The Tax Cuts and Jobs Act (TCJA) - passed in December of 2017 - still has payroll professionals on edge as they continue to wait for the IRS to finalize the calculation for withholding federal tax from employees. The TCJA made significant changes to how federal tax is calculated for individual taxpayers. In addition, many of the long-time exemptions no longer apply for tax year 2018 and beyond. These changes make it difficult to estimate the correct amount of tax to withhold from employees’ paychecks. Historically, sensitive information, such as income from sources other than that particular job, wouldn’t be shared with employers.
The TCJA Effects on W-4 Withholdings, Deductions
To accurately calculate the federal withholding, the TCJA would require employees to notify their employer of income from interest and dividends and potentially wages from other jobs the employee may have. This information is considered to be inappropriate for an employer to solicit from the employee. This was the main argument to the first pass that the IRS took to revamp the W-4 in June of 2018. This proposed W-4 was also much more complex to complete and many payroll professionals voiced concern to the IRS that most employees would be challenged to complete it accurately. The IRS took these comments to heart and withdrew the proposed form and went back to the drawing board.
In addition to changing the withholding brackets, the TCJA:
Eliminated personal exemptions
Doubled the standard deduction
Increased child (aka “family”) tax credits
Removed the deduction for work-related moving expenses
Scaled back the deduction for state and local taxes
Tightened the mortgage interest deduction
This is just a short list of the more notable items. (See full list from the IRS here). All of these changes means that taxpayer liability from 2017 to 2018 is substantially different even if everything stayed the same year over year. The IRS attempted to accommodate these changes with some changes to the tax tables that have supported tax withholding calculations for the last several years.
IRS Offers Little Guidance, Relief for Taxpayers and Payroll Professionals in 2019
In an effort to help taxpayers ensure they properly withheld for 2018, they created the “Paycheck Checkup” calculator. The calculator allowed the employees to enter in much of the information that is to be used on the 2018 federal 1040. The result is guidance on how to complete an updated W-4 which continues to use exemptions as a method for calculating withholding. The IRS and employers worked to educate taxpayers to utilize the calculator. Unfortunately, most taxpayers have not used the calculator and will likely be knocking at the door of the payroll department after completing their 2018 tax return wanting to know why they either under or over-withheld taxes throughout 2018.
The IRS recently released Notice 2019-11 providing relief to taxpayers “for the underpayment of estimated income tax for certain individuals who would otherwise be required to make tax year 2018 estimated income tax payments on or before January 15, 2019. This waiver is limited to individuals whose total withholding and estimated tax payments equal or exceed eighty-five percent of the tax shown on the return for the 2018 taxable year.” This will help ensure that the failure of the IRS to provide better guidance on withholding does not burden taxpayers with additional fines for underpaying their taxes.
Per Notice 2018-92, the 2019 W-4 form continues to mirror the W-4 from recent years for the time being. The IRS is working diligently to develop a new version of the form that is simple and easy to complete, yet accommodates the nuances of calculating taxes under the TCJA. As part of this effort, the IRS is still gathering feedback from the market, but there are still lots of unknowns as to what the IRS will propose next. We can likely plan on an early, early draft of the form in March of 2019. Then, a more standard early (aka “almost final”) release of the form in May of 2019 with only final inflation adjusted numbers closer to the end of the year. The intent for having a mostly final release of the form in May is to allow payroll software companies the opportunity to update systems to support the new calculation.
Stay Up To Date with Integrity Data
Integrity Data remains committed to being your partner in payroll compliance and are keeping a close eye on this and other legislative, regulatory, and judicial actions that may impact your ability to take care of your employees. As always, stay tuned to our blog or RSS feed for the latest information. Get real-time updates by following our Twitter account, @IntegrityData and #ACAfluent for ACA related information.
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