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Quick Reference Guide to the New IRS Form W-4

As we begin 2020, the IRS has made some important changes to Form W-4 that will affect both employers and employees alike.  The redesign, which removes withholding allowances, is necessary due to the changes made to the tax law in 2018.  The new form is intended to make the process both easier to understand as well as more accurate by replacing the worksheets previously used to calculate withholding with more straightforward questions.  Nevertheless, whenever changes are made to an established system, a learning curve is imposed.  This guide aims to clarify the most common points of concern that people may have regarding the new Form W-4. 

Who should use the new Form W-4:

            Any person hired after 2019 is required to furnish the new Form W-4.  Anyone hired prior to 2020 is not required to fill out a new Form W-4 simply because of the new changes; their previously-furnished Form W-4 remains perfectly valid.  However, any such persons who wish to make adjustments to their current withholding amounts must do so by using the new form. 

Filling out the new Form W-4:

            The new form consists of 5 steps.  The most basic requirement for all employees is to complete step 1 (personal information) and step 5 (signature).  Steps 2 – 4 are to be completed only if they are applicable.  Completing these middle steps, however, will make withholding more accurate and therefore lessen the odds of later getting a large refund—or, far worse, having to pay additional tax to the IRS.

            Step 2 is for employees with multiple jobs or who have a working spouse.  There are three options to choose between: (a), (b), or (c).  Per the IRS, option (a) is the most accurate, as the new Tax Withholding Estimator will do most of the work (linked below).  Option (b) is also accurate but requires manual work.  Option (c) is less accurate but is the easiest to calculate on the spot.

            Step 3 is only necessary if you are claiming dependents, as would be the case if you have children, for instance.

            Step 4 is for employees who have income from sources other than jobs or self-employment that is not already subject to withholding.  Step 4(a) is used for reporting money earned from dividends, interest, or investments.  Step 4(b) is for claiming deductions other than the standard deduction, for example: mortgage interest or charitable contributions.  Step 4(c) is useful for specifying an exact dollar amount to be withheld from each paycheck. 

For those concerned about privacy:

            It is understandable that some employees may not wish to report their second job in step 2 or additional sources of income in step 4(a) to their employer.  With respect to preserving maximum privacy, the IRS recommends that such persons check the box in step 2(c) or simply enter the specific dollar amount they’d like to be withheld in step 4(c).

What employers should know:

            Calculating federal income tax withholding for any employee furnishing the new Form W-4 now depends on how your business processes payroll.  For automated payroll systems, use the percentage method tables found in IRS Publication 15-T.  For manual payroll systems, use the wage bracket method tables found in the same publication.  Please be aware that the pre-2020 withholding tables will continue to be available for the purpose of calculating withholding for those employees still using the old Form W-4.

            If processing payroll manually by using the wage bracket method tables in Publication 15-T, use the “standard withholding” rate for employees who have only filled out steps 1 and 5.  On the other hand, if the employee has multiple jobs or a working spouse and has checked the box in step 2, then use the “Form W-4, Step 2, Checkbox withholding” rate instead.  Also note that if the employee has added dollar values to any of the three options in step 4, then be sure to account for those adjustments when calculating their withholding.   

            Lastly, although accurate withholding is the responsibility of the employee, it may be in the best interest of the employer to become familiar with the changes made to the new Form W-4 in order to field questions from their employees.  If employees fill out the new form incorrectly and later end up with surprise tax liabilities, for example, it may cause tensions to mount at payroll’s door. 

            As you can see, the new federal income tax withholding can be a bit confusing. At United Employee Services we can take this task off your plate so you can focus on what you do best. We will also ensure that you have followed the new system correctly and keep you in compliance.

Additional resources:

            Hopefully this reference guide on the new Form W-4 has clarified most of the basic concerns from the perspectives of both the employee and the employer.  Linked below is the Tax Withholding Estimator (for employees) as well as Publication 15-T (for employers).  If a deeper dive into these topics is necessary, please have a look at the 70-minute video guide created by the IRS to help understand the new form and how to use it to calculate withholding.

The Tax Withholding Estimator: https://www.irs.gov/individuals/tax-withholding-estimator

Publication 15-T:  https://www.irs.gov/pub/irs-pdf/p15t.pdf

IRS Video Guide on the new Form W-4: https://www.irsvideos.gov/Webinars/UnderstandingThe2020FormW4AndHowToUseItToCalculateWithholding

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