IRS issues updated Form W-4, releases withholding calculator

Authored by Michael Wronsky and Paul Dillon

The IRS issued an updated Form W-4 to reflect changes made by the Tax Cuts and Jobs Act. It also issued News Release 2018-36 and a withholding calculator that can be used to assist in determining the appropriate amounts that should be withheld from employees’ paychecks. Your payroll provider may be asking you to update your withholding allowances based on this recent IRS release. We recommend this is done as soon as possible to ensure any necessary changes to withholdings are made timely.

The Form W-4 provides for employees to claim a personal allowance for:

  • Themselves,
  • Their spouse if filing jointly,
  • Filing as head of household,
  • An additional allowance depending on filing status as well as their/their spouse’s employment situation, and
  • Various tax credits for which the employee may be eligible (examples include the child and dependent care, child tax and earned income credits).

Similar to the prior version of Form W-4, worksheets are available to assist the employee with accounting for itemized and above-the-line deductions or exclusions, second jobs and/or their spouse’s jobs, and unearned income in determining the proper withholding amounts.

The calculator is an online tool “to help taxpayers make sure that their withholding is appropriate.” The calculator requires a substantial amount of information available for proper use, including:

  • Anticipated filing status and certain credits for which the employee may be eligible
  • Spouse’s wage information and projected withholding
  • The most recently received paystub
  • Estimates of the following items anticipated for 2018:
    • Bonuses
    • Contributions to tax-deferred retirement plans, such as a 401(k)
    • Contributions to cafeteria or other pre-tax plans, such as for health insurance
    • Nonwage income, such as interest, dividends and capital gains
    • Itemized deductions

The information is inputted via a series of worksheets, and the result is an estimated total 2018 tax liability, which is compared to the estimate of total withholding for the tax year. Recommendations are then made for how an updated Form W-4 should be completed in order to satisfy the tax liability by way of withholding.

We strongly recommend that the calculator results be independently verified, particularly with the assistance of the employee’s tax advisor. We suggest a separately prepared taxable income projection for the year be compared against the projected federal tax liability computed by the calculator.

We would not advise changing your withholding allowances until the projected total federal tax appears reasonable based on this comparison.

For more on withholding tables, see the IRS’ frequently asked questions.

For related insights and in-depth analysis, see our Tax Reform Resource Center.

For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.