The U.S. federal government released a highly anticipated revised draft of the Form W-4 in summer 2019. After a review period and soliciting feedback from payroll and tax communities, a final version is expected in November 2019 with minor adjustments. The new form will apply to the 2020 tax year.

The W-4 form is filled out upon hiring a new employee and tells employers how much federal income tax to withhold from an employee’s paycheck. A proper withholding amount ensures employees do not owe any additional taxes when filing tax returns. This form is not to be confused with a W-2 form, which employees receive at the end of each year to see how much money was remitted to the federal government (or withheld) during that tax year.

The main impetus for these changes is the 2017 Tax Cuts and Jobs Act (TCJA), which modified personal exemptions so an employee cannot claim personal or dependency exemptions. The IRS says the new version “reduces the form’s complexity and increases the transparency and accuracy of the withholding system.”

What do these changes mean for employers?

Employers can continue to use the current Form W-4. Current employees are not required to fill out the form again; versions from previous years form will still be valid. New employees starting on or after January 1, 2020 will need to use the new W-4. Any employees who wish to adjust their withholdings or who experienced a major life change, such as marriage or the birth of a child, should fill out the new form to account for changing personal or financial situations. Employers can use the IRS resources to determine the amount of federal income to withhold from their employees’ wages here.

Employers will have time to make changes to their software and payroll systems before the form is instituted. Because previous versions of the form don’t need to be updated, payroll systems will have to accommodate the older withholding calculation as well as the new method.

A brief overview of changes

Changes in calculating allowances

The IRS removed the portion to add allowances with the hope that the new directions will help employees accurately determine their desired and appropriate withholding. Now, the form asks for “specific withholding-related information” including:

  • Adjusting for multiple jobs in a household (of the employee or a spouse) is a new feature on the 2020 form. There is a new worksheet within the form for to help with this calculation or the employee can check a box. [Step 2 of the revised form.]
  • The employee can add non-wage income such as dividends, interest, self-employment payments or retirement plans that the employee wants income tax withheld from. [Step 4 of the revised form.]
  • Tax credits for dependents. [Step 3 of the revised form.]
    • The TCJA increased the Child Tax Credit to $2,000 for qualifying children under the age of 17 and $500 for other dependents.
  • Itemized deductions that exceed the standard deduction under the TCJA or to which the tax payer Is entitled to regardless of the standard deduction.

Simplified instructions

The form is now two pages instead of four pages. The IRS separated the instructions for filling out the form. There is now a worksheet for completing the multiple jobs calculation and another for calculations for additional deductions. The new worksheets have more straightforward questions to improve employees’ ability to fill out the form correctly.

How to communicate changes to employees

New and current employees can use this tool from the IRS to check their withholding or follow the worksheet and table attached to the new W-4 form. If they would like to adjust their withholding, they may complete the revised W-4 form and submit it to their employer.

As a Professional Employer Organization (PEO), XcelHR is uniquely equipped to help employers manage changes like these. Our payroll software and tax experts ensure you and your employees are in compliance with new tax laws and can ease the burden of change. We’re happy to answer any questions you might have. Contact us to learn more.