On January 11, 2018, the IRS issued Notice 1036, which provides the percentage method tables for income tax withholding in 2018. Key developments include:

  • The flat withholding rate on supplemental wages, such as equity awards, of $1 million dollars and under a year is now 22% – down from 25%.
  • As anticipated, the mandatory supplemental withholding rate for compensation in excess of $1 million is now 37% – down from 39.6%.
  • The backup withholding rate on certain payments to taxpayers who have failed to provide a taxpayer ID number (e.g., on stock sales in the absence of a Form W-9/W-8BEN) is now 24% – down from 28%.

Prior to the IRS’s issuance of Notice 1036, there was ambiguity as to the withholding rate that would apply to 2018 supplemental wages of $1 million and under after the enactment of the Tax Cuts and Jobs Act (the TCJA). The Notice states that employers should implement the new withholding rates as soon as possible, but no later than February 15, 2018.

Impact on Form W-4

Based on the FAQ that the IRS issued in connection with the Notice, the new withholding tables are designed to work with the Forms W-4 that employees already have on file with their employers. However given the new tax withholding rates, it may be necessary for an employee to change the number of withholding allowances selected on their existing W-4. The IRS is also revising Form W-4, but they have not indicated when the revised form will be released. Employers can use the new forms when issued, and the IRS has stated that they will work with employers to encourage employees to file new Forms in 2019.

Potential for Under-Withheld Employees

Decreasing supplemental withholding to 22% could result in employees having significant income tax obligations due at the time they file their tax returns – particularly high earning employees. Democratic legislators have also raised broader concerns that the withholding tables could result in under-withholding in 2018. Sen. Ron Wyden (D-Ore.) and Rep. Richard E. Neal (D-Mass), the ranking members of the Senate Finance Committee and House Ways and Means Committee respectively, have asked the Government Accountability Office to investigate whether the 2018 withholding tables will result in systematic under withholding of wages that will cause taxpayers to owe significant amounts of tax upon filing their tax returns. The two Democrats also sent a separate letter to the acting IRS commissioner requesting detailed information on the development of the withholding tables and proof that there was no political influence on their formulation.

Although it is unclear whether these efforts could result in changes to the released withholding tables, employers should consider notifying employees to review the sufficiency of their tax withholdings in 2018 in view of the anticipated impact of the TCJA on their overall tax liability for the year.

Financial Accounting Considerations

As a reminder, given recent changes to the accounting rules for equity compensation, it is possible for employers to use a withholding rate higher than the minimum statutory rate for net share withholding to satisfy the tax withholding obligations arising under an equity award, so long as the withholding rate does not exceed the highest rate in the jurisdiction applicable to the employee. Therefore, to avoid potentially adverse accounting consequences, employers withholding shares to cover taxes should ensure that they are not using a rate that exceeds the new maximum statutory rate of 37%.


Narendra Acharya focuses his practice on matters relating to US and international employee benefits and executive compensation — including global stock plans and pensions, as well as matters pertaining to pensions, executive compensation and employment issues in mergers and acquisitions. Mr. Acharya assists US and non-US companies – both publicly traded and private – in the design and implementation of employee stock plans. He has extensive experience advising clients on income tax, social security, payroll withholding and reporting, local corporate tax deduction, employment law, securities and other regulatory issues applicable to equity awards in numerous jurisdictions.


Anne Batter is a partner in Baker McKenzie's Tax Practice Group with over 35 years of tax experience. She focuses her practice on the tax treatment of executive compensation and fringe benefits arrangements. She also handles excise tax matters, particularly those involving the air transportation excise tax. She previously served as an attorney in the Income Tax & Accounting Division of the IRS’s Office of Chief Counsel and as attorney-advisor with the US Tax Court.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Christopher G. Guldberg has been practicing in the employee benefits and executive compensation areas since 1992 and is a senior member of the Firm’s benefits practice. Mr. Guldberg advises on a wide range of benefits issues including design, implementation, operation and termination of tax-qualified retirement plans and welfare benefit plans. He assists with all aspects of regulatory compliance associated with employee benefit plans and regularly advises clients on ERISA's fiduciary and prohibited transactions provisions. He also has helped clients correct benefit plan defects through DOL and IRS voluntary correction programs and has assisted clients with negotiated settlements with regulatory authorities.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.


Maura Ann McBreen is a partner in the Firm’s Chicago office and has over 30 years' experience in executive compensation and employee benefits. Maura Ann focuses on executive compensation and employee benefits, especially with regard to single employer, multi-employer, and multinational benefits. She addresses operational and fiduciary issues as they arise under tax-qualified retirement plans, including employee stock ownership plans, and leads our global pensions practice. She designs deferred compensation and equity-based incentive compensation plans, advises on issues under Code Sections 162(m), 280G, 409A and 457A and negotiates executive employment agreements.