IRS releases updated 2018 withholding tables | KPMG | US

IRS releases updated 2018 withholding tables

IRS releases updated 2018 withholding tables

The IRS today released Notice 1036 that updates the income tax withholding tables for 2018 and that reflects changes made by the tax reform legislation enacted in December 2017.


Related content

The updated withholding information provided by Notice 1036 [PDF 744 KB] shows the new rates for employers to use during 2018. 

Employers are to begin using the 2018 withholding tables as soon as possible, although no later than February 15, 2018, but are to continue to use the 2017 withholding tables until implementing the 2018 withholding tables.

Supplemental wages

Withholding on supplemental wages when employee receives $1 million or less of supplemental wages during calendar year

  • Supplemental wages combined with regular wages but the amount of each is not specified—Employers are to withhold federal income tax as if the total were a single payment for a regular payroll period
  • Supplemental wages identified separately from regular wages, if paid separately or combined in a single payment with the amount of each specified—The federal income tax withholding method depends partly on whether tax is withheld from the employee’s regular wages. If income tax is withheld from an employee's regular wages in the current or immediately preceding calendar year, the employer can use one of the following methods for the supplemental wages.
    • Withhold a flat 22% (no other percentage allowed).
    • If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. Compute the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. Subtract the tax already withheld or to be withheld from the regular wages—withhold the remaining tax from the supplemental wages. If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax.

If income tax was not withheld from the employee's regular wages in the current or immediately preceding calendar year, employers are instructed to use the method provided immediately above. 

KPMG observation

Because of changes to the Code, there was uncertainty regarding the appropriate flat rate to use for supplemental withholding. Today’s guidance establishes that 22% is the appropriate supplemental flat rate to use for supplemental wages of $1 million or less.

Withholding on supplemental wages when employee receives more than $1 million of supplemental wages during calendar year

If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 37% (or the highest rate of income tax for the year). 

Employers are instructed to withhold using the 37% rate without regard to the employee's Form W-4.

Regardless of the method used to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. 

Backup withholding rate

In general, a withholding rate of 24% applies to certain taxable payments if the payee fails to furnish a correct taxpayer identification number (TIN). This withholding is referred to as “backup withholding.”

Future guidance expected

According to a related IRS release—IR-2018-05—the IRS is also working on revising the Form W-4 and the “withholding tax calculator” to reflect additional changes in the new law, such as changes in available itemized deductions, increases in the child tax credit, the new dependent credit and repeal of dependent exemptions.

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

The IRS release states that the IRS anticipates making further changes for 2019 involving withholding. 

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