IRS Revision of W-4 May Prompt State Changes

The most comprehensive resource available for payroll professionals. This service provides payroll news, white papers, custom research answers, webinars on the hottest payroll topics, survey and...

By Jamie Rathjen

The recent release by the IRS of the draft 2019 Form W-4 creates a question for many states: revise their own withholding forms or accept the federal version.

The draft 2019 Form W-4, Employee’s Withholding Allowance Certificate, released June 6 by the Internal Revenue Service, eliminated the use of the personal exemption, the basis of federal income tax withholding and that of many states. Personal exemptions were suspended in the federal tax code overhaul (Pub. L. 115-97) and replaced on the draft W-4, with new fields for employees to indicate additional income, deductions, or credits that may affect taxes owed.

The states that only accept the federal W-4 and do not have a state equivalent, meaning they would have to decide whether to adopt the 2019 W-4, are Colorado, Delaware, Idaho, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Carolina, and Utah.

Among the first states to make changes to withholding allowances were Maryland, Michigan, and Nebraska. These states all have their own allowance values, but their laws required taxpayers to claim the same number of state as federal allowances, meaning that each state’s allowance would have been eliminated in the tax code overhaul. Each state preserved its allowance by removing the dependence on federal allowances.

Idaho, which uses the federal Form W-4 for state purposes, established a state allowance April 27 of $2,960 a year in 2018. Idaho now requires employees to note the number of state allowances on the federal Form W-4.

New Mexico revised its withholding tables May 31 to account for the tax code overhaul. The state uses the federal W-4, but with the revised tables no more than three allowances may be used to calculate state withholding, even if more are claimed.

Oklahoma released a Form OK-W-4, Employee’s Withholding Allowance Certificate, on March 29 and switched to using the state form, instead of the federal W-4, for employees who begin employment or who must update their withholding allowances after Feb. 28, 2018. Federal Forms W-4 submitted by employees before March 1, 2018, may still be used to calculate withholding if they do not need to be updated.

States that accept the federal W-4 and a state form are Arkansas, California, Georgia, Massachusetts, Minnesota, New Jersey, New York, Rhode Island, Vermont, West Virginia, and Wisconsin.

Regardless of any state changes that may come, withholding calculations under the new W-4 would present challenges for employers and employees, payroll professionals told Bloomberg Tax.

Draft W-4 Challenges

Employees may have difficulty completing the draft W-4’s new fields, said Patrick McKenna, CPA, tax director for Prudential Financial Inc. While the apparent goal of the form is to provide an amount of withholding that approximates employees’ federal tax liability, “for many employees this may be a difficult result to produce” because of the complexity of the form and instructions, McKenna said.

The form does not contain an explanation of why employees are being asked to provide the information needed for the new fields, or what employers will do with the information given, said Martin Armstrong, CPP, vice president of payroll shared services at Charter Communications Inc. Employees may not want to disclose the information the form requires, he said.

Additionally, “to expect employers to make eight calculation steps for every single 2019 Form W-4 is extremely burdensome,” Armstrong said.

The draft form “seems to make the withholding calculation process much more difficult for employers and their systems,” said Brent Gow, CPP, managing partner of BRGow & Associates LLC. Each of the form’s new lines would require a separate calculation, he said.

McKenna, Armstrong, and Gow are members of the Bloomberg Tax Payroll Library Advisory Board. Their responses were sent by email to Bloomberg Tax.

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

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Payroll Decision Support Network