“Payroll Withholding Under Tax Reform, Your FAQs Answered” by Susan J. Peirce, CPA, MTax | Principal – Audit & Assurance
Employers are being bombarded with payroll withholding questions from employees looking for the widely publicized increase in their take-home pay in 2018 under the new tax law. Payroll departments have also been searching for answers as the 2018 W-4 is not available yet. The IRS released additional federal income tax withholding guidance on January 29, 2018 pending the release of the 2018 Form W-4. The Form W-4 is being revised to reflect changes made by the Tax Cuts and Jobs Act (“TCJA”) affecting individual taxpayers including changes in itemized deductions, increases in the child tax credit, the new dependent credit, and the repeal of dependent exemptions.
Do all current employees need to fill out the updated W-4 upon release?
No. An employer is not required to obtain a new Form W-4 from an employee solely because the IRS releases the 2018 Form W-4, nor because the new lower income tax rates are equivalent to different payroll withholding allowances. The impact of the reduced tax rate is handled through the revised 2018 withholding tables that are designed to work with the existing Form W-4 previously furnish by employees.
If the 2018 W-4 is not available, what documentation should an employee submit if they want to change their payroll withholding allowances?
The employer may rely on a modified 2017 Form W-4 completed by the employee provided it is received no later than 30 days after the 2018 Form W-4 is released. To use the 2017 Form W-4:
- Edit by striking “2017” in the text and entering “2018” in its place and complete the remainder of the form; or
- Sign and submit under the employer procedures to change withholding or to certify exempt status.
Although the number of exemptions is moot under TCJA, it remains the employee’s responsibility to submit an amended Form W-4 within than 10 days after a change in status that decreases the number of his/her withholding allowances.
Can the modified 2017 W-4 form be used by new hires?
Yes. An employer should obtain a completed and signed Form W-4 from its newly hired employees, on or before the first day of work. The modified 2017 Form is appropriate to establish withholding for new hires.
How should employees attest to their payroll withholding exemption status for 2018?
Employers are not required to withhold federal income tax from an employee’s wages if the employee claims on the Form W-4 that he or she is exempt from withholding. To be exempt from federal income tax withholding in 2018, the employee must certify that he or she:
- Had a right to a refund of all federal income tax withheld in the prior year because the employee had no tax liability; and
- Expects to have no tax liability in the current year.
Exempt withholding is effective through February 15 of the following year, when a new Form W-4 attesting to the exempt status must be filed with the employer. If a valid Form W-4 is not on file, the employer must begin withholding based on the last Form W-4 from the employee that did not claim an exemption from withholding. If there is none, then the employer must withhold from the next wage payment to the employee as if the employee were single with zero withholding allowances.
Any Forms W-4 claiming exemption from withholding for 2017 are scheduled to expire on February 15, 2018. Notice 2018-14 extends the expiration for the 2017 exemptions from February 15, 2018, to February 28, 2018. For the employer to exempt wages paid after February 28, 2018, a new exemption using a modified 2017 Form W-4 as described above must be obtained from the employee.
Did the reduction in tax rates under the new tax law affect the flat rate on bonuses and other supplemental wage payments?
In certain circumstances, employers may withhold income tax from supplemental wage payments at an optional flat rate. Under TCJA, the optional flat rate declined to 22% in 2018 from 25% in 2017. Employers paying supplemental wages should implement the 22 percent optional flat rate for withholding on an employee’s first $1 million of supplemental wages as soon as possible, but not later than February 15, 2018. If a higher optional flat rate withholding has been applied to supplemental wage payments prior to February 15, 2018 (for example, employers that withheld at the 2017 optional flat rate of 25 percent or the 28 percent default rate contained in the regulations), the employer may, but is not required to, correct such withholding on supplemental wages paid during the period of January 1, 2018 through February 15, 2018 by applying the over withheld amounts to future wages. The mandatory 37 percent rate applies to supplemental wages over $1 million paid to an employee during the year.