Understanding How the New Tax Form W-4 for 2020 Impacts Your Business

If you’re familiar with Form W-4, be aware that the IRS recently finalized the 2020 version of Form W-4, Employee’s Withholding Certificate. This new version officially replaces the prior version.

So, what’s changed? There are several of note, including new ways to calculate federal income tax withholding. Unless current employees wish to make adjustments to their withholdings, they will not need to complete the new form. However, all new employees hired January 1, 2020 and after must complete it.

The IRS’ goal in releasing the new form is to provide greater accuracy, simplicity and privacy for employees while streamlining processes for employers and payroll processors. Employers are encouraged to inform their employees about the changes in the new form.

What’s Different?

The new Form W-4 enables employees to more easily account for combined income from all sources, including additional jobs, investments and a spouse’s income. It eliminates the number of withholding allowances and changes how to claim exemption from withholding. The new form also enables employees to maintain their privacy about other sources of income, deductions and credits while making adjustments for appropriate withholding.

Keeping It Simple

The new form entails a five-step process. Employees must complete Steps 1 and 5, but they only need to complete Steps 2-4 if the information is applicable to their situation. The five steps are:

• Step 1: Enter personal information including name, address, Social Security number and tax filing status.
• Step 2: Make calculations for multiple jobs or a spouse’s income. The employee has several ways to make these calculations including using the IRS estimator, a worksheet included with the form or, if the employee holds two jobs of similar pay, checking the box on the form.
• Step 3: Claim the number of dependents if annual income is $200,000 or less ($400,000 or less if married and filing jointly).
• Step 4: Make other adjustments for investment and retirement income, deductions other than the standard deduction and any extra withholding per pay period. Employees who write “exempt” below Step 4(c) will have no federal income tax withheld from their paychecks except in the case of certain supplemental pay.

• Step 5: Sign and date the form.

Revised IRS Tax Estimator

Employees who faced a large or unexpected tax bill or penalty after filing their 2018 tax returns can more accurately calculate any additional withholding using the updated IRS Tax Estimator. This is especially helpful for employees who anticipate a change in marital status, investment or retirement income, number of dependents or jobs in 2020.

Resources Available

The IRS offers several resources to help employers and employees use the new form:

• Form W-4 and instructions
• Updated IRS Tax Estimator
• FAQs about the new form
• Publication 15-T, Federal Income Tax Withholding Methods (provides employers with steps to determine federal withholding)

Do you have questions about the new W-4, or other tax planning and preparation issues? Please contact SVA.