After deciding in September 2018 to give up on the revisions to Form W-4 found in the draft 2018 Forms W-4 released in June, the IRS in Notice 2018-92 has decided to continue for the most part with interim rules that were found in Notice 2018-14 for the 2018 tax year and, in the case of one such rule, until April 30, 2019.

The IRS, facing criticism regarding the more complex draft Form W-4 initially proposed, had indicated on September 20, 2018, that implementation of the revised Form W-4 fully incorporating changes made in the Tax Cuts and Jobs Act (TCJA) would be delayed until 2020.  The IRS will be releasing a 2019 Form W-4 before the end of this year that will make “minimal changes to the 2018 Form W-4.”[1]

The new notice notes that TCJA’s changes include a change in terminology, eliminating the term “withholding exemptions” with a “withholding allowance” to be computed for an employee.  The Notice provides:

Although the TCJA amended section 3402(f) to provide for a “withholding allowance” in the singular rather than “withholding exemptions” in the plural, section 3402(f) provides that under rules determined by the Secretary, an employee shall be entitled to a withholding allowance determined on the basis of multiple items listed in section 3402(f), and section 3402(m) provides for an additional withholding allowance. Accordingly, under the general authority to establish computational procedures pursuant to section 3402(a), the 2019 Form W-4 and the computational procedures in Publication 15 will continue to use the term “withholding allowances” and related terminology to properly incorporate the factors specified in section 3402(f) and the additional items in section 3402(m).

…Until further guidance is issued, any reference to a withholding exemption in the regulations and guidance under section 3402 will be applied as if it were a reference to a withholding allowance. Thus, for example, the language in Treas. Reg. § 31.3402(f)(2)-1(g)(2)(i) providing for an IRS notification process to specify a “maximum number of withholding exemptions” an employee may claim will be applied as a reference to a maximum number of withholding allowances.[2]

The IRS will continue to suspend the rule requiring employees to give employers a revised Form W-4 within 10 days of a change in status that reduces the number of withholding allowances the employee is entitled to if the change of status is solely due to changes made by the TCJA.  This rule will continue in place until April 30, 2019.[3]

The IRS explains the application of this rule as follows:

Accordingly, if an employee experiences a change of status on or before April 30, 2019 that reduces the number of withholding allowances to which the employee is entitled and the change is solely due to the changes made by the TCJA, the employee is not required to furnish a new Form W-4 on or before May 9, 2019, but is generally required to furnish the employer a new Form W-4 by May 10, 2019. However, consistent with section 3 of this notice, if an employee no longer reasonably expects to be entitled to a claimed number of withholding allowances because of a change in personal circumstances not solely related to changes made by the TCJA (for example, an individual no longer qualifies as the employee’s qualifying child, as defined in section 152(c), because of a change in the individual’s principal place of abode), the employee must furnish his or her employer a new Form W-4 within 10 days after the change. Similarly, if an employee claims married filing status on Form W-4 but becomes divorced from his or her spouse, the employee must furnish the employer a new Form W-4 within 10 days after the change. See section 3402(l); Treas. Reg. § 31.3402(l)-1(b)(2).[4]

Despite this suspension of the rule, the Notice encourages employees to update their W-4s for changes in status caused by TCJA changes as soon as possible and to check their withholding using the IRS’s online withholding calculator.

The Notice also explains how to handle employees who fail to furnish a Form W-4.  The IRS explains the law in place prior to TCJA for this situation as follows:

Prior to TCJA, section 3401(e) provided that employees who failed to furnish a Form W-4 were considered to have claimed zero withholding allowances or exemptions. See also Treas. Reg. § 31.3402(f)(2)-1(a) (last sentence). Under section 3402(l) an employee is treated as single unless the employee furnishes a Form W-4 indicating that the employee is married (determined by applying the rules of section 3402(l)(3)). Thus, under prior law, employees who failed to furnish a Form W-4 were treated as single with zero allowances for purposes of determining withholding.[5]

