The IRS has issued guidance on the federal income tax withholding rules in response to recent changes made by the Tax Cuts and Jobs Act (P.L. 115-97). The IRS also has released IRS Publication 15 (Circular E), Employer’s Tax Guide for 2018, which includes specific information on the withholding guidance.
The Act made significant changes to federal income tax rates, deductions, and credits that affect income
tax withholding. These include changes in available itemized deductions, increases in the child tax credit,
a new dependent credit, and the repeal of dependent exemptions. To minimize the burden on employees
and employers, the IRS and the Treasury Department have designed the 2018 withholding tables to
work with the 2017 version of Form W-4, Employee’s Withholding Allowance Certificate that
employees have already furnished their employers.
(Note: The IRS is currently revising Form W-4 to reflect the changes made by the Act, but the 2018 Form
W-4 might not be available until after February 15, 2018. Until then, employees and employers should
continue to use the 2017 Form W-4).
Exemption from Withholding
The IRS has extended the effective period of Forms W-4 that employees furnish to their employer to
claim exemption from withholding for 2017 to February 28, 2018. The exemption was originally
supposed to expire on February 15, 2018. Employees claiming exemption from withholding for 2018 can
temporarily use the 2017 Form W-4 until 30 days after the 2018 Form W-4 is released, under the revised
rules set forth in the guidance. Employees who claimed exemption for 2017 and are renewing exemption
claims for 2018 must furnish employers with the revised 2018 Form W-4 by February 28, 2018 or risk
losing the exemption.
Changes in Status
If a change in status occurs that reduces the number of withholding allowances to which an employee is
entitled, the IRS has determined that the employee does not need to furnish the new withholding
allowance certificate to the employer until 30 days after the 2018 Form W-4 is released (normally, the
employee must furnish a new Form W-4 to the employer within 10 days of the change in status.) Further,
if the withholding allowances reduction is due solely to the changes made by the Act, the employee does
not need to furnish the employer with a new withholding allowance certificate during 2018.
Withholding on Supplemental Wages
The Act has changed the income tax rate tables for 2018 through 2025 by adding Code Sec. 1(j). This
change has lowered the optional flat rate that employers may use to withhold income tax on supplemental
wage payments during this period from 25 percent to 22 percent. Under the guidance, employers and
other entities paying supplemental wages should implement the 22-percent optional flat rate as soon as
possible, but not later than February 15, 2018. Employers using a higher withholding rate can, but are not
required to, correct that withholding on supplemental wages paid on or after January 1, 2018, and before
February 15, 2018.
Withholding on Pension, Annuity Payments
The payor of certain periodic payments for pensions, annuities, and other deferred income generally must
withhold from the payments as if they were wages, unless the individual payee elects not to have
withholding apply. If a withholding certificate has not been furnished to the payor, the withholding rate
has normally been determined by treating the payee as a married individual claiming three withholding
exemptions. The Act amended this rule so that the withholding rate “shall be determined under rules
prescribed by the Secretary.” The IRS has determined that, for 2018, withholding on periodic payments
when no withholding certificate is in effect continues to be based on treating the payee as a married
individual claiming three withholding allowances.
Source: Notice 2018-14 (https://www.irs.gov/pub/irs-drop/n-18-14.pdf)
Publication 15: (Circular E), Employer’s Tax Guide (https://www.irs.gov/pub/irs-pdf/p15.pdf)