Analysis: IRS W-4 Draft to Increase Employer Burden

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Income tax withholding systems for 2019 may need to include at least four new input fields, based on an early draft of a critical withholding tax form, creating more complexity and burdens for employers, payroll professionals told Bloomberg Tax.

The Internal Revenue Service’s early draft Form W-4, Employee’s Withholding Allowance Certificate, released June 6, instructs employees to provide employers with “a mini Form 1040" based on estimated household income, Pete Isberg, president of the National Payroll Reporting Consortium, said June 7 in a telephone interview. The National Payroll Reporting Consortium is a nonprofit trade association that includes ADP LLC, Ceridian Inc., Paychex Inc. and several other payroll-processing companies as members.

The four new fields are for nonwage income (Line 5); itemized deduction amounts (Line 6); reporting amounts that could be credits against tax liabilities, such as the child tax credit (Line 7); and income amounts from separate or multiple jobs within the household (Line 8). These data points would require employers to perform additional calculations based on those amounts to apply for federal income tax withholding purposes.

“It appears IRS wants to get the tax bracket right for the family” at the withholding stage, said Isberg, who also is vice president of government affairs for ADP.

Brent Gow, CPP, managing partner of BRGow & Associates LLC, said the need for more data appears to “make the withholding calculation process much more difficult for employers and their systems.”

Adoption of the form by employees also may be an issue, Gow told Bloomberg Tax on June 8. Gow, a member of the Bloomberg Tax Payroll Advisory Board, said he believes “employees will not bother to complete a new 2019 Form W-4 as it is too complicated.”

2 Systems, Impact on States

Isberg also anticipates employers may need two systems to process income tax withholding starting in 2019 because the IRS said it would allow the use of previously filed W-4s, which are based on withholding allowance amounts and do not have the additional fields. There would be “two separate sets of calculations,” he said, one for pre-2019 W-4s and another for 2019 forms, so employers would need to run parallel payroll processes as long as some employees have W-4s that were valid before 2019.

The form changes may affect state and local withholding tax processes as well, because many states still allow use of the federal W-4 for state purposes, Isberg said. States with income tax withholding requirements would need to decide soon whether to adopt or reject the new system being established at the federal level. “They can’t ignore” the federal form change, he said.

The state processes for making changes could mean a later release of withholding methods and new Form W-4 equivalents for states, which could strain employer resources at a time when year-end processing and preparations for the new year are at their peak.

Only Part of the Puzzle

The release of the draft W-4 by the IRS allows payroll professionals to see only part of the equation used to determine withholding. The instructions to the draft form for employers provides an example of calculating withholding, without providing the withholding table being referenced.

“Payroll providers need details such as table formulas” to adequately assess the draft form and start preparing to change withholding systems, Isberg said.

To contact the reporter on this story: Michael Baer in Washington at mbaer@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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