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Proposed Regulations Reflect Changes to Wage Withholding, Redesigned W-4

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages. The proposed regulations:

  • implement recent changes made to Internal Revenue Code (IRC) Sections 3401 and 3402
    by the Tax Cuts and Jobs Act (TCJA); and
  • reflect the redesigned 2020 Form W-4, Employee’s Withholding Certificate, and the related wage withholding tables and computational procedures published in IRS Publication 15-T, Federal Income Tax Withholding Methods.

TCJA Changes

The TCJA made many IRC amendments affecting income tax withholding on wages. Among other things, the TCJA:

  • repealed the rule that, for purposes of collecting income tax at the source of wages the
    “number of withholding exemptions claimed” meant the number of withholding exemptions claimed in a withholding exemption certificate in effect, except that if no such certificate was in effect, the number of withholding exemptions claimed was considered zero;
  • permanently modified the wage withholding rules and replaced “withholding exemptions”
    with a “withholding allowance” prorated to the payroll period, to reflect the reductions in
    the personal exemption amount to zero due to the temporarily repeal of the personal and
    dependency exemption deduction for tax years 2018–2025;
  • changed the list of factors on which the withholding allowance is based, and entitled an employee to take into account the number of individuals for which the employee expects to take an income tax credit for other dependents, instead of the number of individuals for whom the employee reasonably expects to claim a personal and dependency exemption deduction;
  • changed an employee’s entitlement to take into account the standard deduction from an amount generally equal to one withholding exemption to the standard deduction allowable to the employee (one-half of the standard deduction for a married employee whose spouse is an employee receiving wages subject to withholding);
  • added a provision that the employee’s withholding allowance also takes into account whether the employee has withholding allowance certificates in effect for more than one employer;
  • added the IRC Section 199A qualified business income deduction to the list of deductions that an employee may take in determining the additional withholding allowance that the employee is entitled to claim on Form W-4;
  • struck references to payments made under certain divorce or separation instruments; and
  • changed the rules for withholding from periodic payments under IRC Section 3405(a) when no withholding allowance certificate has been furnished.

W-4 Issues

An employee is not required to submit a new Form W-4 solely because of the form’s redesign, regardless of when the employee’s Form W-4 currently in effect was submitted. Similarly, an employer must generally continue to compute the amount of tax to be withheld from an employee’s wages based on a valid Form W-4 submitted by the employee regardless of when the employee submitted Form W-4.

The 2020 IRS Publication 15-T provides guidance on how employers will withhold income tax using Forms W-4 submitted and in effect on or before December 31, 2019. An employer can ask all employees who were first paid wages before 2020 to submit a 2020 Form W-4, and if it does, the employer should explain that:

  • employees are not required to submit a new Form W-4; and
  • if the employee does not submit a 2020 Form W-4, the tax to be withheld from the employee’s wages will continue to be based on the last valid Form W-4 previously submitted.

Similar to the current regulations, the proposed regulations generally allow current Forms W-4 to remain in effect until another Form W-4 is provided. There are special rules regarding when a Form W-4 submitted by an employee subject to a “lock-in letter” stops being effective.

For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES (844.494.6337).
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