Tax reform signed into law late last year (2017) is already benefiting employees who are now seeing more money in their paychecks. But experts warn that any differences seen in 2018 paychecks may not carry over into 2019. Furthermore, some employees may find that they are having too little withheld because they failed to submit a new W-4 form.
Unfortunately, the IRS was caught unprepared by the tax overhaul due to the speed with which it was implemented. This has led to some confusion about withholding. Employers are allowed to use 2017 W-4s for the 2018 tax year, but they will have to switch to the new form in 2019. The question for employees is whether they should fill out a new W-4 this year or not.
There is little anyone can do about the confusion the new system has generated. It is what it is. But as an employer, you can direct your employees to use a new tool just released by the IRS for determining withholding. It is an online tool that can help employees understand whether it is in their best interests to fill out a new W-4 now.
What the Tool Does
The IRS tool is a simple, three-step calculator that analyzes current withholdings compared to the new tax law. Employees need to understand that not having to fill out a new W-4 for the 2018 tax year does not in any way change their tax liabilities. The only purpose of the tool is to help them understand whether they should submit a new W-4 this year or not.
Using the tool begins with entering a person's filing status for the 2018 tax year. In other words, how does the employee intend to file his or her taxes next year? The choices are the same as they have been for decades: single, married filing jointly, married filing separately, head of household, and qualifying widow or widower. This first step also asks about dependent children.
The second step involves information about current employment, child and dependent care, and a couple of other credits. Finally, the third step requires an employee to enter current information including expected salary for the year, the amount currently being withheld, frequency of payment, and other information. This enables the tool to compare current withholdings against the new tax law.
Understanding the IRS Advisory
Completing all three steps of the tool generates an IRS advisory based on the information provided. The tool essentially calculates whether current withholdings are sufficient to cover the taxes due for the 2018 tax year. Along with that information is advice about whether the tax payer should consider filling out a new W-4.
It is important to note that the tool only covers 2018. This is because employers are still allowed to use old forms to get through the year. Nearly every employee who uses the IRS tool will see a notice in the resulting advisory recommending that withholdings be re-evaluated in 2019.
Employees should also note that the advisory does not carry the force of law. It is simply advice. If too little is withheld in any given tax year – regardless of what the advisory states – the effective tax payer will still have to pay what is due. The point of the tool is to simply act as a reference guide.
If your employees are confused by the W-4, you might want to point them to the new IRS tool. It can help clear things up enough to get them through the end of this tax year.
IRS – https://www.irs.gov/individuals/irs-withholding-calculator