by Robert L. Gauss et al.
IceMiller LLP is an IMA Member
Although the Internal Revenue Service (“IRS”) has issued a draft revised Form W-4, Employee’s Withholding Certificate, to reflect changes to the tax laws under the Tax Cuts and Jobs Act of 2017 (“TCJA”), it has not yet announced any proposed revisions to Form W-4P, Withholding Certificate for Pension or Annuity Payments.
For periodic and non-periodic payments, the recipient of an employer pension or annuity benefit is entitled to choose not to have income tax withheld from retirement plan payments (so long as the payments are not eligible rollover distributions). For a detailed discussion of federal withholding tax, visit Publication 575 Pension and Annuity Income (2018), pp. 9-10. The withholding election remains in effect until the recipient changes or revokes the withholding election in place. Benefit recipients use Form W-4P to opt out of withholding or increase withholding on pension and annuity payments.
Changes made under the TCJA impact individual income tax rates. When the IRS released the 2018 tax withholding tables, it also published a list of Frequently Asked Questions, which are located here. In this FAQ document, the IRS stated it was working on updating Form W-4.
Since then, the IRS has released two early drafts of the 2020 Form W-4, most recently on August 2, 2019. This second early release draft makes several changes to the earlier draft version, following comments the IRS received from tax professionals. The IRS also clarified that those employees who submitted a Form W-4 in any year before 2020 are not required to submit a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently submitted Form W-4.
Form W-4P is not mentioned in this release. However, we would not be surprised if the IRS revised Form W-4P for the same reasons it revised the Form W-4 – to incorporate changes made under the TCJA, make the form easier for employees to understand and minimize administrative burdens on employers. As there is not yet any indication that a revised Form W-4P will be released in 2019, we do not anticipate a revised W-4P will be required for 2020. We also anticipate that once the IRS does release a revised W-4P, there will be sufficient lead time to review and provide comments to any proposed changes. For example, the IRS first indicated its revised Form W-4 would be available for use in July 2018 but, after receiving comments on the proposed draft, the IRS delayed implementation until 2020. Thus, if the IRS makes significant changes to the Form W-4P, it is likely there will be sufficient time to comment and make any necessary programming changes.
Two Q&As from the Form W-4 FAQs may provide insight into the implementation of a revised W-4P:
15. Does this mean our software will need two systems—one for forms submitted before 2020 and another for forms submitted after 2019?
Not necessarily. The same set of withholding tables will be used for both sets of forms. You can apply these tables separately to systems for new and old forms. Or, rather than having two separate systems, you may prefer to use a single system based on the redesigned form. To do this, you could enter zero or leave blank information for old forms for the data fields that capture the information on the redesigned form but was not provided to you under the old design. Additional guidance will be provided on the payroll calculations needed based on the data fields on the new and old forms.
16. How do I treat employees hired after 2019 who do not submit a Form W-4?
New employees who fail to submit a Form W-4 after 2019 will be treated as a single filer with no other adjustments. This means that a single filer’s standard deduction with no other entries will be taken into account in determining withholding. The IRS and the Treasury Department anticipate issuing guidance consistent with this approach.
Payors are able to use a substitute Form W-4P if it also provides the tables, instructions and worksheets contained in the Form W-4P in effect at that time. The substitute W-4P must contain language that is identical to the official W-4P and must meet the current IRS rules for substitute returns found in Revenue Procedure 2018-51, Publication 1167, General Rules and Specifications for Substitute Forms and Schedules. Because Form W-4P has not yet been updated by the IRS, we recommend continuing to use the current Form W-4P, even though upcoming changes to the Form may be foreseeable.
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