Draft W-4 Calculations to Burden Employers, Tax Groups Say

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By Keith Hill

Employers face a significant burden related to the withholding calculations required by the draft 2019 Form W-4, two tax groups said in letters to the IRS.

The draft instructions for Form W-4, Employee’s Withholding Allowance Certificate, state that the entries on new Lines 5, 6, 7, and 8 are annual dollar amounts rather than a figure corresponding to the number of withholding allowances. Instead of subtracting from gross wages a specific withholding allowance amount based on payroll period, employers would be required to calculate the amounts to enter on those lines. The dollar amounts would be added or subtracted to wages each pay period to determine the total amount of taxes to withhold.

The form is being revised because of the federal tax code overhaul (Pub. L. 115-97), which took effect Jan. 1.

The draft W-4 shifts the “burden to the employer in calculating withholding amounts,” the National Association of Enrolled Agents said July 6 in a letter to the Internal Revenue Service. The burden particularly would affect smaller businesses that “generally lack HR resources and tax code knowledge” and would need to seek help from external payroll providers, said the association that is made up of advisers who represent taxpayers before the IRS in dealing with audits, collections, and appeals.

The draft form increases complexity, said the letter. A Form W-4 redesigned in response to a major tax code overhaul requires the IRS “to strike a balance between a complex yet more accurate form on the one hand and a simpler yet less accurate version on the other,” the association said.

The American Institute of CPAs, which sent a letter July 12 to the Treasury Department and the IRS, said the draft W-4 requires employers “to calculate their employees’ withholding on an annual basis.” This change from a form that was distributed by employers to new employees “is a significant change with the risks and responsibility of accurate withholding calculations shifted to employers,” said the association of certified public accountants whose members advise clients on federal, state and international tax matters.

The level of employer due diligence regarding proper withholding amounts was not made clear by the IRS, the association said. Significant underpayment or overpayment of taxes could occur if an employee omits W-4 information to avoid having to properly calculate their withholding or does not use the IRS online calculator to determine the amount to withhold from each paycheck, the letter said.

Line 5 records the amount of nonwage income, Line 6 records the annual deductions from income for the employee’s household, Line 7 records the total annual income tax credits the employee expects to take, Line 8 records the total annual taxable wages for all lower paying jobs in the employee’s household, and Line 9 records any additional amount employees want withheld from their paychecks. Employers should use the entries on employees’ 2019 Forms W-4, Lines 5, 6, 7, 8, and 9 to adjust income tax withholding, the IRS said.

Employers Require More Guidance

Employers need a revised Publication 15 (Circular E), Employers Tax Guide, “to provide guidance, perhaps with a new withholding table or a prescribed equation, to calculate the proper withholding,” the CPA association’s letter said.

Publication 15 includes tables that determine employees’ withholdings. Employers would need to understand and interpret the changes under the tax code overhaul to determine appropriate withholding if there is no revised Publication 15, the letter said. “Many employers, particularly small businesses, simply do not have the technical knowledge or resources to make these critical tax decisions on behalf of their employees,” it said.

The AICPA letter did not recommend that revised withholding tables be provided to employers as soon as possible to give them time to update their systems. The IRS generally issues Notice 1036, which is an early release of the percentage method tables, in mid-December.

A second draft of the 2019 W-4 is to be released in mid-August, with a final version expected in November, the IRS said. Employers have been told to make prior-year W-4 data conform to the 2019 withholding method by keeping the number of withholding allowances and additional withholding the same as on prior-year W-4s and assuming Lines 5, 6, 7, and 8 are zero. The IRS said it adjusted withholding tables to take into account older W-4s.

A simple Form W-4 is needed “that reduces administrative burden” and “determines withholding in an appropriate and fair manner without placing undue burden” on employers, the CPA association letter said, adding that the IRS “should provide employers a straightforward method to determine their employees’ withholdings.”

The IRS should consider ease of use as it modifies the draft Form W-4, the National Association of Enrolled Agents letter said. If taxpayers and employers must use Forms W-4 that are difficult to understand, unpleasant or catastrophic surprises could result, the letter said.

The National Association of Enrolled Agents and the American Institute of CPAs are among industry groups that called for changes to the draft 2019 W-4. The National Payroll Reporting Consortium said some tax withholding systems for 2019 may need to include at least four new input fields, which would create more complexity for employers. The American Payroll Association said July 3 in a letter to the IRS that more information on where to find information on prior-year W-4s was needed.

Additionally, some states may have to decide whether to revise their own withholding forms or accept the federal version. Colorado, Delaware, Idaho, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Carolina, and Utah only accept the federal W-4 and do not have a state equivalent, which means officials would have to decide whether to adopt the 2019 W-4. Other states, including Maryland, Michigan, and Nebraska, have made changes to withholding allowances.

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

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