously, employees with significant nonwage income had to convert such amounts to equivalent per-payroll additional amounts to withhold. Line 5 amounts will be full-year estimates.
New Line 6. Itemized and Other Deductions
Line 6 prompts employees to enter estimated subtractions to income based on expected deductions (such as state and local taxes, mortgage interest, and charitable contributions). Previously, employees needed to convert deductions into equivalent withholding allowances. Again, amounts entered will be full-year estimated deduction totals.
New Line 7. Tax Credits
This line asks employees to enter the full-year amount of any tax credits for which they expect to qualify, such as the child tax credit. As a reminder, the 2017 Tax Cuts and Jobs Act significantly expanded child and dependent tax credits. Previously all tax credits were translated by employees into additional withholding allowances. With the 2019 Form W-4, full-year tax credit amounts will be directly entered into payroll systems.
Critically, any tax credits should only be entered for the highest paying job in households with multiple incomes. Taxes may be significantly under-withheld for a household if both spouses enter the full-year credit expected, resulting in a large tax amount due at year-end. Conversely, taxes may be significantly over-withheld if neither spouse enters the total tax credit amount, resulting in reduced net paychecks during the year, and a large tax refund at year-end.
New Line 8. Additional Household Income Due to Multiple Jobs If applicable, employees will enter the (full-year) income associated with any second job (e.g., a second job that the employee holds, or the annual wage income of any spouse, if they are employed). Additional wage income should only be entered for the highest paying job in households with multiple incomes. There are special instructions for households with more than two incomes. Previously, employees used a Form W-4 worksheet to calculate a specific additional amount to withhold per pay period.
Employers will include these full-year amounts in withholding calculations in order to determine the appropriate tax bracket and rates for the employee.
Alternatively, the instructions will offer a calculation to estimate an additional tax amount to withhold per pay period, which was the solution prior to 2019. Employees will also be able to go to the online calculator (discussed below) or IRS Publication 505, Tax Withholding and Estimated Tax, to bypass Lines 5 and/or 8.
Line 9. Additional Amount, If Any, You Want Withheld From Each Paycheck
This line is unchanged. Employees will continue to be able to enter an additional per-pay period amount to withhold. Line 9 is the only entry with a per-pay period result.
Minimal Change to Current 2018 W-4
The Tax Cuts and Jobs Act (TCJA) made signiﬁcant changes to tax rates, deductions, tax credits, and withholding calculations, beginning in 2018. New IRS withholding tables were published in January, and the 2018 Form W-4 was released in February. The IRS made few changes for 2018 and determined that employees would not be required to complete a new Form W-4 for 2018.
Under the Tax Cuts and Jobs Act of 2017 and effective January 1, 2018, and through December 31, 2025, the personal exemption deduction is suspended; however, the law allowed the IRS to administer the federal income tax withholding rules under IRC Section 3402 without regard to this provision for tax years beginning before January 1, 2019. (TCJA Section 11041.)
The 2018 Form W-4 continues to contain line 5 on which employees can claim withholding allowances. The IRS explained that the 2018 federal income tax withholding are designed to work with Forms W-4 submitted prior to 2018 and there is currently no requirement that employees submit a revised Form W-4 merely because they claimed withholding allowances. (IR-2018-36.)
Employees Should Review Their Tax Withholding
For most people, the TCJA will result in a tax reduction, and many have noticed reduced federal income tax deductions and a corresponding increase in net pay. However, even though the 2018 withholding tables were designed to be as accurate as possible, changes to withholding may not correspond closely to changes in actual full-year income tax liability. In some circumstances, even employees that ordinarily receive an IRS tax refund may ﬁnd that they owe additional tax to the IRS for tax year 2018.
Unless an employee has already ﬁled a new Form W-4 in 2018, tax withholding calculated for 2018 payrolls could be based on outdated withholding allowances. Most signiﬁcantly, the law eliminated personal exemptions. In 2017, each personal exemption (e.g., for the employee, any spouse and any dependents) reduced federal taxable income by $4,050 per person. In 2018, the value of personal exemptions is zero. The value of each withholding allowance is $4,150 for 2018, and to the extent that withholding allowances on ﬁle in 2018 represent personal exemptions, an employee’s withholding allowances may be overstated for 2018, which could result in tax under-withholding.
The new IRS tax tables adjusted for this and other factors to some extent, but because Forms W-4 permit withholding allowances based on factors such as expected tax credits and itemized deductions (such as mortgage interest, and state/local taxes), employers are not able to automatically adjust withholding allowances to eliminate personal exemptions.
