Final rules on employee wage withholding give businesses flexibility when dealing with Form W-4 changes and allow workers to look at the big picture in doing their calculations.
The final rules (T.D. 9924), released October 1, are generally meant to complement the recent modifications to the W-4 that reflect changes made by the Tax Cuts and Jobs Act, such as the removal of personal exemptions.
The government released proposed rules (REG-132741-17) in February to address legislative changes and implement the form changes.
Janine Cook, IRS deputy associate chief counsel (employee benefits, exempt organizations, and employment taxes), pointed out that the final regulations were posted on the IRS’s website but haven’t yet been published in the Federal Register, so there could be minor editing changes when they are officially published.
“Ultimately, the reg published by the Federal Register will be the official reg, but we wanted to get it available to taxpayers sooner,” Cook said October 1 at an American Bar Association Section of Taxation virtual meeting.
The government received seven comments on the proposed regulations, and the final regulations did make a few changes to the earlier proposal. However, nothing changed between the proposed and final rules on the position that people aren’t required to fill out new W-4s just because there is a new form.
“We made that clear in the proposed reg, and we did not change that in the final,” Cook said. That means if an employee continues working with the same employer from last year to this year, he doesn’t have to fill out a new Form W-4. However, if circumstances change — such as filing status or dependency — the employee would then have to fill out a new W-4, she said.
Computational Bridge
Because there wasn’t a requirement to do a new W-4, some of the comments the government received expressed concern that the old and new forms are significantly different in terms of how to determine and process withholding. Some businesses had to maintain two separate systems to figure out withholding.
To address those concerns, the final regs provide a new optional computational bridge, Cook said.
“This computational bridge is to allow an employer, if they want to, to be able to convert old W-4s to new W-4s, in the sense of how to do the withholding,” Cook said. “The employee is not doing anything new, we’re just taking what was on the old W-4 and mathematically equating it to what it would be on the new W-4.”
The final regulations explain that process, but most of the details will be in other publications, such as Publication 15-T, “Federal Income Tax Withholding Methods,” Cook said. She said the optional computation bridge can also be used with lock-in letters. A lock-in letter is sometimes issued by the IRS to employers if it determines an employee doesn’t have enough withholding. The lock-in letter contains procedures for employers to follow in that case.
Estimated Taxes
Like the proposed regulations, the final regs allow employees to take already-paid estimated taxes into account when they’re filling out their W-4s. But the final regs go further by also allowing some employees with relatively high non-wage income relative to their wage income to take into account their planned estimated tax payments.
That means if an employee is completing a W-4 in March and she knows she'll have significant income that’s not subject to withholding, she needs to make estimated tax payments and the final rules address how to account for that.
An employee filling out a W-4 can take into account a planned estimated tax payment even if it's not yet made if she does three things, Cook said.
First, the employee totals all the wage and non-wage income in determining withholding, like partnership income. Second, the employee follows the instructions for the tax withholding estimator — the tool put out by the IRS at the same time the W-4 was released. And third, the employee can’t use planned estimated tax payments to reduce income tax withholding on wages, Cook said.
“If you want to use the planned estimated payments to cover the non-wage income, as opposed to having your withholding jacked up, that’s fine,” Cook said. “But you can’t use planned estimated tax payments to reduce withholding you would otherwise have solely on the wages itself.”