In a Notice, IRS has provided interim guidance for the 2019 calendar year on income tax withholding from wages and from retirement and annuity distributions. The Notice also provides that IRS will be issuing withholding regs that reflect changes made by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) as well as other miscellaneous changes.
Background. Code Sec. 3402 requires an employer to withhold income tax from wages under methods and procedures prescribed by IRS. Under Code Sec. 3402(f)(2), an employee who receives wages subject to withholding under Code Sec. 3402 is required to furnish his or her employer a Form W-4 (Employee’s Withholding Allowance Certificate).
The 2019 draft version of Form W-4 previously posted by IRS in June was one full page with 13 lines. It was a more complex form than in previous years due to tax law changes in the TCJA that nearly doubled the standard deduction, eliminated personal exemptions, increased the child tax credit, limited deductions for state and local taxes, limited the deduction for home mortgage interest, and changed the tax rates and brackets. IRS was expected to issue the 2019 final draft version of Form W-4 in mid-August and to finalize the 2019 Form W-4 in November. The draft Form W-4 Instructions were also more complex due to these changes. They were separate from the Form W-4 itself and were 11 pages long.
Many comments were received on the draft form and instructions. In response to comments received from stakeholders, IRS announced on Sept. 20, 2018 that implementation of the redesigned form would be postponed until 2020 and that IRS would continue working closely with stakeholders as additional changes are made to the form. Accordingly, instead of using the draft 2019 Form W-4 that was released in June of 2018, IRS announced that it intends to release a 2019 Form W-4 before the end of 2018 that makes minimal changes to the 2018 Form W-4. See IRS announces 2019 Form W-4 will be similar to current 2018 version.
Notice provides a variety of guidance. The Notice provides a variety of guidance including:
…Withholding allowances. Although the TCJA amended Code Sec. 3402(f) to provide for a “withholding allowance” in the singular rather than “withholding exemptions” in the plural, Code Sec. 3402(f) provides that an employee is entitled to a withholding allowance determined on the basis of multiple items listed in Code Sec. 3402(f), and Code Sec. 3402(m) provides for an additional withholding allowance. Accordingly, under the general authority to establish computational procedures pursuant to Code Sec. 3402(a), the 2019 Form W-4 and the computational procedures in Publication 15 will continue to use the term “withholding allowances” and related terminology to properly incorporate the factors specified in Code Sec. 3402(f) and the additional items in Code Sec. 3402(m).
Until further guidance is issued, any reference to a withholding exemption in the regs and guidance under Code Sec. 3402 will be applied as if it were a reference to a withholding allowance. Thus, for example, the language in Reg. § 31.3402(f)(2)-1(g)(2)(i) providing for an IRS notification process to specify a “maximum number of withholding exemptions” an employee may claim will be applied as a reference to a maximum number of withholding allowances.
Code Sec. 3402(f)(2)(B) and Code Sec. 3402(f)(2)(C) and the regs thereunder provide that if an employee experiences a “change of status” that reduces the “withholding allowance” the employee is entitled to, the employee must furnish his or her employer a new Form W-4 within 10 days after the change if the change affects the current calendar year and by December 1 of the current calendar year if the change affects the next calendar year. However, if the change affecting the next calendar year occurs in December of the current calendar year, the employee must furnish a new Form W-4 within 10 days after the change occurs. See Reg. § 31.3402(f)(2)-1(c)(1)(i).
For 2019, IRS has determined that the “withholding allowance” as described in Code Sec. 3402(f)(2)(B) and Code Sec. 3402(f)(2)(C) means the number of withholding allowances claimed by the employee on Form W-4 multiplied by the value of the “withholding allowance” for 2019 as prescribed in Publication 15. Thus, if an employee no longer reasonably expects to be entitled to one or more of the withholding allowances claimed on the Form W-4, the employee must generally furnish the employer a new Form W-4 within 10 days of the change. (Notice 2018-92, Section 3)
… Changes of status solely because of the TCJA. Under Section III of Notice 2018-14, employees who had a change of status “solely due to the changes made by the TCJA” were not required to furnish new Forms W-4 to their employers during 2018. IRS has determined that this rule should continue in effect until Apr. 30, 2019. Accordingly, if an employee experiences a change of status on or before Apr. 30, 2019 that reduces the number of withholding allowances to which the employee is entitled and the change is solely due to the changes made by the TCJA, the employee is not required to furnish a new Form W-4 on or before May 9, 2019, but is generally required to furnish the employer a new Form W-4 by May 10, 2019.
However, if an employee no longer reasonably expects to be entitled to a claimed number of withholding allowances because of a change in personal circumstances not solely related to changes made by the TCJA (for example, an individual no longer qualifies as the employee’s qualifying child, as defined in Code Sec. 152(c), because of a change in the individual’s principal place of abode), the employee must furnish his or her employer a new Form W-4 within 10 days after the change. Similarly, if an employee claims married filing status on Form W-4 but becomes divorced from his or her spouse, the employee must furnish the employer a new Form W-4 within 10 days after the change.
IRS’s online withholding calculator has been updated to reflect changes made by the TCJA and will be updated for 2019. Employees are encouraged to check their withholding using this online tool. (Notice 2018-92, Section 4)
…Employees who fail to furnish a valid Form W-4. Section 5 provides that employees who have failed to furnish a Form W-4 will be treated as single but entitled to the number of allowances provided in accordance with computational procedures set forth by IRS in Publication 15 (Circular E), Employer’s Tax Guide.
… Estimated amounts of deductions and credits under Code Sec. 3402(m). Section 6 requests comments on items taken into account under Code Sec. 3402(m) and Reg. § 31.3402(m)-1(b) and provides that taxpayers may include an estimate of the deduction allowed under Code Sec. 199A in determining the additional withholding allowance under Code Sec. 3402(m) to which they are entitled and may claim on Form W-4.
… Use of withholding calculator and Publication 505 as an alternative withholding procedure. Section 7 explicitly allows taxpayers to use the online withholding calculator ( www.irs.gov/W4App) or Publication 505, Tax Withholding and Estimated Tax, in lieu of the worksheets to Form W-4.
… Alternative withholding methods under Code Sec. 3402(h). Section 8 requests comments on alternative withholding methods under Code Sec. 3402(h) and announces that IRS intends to eliminate the combined income tax withholding and employee FICA tax withholding tables under Reg. § 31.3402(h)(4)-1(b).
… Suspension of requirement to notify IRS that an employee is not employed by an employer. Section 9 announces that IRS intends to eliminate the requirement that employers notify IRS when an employee, who was the subject of a notice from IRS setting the maximum number of withholding allowances that the employee may claim, is no longer employed by the employer.
…Withholding with respect to pensions, annuities and certain other deferred income. Notice 2018-92, Section 10 provides that, for 2019, the rules for default withholding for periodic payments under Code Sec. 3405(a)(4), related to pensions, annuities and certain other deferred income, will continue to parallel the rules for prior years by treating the payee as a married individual claiming three withholding allowances and applying that status to the 2019 withholding tables.