The IRS has released draft versions of Form W-4 and Instructions to Form W-4, known as the Employees Withholding Allowance Certificate. The forms bring significant changes to the way withholding amounts will be calculated and the details employees need to submit.
The changes were made in order to comply with the Tax Cuts and Jobs Act (TCJA). It is important to note that the use of a new form is encouraged, but not mandatory.
Not yet in final form, the draft form will undergo revisions after an extended consultation period with stakeholders, before it can be released. The expected release date is in 2020. Until then, employees are encouraged to make use of the withholding calculator to review their withholdings.
The key changes brought by Form W-4 are summarized below.
5 Key Changes to Form W-4:
- Withholding will now be calculated by looking at individual income tax liability as opposed to the number of allowances, allowing for more accuracy. Taxpayers could calculate their withholding from information provided in Form 1040, except without the holding brackets and calculations.
- Employees are now required to list all of their jobs, ranking them from highest to lowest with regard to income level. Additionally, they would need to calculate their total taxable wages for all of their listed jobs.
- Should an employee not sign a W-4 as a new hire, they would need to calculate their withholdings as though they are single, without claiming any adjustments.
- There are four new lines introduced (lines 5 to 8). Line 5 introduces non-wage income not subject to withholding. Line 6 involves itemized and other deductions. Line 7 deals with applicable tax credits and Line 8 looks at the total pay of lower paying jobs in the case where employees have more than one job.
- The Instructions to Form W-4 detail how employees can make data from older forms compatible with the new forms.
There are many unanswered questions of the interim forms faced by both employers and employees, as users come to grips with complicated calculating methods and protocol regarding raises and promotions.
In the interim period, businesses are encouraged to have patience with the process and support the new methodology, ensure that their systems can support the new requirements and keep an eye on state activity, monitoring their adherence to new federal procedure.
The IRS are offering an online withholding calculator and additional tools for employees who do not wish to make available their financial information to their employers. The IRS Withholding Calculator and can be accessed here.
You can read a detailed report on this issue here.