It Will Take Time for the W-4 Dust to Settle

It Will Take Time for the W-4 Dust to Settle
January 22 07:02 2018 Print This Article

Every employer knows that the W-4 form is the form employees use to designate how much is withheld from their pay for income tax and FICA. With the new tax law just signed by the president come a number of changes to both withholding and the form itself. Employers and payroll providers are now scrambling to adapt to the changes. It will be a while before the W-4 dust settles.

Had the GOP failed to push through tax reform by the end of the year, withholding and tax reporting would have remained the same for 2018. But we know what happened. Unfortunately, the president did not sign the new law until late December, giving companies and payroll providers little more than a week to figure it out. It was a holiday week to boot. Now that January has arrived, the real work begins.

Elimination of Personal Exemption

Before a new employee ever fills out a W-4 form, he or she is automatically allowed one personal exemption for the purposes of tax withholding. That personal exemption has been eliminated for the 2018-2025 tax years. Eliminating one of the fundamental components of tax withholding means having to change the W-4 form. It also means changes to how companies determine withholding for individual employees.

The IRS has said they will have new withholding tables available by the end of January. At that point, employers and their payroll providers will be relying on the new tables as well as W-4 information. But there’s a slight problem here: the W-4 will not be updated for a while. Employers will be using old W-4 data with new withholding tables to determine how much to set aside for taxes.

The IRS has said this is not a problem. An IRS notice sent out on December 26 stated that updated withholding information “will be designed to work with the existing Forms W-4 that employees have already filed, and no further action by taxpayers is needed.” The agency went on to say that employers should continue using old withholding tables until the new ones are released.

Issues for State Withholding

Eliminating the personal exemption without providing updated W-4 at the same time is definitely problematic the federal level. But there are a number of states – including Colorado, Oklahoma, the Nebraska, and Utah – that face additional problems inasmuch as they require the use of the W-4 for determining state withholdings.

Furthermore, just because other states do not require using the federal W-4 does not mean they don’t rely on the same data. Many do. Until the IRS figures out what it is going to do with the W-4 and the individual allowance (it replaces the personal exemption) state tax waters will remain a bit murky.

Get Some Help

BenefitMall, a payroll and benefits administration provider based in Dallas, says it is going to take some time for the W-4 dust to settle. In the interim, they strongly urge companies still handling payroll in-house to get some help from a payroll specialist. Between new withholding amounts, changes to the W-4, and the eventual phase-out of the individual mandate in 2019, payroll just got a lot more complicated – at least in the short term.

Things will quieten down and settle into a new normal in 6 to 8 months. In the meantime, all the changes being brought about by tax reform will create new opportunities for employers to make payroll mistakes. Third-party providers like BenefitMall have been anticipating tax reform for some time now. They are fully prepared to implement the changes quickly and accurately.

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