About 80 percent of taxpayers will see tax cuts next year averaging $2,100, the independent Tax Policy Center reported Monday. | Mark Lennihan/AP Photo New paycheck rules for millions leave employers scrambling

Republicans’ tax overhaul will completely change the way employers figure out how to withhold income taxes from millions of Americans’ paychecks, potentially disrupting payroll departments as they figure out how to switch to the new system with little guidance and just days to spare.

As of Jan. 1, the Republican plan dumps the entire concept of personal exemptions that workers now use to calculate how much should be taken from their pay on the tax forms known as W-4s. That means forms could need to be rewritten, and millions of workers will need to submit new ones. At the same time, the GOP plan doesn’t specify exactly what should happen, leaving it to the IRS to figure out.


The vagueness about withholding is one of the casualties of Republicans’ rush to push their plan through Congress and into law so its combination of individual and business tax cuts can boost the economy ahead of next year’s midterm elections. That lack of detail may mean workers may not see changes in their paychecks as quickly as some lawmakers are suggesting.

“Employers are going to be in limbo until they get some sort of signal from Treasury and the IRS on what they plan on doing,” said Will Hansen, a vice president of retirement and compensation policy at The ERISA Industry Committee, an advocacy group for large employers.

Employers are especially confused because the bill says Treasury and the Internal Revenue Service could decide not to change the payroll withholding system until 2019, a move that could mean some workers have a lot less than they actually owe withheld from their checks under the new law. Some could end up facing tax penalties.

“It raises a lot of questions,” said Pete Isberg, head of government relations for the payroll processing firm ADP.

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It’s a contrast from the last major code rewrite, in 1986, when there was far more preparation for the nitty gritty details of implementing the plan. And the confusion comes as the promise of bigger paychecks has become key to Republicans’ efforts to sell the controversial tax plan to the public.

“I am going to encourage the American people, in January, take a look at your pay stubs,” said Sen. Ted Cruz. “For virtually every American taxpayer in this country, your taxes will go down.”

About 80 percent of taxpayers will see tax cuts next year averaging $2,100, the independent Tax Policy Center reported Monday. Five percent will face tax increases on the order of $2,800 while the remainder will see their tax bills essentially unchanged.

Asked about the withholding questions, House Ways and Means Chairman Kevin Brady said: “I know Treasury and the IRS have been working on this” and “have been for a little while now.”

The IRS said it will issue guidance in January, and that taxpayers could see changes in their checks as soon as February.

“We are taking the initial steps to prepare guidance on withholding for 2018, the IRS said in a statement last week. That should be ready next month “which would allow taxpayers to begin seeing the benefits of the change as early as February.”

“The IRS will be working closely with the nation’s payroll and tax professional community during this process,” the agency said.

In the meantime, payroll administrators have a lot of unanswered questions.

Many companies pay bonuses in January, which are typically subject to a special withholding rate — how do they deal with that? What if people want to adjust their withholding in January to take advantage of the Republicans’ tax cuts? Given the confusion, will the government waive those underpayment penalties as they did with the 1986 tax overhaul?

“It’s going to take some time for people to adjust,” said Mike O’Toole, senior director for publications education and government relations at the American Payroll Association. “Putting something into effect a week after it’s signed — I don’t know how you can expect good results.”

On withholding, which is done so that workers don’t face giant tax bills or refunds during filing season, employers rely on their workers’ W-4 forms as well as tables from the IRS explaining how much to withhold at different income levels and given the number of allowances someone claims.

The IRS could choose to issue new W-4s next year, and have every worker in American fill out a new one, and also publish new computational tables to reflect the new tax regime. While that would better approximate how much ought to be withheld, it would also be more disruptive.

“One the one hand, you don’t want to be burdensome to employers who have to crunch this on very short notice,” said Isberg. “On the other hand, you don’t want to put a lot of burden on employees — especially if they might be getting penalties as a result of underwithholding.”

“I think Treasury is going to look long and hard at that,” he said.