The recent Tax Cuts and Jobs Act, signed in to law by President Trump late last year, has many payroll service bureaus and employers scurrying to understand how the newly enacted legislation will affect their clients and employees. Of particular concern is the impact of the act’s suspension of personal exception deductions – a key component of the IRS’s Form W-4.
Completing the W-4 helps calculate the correct amount of tax to withhold from an employee’s paycheck based upon his or her marital status, number of exemptions and dependents and other factors. As of this past January 1, however, such personal exemptions are suspended until Jan. 1, 2026. The news has company payroll professionals wondering whether and when employees must complete new forms.
So, do your payroll clients need to collect updated W-4s from all employees? The simple answer is: No. Not yet. But maybe.
Confused yet? Let us explain.
First, know that the new tax bill does not affect 2017 taxes to be filed this month. Rather, most new requirements will take effect for filing of 2018 taxes early next year.
Moving forward, most employees are under no rush-requirement to redo their current Form W-4s, per guidance issued by the IRS recently. That guidance:
- Extends the use of the existing 2017 Form W-4 until the IRS finalizes an updated 2018 version. The IRS designed the new withholding tables and percentages, released earlier this year, to work with the 2017 Form W-4. However, under the new bill, the agency still must make several revisions affecting the total number of allowances and dependents an employee claims. Once the new form is released, employees have 30 days to refile.
- Suspends a rule stating employees must notify employers of changes to their withholding within ten days.
- Offers new rate (22 percent) of optional withholding on supplemental wages.
- States withholding on periodic payments when no withholding certificate is in effect is based on treating the employee as married and having three withholding allowances.
Regardless of the new tax bill, it’s always necessary for employees to update their Form W-4s when major life changes, including marriage, divorce or the birth, adoption or death of a dependent, affect their withholding allowances.
Also, tax experts encourage employees with more complicated financial situations to double check their W-4s. These include workers who:
- Have multiple incomes or are in multiple-income families.
- Work only part of the year.
- Have dividends or capital gains from securities held in taxable accounts.
- Claim the Child Tax Credit, the Earned Income Tax Credit or other credits.
- Itemized deductions in 2017.
- Have high incomes and more complex tax returns.
The new federal tax bill, along with ever-changing state-level tax requirements, can make for a bit of a headache for even the most seasoned payroll professional. Apex HCM can take on that burden while you concentrate on building your payroll service bureau business. Our tax experts constantly work to stay on top of changes in tax rates, tax brackets, statutory limits and other factors to assure that you and your clients remain fully compliant. To learn more, reach us at 877-750-2739 or firstname.lastname@example.org.