The Tax Cuts and Jobs Act (TCJA) has created significant changes for payroll and other key human resources processes. In this current environment, it's imperative that HR professionals ensure they remain on top of these adjustments and understand what the changes will mean for their internal paperwork and their employees.
Recently, in accordance with updates coming as part of the TCJA, the Internal Revenue Service provided a draft version of 2019 Form W-4, the Employee's Withholding Allowance Certificate form, which encompasses required information for employers.
What does this draft version release mean?: Possible changes forthcoming
While the IRS has made a draft of the updated W-4 form and instructions available to employees and employers on its website, the organization also makes clear that this should not be considered the final version of the form, and it should not yet be circulated among employees.
"Do not file draft forms," the IRS directed. "Also, do not rely on draft forms, instructions, and publications for filing. We generally do not release drafts of forms until we believe we have incorporated all changes. However, in this case we anticipate it is likely that this form will change before being released as final."
The final version will be released in November, according to Bloomberg, and will include a cover sheet indicating that it is not a draft. The purpose of providing this version is to enable employers and their HR and benefits administration team to ready themselves and their internal processes and policies in alignment with the included updates.
W-4 changes according to TCJA
Quite a few elements will be adjusted in light of the TCJA, and employers may consider urging employees to revisit their forms once the final version is released. Even if their individual condition or situation has not changed significantly compared to the previous year, new standards may affect the information included in the form.
As Automatic Data Processing noted, some of the highlights of the updated draft form include:
Previous Line 5, Number of Allowances, eliminated
In the past, form W-4, Line 5 was the location where employees would list the total number of allowances being claimed. This has now been eliminated for 2019 filings.
This adjustment in particular will affect internal HR teams. While employees are not decidedly required to fill out a new W-4 form, they are strongly encouraged to do so. In this way, employers can utilize the information from previous forms, but they will also have to maintain withholding calculations from both 2018 and 2019.
New Line 5: Additions to income
The eliminated Number of Allowances space is now being utilized for employees to enter estimated additions to their income. This encompasses amounts that are significant and do not come from their typical wages, including things like account interest earnings and stock dividends.
Previously, individuals converted these amounts and included the additions at a per-pay period basis. Now, however, this new Line 5 allows for a yearly estimate of nonwage income not subject to withholding. With this update, HR teams will need to take a second look at their payroll systems to ensure that these annual amounts are included in calculations.
Updated Line 6: Deductions
In addition to updating payroll systems to include annual estimations of additions to income, instead of per-payroll amounts, HR teams will also have to ensure that their systems leverage full-year calculations of itemized and other deductions. Form W-4 includes this update within Line 6, where employees are requested to enter the amounts expected to be subtracted from income, including things like state and federal taxes, interest to mortgage payments and donations to charitable organizations.
Updated Line 7: Tax credits
The TCJA provides expanded tax credits for children and dependents, and line 7 of Form W-4 has been updated accordingly. Employees are to estimate the annual amount for the credits they expect to receive, including those for dependents or other credits. This amount may have changed considerably for employees with dependents in comparison to last year's credits.
Updated Line 8: Additional income
This line is used to include income amounts from multiple jobs, but this amount should only be entered for the highest paying job within the household. Where a worksheet was previously used to calculate this amount, updated Form W-4 includes special instructions for employees that have multiple job incomes within their household. These calculations will then be used by employers to determine individuals' tax bracket and rates.
Preparing for additional changes
As the IRS noted, this is a draft version of the form, and the final version may include additional adjustments. In this way, it's imperative that internal HR teams take the necessary steps now to update their internal payroll and other systems to calculate deduction estimations and other changing items appropriately. If subsequent changes comes with the final Form W-4, employers will be better prepared.
The IRS provides a Withholding Calculator, an important resource for employees, particularly heading into 2019. This calculator can help workers perform a "paycheck checkup" to ensure that the right amount is being withheld from their earnings, especially given these recent changes.
To find out more about how the updates will impact your HR team and how outsourced services can be a benefit, connect with the experts at Triton today.