Individual Income Tax Withholding


Guidance on 2019 Individual Income Tax Withholding Rules

The IRS has provided interim guidance for the 2019 calendar year on individual income tax withholding from wages and withholding from retirement and annuity distributions. In general, certain 2018 withholding rules provided in Notice 2018-14, I.R.B. 2018-7, 353, will remain in effect for the 2019 calendar year, with one exception.

The IRS and the Treasury Department intend to develop individual income tax withholding regulations to reflect changes made by the Tax Cuts and Jobs Act (TCJA), as well as other changes in the new tax laws since the regulations were last amended, and certain miscellaneous changes consistent with current procedures.

Withholding Allowances

The IRS delayed the release of the 2018 Form W-4, Employee’s Withholding Allowance Certificate, in order to reflect changes made by the TCJA, such as changes in itemized deductions available, increases in the child tax credit, the new credit for other dependents, and the suspension of personal exemption deductions. Notice 2018-14 provided relief for employers and employees affected by the delay.

In June, the IRS released a draft 2019 Form W-4 and instructions, which incorporated changes designed to improve the accuracy of individual tax return withholding and make the withholding system more transparent. However, in response to stakeholders’ comments, the IRS announced that the redesigned Form W-4 would be postponed until 2020. In the meantime, the IRS released a 2019 Form W-4 that makes minimal changes to the 2018 Form W-4.

The 2019 Form W-4 and the computational procedures in IRS Publication 15 (Circular E), Employer’s Tax Guide, will continue to use the term “withholding allowances” and related terminology to incorporate the withholding allowance factors specified in Internal Revenue Code (IRC) Section 3402(f) and the additional allowance items in IRC Section 3402(m). Until further guidance is issued, references to a “withholding exemption” in the IRC Section 3402 regulations and guidance will be applied as if they were referring to a withholding allowance.

Changes in Status

According to the guidance, the number of withholding allowances to which an employee is entitled is reduced if the employee experiences a change of status on or before April 30, 2019. If that change is solely due to the changes made by the TCJA, the employee generally must furnish a new Form W-4 to the employer by May 10, 2019. However, if an employee no longer reasonably expects to be entitled to a claimed number of allowances due to a change in personal circumstances that is not solely related to TCJA changes, 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 divorces his or her spouse, the employee must furnish the employer a new Form W-4 within 10 days after the change.

Failure to Furnish

The IRS and the Treasury Department intend to withdraw the regulations under IRC Section 3401(e), in order to allow employees who fail to furnish a Form W-4 to be treated as “single,” yet be entitled to the number of withholding allowances as defined in IRS Publication 15. Until further guidance is issued, however, employees who fail to furnish a Form W-4 will be treated as single with zero withholding allowances.

Additional Allowances

Until further guidance is issued, a taxpayer may include his or her estimated IRC Section 199A pass- through deduction in determining whether the additional withholding allowance can be claimed under IRC Section 3402(m) on Form W-4.

Alternative Procedure

The IRS and the Treasury Department intend to update the withholding regulations to explicitly allow employees to determine their Form W-4 entries by using the IRS withholding calculator (www.irs.gov/W4App) or IRS Publication 505, Tax Withholding and Estimated Tax, instead of having to complete certain schedules included with the Form W-4. However, the regulations are likely to state that an employee cannot use the withholding calculator if the calculator’s instructions state that it should not be used due to the employee’s individual income tax situation. The employee will need to use Publication 505 instead.

Alternative Methods

The IRS and the Treasury Department intend to eliminate the combined income tax withholding and employee FICA tax withholding tables under Regulation (Reg.) Section 31.3402(h)(4)-1(b), due to this alternative procedure’s unintended complexity and burden.

Lock-In Letters

The IRS may issue a “lock-in letter” to an employer, which sets the maximum number of withholding allowances an employee may claim. If the employer no longer employs the employee, the employer must send a written response to the IRS office designated in the lock-in letter that the employee is not employed by the employer. The IRS and the Treasury Department intend to eliminate the written response requirement. Pending further guidance, employers should not send a written response to the IRS under Reg. Section 31.3402(f)(2)-1(g)(2)(iv).

Pension, Annuity Payments

The payor of certain periodic payments for pensions, annuities, and other deferred income generally must withhold individual tax from the payments as if they were wages, unless the individual payee elects not to have withholding apply. Before 2018, if a withholding certificate was not furnished to the payor, the withholding rate was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended this rule so that the rate “shall be determined under rules prescribed by the Secretary.” The IRS has determined that, for 2019, withholding on periodic payments when no with-holding certificate is in effect continues to be based on treating the payee as a married individual claiming three withholding allowances.

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