IRS Issues New Withholding Tables for 2018

Employers should make adjustments by Feb. 15; workers need not resubmit Form W-4

By Stephen Miller, CEBS Jan 12, 2018
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updated on Jan. 30, 2018

The Internal Revenue Service on Jan. 11 released IRS Notice 1036, which contains updated income-tax withholding tables for 2018 that reflect changes made by the tax reform law enacted at the end of December, informally known as the Tax Cuts and Jobs Act. The IRS also posted a set of Withholding Tables Frequently Asked Questions.

Employers should begin using the 2018 withholding tables as soon as possible but not later than Feb. 15, 2018, the IRS said. HR compensation and payroll managers should work with their internal payroll departments and payroll vendors to ensure that their systems are appropriately adjusted in light of the IRS guidance. Employers should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.

The updated withholding information shows the new rates for employers to use during 2018 and reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and income brackets. For employees with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding, avoiding over- and under-withholding of tax as much as possible.

Ninety percent of wage earners will see increases in their paychecks under the new withholding rates, the Trump administration has said. The time it will take for employees to see the changes in their paychecks will vary depending on how quickly the new tables are implemented by their employers and how often they are paid—weekly, biweekly or monthly—the IRS noted.

IRS Notice 2018-14, issued on Jan. 28, has additional withholding guidance, such as providing that the optional flat withholding rate for supplemental wage payments is 22 percent and that, for 2018, withholding pensions, annuities, and other deferred income, when no withholding certificate is in effect, is based on treating the payee as a married individual claiming three withholding allowances.

Revised Form W-4 in the Works

The new withholding tables are designed to work with the current Form W-4, Employee's Withholding Allowance Certificate, that workers have already filed with their employers to claim withholding allowances. "Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4," the IRS said. This will minimize burden on taxpayers and employers, as "employees do not have to do anything at this time."

Treasury Secretary Steven Mnuchin told the Washington Post, "We had an existing form. We had existing technology. We had to figure out how to fit this in this format."

The IRS, however, is working on revising Form W-4 to reflect changes in the new law regarding available itemized deductions, increases in the child tax credit, the new dependent credit and repeal of dependent exemptions. The IRS does not expect to release a revised 2018 Form W-4 and instructions until late February.

In light of the delayed Form W-4, Notice 2018-14 suspends the requirement that employees must provide a revised Form W-4 within 10 days of any change to their tax status that would reduce the allowances to which they are entitled.

Using the 2017 Form W-4 to Claim Exemption from Withholding

IRS Notice 2018-14 describes the procedures by which employees may claim exemption from withholding for 2018 using the 2017 Form W-4. These procedures expire 30 days after the 2018 Form W-4 is released. The IRS will allow employees to claim exemption using the 2017 Form W-4 in one of the following ways:

  • Modifying the 2017 Form W-4 by striking "2017" in the text on Line 7 of the Form W-4 and entering "2018" in its place and signing the form in 2018.
  • Modifying the 2017 Form W-4 by entering "Exempt 2018" on Line 7 of the 2017 Form W-4 and signing the form in 2018.
  • Using the 2017 Form W-4 without modification and signing the form in 2018, provided that the employer establishes and communicates to employees a procedure under which an employee signs and furnishes the 2017 Form W-4 in 2018 to certify both that the employee incurred no income tax liability for 2017 and that the employee anticipates that he or she will incur no income tax liability for 2018 and thus claims exemption from withholding for 2018.
  • Any method substantially similar to the three above that clearly conveys in writing an employee's intent to certify his or her exemption from withholding for 2018.


[SHRM members-only HR Q&A: Are employers required to have employees complete a new W-4 each year?]

Withholding Calculator to Be Adjusted

To help employees determine their optimal withholding, the IRS is revising the withholding tax calculator on IRS.gov. The IRS anticipates this calculator should be available by the end of February.

While employees are not required to take any extra steps, the revised calculator can help them to review their adjusted withholding to make sure that it reflects their needs, so they can alter their withholding if necessary. For instance:

  • Employees with itemized deductions may want to lower the amount being withheld.
  • Employees with taxable income from investments may choose to withhold more.

"Having the correct amount withheld from paychecks helps to ensure that taxpayers don't pay too much tax during the year—and that they have money upfront rather than waiting for a bigger refund after filing their tax return," the IRS said. Most people are over-withheld on their taxes, meaning that more taxes are held out of their paychecks than what they owe, the IRS noted.

2018 Income Tax Rates and Brackets

The 2017 tax act changed the tax rates and income ranges to which the rates apply. The level of income that is subject to a higher tax bracket can influence a number of decisions by employees, including how much salary to defer into a traditional 401(k) plan, which reduces taxable income for a given year by the amount contributed, or whether to participate in a nonqualified deferred income plan, if that option is available through the employer.

The charts below shows 2018 versus 2017 tax rates and income brackets for single filers and married couples filing jointly (additional income tax rates and brackets can be viewed here):

2018 Tax Rate Single Married Filing Jointly
10%$0 to $9,525$0 to $19,050
12%
$9,525 to $38,700$19,050 to $77,400
22%$38,700 to $82,500$77,400 to $165,000
24%$82,500 to $157,500$165,000 to $315,000
32%$157,500 to $200,000$315,000 to $400,000
35%$200,000 to $500,000$400,000 to $600,000
37%
Over $500,000Over $600,000
As compared with:

2017 Tax Rate Single Married Filing Jointly
10%$0 to $9,325$0 to $18,650
15%$9,325 to $37,950$18,650 to $75,900
25%$37,950 to $91,900$75,900 to $153,100
28%$91,900 to $191,650$153,100 to $233,350
33%$191,650 to $416,700$233,350 to $416,700
35%$416,700 to $418,400$416,700 to $470,700
39.6%Over $418,400
Over $470,700

The 2017 tax act also made the following income tax adjustments for 2018:

  • The deduction for personal exemptions, which had been $4,050 for 2017, is suspended.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.

Going Forward

The IRS said it will work with the business and payroll community to encourage workers to file new Forms W-4 next year and to share information on changes in the new tax law that impact withholding.

"The IRS appreciates the help from the payroll community working with us on these important changes," said Acting IRS Commissioner David Kautter in a statement. "Payroll withholding can be complicated, and the needs of taxpayers vary based on their personal financial situation. In the weeks ahead, the IRS will be providing more information to help people understand and review these changes."

What's FIT?

Some employers use the acronym FIT on employees' pay stubs or earnings statements to indicate deductions for federal income tax. Others may use fed tax, f tax, Fed TX or a similar variation. Employees may be confused when they encounter these acronyms or abbreviations without explanation. 

When communicating about changes to federal income tax withholding, point out where the deduction is placed on earning statements and how it is referenced.



Related SHRM Articles:

Tax Act Alters Executive Pay, Affects Bonus Deductions and Withholding, SHRM Online Compensation, December 2017

SSA Revises Payroll Tax Cap for 2018; Tax Bill Alters Rates and Brackets, SHRM Online Compensation, updated December 2017


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