Today, the IRS unveiled its new Tax Withholding Estimator to help employees complete the Form W-4 and ensure that withholdings are sufficient to cover their income tax liability. The new calculator was previewed in the draft 2020 Form W-4. (See earlier coverage.) A near-final draft 2020 Form W-4 is expected to be released soon. Currently, the calculator provides guidance to employees regarding how to complete the 2019 Form W-4 based on the information they provide and whether they wish to match their withholding to their estimated tax liability or receive a refund.
The calculator has been updated to reflect the changes made to the Internal Revenue Code by 2017 tax reform legislation, such as the elimination of personal exemptions. To use the calculator, an employee provides information regarding the income that he or she and his or her spouse earn at each job, tax withholding per pay period, and tax withholding year-to-date. The calculator allows an employee to input information regarding qualified retirement plan contributions (it is worth noting that the results page displays only the amount included in box for the employee’s contribution, but the calculation appears to take into account any contribution made by a spouse), cafeteria plan salary reductions (for HSAs, FSAs, dependent care accounts, health insurance, adoption assistance, group-term life, etc.), and other pre-tax reductions, such as for qualified transportation fringes. The prompt, however, does not make it clear what should be included in the total as employees may be unfamiliar with the term “cafeteria plan” and no reference is made in the prompt to qualified transportation fringes. In addition, the income information asks for “wages” and if the employee inputs “taxable wages” from his or her paystub and then includes pre-tax deductions, the recommendations may result in too little withholding. The calculator includes expandable tips that explain that “total wages” means “gross wages” before any pre-tax reductions, but employees may not complete the form without seeing the additional guidance, which is only visible if the employee clicks on a question mark.
In addition to income and withholding information, the calculator also allows employees to account for “adjustments,” which are primarily above-the-line deductions, such as the educator expense deduction, student loan interest deduction, alimony paid, and non-payroll IRA deductions. The items were included on Schedule 1 of the 2018 Form 1040. The revised calculator allows employees to further refine the withholding calculation by electing to input itemized deductions or to make the withholding estimate using the standard deduction. If the employee uses itemized deductions, the calculator will automatically take into account the $10,000 limit on state and local tax deductions.
Finally, the calculator allows employees to take into account various tax credits, including the child and dependent care tax credit, foreign tax credit, and educational tax credits. The calculator provides links to other IRS tools and/or guidance to enable employees to determine whether they are likely to be eligible for the credits.
It is anticipated that the calculator will be revised to provide guidance on completing the 2020 Form W-4 after the end of the year. Because of the elimination of personal exemptions, the draft Form W-4 released earlier this year requires employees to provide more personal information on the face of the form to achieve accurate withholding calculations. The calculator will allow employees to achieve more accurate withholding from their paychecks without providing all of the personal information to their employers on the face of the 2020 Form W-4. Regardless of whether the employee uses the withholding calculator or provides the information on the form itself, completing the 2020 Form W-4 is likely to be significantly more complicated and labor intensive than employees are used to. Given public complaints earlier this year by taxpayers regarding reduced refunds or taxes due after filing their 2018 income tax returns, employers may wish to recommend that their employees use the new calculator to review their withholding determinations sooner rather than later.