New W-4 for 2020: What It Means for Employers & Employees
At the time of hire, all employees must complete the Form W-4 so their employer can withhold the correct federal income tax from their pay. The Internal Revenue Service (IRS) has released a draft of the 2020 Form W-4 that includes major revisions. A final version is expected later this fall. Here is an overview of the proposed changes and what they would mean for you and your employees.
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were based on personal exemptions (such as, one each for the employee, any spouse, and dependents), but the TCJA repealed personal exemptions while increasing the standard deduction and changing the tax rates and brackets.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 Proposed Changes to W-4:
- Only two steps are required. The new draft 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 they complete only those two steps, their withholding will be computed based on their filing statuses standard deduction and tax rates.
- 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.
- 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. They can:
- 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.
- 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.
- 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.
- 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 ($12,200 for single filers; $24,400 for Married Filing Jointly in 2019) 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 full-year deduction amounts over the standard deduction to a per-payroll period adjustment to taxable wages in withholding calculations.
Will Employees Need to Complete a New W-4 for 2020?
Employees who have submitted Form W-4 in any year before 2020 are not required to submit a new form merely because of the redesign. However, if existing employees wish to adjust their withholding, they must use the redesigned form. Additionally, beginning January 1, 2020, all new employees must use the new redesigned form.
Because the new form requires detailed knowledge of the employee's prior year's tax return, it may be helpful to give new employees additional time to complete the form, or allow them to take the Form W-4 home for completion.
The IRS recommends that taxpayers access the online W-4 Calculator to check their payroll withholding and adjust withholding allowances, if needed, as early as possible. 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.
Employers should watch for the final version of the 2020 Form W-4 and begin using it January 1, 2020. Once released by the IRS, the 2020 Form W-4 will be available for download from the State & Federal Resources section of HR411®.