As previewed by the recent final Form W-4 regulations published in October (see earlier coverage), the IRS released a draft of Publication 15-T (Federal Income Tax Withholding Methods) on November 17. The publication provides a new computational method for employers who must continue to rely on pre-2020 Forms W-4 to determine the amount of
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.
Continue Reading Preamble to Final Regulations on the Mechanics of Income Tax Withholding Provide Transition Method for Pre-2020 Forms W-4
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.
Continue Reading IRS Releases Proposed Regulations on the Mechanics of Income Tax Withholding
Earlier this year, the IRS issued IR-2020-09, in which it announced the launch of a new and improved Tax Withholding Estimator. The Tax Withholding Estimator (the “Estimator”) is designed to help employees adjust their federal income tax withholdings by performing a “Paycheck Checkup.” The process also helps employees target the refund they want by adjusting the amount of federal income tax taken out of their pay. The Estimator incorporates changes from the redesigned Form W-4, Employee’s Withholding Certificate that employees can complete and give to their employers this year. To adjust for the amount of refund desired, the Estimator features a customized refund slider that the employee can use to select a refund from a range of amounts available. Based on the refund amount selected, the Estimator will give the employee instructions on how to fill out their Form W-4 or allow the employee to download a pre-filled Form W-4 based on the Estimator’s recommendations.
Continue Reading IRS Launches New Tax Withholding Estimator
The IRS recently released Notice 2020-3, which provides interim guidance on default federal income tax withholding rates applicable to certain periodic payments of deferred income. The Notice also provides clarity as to how the IRS will accommodate a change that affects the form used to elect federal income tax withholding from wages, but not the form used to make those elections for deferred income distributions.
Continue Reading IRS Issues Interim Guidance on Income Tax Withholding from Deferred Income Distributions
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.
Continue Reading IRS Releases Updated Tax Withholding Estimator
On May 31, the IRS released a draft 2020 Form W-4 that addresses some, but not all, of the privacy concerns that led the IRS to abandon the redesigned form for 2019. According to an accompanying news release, the IRS anticipates releasing a near-final form in July to allow payroll processors and employers to begin work on programming updates to their systems. Minor changes may be made based on comments to that draft form, but stakeholders are encouraged to submit their comments on the released draft by the end of June to ensure they can be taken into account. Draft form instructions are expected to be released in the next few weeks for stakeholder comment.
The new draft directs filers to the IRS withholding calculator to determine how to complete the form without disclosing all of the personal information that would be disclosed on the form if it were fully completed. It also requires less information to be shared with employers, even if the employee does not use the withholding calculator. As with the 2019 draft, the 2020 draft eliminates the concept of withholding allowances to reflect the elimination of personal exemptions under tax reform.
Continue Reading Draft 2020 Form W-4 Addresses Some Privacy Concerns
In a news release, the IRS today announced that it anticipates issuing initial withholding guidance to implement the changes under the tax reform bill in January 2018. Employers and payroll service providers are encouraged to implement the changes in February. In the release, the IRS indicated that the withholding guidance will work with the existing…