New W-4 Form for Withholdings

As we discussed in our PayDay a month ago titled “2018 Tax Tables and W-4 Changes” the IRS did just release both a new 2018 W-4 and an online withholding calculator which taxpayers are encouraged to use to determine if their 2018 federal tax withholdings are sufficient to avoid large federal income tax balances due when Form 1040’s are filed next April for year 2018.

Due to significant changes in “core areas” of 2018 tax laws pertaining to all individuals, we strongly recommend that taxpayers/employees do as follows:

• Use the IRS online calculator to project 2018 federal income tax withholdings.  Be careful since some of the terminology may be confusing.  The IRS has provided FAQs to assist taxpayers in using the calculator.  You will need copies of your year-to-date pay stubs to correctly use the IRS withholding calculator;
• Consider providing a new 2018 Form W-4 to your employer.  Your new W-4 for 2018 can be based on the W-4 worksheets OR by using the online withholding calculator ; and
• As our previous PayDay of a month ago suggested, calculate your 2017 Form 1040 ratio of federal income tax on “line 63” divided by total taxable wages from your 2017 Form 1040, line 7.  Compare this 2017 tax “ratio/percentage” to your new W-4/online calculator 2018 federal income tax withholding divided by total wages.  Your 2018 ratio of federal income tax to wages should be slightly less than your 2017 federal tax to wages ratio.

When you complete a new 2018 W-4 by the worksheets or online IRS calculator, pay special attention to the “child tax credit” calculations.  Federal tax credits for your children have increased significantly from 2017 to 2018 per the new tax law.

Employer Responsibilities

Employers can continue to use 2017 W-4 forms for ongoing employees.  Employees hired March 1, 2018 or later should ask their “new hires” to complete the 2018 W-4 forms.  Also, employees who do choose to complete a 2018 W-4 should have future tax withheld based on a revised 2018 W-4.

Employers may choose to notify their employees about the releases of both the 2018 W-4 form and the IRS online withholding calculator.  Feel free to forward this PayDay email to your employees if you wish to do so.

Concerns About the 2018 W-4

The new 2018 tax law does not allow personal exemptions/allowances, resulting in no tax savings for exemptions/allowances, and has increased tax savings in 2018 via increased standard deductions, generally reduced tax rates/brackets, and increased child tax credits.

The new 2018 W-4 still calculates “exemptions/allowances”, based on the new W-4 forms/worksheets and the IRS online calculator.  Since the number of exemptions in 2018 produces zero tax “value”, it is a puzzle/quandary as to how W-4 forms with allowances is relevant in calculating correct federal tax withholding.  The IRS has not been able to explain how “allowances/exemptions” on 2018 W-4 forms produce accurate tax withholdings since exemptions are not tax-deductible in 2018.

In Conclusion

We encourage employers to make employees aware of the new 2018 W-4 forms and online tax withholding calculator.  Employers should provide “new hires” with the 2018 version of the W-4.

Indiana should soon be addressing how the federal elimination of tax exemptions affects their WH-4 withholding forms, which are also based on “allowances/exemptions”.  We suspect that Indiana will leave their current system of “exemptions” in place, as many other states have already announced.  We will advise you about any Indiana withholding changes as they occur.

If you have any questions about 2018 federal income tax withholdings or the 2018 W-4 forms, contact your payroll specialist at AccuPay.