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Draft Form W-4 makes drastic changes to employee withholding calculation

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Tax Hot Topics newsletter The IRS has issued new draft form and instructions for Form W-4, Employee’s Withholding Allowance Certificate, and the new form would require employees to furnish much more personal income tax information than previous versions.

The Form W-4 is filled out by employees so employers can withhold the correct amount of federal income tax from employee pay. Previously, withholding has been determined based on the number of “allowances” claimed on the Form W-4. These allowances are based partially on the number of personal exemptions an employee expects to claim. The Tax Cuts and Jobs Act eliminated personal exemptions starting with the 2018 taxable year, so calculating an employee’s income tax withholding based on allowances may no longer accurately reflect an employee’s projected tax liability for the year. In response, the IRS is creating a new form effective for years beginning after 2018.

The new draft version requires employees to provide employers with substantial personal income tax information. For example, the draft 2019 Form W-4 requests an employee’s non-wage income (e.g., interest and dividends), the amount of itemized deductions, the amount of tax credits (e.g., the child tax credit), a spouse’s income and income from lower paying jobs. Employees are not required to provide this information to employers. Instead, employees can use the IRS withholding calculator to estimate the amount of income tax that should be withheld from pay for the year. The draft 2019 Form W-4 would have minimal impact on employees who have a single form of income and who do not itemize their deductions.

The IRS has requested comments on the draft 2019 Form W-4, and it expects to issue a second draft later this summer. The IRS plans to issue a final 2019 Form W-4 early enough in 2018 to give payroll processors enough time to update their systems.

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

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