TCJA payroll update: Form W-4
April 16, 2018
By Tracey Lueken-Burds, CPP, Partner
Since the passage of the Tax Cuts and Jobs Act (TCJA), many employers are questioning where things stand with the W-4. The TCJA announced new individual tax rates and brackets, increased the standard deduction for individuals from $6,000 to $12,000 and $12,700 to $24,000 for married-filing-joint, and eliminated personal exemptions. It’s this elimination of personal exemptions that will have the greatest impact on payroll withholding, and employers should be aware of and make plans for changes to come.
The Internal Revenue Service (IRS) issued the newest W-4 on Feb. 28, and employers must have adopted by March 31 (The 2017 form could be used until March 30, 2018). If an employee needs to make a reduction to the number of withholding allowances, they will need to present the updated W-4 to the employer within 30 days, which is an increase from the previous 10-day deadline.
The IRS has also launched a tax calculator on their website this quarter which can be used to help employees determine what their withholding amounts should be. Instructions on using the calculator have also been published (https://www.irs.gov/newsroom/step-by-step-instructions-for-using-the-irs-withholding-calculator ). There are situations where employees could be under-withheld and result in too little taxes being paid in when they file their return. For example, if an employee is not withholding the proper amount, and they now have children over the age of 17, they may not receive the same amount of credit as in prior years which could cause them to owe in at tax time next year.
Twenty-five states also have connections to federal withholding tables, and 11 have made updates to their tables to reflect the changes. More are sure to follow. Twenty-one states, including Iowa, accept the federal W-4, so we encourage you to ensure your employees are indicating on their federal W-4 if they would like to use the same form for their state withholding.
The updated 2018 W-4 still asks for the number of allowances just like the 2017 W-4, but the new tax rates were changed to factor in these allowances. However, in 2019, employers should expect a completely new W-4 updated to reflect the changes to exemptions present on the 1040. Employees should be encouraged at that time to complete a new W-4; they are not mandated to fill out an updated W-4 for 2018.