On October 6, the IRS published final 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 based on the employee’s Form W-4 (Employee’s Withholding Certificate).  These final regulations were issued only 8 months after the proposed regulations were published (see earlier coverage), which is considered warp-speed in IRS time. The Preamble to the final regulations provide a new method for employers who must continue to rely on pre-2020 Forms W-4 to determine the amount of federal income tax to withhold from employee’s wages.

The final regulations, which taxpayers generally may choose to apply on or after January 1, 2020, adopt the proposed regulations with few changes.  The 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.

The IRS issued a redesigned Form W-4 for 2020 to reflect the TCJA changes. Employers were required to collect the new Form W-4 from new hires, but not from current employees.  Although employers were permitted to request employees submit a new Form W-4, employers were not permitted to require the new form. Some commenters on the proposed regulations expressed concern that employers must continue to withhold according to a valid pre-2020 Form W-4 submitted by an employee until an employee furnishes the employer a new Form W-4.  Preamble

Transition Method for Pre-2020 Forms W-4

The Preamble of the final regulations address commenters’ concerns about an employer’s requirement to maintain two systems to determine withholding.  Specifically, the Preamble announces that the IRS will address those concerns by (1) issuing additional instructions to the redesigned Form W-4 for employees with multiple jobs and (2) providing “optional computational bridge entries” to be described in the 2021 Publication 15-T (Federal Income Tax Withholding Methods).  The Preamble explains that the computational bridge entries will allow employers to use the computational procedures and data fields for the redesigned Form W-4 to arrive at an equivalent amount of withholding for an employee that would have applied using the computational procedures and data fields for a 2019 or earlier Form W-4 furnished by the employee.

Surprisingly, the Preamble provides a detailed preview of the four specific adjustments that an employer may make to implement the computational bridge entries, so that the employer does not have to maintain two withholding systems.  The Preamble also announces that to facilitate the use of the computational bridge entries, the IRS will no longer index the pre-TCJA withholding allowance to reflect cost-of-living adjustments, starting in 2021.  Thus, going forward, the withholding allowance will be fixed at $4,300.  The use of the computational bridge entries is optional.  Therefore, employers may continue computing withholding using computational procedures for pre-2020 Forms W-4, since the IRS will continue to publish withholding tables and procedures for employers who choose to do so.

The Preamble also rejects one commenter’s concern that “lock-in” letters related to pre-2020 Forms W-4 must be reissued.  Lock-in letters are instructions from the IRS directing an employer to withhold certain amounts from an employee’s wages until the IRS issues a modification notice, including a release from a lock-in letter or prior modification to the lock-in letter.  The Preamble instructs employers that they should not assume that a lock-in letter or modification notice ceases to be effective because of changes resulting from the redesigned Form W-4 and related withholding procedures.  Unless the employee furnishes the employer a Form W-4 that results in more withholding than that required by the lock-in letter or modification notice, the employer must continue to withhold as instructed by the IRS until the IRS releases the employee from the program.  An employer is permitted to use the optional computation bridge entries discussed above to administer the withholding instructions of a lock-in letter or modification notice related to pre-2020 Forms W-4.

We will continue to update our readers on significant developments with the revised Publication 15-T. We discuss other effects of the TCJA elsewhere on our blog.

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Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.