IRS New Guidance on Withholdings Reflects Tax Law Changes

With the busy season in full swing, the IRS has issued a new advisory on tax withholdings for 2018, with some changes taking place starting this month.

Notice 2018-14, Guidance on Withholding Rules, includes four key points:

• The effective period of Form W-4, Employee’s Withholding Allowance Certificate, furnished to claim exemption from income tax withholding under section 3402(n) of the Internal Revenue Code for 2017, is extended to Feb. 28.  It allows employees to claim an exemption from withholding for 2018 by temporarily using the 2017 Form W-4.
• The requirement under Section 3402(f)(2)(B) that employees must give their employers a new Form W-4 within 10 days of a change in their status that reduces their withholding allowances is temporarily suspended.
• The optional withholdings rate on supplemental wage payments under Treasury Regulation 31.3402(g)-1 is 22 percent for 2018 through 2025.
• For this year, the withholding under Section 3405(a)(4) 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 working on amending Form W-4 to reflect the new tax law’s changes. Those include changes in itemized deductions, increases in the child tax credit, the new dependent credit and the repeal of dependent exemptions. That means that the new Form W-4 may not be issued until after Feb. 15.

Further, the IRS and the Treasury Department designed the withholding tables for this year to mesh with Forms W-4 that employees already have given their employers. That’s because the new law doesn’t mandate new Forms W-4 for this year and allows the IRS to administer income tax withholding under Section 3402 without regard to the changes in withholdings and the suspension of personal exemptions.

For workers with less complicated tax situations, the new tables are intended to produce the correct amount of withheld taxes, which includes avoiding over- and under-withholding of taxes.

The IRS also will be revising the withholding calculator on its website to reflect the new law’s requirements.

When the modified calculator and 2018 Form W-4 are released, employees can update their withholding or changes in their personal situations this year. Until then, everyone should use the 2017 Form W-4.