No one wants a hefty tax bill at the end of the year, and even though a large refund is nice, most people prefer to keep their tax withholdings as small as possible. It has always been important for employees to review the allowances they have claimed on their W-4s when their personal or financial situations change (e.g., change in marital status or number of dependents).
With substantial changes under The Tax Cuts and Jobs Act (TCJA) of December 2017—which increased the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions and changed the tax rates and brackets—more employees may want to review their W-4 allowances.
Which employees should update their W-4s?
Most employees don’t need to change their existing W-4s. The IRS issued updated withholding tables in early 2018 to account for changes under the new law. For employees with more complicated financial situations, the IRS has encouraged use of the Withholding Calculator, an online tool to more accurately determine allowances. This is especially important for employees with:
- Two-income families.
- People working two or more jobs or who only work for part of the year.
- People with children who claim credits such as the Child Tax Credit.
- People with older dependents, including children age 17 or older.
- People who itemized deductions in the past.
- People with high incomes and more complex tax returns.
- People with large tax refunds or large tax bills last year.
Employees in these situations may find that their allowances, elected before the TCJA, have resulted in over or under-withholding.
What should employers do?
The IRS released a draft W-4 for 2019 in October that is very similar to the 2018 W-4. As with the 2018 W-4, existing employees are not required to complete the new form. Employers should be aware, though, that when the 2019 W-4 is finalized, they will need to use it for new hires or any employees changing their withholdings.
Don’t offer specific guidance.
With the recent tax changes, employees may be unprepared or surprised by an unexpected tax bill or refund. They may seek your help and advice in adjusting their withholdings in the coming year. It is essential for employers to remember that employees are responsible for checking the accuracy of their withholdings and that employers should not offer advice. Instead, employers are encouraged to refer employees to the Withholding Calculator or to a tax advisor.