Online W-4 Tax Calculator
The new tax rules will make it far more complex for many employees to complete than the current W-4 form and will require disclosure of details of household income, deductions and tax credits to employers. As an alternative, employees may consider using the IRS Tax Calculator to determine their tax liability without providing additional information to their employer.
The IRS published the new online W-4 Calculator in February, and strongly recommended that employees access the calculator at https://www.irs.gov/individuals/irs-withholding-calculator,to determine the correct number of withholding allowances (either adjusting for the TCJA, and/or changes in personal circumstances).
The online IRS calculator will ask a number of questions about income, marital status, anticipated deductions and eligibility for tax credits, to estimate annual taxable income and suggest the most appropriate number of withholding allowances.
Steps Employers Can Take to Prepare for 2019
While payroll systems like Sage HRMS prepare for the necessary changes to income tax calculation, there are steps employers can take now to prepare for the changes.
Notice to Employees
Employers should consider reminding employees of the withholding calculator, which will help employees check their tax withholding at any point in the year compared to their total expected full-year tax liability. It is not too late for employees to make adjustments (if needed) during the remainder of the year. Here is a sample letter.
Example Notice to Employees
Re: 2018 Income Tax Withholding
This is a reminder that the 2017 Tax Cuts and Jobs Act (TCJA) changed federal income tax rates and brackets, among other things, beginning in 2018. New IRS withholding tables were put into effect in late January.
Depending on your speciﬁc tax situation, you might owe additional tax when you ﬁle your 2018 income tax return, even if you normally receive a tax refund from the IRS at year-end.
The IRS offers an online “W-4 Calculator,” at https://www.irs.gov/individuals/irs-withholding-calculator. This calculator can help you check your tax withholding at any point in the year, compared to your total expected 2018 tax liability. If you have not already done so, it is not too late to make adjustments (if needed) during the remainder of the year.
Although the IRS did not require all employees to ﬁle a new Form W-4 for 2018, for some people it may be advisable. The TCJA made many other changes that could affect your 2018 income taxes.
To update your withholding allowances, see the IRS 2018 Form W-4, Employee’s Withholding Allowance Certiﬁcate, and related instructions, which you can ﬁnd at www.irs.gov/W4.
For questions regarding your personal tax situation, talk with your tax advisor, or visit www.IRS.gov.
Consider Training\Workshops for Employees in Filling Out the Form
Employees will find completing the W-4 much more difficult than previous forms. While employers will want to be careful not to offer specific tax advice to employees, general training on completing the form may be useful.
Follow State W-4 Rule Changes
Several states have not adopted the new TCJA rules. It is important for employers to provide an accurate state W-4 to employees in 2019. A current list of states and planned adoptions can be found here.
Monitor the Draft W-4 Process
Look for additional information on the 2019 W-4 to be published later this year.
Many organizations are critical of the complexity of the new form and the exposure to employers of personal financial data. In a recent letter to IRS Acting Commissioner David Kautter, National Association of Enrolled Agents (NAEA) President Jean Nelsen expressed their concerns this way:
“If taxpayers and employers are forced to use Forms W-4 that are difficult to understand and require taxpayers to disclose personal information, we should expect unpleasant (or catastrophic) surprises in early 2020 when taxpayers determine the liabilities of their post-TCJA Form 1040,”
Attend Our “How the IRS 2019 Form W-4 Will Change Payroll” webinar
In our webinar, we will breakdown the W-4 changes in detail and talk about additional steps employers can take to prepare. We will also review the latest changes to the draft form and how payroll publishers will be responding to those changes. Click here to register for the September 28th.
Our Net at Work payroll software partners like Sage and Infinity HR are monitoring the changes closely and will consider how their systems will be configured to accommodate the proposed federal income tax withholding calculation. Changes potentially needed to electronic Form W-4 systems like HR Actions are also being considered.
The proposed Form W-4 would be far more complex and employees could struggle to understand how to complete it correctly. Accordingly, employers should consider the extent they would provide Form W-4 training or other assistance to their employees.
Finally, the draft Form W-4 would likely not conform for state income tax withholding purposes. Accordingly, states that currently use the Form W-4 could require that a unique state form be used.
Net at Work can assist you with employee training, as well as deploying the new W-4 when the final form is released. For more information, talk with your Net at Work Account Manager or contact us at 800-719-3307.
Upcoming Live Webinar: Topic: How the IRS 2019 Form W-4 Will Change Payroll Register Here | Date: Sep 28