Posted by Joseph DeMartinis, CPA
The Tax Cuts and Jobs Act passed in Congress sparked a major change in the withholding requirements for employers. As if our friends at the IRS didn’t have enough going on, they were tasked with the unenviable project of creating new withholding tables to incorporate the new laws. Even seasoned tax vets are left asking numerous questions regarding the new withholding amounts:
- How will the new withholding amounts be calculated if there are no longer exemptions?
- When do these new withholding rates need to be put into effect?
- Will new W-4s need to be filed for employees?
- Where can I get additional information on the new tables?
- Is it time for me to change professions?
Luckily for you, The REM Cycle is on top of it and here to help. Let’s take these issues one by one.
How will the new withholding amounts be calculated if there are no longer exemptions?
The new withholding tables are designed to incorporate all of the changes to the new tax law, not just the suspended exemptions. There are also reduced tax rates, adjusted tax brackets, and an increased standard deduction to account for. To summarize how it works, the new tables use a percentage method based off of your net wages. Your net wages are reduced by your total withholding allowances and then a percentage is withheld accordingly.
When do these new withholding rates need to be put into effect?
This answer depends on when your employer puts these changes into effect. However, the IRS stated that the new rates need to be put into use no later than February 15, 2018.
Will new W-4s need to be filed for employees?
In the past, as a best practice, new W-4 forms should have been filed on a yearly basis for employees. At the very least, employees should have been reviewing their withholding on a yearly basis to make sure no changes were needed. In that regard, not much has changed. The new withholding tables are supposed to incorporate the W-4s that the employees already have on file. As a helpful tool, the IRS will be releasing an improved withholding calculator that can be used to verify any withholding is accurate. Also, the IRS will be revising the W-4 form to fully reflect the new laws and rates. Having your clients check their withholding after these new tools and forms come out is strongly suggested.
Where can I get more information on the new tables?
The IRS released Notice 1036: Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding, which details how the new withholding tables work. The Service also provided an FAQ page on irs.gov to help answer commonly asked questions.
Is it time for me to change professions?
I can’t answer that one for you but can tell you this: as long as the tax laws are written and controlled by politicians, we’ll all have jobs. No “postcard” filings – it’s called job security, people!
At the end of the day, the Tax Cuts and Jobs Act created a slew of new tax planning hurdles and opportunities. If you haven’t already, reach out to your trusted advisor to see how the new laws affect you.