Employers, Stay Updated on Changes to IRS Form W-4
The IRS released the redesigned 2020 Federal W-4 Form. The updated form implements the changes initiated by the Tax Cuts and Jobs Act and is meant to reduce complexity for both employees and employers. The IRS has championed the changes as necessary steps in increasing the transparency and accuracy of the employee withholding tax system.
Employees Required to Complete the 2020 W-4
The first issue faced by many employers is determining who must fill out the new W-4 form. Only a newly hired employee whose first pay period is in 2020 and any employee who wishes to adjust withholdings in 2020 must use the redesigned form.
Employees hired before 2020 who don’t wish to adjust their withholdings aren’t required to submit a new form merely because of the redesign. They must be aware that if they don’t submit a new W-4, withholding will continue to be based on the previous W-4 form.
Step-by-Step Analysis of the 2020 W-4
A monumental change to the W-4 is the form’s method of calculating an employee’s withholding amount.
Previously, employee withholding was tied to allowances. Since the Tax Cuts and Jobs Act eliminated withholding allowances, employees now must claim dependents and other deductions directly on the W-4 to calculate their withholding amount. There are five steps on the redesigned W-4 to account for the changes to the employee withholding calculations.
Step 1: basic information. Every employee who files a new W-4 must fill out Step 1. Under this step, employees must provide their basic information as well as their filing status. They must select one of three options under Step 1(c): (1) single or married filing separately, (2) married filing jointly, or (3) head of household. The filing status will determine the applicable standard deduction and tax rates used to more accurately compute their withholding.
Step 2: multiple jobs or spouse works. Step 2 is optional. If an employee doesn’t fill out Step 2, the employer must withhold the amount based on the employee’s response in Step 1. An employee is required to complete Step 2 only if she holds more than one job at a time or if she is married filing jointly and her spouse also works. There are three different options an employee can select to increase the accuracy of any employment withholding.
Under Step 2(a), the employee must use the tax withholding estimator at www.irs.gov/W4app. She will be required to enter the approximate pay of each job and the approximate amount of any other income. The estimator will calculate the amount of withholding, and she will then enter any additional amount of withholding as stated by the estimator in Step 4(c). Employers aren’t required to assist employees with the tax withholding estimator.
Step 2(b) requires the employee to use the multiple jobs worksheet on page 3 of the W-4 to calculate the approximate withholding amount. She must complete the worksheet and add any additional withholding amount in Step 4(c).
An employee can select Step 2(c) if she (and her spouse if applicable) have a total of only two jobs. If box 2(c) is selected, the standard deduction and tax brackets will be equally distributed between the two jobs to calculate the withholding. The tax withheld from each job will be at higher rates if 2(c) is selected. If an employee selects 2(c), it’s important to realize that her spouse must make the same selection.
Step 3: claim dependents. Similar to Step 2, Step 3 is optional. It allows the employee to reduce annual withholding by reporting various credits. Employees can calculate the value of the child credits and dependent credits directly on the form. They also can add other credits to the total on line three.
Step 4: other adjustments. Step 4 is also optional for the employee. Step 4(a) allows her to report additional income normally not subject to withholding but subject to income tax. That means she is withholding more from each pay period in lieu of making estimated tax payments on the additional income.
Generally, additional income includes interest, dividends, 1099 income, and retirement income. The employee can reduce her withholding by claiming any additional deductions other than the standard deduction in Step 4(b). That means employees who elect itemized deductions would report any additional deductions above the standard deduction in Step 4(b). The deductions worksheet is on page three to calculate any additional deductions. Under Step 4(c), the employee must list any additional tax she wishes to withhold from each pay period.
Step 5: signature. Every employee who files a new W-4 must fill out Step 5. This section includes the penalties-of-perjury statement and requires the employee’s signature to validate the W-4.
The changes to the withholding tax system and the W-4 form will have a significant impact on employers throughout 2020. For additional resources, please see Publication 15-T: Federal Income Tax Withholding Methods.
This article, slightly modified to note recent updates, was featured in the April issue of the Great Lakes Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.