Following the enactment of the Tax Cuts and Jobs Act (the “TCJA”) in late December 2017, which introduced significant reforms to the U.S. tax system, the Internal Revenue Service (“IRS”) issued new withholding guidance in January 2018. Recently, two Democratic legislators have openly questioned whether the IRS’ 2018 withholding tables may result in systematic under-withholding of W-2 earnings. Companies will need to comply with the IRS withholding guidance, through administrative procedures that are typically the responsibility of payroll departments and outside payroll service providers. Companies may also be concerned about the consequences of under-withholding from an employee-relations perspective.
1. Background: Administrative and Political Issues
Changing the payroll withholding tables in a short time-frame raises numerous administrative complexities, including dealing with payroll IT systems and adjusting withholding rates to reflect the TCJA. Some of the adjustments require information from taxpayers that employers do not currently typically collect, such as information relevant to the impact on tax rates of the elimination of the state and local tax deduction. Many payroll service providers have been working with companies in anticipation of the TCJA becoming effective to address these issues.
On January 8, 2018, Senate Finance Committee Ranking Member Ron Wyden (D-OR) and House Ways and Means Ranking Member Richard Neal (D-MA) sent letters to Acting IRS Commissioner and Assistant Secretary for Tax Policy David Kautter and Government Accountability Office (“GAO”) Comptroller General Gene Dodaro, raising concerns that the Department of the Treasury “may unduly influence” withholding rates by promulgating formulas that cause insufficient amounts to be withheld in 2018, such that taxpayers will ultimately owe additional federal income tax (and potentially under-withholding penalties, unless addressed by subsequent guidance) when they file their returns in 2019. Senator Wyden and Representative Neal have requested that the IRS provide them with certain information regarding the drafting and review of the 2018 withholding tables, including the names and titles of Treasury employees or officials who participated in the review and approved the updated tables. Senator Wyden and Representative Neal have also requested that the GAO review the revised withholding tables and determine whether the tables provide adequate withholding in light of the changes to the tax code.
In its press release announcing the new guidance, the IRS indicated that the 2018 withholding tables reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets under the TCJA, and that employers should begin implementing the 2018 tables as soon as possible (and in no event later than February 15, 2018). Additionally, the IRS stated that it is in the process of revising the Form W-4 and its withholding tax calculator to take into account additional changes as a result of the new law, and that until a new Form W-4 is issued, employers and employees should continue to use the 2017 Form W-4.
2. Employee-Relations Issue for Employers
Given the recent attention on the matter, companies and employees may be concerned about the potential impact of the new 2018 withholding tables on employee tax liabilities and the risk that employees may be faced with unexpected tax bills when they file their 2018 tax returns. Companies should be aware of the ways in which they and/or their employees can attempt to mitigate these risks and the technical issues they raise. First, employers generally cannot unilaterally withhold at rates higher than the scheduled rates. Second, the IRS issued guidance in 2012 to the effect that increased withholding on supplemental wages is generally not permitted, even when based on an employee’s request. The rationale for the IRS’ 2012 position is not entirely clear, making it difficult to predict analytically how the IRS might react to the question of additional withholding on supplemental wages today, putting aside the relevant political and administrative issues.
Employees may use the Form W-4 to increase withholdings from regular wages by electing an additional fixed dollar amount be withheld from each paycheck, limiting claimed exemptions or, if the employee is married, electing to withhold at the higher single rate. None of these approaches will necessarily result in withholding that bears any resemblance to the employee’s actual liability under the new tax regime, making it difficult to strike the employee’s desired balance between avoiding an unexpectedly large tax bill (and any penalties) in the following year and managing their cash flow needs in the current year. Furthermore, since an employee is not limited in the number of subsequent Forms W-4 that he or she may file to change the applicable elections, this may pose a significant administrative burden on employers and their payroll departments and outside vendors.
Companies should be aware of the ongoing discussion on this topic, be cautious about reacting to the issue in the absence of further guidance and continue to monitor developments.
 The letters are available at https://www.finance.senate.gov/imo/media/doc/010818%20IRS%20Witholding%20Letter.pdf, and https://www.finance.senate.gov/imo/media/doc/010818%20GAO%20Witholding%20Letter.pdf, respectively.
 The IRS information letter is available at https://www.irs.gov/pub/irs-wd/12-0063.pdf. The information letter indicates that over-withholding is permissible under an aggregate procedure (i.e., where a payment of supplemental wages are added to regular wages in a payroll period), but the employee would be required to submit a request for additional withholding on a Form W-4, and would then be required to submit a subsequent Form W-4 to avoid additional amounts being withheld from future paychecks.