Even though the IRS Form W-4 is completed by employees, employers’ responsibility does not end with collecting these forms, using the information for withholding, and keeping them on file. Form W-4 contains the information necessary for computing the amount of federal income tax to deduct and withhold from the employee’s pay. Therefore, employers need to have a clear understanding of their obligations, especially when it comes to changes in the method they need to use to calculate withholding.
On December 5, 2019, the IRS issued the redesigned 2020 Form W-4 that was expected ever since the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017. The 2020 Form W-4, Employee’s Withholding Certificate, is an updated version of the previous Form W-4, Employee’s Withholding Allowance Certificate. This new form includes major revisions in order to simplify the process of filling out Form W-4 for employees and improve tax withholding accuracy.
What Is IRS Form W-4
Form W-4 provides employers with information such as the employee’s filing status, multiple jobs adjustments, amount of credits, amount of other income, amount of deductions, and any additional information needed to compute the right amount of income tax to withhold from employee paychecks. If employees fail to give a properly completed Form W-4, employers need to withhold federal income taxes from their wages as if they were single with no other adjustments.
Employees can change the entries on Form W-4 for any number of reasons related to their personal or financial situation. In case employers receive a revised Form W-4 from an employee, they have to put it into effect no later than the start of the first payroll period ending on or after the 30th day from the date they received the revised form. Employees can also ask to be exempt from withholding, but only if they had no tax liability for the previous year and expect to have no tax liability for the current year.Find all the necessary information about payroll taxes and forms needed to calculate and submit them, remain tax compliant, and avoid potential penalties.
Changes of Form 2020 W-4
The new Form W-4 is designed to make accurate income tax withholding easier and includes modifications that can affect both employers and employees. Changes of 2020 Form W-4 are largely in response to the 2017 Tax Cuts and Jobs Act. The Act has made significant modifications to tax rates, deductions, tax credits, and withholding calculations. As a result, the IRS released new withholding tables for 2018 and 2019, but the Form W-4 remained largely unchanged, continuing to feature entry for the number of withholding allowances. After two draft versions issued in June and August 2019, the IRS has issued the final 2020 Form W-4 in December.
The 2020 Form W-4 no longer uses the concept of withholding allowances to account for additional income, deductions, and tax credits, but includes lines where employees can enter those amounts directly so they can be used to calculate the withholding amount. Even though this form is different, the IRS designed the withholding tables to work with a prior year form or the 2020 form.
Furthermore, the IRS does not require all employees to complete a new form. However, the new form is required for all new hires in 2020 and for employees who have completed a Form W-4 before 2020 and want to make changes to their withholding in 2020. While employers may not require employees to complete a new form, they may ask them to do so.
To explain how withholding is calculated with the prior year and 2020 Forms W-4, the IRS also created Publication 15-T, Federal Income Tax Withholding Methods. The final version of the publication, which includes the 2020 withholding tables, was released in mid-December.Find out how to manage Forms W-2 and W-4 that are in some ways related, but in other ways completely different, and ensure their accurate completion within the appropriate time frame as dictated by the IRS.
Elimination of Personal Withholding Allowances
One of the biggest changes within the 2020 Form W-4 is the elimination of personal withholding allowances. In the past, employees could claim withholding allowances to lower the amount of federal income tax withheld from their wages. The more withholding allowances an employee claimed, the less employers would withhold in federal income tax. However, these withholding exemptions were eliminated under tax reform and the new 2020 Form W-4 uses a five-step process and new Federal Income Tax Withholding Methods to determine actual withholdings.
The five steps are:
- Entering personal information,
- Adding information about multiple jobs and a working spouse,
- Claiming dependents,
- Making other adjustments,
- Signing the form.
The only two steps required for employees submitting a new form are Step 1, where they enter personal information such as their name and filing status, and Step 5, where they sign the form. If Steps 2, 3, or 4 apply to employees and they choose to provide that information, their withholding will more accurately match their tax liability if they complete them. However, employees can adjust their withholding in Step 4(c) without sharing additional information.
Also, the IRS provides a Tax Withholding Estimator to help ensure maximum accuracy. To use it, employees need to have their latest pay statement, as they have to enter the federal income tax withheld from their last paycheck and the total federal income tax withheld to date.
Handling the Revised 2020 Form W-4
While the new 2020 Form W-4 is simplified and presented on a single, full-page, followed by instructions, worksheets, and tables, it can be intimidating both to employers and employees due to introduced changes. It is important to note that existing employees are not required to complete a 2020 Form W-4. Employees hired before 2020 can leave their 2019 or prior form W-4 in effect indefinitely, meaning that employers will probably have a few different versions of the form on file.
In addition to this, employers need to pay attention to income tax withholding tables that go with the new 2020 Form W-4 as well as tables that support 2019 and earlier versions of the form and still include rates based on claimed withholding allowances. However, the easiest and most effective way to resolve different 2020 Form W-4 complexities is to streamline tax form processes. Apart from the accurate completion of every form involving employee withholding issued by federal, state, and local governments, such an approach ensures that forms are regulatory compliant and auditable for all tax jurisdictions.Eliminate challenges of changing tax rates and complicated calculations with automated tax management software and ensure simplified reporting and compliance with regulatory agencies.