On February 28, the IRS publicly released the updated 2018 Form W-4, along with a new withholding calculator for taxpayers to perform “paycheck checkups.” The calculator helps assess whether the correct amount of tax is withheld from an employee’s paycheck. The changes to the form and calculator come as a result of the various provisions included in the Tax Cuts and Jobs Act (TCJA) that affect individual taxpayers. Earlier this year, the IRS provided updated 2018 federal income tax withholding tables to reflect those changes. This alert includes some of the potential actions for employers and employees to consider in light of the newly updated Form W-4 and withholding calculator. See our recent BKD Thoughtware® alert for a closer look at some of the other effects the new law will have on these groups.
The TCJA made several changes to how individuals will determine their tax liability starting in 2018. While the withholding calculator is designed to guide taxpayers through the process, it’s important to keep these changes in mind when using the calculator, as you may need to alter some of the provided assumptions. For example, to the extent they exceeded 2 percent of an individual’s adjusted gross income, amounts paid for tax preparation fees, unreimbursed employee expenses and other miscellaneous items were previously deductible. However, the deduction for these items, including expenses related to an employee’s home office, was repealed under the TCJA. The new law also imposes a $10,000 cap on the maximum combined deduction for state and local income taxes, property taxes and sales taxes paid. For a complete list of changes affecting individuals, see the Individual Provisions chart on BKD’s Tax Reform Resource Center.
The results provided by the withholding calculator are intended to help taxpayers complete Form W-4, which instructs employers on how much to withhold from an employee’s pay. While completion of the new form isn’t required, employees seeking to initiate exemption from withholding during 2018 will need to furnish their employer with a completed 2018 Form W-4. Withholding exemptions claimed after February 28 will be applied to wages on a prospective basis. Employees will no longer be able to claim exemption from withholding using the 2017 Form W-4 after March 30; however, a 2017 Form W-4 submitted before this date is still valid. The IRS also encourages employees to refer back to the calculator periodically throughout the year and update Form W-4 accordingly, especially if any significant changes to employment or personal circumstances occur. See the IRS Withholding Calculator Frequently Asked Questions for more information.
Although the release of the 2018 Form W-4 and withholding calculator primarily affects employees, it does trigger some potential actions employers should consider. Due to the TCJA’s repeal of the individual deduction for unreimbursed employee expenses, employers may consider implementing an accountable plan arrangement whereby employees are directly reimbursed for qualified expenses. Such plans, if designed properly, allow the employer to deduct any eligible expenses reimbursed to employees while the reimbursement is excluded from employee income. Reimbursements must meet these three criteria to be treated as paid under an accountable plan:
- The reimbursement is related to a specified deductible business expense incurred by the employee in connection with the performance of services for the employer.
- The employee substantiates the business expense to the employer.
- Any reimbursement received in excess of the substantiated expense is returned to the employer within a reasonable period of time.
IRS Publication 15, (Circular E), Employer’s Tax Guide, provides additional guidance for employers related to withholding and remitting taxes from employee wages.
Contact Julia or your trusted BKD advisor for help determining how the new law affects you as an employee or employer. For more information on other areas of the new law, check out BKD’s Tax Reform Resource Center.