TCJA repealed IRC §3401(e) but made no changes of substance to IRC §3402(l).  The IRS in the Notice indicates the guidance that will provide the following:

… the IRS and the Treasury Department intend to withdraw the regulations under section 3401(e) and modify other regulations to provide that employees who have failed to furnish a Form W-4 will be treated as single but entitled to the number of withholding allowances provided in accordance with computational procedures set forth by the Commissioner in Publication 15. Until further guidance is issued, the IRS plans to provide, in the computational procedures in Publication 15 applicable for 2019, that employees who fail to furnish a Form W-4 will be treated as single with zero withholding allowances.[6]

The Notice goes on to discuss the computation of additional withholding allowances for a taxpayer.  The IRS begins by noting that “Treas. Reg. § 31.3402(m)-1(b) lists items that may be taken into account in determining the withholding allowance to which an employee is entitled.”  The agency requests comments regarding the items listed in that section and any changes that may be needed to that list.[7]

However, until such guidance is issued the IRS will allow taxpayers to take into account the qualified business income deduction under IRC §199A they expect to qualify for in computing additional withholding allowances.[8]

The IRS plans to explicitly allow taxpayers to compute their withholding allowances via the use of the online W-4 calculator or Publication 505, rather than being required to use schedules included with Form W-4.[9]

The Notice indicates which taxpayers should not use the online calculator, but rather should make use of the information in Publication 505 to compute their withholding allowances:

As explained in the instructions for the IRS withholding calculator on the irs.gov website, taxpayers in certain situations should not use the calculator to calculate their withholding but should use Publication 505 instead. For example, for 2018, the 2018 withholding calculator should not be used by taxpayers who owe self-employment tax, alternative minimum tax, the tax on unearned income of dependents, or certain other taxes; taxpayers with long-term capital gains or qualified dividends; or taxpayers who have taxable social security benefits. It is expected that the regulations will provide that using the withholding calculator is not an acceptable procedure for an employee to follow in calculating withholding if the instructions for the IRS withholding calculator provide that it should not be used by the employee because of the employee’s individual tax situation.[10]

The Notice requests comments on the alternative withholding procedures under IRC §3402(h) and noted that the IRS plans to eliminate the combined income tax withholding and employee FICA tax withholding tables.  The IRS justifies this based on the unintended complexity and burden of the method since the employee will still need to separately report the FICA and income tax withholding on the Form W-2.[11]

The Notice provides that the IRS plans to eliminate the requirement that an employer notify the IRS when an employee for which a “lock-in letter” has been issued no longer works for the employer.  A lock-in letter is one issued by the IRS that provides a maximum number of allowances an employee may claim.[12]

The Notice also provides a continuation of the rules from 2018 for withholding on pensions and annuities if the recipient has not elected not have withholding apply to the payment.  The Notice provides:

Section V of Notice 2018-14 provided that, for 2018, the rules for withholding when no withholding certificate is furnished with respect to periodic payments under section 3405(a) parallel the rules for prior years and are based on treating the payee as a married individual claiming three withholding allowances. For 2019, the same rules will continue to apply to periodic payments under section 3405(a). Accordingly, for 2019, the rules for withholding when no withholding certificate is furnished with respect to periodic payments under section 3405(a) will parallel the rules for prior years and will be based on treating the payee as a married individual claiming three withholding allowances and applying that status to the 2019 withholding tables.[13]

[1] Notice 2018-92, SECTION 2

[2] Notice 2018-92, SECTION 3

[3] Notice 2018-92, SECTION 4

[4] Notice 2018-92, SECTION 4

[5] Notice 2018-92, SECTION 5

[6] Notice 2018-92, SECTION 5

[7] Notice 2018-92, SECTION 6

[8] Notice 2018-92, SECTION 6

[9] Notice 2018-92, SECTION 7

[10] Notice 2018-92, SECTION 7

[11] Notice 2018-92, SECTION 7

[12] Notice 2018-92, SECTION 8

[13] Notice 2018-92, SECTION 10