IRS provides updated income tax withholding tables for 2018

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 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.

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

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

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.