IRS issues interim guidance on 2019 payroll and income tax withholding matters

The IRS recently issued Notice 2018-92, providing interim guidance on various requirements and procedures for 2019 federal income tax withholding. This alert focuses on the following items addressed by the Notice:

2019 Form W-4 will be similar to the 2018 form

In June 2018, the IRS released a draft of the 2019 Form W-4 and accompanying instructions, which included significant changes from the 2018 Form. In response to the resulting feedback, the IRS announced the redesign would be delayed until 2020. The Notice indicates the IRS will re-release the 2019 Form with minimal changes by the end of 2018.

Employee requirements for submitting Form W-4

If an employee experiences a “change in status” that reduces the number of withholding allowances they are entitled to claim (for additional details regarding these allowances, please see our earlier alert), they generally must submit an updated Form W-4 to their employer within 10 days of the change. In January 2018, the IRS announced that employees whose allowances were affected solely by changes wrought by the Tax Cuts and Jobs Act (TCJA or the Act) were not required to submit updated Forms in 2018. The Notice extends this grace period through April 30, 2019. Accordingly, any such employee should submit an updated Form by May 10, 2019.

Under prior law, employees who failed to furnish a Form to their employer were treated as single with zero exemptions for determining their withholding requirements. Ultimately, the IRS and Treasury Department intend to withdraw and modify existing regulations, and issue guidance to allow employees to be treated as single, but entitled to certain additional allowances. However, in the interim, employees who fail to furnish a Form will continue to be treated as single with zero allowances.

Section 199A deduction

For taxpayers that may be entitled to a deduction under section 199A (qualified business income deduction), the Notice allows such taxpayers to use an estimate of their anticipated 20 percent deduction to determine their withholding allowances to report on the Form W-4. As a reminder, wages are not qualifying income for purposes of the section 199A deduction.

Alternative withholding methods

As an alternative to using the personal allowances worksheet included with the Form to arrive at the number of allowances to claim, the Notice allows taxpayers to use the withholding calculator released by the IRS in early 2018. The Notice cautions this approach should not be used by taxpayers in certain tax situations, including but not limited to being liable for alternative minimum or self-employment taxes, or having long-term capital gains, qualified dividends or taxable Social Security benefits. We strongly advise that, if used, the calculator results be independently verified, particularly with the assistance of the employee’s tax advisor.

The IRS and Treasury intend to discontinue the combined income tax and employee FICA tax withholding tables for use in completing the Form due to the “unintended complexity and burden of the method.”

Withholding from pension, annuity and other certain deferred income

Generally, payors of certain pensions, annuities and other certain items of deferred income are required to withhold from such payments pursuant to the number of allowances the recipient claims on their Form W-4P, Withholding Certificate for Pension or Annuity Payments. The Notice provides that similar to previous years, a recipient who has not submitted Form W-4P will continue to be treated as married and entitled to three withholding allowances, as applied to the 2019 withholding tables.

Conclusion

Several recent articles indicate taxpayers may be significantly underwithheld for 2018 tax purposes. As a result, we recommend you work with your Baker Tilly advisor on a 2018 projection so that withholding adjustments can be made before the final paycheck of the year. This projection can also serve as a guide toward implementing the new 2019 withholding tables.

Do not hesitate to reach out to your Baker Tilly tax advisor with respect to how the above applies to your tax situation.

For related insights and in-depth analysis, see our Tax Reform Resource Center.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.