The Internal Revenue Service (IRS) has released the final version of the 2020 Form W-4. The form includes major revisions from the previous version. Employers must use the form for all new hires beginning January 1, 2020. Here is an overview of changes and what they will mean for you and your employees.

Background:

Employees must complete the Form W-4 so their employer can withhold the correct federal income tax from their pay. Enacted in late December 2017, the Tax Cuts and Jobs Act (TCJA) made significant changes to tax rates, deductions, tax credits, and withholding calculations. The IRS released new withholding tables for 2018 and 2019, but the Form W-4 remained largely unchanged, continuing to feature an entry for the number of withholding allowances. Prior to the TCJA, most withholding allowances were based on personal exemptions (such as, one each for the employee, any spouse, and dependents), but the TCJA repealed personal exemptions while increasing the standard deduction and changing the tax rates and brackets.

Major changes to W-4 for 2020:

• Only two steps are required. The new form is divided into five steps. Only two steps are required: Step 1 (where the employee enters their name, Social Security Number, address, and marital status) and Step 5 (where they sign the form). If the employee completes only those two steps, their withholding will be computed based on their filing status' standard deduction and tax rate.
• Entry for number of withholding allowances eliminated. With the redesigned form, withholding allowances are no longer used. Instead, employees can complete Step 2, Step 3, and Step 4 to make adjustments to their withholding, if applicable.
• New filing status box. In addition to "single or married filing separately" and "married filing jointly," employees will be able to choose "head of household."
• Adjustment for multiple jobs in a household (Step 2). For employees to adjust withholding when they have multiple jobs and/or a spouse who works, the IRS is giving three options. Employees can:
  
  1. Use the calculator at www.irs.gov/W4APP for the most accurate withholding. This option determines an additional amount to withhold each pay period. Only one wage earner in the family should elect this option and apply the additional amount to Line 4c.
  2. Use the Multiple Jobs Worksheet on Page 3 of the form to calculate any additional tax due, and enter the additional tax to withhold from each paycheck on Line 4c.
  3. If there are only two jobs in a household, the employee can simply check a box to apply withholding at higher rates. With this option, both wage-earners in a household should check the box. The IRS says this option is accurate for jobs with similar pay; otherwise, more tax than necessary may be withheld.
• Step 3 is for claiming dependents. The TCJA increased the Child Tax Credit to $2,000 for qualifying children under age 17, and $500 for other dependents. Employees will be able to directly enter the expected full-year tax credits related to dependents on Line 3. The IRS provides taxpayers instructions if the household's expected annual income will be over $200,000 ($400,000 if married filing jointly).
• A simplified process for deductions. Line 4b permits employees with estimated full-year deductions (such as state and local taxes up to $10,000; mortgage interest and charitable contributions) above the standard deduction amount ($12,400 for single filers; $24,800 for Married Filing Jointly in 2020) to use Worksheet 2 on Page 3 and enter the result on Line 4b. Previously, employees were required to convert estimated deductions into an equivalent number of withholding allowances, so this approach significantly simplifies the W-4 completion process for employees. However, employers will need to convert reported amounts to a per-payroll period adjustment to calculate the income tax to withhold.

Frequently asked questions:

Q: Will employees need to complete a new W-4 for 2020?

A: All new employees first paid after 2019 must use the new form. If existing employees wish to adjust their withholding after 2019, they must use the redesigned form. 

Because the new form requires detailed knowledge of the employee's prior year's tax return, it may be helpful to give employees additional time to complete the form or allow them to take the form home for completion.

The IRS recommends that taxpayers access the online W-4 Calculator as early as possible to check their payroll withholding and adjust withholding allowances, if needed. The IRS calculator asks about income and marital status, as well as estimated deductions and tax credits, to determine whether any additional withholding is necessary. The calculator can be found here.

Q: How do I treat employees hired in 2020 who fail to submit a Form W-4?

A: Employees hired in 2020 who fail to submit a Form W-4 will be treated as a single filer with no other adjustments. This means that a single filer's standard deduction with no other entries will be taken into account in determining withholding.

Q: Am I required to inform current employees of the W-4 changes?

A: While not required, we encourage you to advise all current employees that the Form W-4 has substantially changed. Most people want to make sure that their income tax withholding is reasonably accurate, and they may be happy to see the new simplified approach of entering in full-year tax credits and deductions.

Q: May I ask all my employees hired before 2020 to submit new Forms W-4 using the redesigned version of the form?

A: Yes. You may ask, but as part of the request you should explain that:

• They aren't required to submit the new Form W-4; and
• If they don't submit a new Form W-4, withholding will continue based on a valid form previously submitted.

Conclusion:

Review and understand the changes to the form and be prepared to explain the revisions to employees. To help you, ADP has created a toolkit related to the new form.