IRS updates withholding tables for new tax law

The Internal Revenue Service released updated tax withholding tables for 2018 Thursday to reflect changes for the Tax Cuts and Jobs Act, amid warnings that the tables may not be accurate and will need further refinements.

Notice 1036 is only the first in a number of steps the IRS intends to take to improve the accuracy of withholding after the major changes in the new tax law, the service cautioned.

Among other things, the new tables reflect the increase in the standard deduction, the repeal of personal exemptions, and changes in tax rates and brackets.

Andrew Harrer/Bloomberg

“With this guidance, most American workers will begin to see bigger paychecks. We estimate that 90 percent of wage earners will experience an increase in their take home pay,” said U.S. Treasury Secretary Steven Mnuchin in a statement. “The administration’s monumental tax reform legislation continues to provide economic benefits for hard-working Americans. These tax cuts will ensure that American workers are able to keep more of their hard-earned income and decide how to spend, invest or save it.”

The updated withholding information shows the new rates for employers to use this year. Employers should begin using the new withholding tables as soon as possible, the IRS and the Treasury Department stressed, but no later than Feb. 15, 2018. They should continue using the 2017 withholding tables until they implement the 2018 withholding tables.

How long it will take for the changes to surface will vary, depending on how quickly the new tables are implemented by employers and how often employees are paid, whether it’s on a weekly, biweekly or monthly basis. The new withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers to claim withholding allowances. That's supposed to minimize the burden on taxpayers and employers, so employees don't have to do anything at this time with their W-4.

“The IRS appreciates the help from the payroll community working with us on these important changes,” said Acting IRS Commissioner David Kautter in a statement. “Payroll withholding can be complicated, and the needs of taxpayers vary based on their personal financial situation. In the weeks ahead, the IRS will be providing more information to help people understand and review these changes."

One of the goals of the new tables is to produce the correct amount of tax withholding for people with simpler tax situations, helping them avoid over- and under-withholding of tax as much as possible.

To help taxpayers determine their withholding, the IRS is revising the withholding tax calculator on IRS.gov. It expects the calculator will be available by the end of February, and is recommending that taxpayers to use it to adjust their withholding once it’s released.

The IRS is also working on revising the Form W-4, the employee withholding allowance certificate, which has been rendered outdated by the new tax law. The form and the revised calculator will reflect additional changes in the new law, including changes in available itemized deductions, increases in the child tax credit, the new dependent credit and the repeal of dependent exemptions.

The calculator and the new Form W-4 can be used by employees who want to update their withholding in response to the new law or changes in their personal circumstances in 2018, and by taxpayers who starting a new job. Until a new Form W-4 is issued, both employees and employers should continue to use the 2017 W-4.

For 2019, the IRS anticipates making further changes involving withholding. The IRS will work with the business and payroll community to encourage workers to file new Forms W-4 next year and share information on changes in the new tax law that impact withholding.

Democrats have warned the withholding tables may be inaccurate. Senate Finance Committee ranking member Ron Wyden, D-Ore., released a statement Thursday on the IRS’s release of their 2018 withholding tables: “Republicans are using brute force and speed to implement a law that will deliver a financial blow to hardworking Americans all across the country,” he said. “I look forward to GAO’s independent review of these tables, which will expose whether the Trump administration is tampering with Americans’ paychecks, resulting in a whopping tax bill next year.”

Earlier this week, he and House Ways and Means Ranking Member Rep. Richard Neal, D-Mass., raised concerns that the Trump administration was politically interfering with the development of the 2018 withholding tables (see Democrats raise concerns about IRS withholding tables). They asked the Government Accountability Office to independently analyze the new tables and determine whether they might result in the systematic underwithholding of federal taxes from employee paychecks. Trump has promised his tax cuts would produce an average savings of $4,000 for taxpayers.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, promised taxpayers would start to see a boost in their paychecks thanks to the new tax law he shepherded through Congress. “This is outstanding for families in Texas and taxpayers across the country,” he said in a statement. “With the new tax code provided by the Tax Cuts and Jobs Act, nine out of 10 taxpayers will see a boost in their take-home pay within the coming weeks. That comes on top of all the bonuses, wage increases, and expanded benefits that so many businesses have already provided American workers as a result of tax reform. The American people work hard to earn their paychecks and support their families. Finally, they have a tax code that allows them to keep more of their money to use as they see fit.”