IRS provides guidance on 2018 withholding rules, issues withholding tables for 2018

The IRS has issued guidance on the federal income tax withholding rules in response to recent changes made by the Tax Cuts and Jobs Act (P.L. 115-97). The IRS also has released IRS Publication 15 (Circular E), Employer’s Tax Guide for 2018, which includes the withholding guidance and tables.

Background

The Act made significant changes to federal income tax rates, deductions, and credits that affect income tax withholding. These include changes in available itemized deductions, increases in the child tax credit, a new dependent credit, and the repeal of dependent exemptions. To minimize the burden on employees and employers, the IRS has designed the 2018 withholding tables to work with the Form W-4 (Employee’s Withholding Allowance Certificate) that employees have already furnished their employers.
The IRS is currently revising Form W-4 to reflect the changes made by the Act, but the 2018 Form W-4 might not be available until after February 15, 2018. Until then, employees and employers should continue to use the 2017 Form W-4.

Exemption from withholding

The IRS has extended the effective period of Forms W-4 that employees furnish to their employer to claim exemption from income tax withholding for 2017 to February 28, 2018. The exemption was originally supposed to expire on February 15, 2018. Further, employees claiming exemption from withholding for 2018 can temporarily use the 2017 Form W-4 until 30 days after the 2018 Form W-4 is released, under the revised rules set forth in the guidance. Employees who claimed exemption for 2017 and are renewing exemption claims for 2018 must furnish their Forms W-4 by February 28, 2018, under the revised rules.

Changes in status

If a change in status occurs that reduces the number of withholding allowances to which an employee is entitled, the IRS has determined that the employee does not need to furnish the new withholding allowance certificate to the employer until 30 days after the 2018 Form W-4 is released (normally, the employee must furnish a new Form W-4 to the employer within ten days of the change in status). Further, if the withholding allowances reduction is due solely to the changes made by the Act, the employee does not need to furnish the employer with a new withholding allowance certificate during 2018.

Withholding on supplemental wages

The Act has changed the income tax rate tables for 2018 through 2025 by adding Code Sec. 1(j). This change has lowered the optional flat rate that employers may use to withhold income tax on supplemental wage payments during this period from 25% to 22%. Under the guidance, employers and other entities paying supplemental wages should implement the 22% optional flat rate as soon as possible, but not later than February 15, 2018. Employers using a higher withholding rate can, but are not required to, correct that withholding on supplemental wages paid on or after January 1, 2018, and before February 15, 2018.

Withholding on pension, annuity payments

The payor of certain periodic payments for pensions, annuities, and other deferred income generally must withhold from the payments as if they were wages, unless the individual payee elects not to have withholding apply. Plan administrators figure withholding by using the recipient’s Form W-4P and the federal income tax withholding tables.
If a withholding certificate has not been furnished to the payor, the withholding rate has normally been determined by treating the payee as a married individual claiming three withholding exemptions. The Act amended this rule so that the withholding rate “shall be determined under rules prescribed by the Secretary.” The IRS has determined that, for 2018, withholding on periodic payments when no withholding certificate is in effect continues to be based on treating the payee as a married individual claiming three withholding allowances.

Source: IRS Notice 2018-14.
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