By Lynda Hofmann, Melissa Erdman and Joel Nuernberger
The Tax Cuts and Jobs Act (TCJA) brought with it many changes. For individuals, some of the changes included tax rates, personal and dependent exemptions and itemized deductions. Because of these changes, the IRS redesigned Form W-4 for determining employee’s federal income tax withholding.
The new form for 2020 withholding was released in draft in May and should be finalized in the very near future. Understandably, it’s bringing a lot of questions with it for both employees and employers.
Below, we’re going to talk about what will be changing and how it impacts businesses and organizations across the country.
What changed in the new Form W-4?
The short of it is, Form W-4 is now less complex and more transparent. (The IRS has even created an FAQ on the draft 2020 W-4.)
It’s aimed at making the withholding system more accurate, but it also makes it simpler by replacing complicated worksheets with straightforward questions. And the instructions for how to complete Form W-4 have been redone and are a lot easier for the average person to understand.
The IRS wants people to know how to give employers more accurate information for withholding, based on things like the taxpayer’s job and, if married, their spouse’s job; whether they hold multiple jobs; and whether they have children.
And with this overall goal of making withholding more accurate, taxpayers can more easily set their withholding to match their liabilities in each paycheck instead of getting that money back via an annual tax refund. Some taxpayers prefer to get a refund when they file their return and want to over withhold from their paychecks. That is still possible with the new W-4 by entering an additional withholding amount on line 4c.
In addition to making the form simpler, another significant change is around allowances. Because the TCJA eliminated a taxpayer’s ability to claim personal or dependency exemptions — and because previously allowances were tied to the amount of those exemptions — allowances are no longer used on the redesigned Form W-4.
The form also looks different when it comes to claiming exempt. Instead of checking a box to claim exempt, taxpayers now have to write “exempt” under line 4C. The IRS has provided instructions so that taxpayers can figure out if they meet the criteria to claim exempt. Employers should note that employees claiming exempt in the prior year must submit a new Form W-4 by February 15th to continue claiming exempt.
How do the W-4 changes affect employers?
There are several ways the redesigned Form W-4 affects businesses and other organizations.
First, all employees hired in 2020 must fill out the redesigned form. And all employees hired before 2020 who wish to adjust their withholding must fill out the redesigned form.
Second, all employees hired prior to 2020 who do not wish to adjust their withholding are not required to fill out the redesigned form. Employers may request that all these employees fill out the redesigned Form W-4, but legally they cannot require it. If an employee does not submit a new Form W-4, withholding will continue based on the W-4 they previously submitted. The IRS clearly says, “You are not permitted to treat employees as failing to furnish Forms W-4 if they don’t furnish a new Form W-4.
Third, employers can assist employees with filling out the redesigned Form W-4 by providing resources on how to do so, but they cannot advise employees on how to fill out the form. Basically, you can tell your employees what each field means, but you can’t suggest what to put down. Employers can also direct employees to the IRS’s tax withholding estimator, which helps employees determine if they should change their withholding and thus fill out the redesigned Form W-4.
Do employers have to convert legacy forms?
The biggest impact on employers has to do with converting legacy forms. The IRS has made it clear that the same set of withholding tables will be used for old W-4 forms and the redesigned ones.
If you’re using a software program provided by a third-party vendor, this vendor will likely update their software by 2020 so that it can handle both forms.
If you’re doing things manually, you’ll have to know which form (legacy or redesigned) each employee is using and how to convert the legacy form into the redesigned form. There is a worksheet that employers can use to do this one-time conversion for each employee. If you are doing manual payroll for your employees, this could be the time to consider implementing a payroll system that can handle the changes, or outsourcing to a third party.
Are there benefits to employees who fill out the new Form W-4?
Because filling out the redesigned Form W-4 could change the amount going into an employee’s paycheck by providing employers with more accurate withholding information, there may be some added benefits to enjoy.
One benefit could be helping to plan for retirement. When an employee gets an annual refund — which, according to the IRS, averages around $2,800 — they’re not very likely to put the whole of it towards retirement. But if that $2,800 gets automatically put towards their 401(k) throughout the year per paycheck, the employee is improving their chances of a successful retirement. More accurate withholding and more money per paycheck means employees can benefit from increasing their 401(k) percentage.
Another benefit could be with privacy. With the IRS’s tax withholding estimator, an individual can accurately determine what their withholding should be and report that number on the form. They then don’t have to put private, non-work-related information on the form, such as whether they have a second job or income from non-wage sources.
Overall, using the estimator and filling out the redesigned Form W-4 gives your employees a better idea about how much they actually make and what they can budget for. And if something changes during the year, such as a change in jobs and a spouse going back to work full time, they can use the estimator to make the correct adjustment on Form W-4.
Are you ready for the Form W-4 2020 changes?
From this overview, you probably have a good sense of how the redesigned Form W-4 benefits both you as an employer and your employees. Just remember that you cannot require employees to fill out the form if they were hired before 2020. But you can provide employees information about the changes to Form W-4, the benefits in filling it out and resources on how to do so.
Possibly the most important question to ask about your business is: Is my system ready? If you are responsible for your payroll, you have to ensure that the system is up and ready for 2020. The IRS is putting everyone in a tight spot since they haven’t released the final Form W-4. Although, many of the payroll systems are taking steps already to react with the various form differences (both old entry and new entry).
Employers can expect the final Form W-4 to come out before the end of the year. And the 15-T publication with the new withholding tables will likely release in December.
If you have other questions about the new Form W-4 and how it may impact your organization, email HCM@wipfli.com or contact your Wipfli relationship executive.