There has been much angst in the payroll sector over what lies in store for employees who failed to update their W-4 forms to accommodate changes implemented by the Tax Cuts and Jobs Act. The angst was somewhat reduced by a January 16 (2019) news release from the IRS letting it be known that they are offering relief to underpaying taxpayers under certain conditions.
The relief is being offered in the form of no penalties assessed against regular wage earners who paid at least 85% of their 2018 federal tax liability through withholding. Self-employed individuals and others who pay estimated taxes will also be granted relief if they have met the minimum 85% threshold.
What It Means to You
If you are a standard employee who receives a regular paycheck after income tax and FICA contributions have been withheld, you may be eligible for the relief. The relief only applies if you underpaid your taxes for 2018. Here is a practical example of how it would work:
Let’s say you submitted a new W-4 form as advised by your employer. But when you prepare your taxes next month, you discover you still owe the government a few hundred dollars. You will still have to pay what you owe, but you will not have to pay any penalties if the amount you owe equals 15% or less of your total tax bill for the year.
In real numbers, let us assume your total tax bill for 2018 was $2,000. If you prepare your taxes and discover you still owe $300 or less, you won’t have to pay any penalties.
What It Means to Employers
The IRS offering relief to underpaying taxpayers has no direct impact on employers. However, there is an indirect impact. Ideally, employers would want to help their workers avoid owing taxes every spring by ensuring their withholding is correct. So the IRS announcement should motivate employers to check with their workers in relation to their 2018 taxes.
If the payroll department finds out that a number of employees came up short, they can offer to help those affected fill out new W-4 forms so that the problem isn’t repeated next year. Payroll departments can also offer training to workers covering the most common tax compliance issues.
Employers should, under no circumstances, assume that the IRS announcement relieves them of their responsibilities to withhold income tax and FICA contributions. It is the employer’s responsibility to withhold the correct amounts, report those amounts, and make income tax and FICA deposits on schedule dates.
Withholding and Incorrect W-4s
As a reminder to employers, they are also required to affect income tax and FICA withholding based on current W-4 information, even if they suspect that information is incorrect. Dallas-based payroll provider BenefitMall says there is even a procedure in place for withholding, reporting, and paying even when W-4 information is incomplete or missing altogether.
If you are an employer struggling to comply with the changes implemented by the Tax Cuts and Jobs Act, you might consider outsourcing your payroll to a third-party provider like BenefitMall. Payroll companies are the most qualified to handle your payroll because that is what they specialize in.
If you’re an employee and you’ve underpaid your taxes for 2018, you may not have to pay any additional penalties as long as your 2018 withholding equals at least 85% of your total tax liability. If you have not met the 85% threshold, there will be penalties imposed. In either case, you need to consider filling out a new W-4 form to guarantee your withholding amounts for 2019 are correct.