11 Nov IRS Issues Final Regulations on Wage Withholding, Redesigned W-4
The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages. The final regulations:
- address the amount of federal income tax that employers withhold from employees’ wages;
- implement changes made by the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97); and
- reflect the redesigned Form W-4, Employee’s Withholding Certificate, and related IRS publications.
TCJA Changes
The TCJA made many amendments affecting income tax withholding on employees’ wages. Among other things, the TCJA:
- repealed the rule that the “number of withholding exemptions claimed” meant the number of withholding exemptions claimed in a withholding exemption certificate in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;
- replaced “withholding exemptions” with a “withholding allowance” prorated to the payroll period, to reflect the change that reduced 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 allowed 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 an 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 an employee who is married and 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 Code Sec. 199A qualified business income deduction as a deduction that an employee may take into account in determining the additional withholding allowance that the employee can 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 Code Sec. 3405(a) when no withholding allowance certificate has been furnished.
After the TCJA was enacted, the IRS issued guidance to implement the changes (for example, Notice 2018-14, IRB 2018-7, 353; Notice 2018-92, IRB 2018-51, 1038; Notice 2020-3, IRB 2020-3, IRB 2020-3, 330). The IRS updated Form W-4 and its instructions with significant changes intended to improve the accuracy of income tax withholding and make the withholding system more transparent for employees. It also released IRS Publication 15-T, Federal Income Tax Withholding Methods, which provides percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year.
On February 13, 2020, the IRS published a notice of proposed rulemaking (REG-132741-17) to update the regulations under Code Sec. 3401 and Code Sec. 3402 to reflect the legislative changes, and expand the rules to accommodate changes necessary to fully implement the redesigned Form W-4 and its related computational procedures, along with most existing computational procedures that apply to 2019 or earlier Forms W-4.
The final regulations adopt the proposed regulations with a few revisions.
Form W-4
The final regulations do not require all employees with a 2019 or earlier Form W-4 in effect to furnish a redesigned Form W-4. Commenters had expressed concerns that the proposed regulations and the related forms, instructions, publications, and other IRS guidance would require employers to maintain two different systems for computing income tax withholding on wages: one for 2019 or earlier Forms W-4, and another for the redesigned Forms W-4.
In response, the IRS is acknowledging the commenters’ concerns with (1) instructions to the redesigned Form W-4 for employees with multiple jobs and (2) optional computational “bridge” entries permitted under the regulations and described in Publication 15-T that will allow employers to continue in effect 2019 or earlier Forms W-4 as if the employees had furnished redesigned Forms W-4.
The final regulations revise Reg. §31.3402(f)(4)-1(a) to provide that an employer’s use of the computational bridge entries to adapt a 2019 or earlier Form W-4 to the redesigned computational procedures as if using entries on a redesigned Form W-4 will continue in effect such a Form W-4 that was properly in effect on or before December 31, 2019.
Lock-in Letters
The IRS issues a “lock-in” letter to notify an employer that an employee is not entitled to claim exemption from withholding, or is not entitled to the withholding allowance claimed on the employee’s Form W-4. The lock-in letter prescribes the withholding allowance the employer must use to figure withholding. After the lock-in letter becomes effective, the IRS may issue a subsequent modification notice, but only after the employee contacts the IRS to request an adjustment to the withholding prescribed in the lock-in letter.
Under the final regulations, employers are not required to notify the IRS that they no longer employ an employee for whom a lock-in letter was issued. Further, the final regulations do not require the IRS to reissue lock-in letters or modification notices solely because of the redesigned Form W-4.
The final regulations revise Reg. §31.3402(f)(2)-1(g)(2)(iv) relating to lock-in letters. and Reg. §31.3402(f)(2)-1(g)(2)(vii) relating to modification notices, to provide that an employer may comply with a lock-in letter or modification notice that is based on a 2019 or earlier Form W-4, as required by the regulations, if the employer implements the maximum withholding allowance and filing status permitted in a lock-in letter or modification notice by using the computational bridge entries as set forth in forms, instructions, publications, and other IRS guidance to calculate withholding for such a Form W-4.
Estimated Tax Payments
The final regulations revise Reg. §31.3402(m)-1(d) to allow employees to take estimated tax payments into account, as long as the employee (1) follows the instructions to the IRS’s Tax Withholding Estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator) or IRS Publication 505, (2) is not subject to a lock-in letter or modification notice, and (3) does not request withholding from wages that falls below the pro rata share of income taxes attributable to wages determined under forms, instructions, publications, and other IRS guidance. The IRS intends to update its Tax Withholding Estimator and Publication 505 to reflect this rule.
Head of Household
One commenter questioned whether employees who were eligible for the head of household filing status but claimed single filing status on a 2019 or earlier Form W-4 must be withheld as head of household using tables applicable to redesigned Forms W4. Under the proposed regulations, the adoption of the head of household filing status and the use of related tables is limited to redesigned Forms W-4. The head of household filing status and related tables are not available for 2019 or earlier Forms W4. These final regulations adopt the filing status rules set forth in the proposed regulations.
History. The IRS has issued two sets of tables for 2020. One set applies to Form W-4s prior to 2020. The other is for those who submitted a new 2020 Form W-4. Prior to 2020 , W-4’s allowed 1 allowance if the filer claimed to be head of household either on the earlier forms (2017 and prior were on Line C) (2018 and 2019 were in the work sheet). There were no separate withholding tables for those who claimed head of household. They were to use the withholding tables that applied to “singles”. The 2019 withholding tables for “singles” and earlier say “including head of households.” The IRS then issued 2020 tables for those who are head of households but say don’t use them for those using a Form W-4 for 2019 and prior. Thus, it appears that those claiming head of household status who are using a 2019 or prior year Form W-4 should use continue to use the withholding tables for single status that the IRS has issued for those who did not submit a new 2020 Form W-4.
Applicable Date
The final regulations generally apply on the date they are published in the Federal Register. Reg. §31.3402(f)(2)-1(g), regarding withholding compliance, applies as of February 13, 2020. Reg. §31.3402(f)(5)-1(a)(3), regarding the requirement to use the current version of Form W-4, applies as of March 16, 2020. The removal of Reg. §31.3402(h)(4)-1(b), regarding the combined income tax withholding and employee FICA tax withholding tables, applies on and after January 1, 2020.
Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the final regulations on and after January 1, 2020, and before their applicability date set forth in the regulations. (IRS TD 9924, October 2, 2020).
Propose regulations_2020-02849
Original Content by IRS.gov – September 28, 2020. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.