Form W-4 for federal income tax withholding was significantly revised for 2020 in response to the 2017 Tax Cuts and Jobs Act. The changes to the form are meant to determine more accurate withholdings based on a fuller picture of the employee’s total income.

The most significant change is that there are no longer withholding allowances. The IRS feels that the new form allows for more simplicity, transparency and accuracy in withholding. Since this has been the basis for income withholding in the past, employees may ask how to translate their allowances on their previous Forms W-4 to the new Form W-4. There is no simple conversion, but the IRS has supplied other tools to help employees determine an accurate withholding.  

First, who needs to complete the new 2020 W-4? Any new employee whose first payment is issued in 2020 is required to complete a 2020 Form W-4. Also, any employee who wishes to change their current withholding after January 1, 2020, is required to complete a 2020 Form W-4, as well. You may ask current employees to complete the 2020 W-4 Form, but they are not required to do so, and if they choose not to complete a new W-4, their withholding will continue based on their previously submitted W-4.

For any new employee or current employee who wishes to update their withholding, the 2020 Form W-4 is broken down into 5 steps. At a minimum, the employee must complete steps 1 and 5. Step 1 includes basic information such as name, address, social security number, and filing status (Single or Married filing separately, Married filing jointly (or Qualifying widow(er), or Head of household). Step 5 is the employee signature and date.

Employees complete steps 2, 3, and 4 only if the steps apply to their specific situation.

Step 2 is for employees who are married filing jointly and his or her spouse also works, or if the employee works more than one job. This is new to 2020 Form W-4. Additional sources of income weren’t taken into consideration on past Forms W-4, and the old Form W-4 accounted for multiple jobs using instructions and worksheets that were often overlooked. The result was less accurate withholdings and the potential for owing additional tax or penalties when filing a tax return.

The IRS recognizes that employees may not want to disclose other income sources or jobs to their employer. For that reason, Step 2 has three options, each of which offers tradeoffs in terms of accuracy, privacy, and ease of use:

a)    Employees can use the estimator found at www.irs.gov/W4App for the most accurate withholding. The app asks a series of questions to help the employee complete this step, as well as Steps 3 and 4. This step offers both the maximum accuracy and privacy because employees are guided to enter an additional amount to withhold in Step 4(c), thereby eliminating the need to disclose other income sources or jobs while still accounting for them in their withholding. If pay for any of the jobs changes significantly, the employee may need to resubmit a new Form W-4 to ensure their withholding is still accurate.
b)    The employee can use the Multiple Jobs Worksheet found on page 3 of Form W-4. The Multiple Jobs Worksheet calculates the total extra tax for all jobs on only one Form W-4. It uses the annual wages of each job to determine withholding.
c)    If there are only two jobs total in the employee’s household, they may choose to check the box found in option c. If an employee chooses to check this box, the box must be checked on the Form W-4 for the other job in the household (i.e. the spouse’s Form W-4) as well. However, only one spouse should complete Step 3 and Step 4(a) and 4(b). Withholding will be the most accurate if Steps 3 and 4 are completed for the highest paying job in the household. This option is accurate for jobs with similar pay because the standard deduction and tax brackets will be cut in half for each job to calculate withholdings. If the jobs are not similar in pay, the employee may be withholding more than necessary. To get an idea of how much more withholding may occur, employees can reference the tables provided in 2020 Pub. 505.

Step 3 takes into account any dependents the employee wishes to account for in their withholdings. Again, only one member of the household can claim dependents in their withholdings by completing Step 3.

Step 4 takes into account other income and adjustments to withholdings. This is again broken down into three sections:

a)    Other income that won’t have withholding, such as from interest, dividends, or retirement income. This amount is per year. This should not include income from other jobs. Form W-4 is not meant to take into account if the employee also operates as an independent contractor or is self-employed, wherein they earn income that is not subject to withholding. In those cases, the employee may opt to make estimated tax payments using Form 1040-ES, Estimated Tax For Individuals, or they may use the Tax Withholding Estimator at www.irs.gov/W4app to determine the additional amount of tax to have withheld from each check, which would then be entered on line 4(c).
b)    Deductions over the standard deduction amount can be accounted for on step 4(b). These deductions may be calculated using the Deductions Worksheet found on page three of Form W-4. This amount is also per year.
c)    Extra withholding. Employees may enter an additional amount they wish to have withheld to cover any additional income or to potentially increase their tax refund. This amount is per pay period.

Regarding an employee with exempt status, there is no longer a dedicated line on the 2020 Form W-4 for this request. The IRS recommends writing the word “exempt” in the open space found below Step 4(c).

Typically employees are asked to complete Form W-4 as part of their onboarding process. However, since the form is asking for more detailed income information and may require them to review past income tax returns or use the online app, they may need additional time to complete the form. In cases where the employee neglects to submit a completed Form W-4, the employee should be treated as a single filer with no other adjustments.

Employees are encouraged to the use IRS online resource at www.irs.gov/W4app for the most accurate withholding result. According to the IRS online Frequently Asked Questions, employees should use this estimator if they meet one or more of these criteria:

• Expect to work only part of the year (this does not apply if they are only switching jobs)
• Had a large balance due or refund last year and it is no longer the beginning of the current year
• Have dividend or capital gain income or are subject to additional taxes, such as the additional Medicare tax
• Have self-employment income
• Prefer the most accurate withholding for multiple job situations
• Prefer to limit information provided in Steps 2–4 but do not want to sacrifice accuracy

There are a few things that employers need to be aware of, as well. Previously, employees completed many of the computations on the old Forms W-4. Some of this work has shifted to employers, however, your TRICOM payroll system will take these calculations into account. As an employer, it is helpful to familiarize yourself with the IRS Withholding Estimator at www.irs.gov/W4app. Not only does it help employees determine their initial withholding, they can also ensure their withholding is on track throughout the year, specify a desired refund amount, as well as supply other helpful information.  

We’ve included a copy of the 2020 Form W-4 on our website with our other online tax tools. You can find it by clicking here. If you have any questions about the 2020 Form W-4, please contact Mary Jo Heim, TRICOM’s CFO and Director of Accounting.

Source: www.irs.gov