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IRS provides updated income tax withholding tables for 2018

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Tax Hot Topics newsletterThe IRS has issued Notice 1036 to update the income tax withholding tables for 2018 to reflect the changes from tax reform legislation enacted at the end of 2017. The new law makes a number of changes for 2018 that affect individual taxpayers. The new tables reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets.

The updated withholding information shows the new rates for employers to use during 2018. Employers should begin using the 2018 withholding tables as soon as possible, but not later than Feb. 15, 2018. They should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.

The new withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers to claim withholding allowances. Employees are not required to update their Forms W-4, but employees can use the withholding tax calculator on IRS.gov to adjust their withholding once the updated calculator is released in late February.

The IRS also plans to revise its Form W-4. The revised Form W-4 will reflect additional changes in the new law, such as changes in available itemized deductions, increases in the child tax credit, the new dependent credit and repeal of dependent exemptions.

In both Notice 1036 and Notice 2018-14, the IRS stated that the optional flat income tax withholding rate for supplemental wages not in excess of $1 million is 22% for supplemental wages paid beginning in 2018 and through 2025. Employers should begin using the 22% optional flat rate for withholding on supplemental wages as soon as possible, but not later than Feb. 15, 2018. Employers using an optional flat rate withholding in 2018 at a rate higher than 22% (e.g., employers that used the 2017 optional flat rate of 25%) may, but are not required to, correct the excess withholding on supplemental wages paid on or after Jan. 1, 2018, and before Feb. 15, 2018. Beginning in 2018, employers are required to withhold income tax using a flat 37% rate on supplemental wages in excess of $1 million.

In Notice 2018-14, the IRS also extended the period employers may rely on an employee’s Form W-4 claiming exemption from withholding. Employees who incurred no liability for income tax in the preceding taxable year and who anticipate not incurring any income tax liability in the current taxable year may use Form W-4 to claim an exemption from income tax withholding. In general, employers are permitted to rely on the exemption claimed in the 2017 Form W-4 up to Feb. 15, 2018. However, the IRS may not release the 2018 Form W-4 until after that date, so the exemption claimed on the 2017 Form W-4 may be treated as effective through Feb. 28, 2018. Once the 2018 Form W-4 is released, employees may use one of the various methods described in Notice 2018-14 to claim the withholding exemption for the remainder of 2018.

Contact Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1526

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