IRS Provides Guidance on Form W-4

In Notice 2018-14, the IRS publishes further guidance on the 2018 Form W-4, Employee’s Withholding Allowance Certificate and income tax withholding on supplemental wages and periodic payments of pensions, annuities and other deferred income.

Four Things to Know About Notice 2018-14

1. The IRS issued the notice to extend the effective period to claim exemption from income tax withholding from February 15 to February 28 using Form W-4 and permits employees to claim exemption from withholding for 2018 by temporarily using 2017 Form W-4.
2. The notice temporarily suspends the requirement that employees must furnish their employers new Forms W-4 within 10 days of changes in status that reduce the withholding allowances they are entitled to claim.
3. The notice provides that the optional withholding rate on supplemental wage payments is 22% from 2018 through 2025.
4. For 2018, withholding on periodic pension and annuity payments when no withholding certificate is in effect is based on treating the payee as a married individual claiming three withholding allowances.

NOTE: Generally, Forms W-4 furnished to the employer claiming exemption from withholding for a taxable year are generally effective up to and including February 15 of the following year.  An employer may continue to rely on employees’ Forms W-4 claiming exemption from withholding until February 16 of the following year; however, as mentioned above, due to changes in the Internal Revenue Code made by H.R. 1, The Tax Cuts and Jobs Act, the IRS may not release the 2018 Form W-4 until after February 15, 2018. Therefore, the IRS and Treasury Department will allow 2017 Forms W-4 claiming exemption from withholding for 2017 to remain in effect for wages paid through February 28, 2018.

2018 Form W-4

The 2018 Form W-4, Employee’s Withholding Allowance Certificate, is not available yet.  The IRS is working on revising Form W-4 to reflect new legislation made by H.R. 1, The Tax Cuts and Jobs Act; for instance changes in itemized deductions, increases in the child tax credit, the new dependent credit and the repeal of dependent exemptions.

In the Interim

The IRS will allow employees to claim exemption using the 2017 Form W-4 until 30 days after the 2018 Form W-4 is released in one of the following ways:

1. Modifying the 2017 Form W-4 by striking “2017” in the text on Line 7 of the Form W-4 and entering “2018” in its place and signing the form in 2018;
2. Modifying the 2017 Form W-4 by entering “Exempt 2018” on Line 7 of the 2017 Form W-4 and signing the form in 2018;
3. Using the 2017 Form W-4 without modification and signing the form in 2018 (the employer must establish and communicate to employees a procedure under which an employee signs and furnishes the 2017 Form W-4 in 2018 to certify both that the employee incurred no income tax liability for 2017 and that the employee anticipates that he or she will incur no income tax liability for 2018); or
4. A method substantially similar to (1)-(3) that clearly conveys in writing an employee’s intent to certify his or her exemption from withholding for 2018.

Employees who claim exemption from withholding for 2018 using the 2017 Form W-4 as permitted by this notice do not need to furnish a 2018 Form W-4 after the 2018 Form W-4 is released.

Withholding on Periodic Payments

The payor of certain periodic payments for pensions, annuities, and other deferred income generally is required to withhold from the payments as if they were wages unless an individual elects not to have withholding apply to the periodic payment. Under the law in effect before 2018, Code Sec. 3405(a)(4) provided that, in the case of a payee entitled to periodic payments with respect to which a withholding certificate has not been furnished, the amount to be withheld from each such payment will be determined by treating the payee as a married individual claiming three withholding exemptions.

The Tax Cuts and Jobs Act amended current Internal Revenue Code to allow the Treasury Secretary to determine the rules for withholding when no withholding certificate is furnished.  However, for 2018, the rules for withholding (when no withholding certificate is furnished with respect to periodic payments) will follow the rules for prior years and be based on treating the payee as a married individual claiming three withholding allowances.

Supplemental Wages

Employers and other entities paying supplemental wages should implement the 22% percent optional flat rate for withholding on supplemental wages as soon as possible, but no later than February 15, 2018. Employers using optional flat rate withholding who withheld at a higher rate than 22% (for example, employers who withheld at the 2017 optional flat rate of 25%) may, but are not required to, correct such withholding on supplemental wages paid on or after January 1, 2018, and before February 15, 2018, under the rules applicable to corrections of over collections of federal income tax.

Thank you for choosing Paylocity as your Payroll Tax partner. Should you have any questions please contact your Paylocity Account Manager.

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.

Date Posted: February 1, 2018