Highly Anticipated Income Tax Withholding Tables Released - Refinements to Follow

Summary

1. Early release of withholding tables to reflect changes made by tax reform legislation last month (increase in standard deduction, repeal of personal exemptions, changes in tax rates and brackets).
2. New withholding tables should be implemented as soon as possible, but no later than February 15, 2018.
3. 2017 and earlier Form W-4s should be used to calculate withholding until employee files a 2018 Form W-4 (not yet available) that will more accurately reflect the new law changes.    
4. Employer must reduce the employee’s actual wages by the amount specified in the guidance for the pay period times each exemption on the employee’s  Form W-4.
5. Flat rate for withholding on an employee’s supplemental wages is 22 percent for supplemental wages up to $1 million during a calendar year, and 37 percent on such wages above $1 million.
6. Backup withholding rate is 24 percent.

 

Discussion

The Tax Cuts and Jobs Act made a number of changes for 2018 that affect individual taxpayers (i.e., increase in the standard deduction, repeal of personal exemptions, and changes in tax rates and brackets). 

On January 11, 2018, the Internal Revenue Service released Notice 1036, which provides updated withholding information for 2018 that reflects changes made by the new tax law.

Withholding taxes are designed to be approximately equal to an individual’s tax liability for the year.  The 2018 revisions to the Percentage Method Tables are aimed at avoiding over- and under-withholding on employee wages.  Employers should implement the 2018 withholding tables as soon as possible, but not later than February 15, 2018.  In the meantime, employers should continue using the 2017 withholding tables.

In an attempt to reduce the burden on employers and their employees, the new withholding tables work with the Forms W-4 that employers already have on file for existing employees.  Employers should not collect new Forms W-4 from existing employees at this time and should continue to use the 2017 Form W-4 for new hires until a revised form is available.  The IRS is working on a revised Form W-4 for use by new hires and existing employees who wish to update their withholding in response to the new law or changes to their personal circumstances in 2018.
 
Notice 1036 also provides the new flat rates that may be applied to supplemental wages.   Upon the elimination of the 25 percent tax rate effective 2018, many employers processing prior year bonuses were uncertain about the correct withholding rate to use for supplemental wages. According to the Notice, employers using the optional flat rate method must withhold 22 percent of the supplemental wages paid to an employee during a calendar year (up to $1 million); and 37 percent on supplemental wages in excess of $1 million.

The rate for backup withholding when the payee fails to furnish a correct taxpayer identification number is 24 percent.