Employers Take Note: IRS 2019 Form W-4 Requires a Payroll Systems Overhaul

IRS 2019 Form W-4 Requires Payroll Systems Overhaul

Here's what employers need to know about IRS 2019 Form W-4.

The draft 2019 IRS Form W-4, released on June 6, 2018, represents the most sweeping changes to payroll withholding since, well, since payroll withholding began. Employers will be scrambling through 2018 and even 2019 to overhaul their payroll systems on the fly. Some of the changes are improvements, making the form easier to understand and shifting some computational burdens to employers. On the other hand, employees may balk at what may be viewed as overly intrusive questions. In particular, a new line asks employees to tell their employers how much their spouse makes annually. How do you imagine that will be received?

What's New?

Employers will find a mix of relatively easy new computations, such as converting employees' full-year additional income and deduction estimates to per-pay period amounts; and more complicated programming. For example, for those employees that disclose their spouse's annual salary, the employee's income tax withholding calculation must be figured twice.

First, convert all other income (and spouse's income), deductions and annual tax credits to per-pay period amounts. Then, calculate withholding for the employee's current pay period wages, plus the estimated pay period earnings of the spouse (or other income). Then, compute withholding for the spouse's income separately, and deduct it from the combined total calculated in the first step. No problem, right?

This is intended to make the withholding result more accurate by using the actual tax rates and brackets associated with the entire (tax) household, as the annual IRS Form 1040 does. Actually, this procedure only applies for the higher earner in the family. Employees will be instructed to enter the spouse's income only if they are the highest-earning person in the family. (Special instructions apply if there are three or more wage-earners in a family. Don't even ask.) Question: What are the odds that a spouse will correctly assert that they are the higher-earning spouse, therefore entering their spouse's income? What do you suppose will happen if both spouses make an entry? Or if neither does?

What Else Is Changing?

Ok, back to the W-4 form. What are the changes, specifically? There are four new entries, and — what may cause the most consternation — no withholding allowances. Employees have elected withholding allowances for payroll pretty much since the beginning of time. Instead, a new line (5) will ask for full-year other income, meaning non-wage income not subject to withholding, such as interest and dividends

A new line (6) will ask employees to enter expected full-year deductions, such as mortgage interest and charitable contributions.

Another new line (7) will ask employees to enter the amount of any tax credits for which they expect to qualify; for example, the newly expanded child tax credit. This is actually helpful to employees. Previously, any tax credits were translated by employees, using a complicated worksheet, into additional withholding allowances. As with additional income, any tax credits should only be entered for the highest paying job in households with multiple incomes. Again, what could go wrong? Well, under-withholding if both spouses enter their full-year tax credit amount, and a large tax bill at year-end. Or if neither enters tax credits, a bigger tax refund — less of a problem, but keep in mind that each paycheck is unnecessarily reduced during the year.

The new line (8) is where employees will enter additional household income due to multiple jobs; i.e., spouse's income, discussed above.

Lastly, just so you can't say that the entire form is different, line (9) will continue to offer an opportunity to elect an additional amount to withhold from each paycheck. Actually, this helpful line is the "out" people will be looking for as an alternative to disclosing their spouse's annual income (or income from their second job). Line 9 is the only entry with a per-pay period result. All other entries represent full-year amounts. Let's all keep that straight so as not to authorize a full-year additional deduction from every paycheck. (Imagine the refund!)

To learn more about the implications of the 2019 Form W-4, click here.