IRS proposes update to income tax withholding rules

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The Internal Revenue Service and the Treasury have proposed regulations updating the income tax withholding rules to reflect the changes in the Tax Cuts and Jobs Act, the recently redesigned Form W-4 and the IRS’s new Tax Withholding Estimator.

The proposed regulations aim to take into account the redesigned Form W-4, Employee’s Withholding Certificate, and the accompanying tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods. The proposed rules and related guidance don’t require employees to furnish a new Form W-4 just because of the redesign of the Form W-4. Employees who have a Form W-4 on file with their employer from before 2020 generally will continue to have their withholding determined based on that form.

The proposed regulations allow employees to use the new IRS Tax Withholding Estimator to help them fill out the new Form W-4. Taxpayers can still use the worksheets in the instructions to Form W-4 and in Publication 505, Tax Withholding and Estimated Tax, help them complete the form the right way.

The proposed regulations also deal with various other tax-withholding issues. They offer some more flexibility in how employees who don’t fill out a W-4 should be treated. Starting this year, employers are required to treat new employees who fail to furnish a properly completed Form W-4 as single and withhold using the standard deduction and no other adjustments. Before this year, employers in this situation were required to withhold as if the employee was single and claiming zero allowances.

In addition, the proposed regulations spell out the rules for when employees must furnish a new Form W-4 for changed circumstances, update the regulations for the lock-in letter program, and eliminate the combined income tax and FICA (Social Security and Medicare) tax withholding tables.

To help figure the proper income tax withholding, the redesigned Form W-4 no longer uses an employee’s marital status and withholding allowances, which were tied to the value of the personal exemption. Because of changes under the 2017 tax overhaul, employees can no longer claim personal exemptions. Instead, income tax withholding using the redesigned Form W-4 is mainly based on an employee’s expected filing status and standard deduction for the year.

The Form W-4 has also been redesigned to make it simpler for employees who have more than one job or married employees who file jointly with their working spouses to withhold the correct amount of tax.

Employees can opt to have itemized deductions, the child tax credit and other tax benefits reflected in their withholding for the year. As in the past, employees can decide to have an employer withhold a flat-dollar extra amount each pay period to cover, for instance, income they get from other sources that’s not subject to withholding. Under the proposed regulations, employees now also get the option to ask their employers to withhold additional tax by reporting income from other sources not subject to withholding on the Form W-4.

The Treasury and the IRS are asking for comments from the public on the proposed regulations, which contain information on how to submit comments.

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IRS Treasury Department Income taxes Payroll Tax regulations