- November 14, 2020
- Lisa Varela
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IRS Issues Final Regulations on Wage Withholding, Redesigned W-4
The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages. The final regulations:
- address the amount of federal income tax that employers withhold from employees’ wages;
- implement changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
- reflect the redesigned Form W-4, Employee’s Withholding Certificate, and related IRS publications.
TCJA Changes
The TCJA made many amendments
affecting income tax withholding on employees’ wages. The TCJA made many
amendments affecting income tax withholding on employees’ wages.After
the TCJA was enacted, the IRS issued guidance to implement the changes
(for example, Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B.
2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020-3, 330). The
IRS updated Form W-4 and its instructions with significant changes
intended to improve the accuracy of income tax withholding and make the
withholding system more transparent for employees. It also released IRS
Publication 15-T, Federal Income Tax Withholding Methods, which provides
percentage method tables, wage bracket withholding tables, and other
computational procedures for employers to use to compute withholding for
the 2020 calendar year.
On February 13, 2020, the IRS published a notice of proposed rulemaking ( REG-132741-17) to update the regulations under Code Sec. 3401 and Code Sec. 3402 to reflect the legislative changes, and expand the rules to accommodate changes necessary to fully implement the redesigned Form W-4 and its related computational procedures, along with most existing computational procedures that apply to 2019 or earlier Forms W-4.
The final regulations adopt the proposed regulations with a few revisions.
Form W-4
The final regulations do not require all
employees with a 2019 or earlier Form W-4 in effect to furnish a
redesigned Form W-4. Comments expressed concerns that the proposed
regulations and the related forms, instructions, publications, and other
IRS guidance would require employers to maintain two different systems
for computing income tax withholding on wages: one for 2019 or earlier
Forms W-4, and another for the redesigned Forms W-4.
In response, the IRS is acknowledging concerns with (1) instructions to the redesigned Form W-4 for employees with multiple jobs and (2) optional computational “bridge” entries permitted under the regulations and described in Publication 15-T that will allow employers to continue in effect 2019 or earlier Forms W-4 as if the employees had furnished redesigned Forms W-4.
The final regulations revise Reg. §31.3402(f)(4)-1(a) to provide that an employer’s use of the computational bridge entries to adapt a 2019 or earlier Form W-4 to the redesigned computational procedures as if using entries on a redesigned Form W-4 will continue in effect such a Form W-4 that was properly in effect on or before December 31, 2019.
Lock-in Letters
The IRS issues a “lock-in” letter
to notify an employer that an employee is not entitled to claim
exemption from withholding, or is not entitled to the withholding
allowance claimed on the employee’s Form W-4. The lock-in letter
prescribes the withholding allowance the employer must use to figure
withholding. After the lock-in letter becomes effective, the IRS may
issue a subsequent modification notice, but only after the employee
contacts the IRS to request an adjustment to the withholding prescribed
in the lock-in letter.
Under the final regulations, employers are not required to notify the IRS that they no longer employ an employee for whom a lock-in letter was issued. Further, the final regulations do not require the IRS to reissue lock-in letters or modification notices solely because of the redesigned Form W-4.
The final regulations revise Reg. §31.3402(f)(2)-1(g)(2)(iv) relating to lock-in letters. and Reg. §31.3402(f)(2)-1(g)(2)(vii) relating to modification notices, to provide that an employer may comply with a lock-in letter or modification notice that is based on a 2019 or earlier Form W-4, as required by the regulations, if the employer implements the maximum withholding allowance and filing status permitted in a lock-in letter or modification notice by using the computational bridge entries as set forth in forms, instructions, publications, and other IRS guidance to calculate withholding for such a Form W-4.
Estimated Tax Payments
The final regulations
revise Reg. §31.3402(m)-1(d) to allow employees to take estimated tax
payments into account, as long as the employee (1) follows the
instructions to the IRS’s Tax Withholding Estimator (available
at https://www.irs.gov/individuals/tax-withholding-estimator) or IRS
Publication 505, (2) is not subject to a lock-in letter or modification
notice, and (3) does not request withholding from wages that falls below
the pro rata share of income taxes attributable to wages determined
under forms, instructions, publications, and other IRS guidance. The IRS
intends to update its Tax Withholding Estimator and Publication 505 to
reflect this rule.
Applicable Date
The final regulations generally
apply on the date they are published in the Federal Register. Reg.
§31.3402(f)(2)-1(g), regarding withholding compliance, applies as of
February 13, 2020. Reg. §31.3402(f)(5)-1(a)(3), regarding the
requirement to use the current version of Form W-4, applies as of March
16, 2020. The removal of Reg. §31.3402(h)(4)-1(b), regarding the
combined income tax withholding and employee FICA tax withholding
tables, applies on and after January 1, 2020.
Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may
choose to apply the final regulations on and after January 1, 2020, and
before their applicability date set forth in the regulations.