Changes to 2020 Form W4 for Employers and Employees

October 21, 2019 — The Internal Revenue Service has made extensive changes to Form W-4 (Employee’s Withholding Certificate) to adjust employee withholding calculations to better align with the Tax Cuts and Jobs Act. For some, the form in its current 2019 layout goes back with them through the majority of their working years, if not through all of them. The 2019 Form W-4 closely resembles the 1993 version, and with a reversion of a form as significant as this one, it is highly likely to bring questions from new hires, current employees, employers, and payroll tax professionals as they navigate the changes.

While most of us are familiar with the form as employees, the employer has the responsibility of using the form to correctly withhold income tax from payroll compensation, and the effects are felt by employed taxpayers who rely on payroll tax withholding to offset tax liability on their tax filings. Read on to learn more about what these updates mean for employers and to discover other resources that can help employees and employers adjust to the new form.

How Form W-4 Was in the Past

Under the previous version, employees were accustomed to completing the form using a withholding allowance based on personal exemption amounts to calculate income tax withholding.  For example, if you were married, had children, or credit for other dependents, you would complete the W-4 checking single, married, or married, but withhold at higher single rate and list the number allowances to claim; for example, 0 if single, 4 as a married filer with dependents, etc. 

With the Tax Cuts and Jobs Act, personal exemptions were suspended and the standard deduction was increased—so when it came time to file taxes in 2019 for the 2018 tax year, many taxpayers found themselves over or under-withheld due to the mismatch between the withholding allowances selected on their W-4 compared to what the new standard deduction allowed.

Overview of Form W-4 Changes

The new Form W-4 implements the changes brought on by the new tax law to help close the gap from payroll withholding to personal tax filing—the redesigned form removes the concept of withholding allowances being tied to the personal exemption, and instead divides the form into five steps. Steps 1 and 5 are required, and steps 2-4 are optional.  

Step 1 asks general taxpayer information and the same questions as the old version; Single or Married filing separately, Married filing jointly, or Head of Household.  Step 5 is the signature line.  The optional steps (2-4) include sections for when the filer has multiple jobs, dependents, and other income.

Allowances such as 0, if single and 4, as a married filer are no longer used.  To some the form has been simplified if only steps 1 and 5 are completed, while for others steps 2-4 will have added more to the process compared to completing the previous form versions personal allowance worksheet.

A draft of the form can be found on the IRS website as well as the employer instructions for calculating the new withholding tables in IRS Publication 15-T.

Who is Affected?

Effective January 1, 2020, only newly hired employees or current employees hired prior to 2020 who choose to adjust their withholding allowances will be required to complete the form. Employees hired prior to 2020 who do not want to adjust their income tax withholding will not be required to complete the new version of the form.

Employees are encouraged to run a “paycheck checkup” using a free tool provided by the IRS to help identify tax withholding for the 2019 tax year.  It is encouraged by the IRS that this calculator is used again at the start of the 2020 year as the withholding tables may have changed and the 2019 calculation may not have the right effect for the full-year impact of 2020.  Click the link to try the IRS calculator.

The new withholding tables in Publication 15-T will be applied to a taxpayer’s withholding calculation based on both the previous version W-4s and the new version. Employees who opt out of completing the new Form W-4 may find that what worked for earlier years—for example, allowances such as 0 if single and 4 as a married filer—may not carry the same tax withholding effect that it used to under the new tables. Employees are therefore encouraged to review his or her tax situation to determine if completing the new Form W-4 will be necessary to safeguard the correct amount of tax withheld from their paychecks.

Employees are responsible for completing the Form W-4 correctly, not the employers—employers are responsible for using the completed form to withhold tax from the employee as payroll is processed.

Something Employers Can Do

The IRS has announced that it will issue the final version of the 2020 Form W-4 by the end of November. Employers will need to start using the new form January 1, 2020, for all new employees and current employees who make W-4 Form changes.

The IRS held a free webinar for employers on October 22, 2019 that covered Form design, steps 1-5, and the usage of the form and withholding calculations. They will likely hold further webinars in the future, so stay tuned for future dates if you missed that one.

Also, see IRS Publication 15-T regarding the employer's steps to calculate federal income tax withholding based on the new form and prior form versions. Payroll providers and software developers will also need time to adjust the tables within the automated payroll platforms most businesses use.

As more guidance comes out, we will provide updates and tips to ease into the 2020 year. If you have questions on this form update or other payroll questions, please reach out to Heather Larson, CPP at hlarson@redpathcpas.com.