Today, the IRS published proposed regulations addressing changes made by the Tax Cuts and Jobs Act of 2017 (the “TCJA”) to how an employee instructs an employer to withhold income taxes on his or her Form W-4 (Employee’s Withholding Certificate). The Form W-4 was redesigned for 2020 to reflect the TCJA changes to how income tax withholding from wages must be calculated.

The proposed regulations update existing regulations under section 3402 to reflect TCJA’s shift from relying on “withholding exemptions” to determine an employee’s income tax withholdings to the more complicated “withholding allowance” methodology that is putatively designed to neutralize the impact of other changes, such as the elimination of certain Schedule A adjustments to gross income for employees. Before settling on a final Form W-4 implementing these changes, the IRS received feedback on multiple draft form revisions that criticized the form as being complex and confusing. In addition, concerns were raised about the amount of personal information regarding an employee’s other jobs and earnings required to complete early drafts of the form. The 2020 Form W-4 addressed some of these criticisms, but still remains more complicated than the earlier form. Time will tell whether employees are able to easily adapt to the new form, or if errors in completing the form could result in employee underwithholding.

Select portions of the proposed regulations are discussed below. We will continue to update our readers on significant developments as the regulations are finalized. We discuss other effects of the TCJA elsewhere on our blog.

Filing Status Changes

  • Three Filings Statuses: The proposed regulations permit an employee to elect one of three filing statuses on the Form W-4: single (or married filing separately), head of household, or married filing jointly (or qualifying widow(er)). Although the Code provides separate income tax tables for single and for married-filing-separately status, the proposed regulations would treat the two statuses the same because the rate brackets for married-filing-separately filers largely mirror the table for single filers. Although relatively rare, this may result in underwithholding for employees who file returns separately from their spouses and whose income is subject to income tax at higher marginal rates. In addition, the proposed regulations reflect the adoption of the head of household filing status on the 2020 Form W-4 in an effort to promote more accurate withholding.
  • Electing Married-Filing-Jointly Status on Form W-4: Currently, an employee may elect married-filing-jointly status on the Form W-4 even if he or she does not anticipate filing taxes jointly with a spouse. The proposed regulations would permit an employee to elect this status only if he or she reasonably expects to file jointly with his or her spouse. Otherwise, the employee must elect single status, because the proposed regulations eliminate a distinct married-filing-separately status.
  • Changes in Marital Status: When an employee’s marital status changes from married filing jointly to single or head of household, the employee must update the Form W-4. The proposed regulations require an employee to provide an updated Form W-4 within 10 days of anticipating filing status changing from married filing jointly to either head of household or single. The same rule applies for an employee whose status changes from head of household to single. However, if more income taxes are to be withheld from the employee’s wages without taking the change of marital status into account than the anticipated liability under his or her changed filing status, the employee does not need to provide an updated Form W-4 until the later of December 1 of the calendar year in which the change occurs or 10 days after the change.

Determining the Withholding Allowances

  • Factors to Determine the Amount of the Withholding Allowance: The proposed regulations set out seven factors. The precise computational details will be established annually in IRS guidance, including the Form W-4, Publication 505, Publication 15-T, and the Tax Withholding Estimator. The factors include: the employee’s or spouse’s entitlement to a personal exemption under section 151 (disregarded through 2025 because the TCJA suspended them); the employee’s or spouse’s entitlement to additional withholding allowances under section 3402(m) for itemized deductions; whether the employee reasonably expects to claim any tax credits, such as the child tax credit or the credit for other dependents; the standard deduction applicable to the employee and his or her spouse; and whether any adjustments are required because the employee or spouse has multiple Forms W-4, for example, if both spouses work or the employee has multiple jobs.
  • Additional Withholding Allowances: Under the proposed regulations, an employee may claim additional withholding allowances on the Form W-4. These additional withholding allowances are intended to help ensure accurate withholding, but they are optional in that an employee does not need to claim them on the Form W-4 even if he or she is entitled to do so. Additional allowances are calculated based on estimated tax deductions (with certain limitations), estimated tax credits, and estimated tax payments. Estimated tax payments take into account income tax on non-wage amounts, including earnings from self-employment. For the purposes of calculating additional withholding allowances, estimated tax credits and payments must be computed using the Tax Withholding Estimator (see earlier coverage), or Publication 505 (for estimated tax credits only). Because non-wage income is not subject to FICA tax, the proposed regulations also eliminate the combined income-tax and employee-FICA-tax withholding tables.

Providing or Failing to Provide a Form W-4

  • Default Withholding Rate: If an employee fails to provide a valid Form W-4 to the employer, the employer must withhold taxes based on a default withholding rate. If an employee had been hired and paid wages in 2019 or earlier, the pre-TCJA method of calculating the default rate continues to apply: the employee will be treated as single with no withholding allowances. The proposed regulations provide that if an employee is first paid wages in 2020 or later (regardless of date of hire), the default rate will be calculated by treating the employee as electing single status (including married-filing-separately status) and making no other elections on the updated Form W-4.
  • When an Employee Must Provide a New Form W-4: The proposed regulations establish seven circumstances under which an employee is deemed to have a “change of status,” which requires the submission of a new Form W-4 to the employer. Changes of status include: changes in marital status (see above); starting a job with a different employer and selecting a higher withholding rate table; for an employee with multiple Forms W-4s, a reasonable expectation that wages will increase by at least $10,000 at the job for which he or she uses multiple job procedures on the applicable Form W-4; an expectation that the number of children for whom the child tax credit may be claimed will decrease; a reasonable expectation that the amount of total tax credits the employee expects to claim decreases by more than $500; a reasonable expectation that the deductions the employee expects to claim will decrease by more than $2,300; and a reasonable expectation that the employee will no longer be able to claim an exemption from income tax withholding under section 3402(n). If the change of status affects the current calendar year, the employee must provide the new Form W-4 within 10 days of the change. If the change affects the next calendar year, the new Form W-4 is due the later of December 1 of the current calendar year or 10 days after the change.