More thoughts on the 2018 withholding tables
The withholding tables the IRS released last week aren’t “obscure” or “so-called,” as several national media organizations have reported. They’re not remarkable and they are quite real. They are, in fact, the grease that keeps the country’s wheels rolling.
Income tax withholding is responsible for about 75% of all income tax revenue collected nationwide each year. That’s not an accident. The country would crumble if it had to depend on taxpayers writing checks to the U.S. Treasury. There are always demands on your money. That’s the beauty of withholding—you can’t miss what you never thought you had. Auto-enrollment into 401(k) plans works on the same principle.
Funny “ha, ha” or funny “you owe taxes”?
Has there been funny business with these tables? Maybe, maybe not. What do we mean by funny business?
According to a Jan. 10 post by Politico, it means pressure from politicians to construct tables that will lead massive underwithholding, which employees won’t know about until next winter, way after the next election.
Senate Finance Committee Ranking Member Sen. Ron Wyden (D-Ore.) and House Ways and Means Ranking Member Rep. Richard Neal (D-Mass.) have alleged just that and have asked the IRS and the Government Accountability Office to research who built the tables, how they were built and who approved them.
However, after working with these tables for a few days, updating examples in The Payroll Compliance Handbook, a Business Management Daily publication, I’d be surprised if the GAO found anything amiss.
But you never know. Apparently there have been at least two previous attempts to tinker with the withholding tables, both of which ended in disaster for taxpayers, who ended up being underwithheld: In 1987, after the 1986 tax reform act was passed, and in 1992, when President George H.W. Bush was running for reelection.
So what do employees do now?
It’s important to understand that there’s no typical taxpayer. Two employees can have the exact same income, but markedly different tax liabilities, depending on their marital status, how many kids they have and now, thanks to the Tax Cuts and Jobs Act, where they live (because of deductibility of property, state and local taxes) and the size of their mortgages. And even that’s overly simplistic.
It is true that the IRS has created the 2018 tables quickly and based them on the now outdated concepts of personal exemptions, which the TCJA has suspended through 2025, and a standard deduction that is almost double what it was last year. For those reasons, employees’ withholding may no longer be accurate.
As a result of the TCJA, all employees’ tax liabilities have changed, and old W-4s can’t be relied upon anymore. You’re responsible for implementing employees’ withholding based on the information they provide you. You don’t have to solicit any more information to ensure that their withholding is correct. That’s the way the system has always operated.
You are also not responsible if employees are underwithheld, regardless of what they or their accountants say. To avoid underwithholding, the smart move is for employees to take a few minutes and work with the IRS’ withholding calculator. The IRS needs to rebuild this, too, and it says it should be available at the end of February. You can encourage employees to do this by demonstrating how it works. Remember that most people don’t like doing math, even simple math.
Extra step: Once the IRS revises Pub. 505, Tax Withholding and Estimated Tax, for 2018, download and distribute it to employees.
The IRS also says that it’s revising the W-4, but it’s not clear right now when it will be released or whether all employees will need to refile. It’s possible that a new form won’t be available until next fall, which ramps up pressure on employees to use the calculator now. Once the IRS releases the new form, you should distribute it to everyone and explain why they should refile. Here’s some language you can consider using:
The income taxes we withhold from your pay should approximate your tax liability for the year and is based on the Form W-4 you have provided us. However, the Form W-4, which we have on file for you may no longer reflect your tax liability, due to changes in personal income taxes made late last year.
All employees are encouraged to review the new form and refile with us to ensure that we are withholding the proper amount of tax.
Please feel free to call or email the Payroll Department if you have any questions.