TAX PROFESSIONALS HAVE QUESTIONS ABOUT PUB 15-T AND FORM W-4

27 January 2020

Representatives from the American Payroll Association (APA) asked the IRS to clarify a statement in Publication 15-T on supplemental wages and to provide guidance on 2020 Form W-4 filing requirements during an IRS payroll industry telephone conference call.

Background. Form W-4, Employee’s Withholding Allowance Certificate, has been completely revised beginning with the 2020 tax year. See IRS issues final version of 2020 Form W-4. The previous version of Form W-4 calculated a taxpayer’s income tax withholding using a withholding allowance based on the personal exemption amount. In 2017, the Tax Cuts and Jobs Act (TCJA) suspended personal exemptions and substantially increased the standard deduction. The mismatch between the old Form W-4 and the new tax law caused some taxpayers to be over- or under-withheld.

As a result of the redesign of the 2020 Form W-4, Publication 15-T, Federal Income Tax Withholding Methods For Use in 2020), was created to help employers and payroll providers calculate federal income tax withholding.

Supplemental wages includes bonuses, commissions, and overtime pay. Withholding on supplemental wages is computed under several methods, including the following:

  1. Mandatory flat rate method. Employers must use this method for supplemental wages in excess of $1 million during a calendar year. Under this method, employers must withhold on the supplemental wages in excess of $1 million at a rate equal to the highest tax rate applicable under Code Sec. 1 for tax years beginning in the calendar year. Currently, the withholding rate is 37%.
  2. Optional flat rate method. Employers may use this method for supplemental wages of $1 million or less during a calendar year if:
    1. Mandatory flat rate withholding does not apply to the payment or portion of the payment;
    2. The supplemental wages are paid separately from regular wages or are paid concurrently with the regular wages, but separately identified on the employer’s payroll records; and
    3. Income tax has been withheld from regular wages of the employee during the calendar year of the payment or the preceding calendar year.

The optional flat rate for supplemental wages paid is currently 22%.

  1. Aggregation method. Employers may use this method for supplemental wages of $1 million or less during a calendar year if mandatory flat rate withholding doesn’t apply.

Under the aggregate procedure, the supplemental wages are added to the regular wages for a payroll period to determine how much income tax should be withheld.

APA’s issues. At issue was page 3 of Publication 15-T, which says that “Employees who write “Exempt” on 2020 Form W-4 in the space below Step 4(c) shall have no federal income tax withheld from their paychecks except in the case of certain supplemental wages.” According to the APA, taxpayers have different interpretations of the phrase “except in the case of certain supplemental wages.”

Some tax professionals are interpreting the statement to mean that flat rate method withholding must be deducted from a supplemental wage payment regardless of whether the employee claims exempt from withholding on Form W-4. The APA has always interpreted the rules as not requiring optional flat rate withholding from employees who claim exempt from withholding. Mandatory flat rate withholding is required, however, for supplemental wages in excess of $1 million during a calendar year since mandatory flat rate withholding is computed without regard to how the employee completed Form W-4.

The APA asked the IRS if it had changed its position on optional flat rate withholding. The IRS told the APA that it does not believe it has changed its position that:

  1. Mandatory flat rate withholding must be deducted, but
  2. An employer can look at Form W-4 in computing optional flat rate withholding.

But IRS also said that it will look into the matter further.

The APA also asked the IRS if Form W-4 has to be completed for 2020 by employees who change their address since this might have state withholding tax ramifications. The IRS responded that it does not believe that a Form W-4 has to be completed in this instance but will look into the matter further.