In December 2019, the Internal Revenue Service unveiled the final version of its new Form W-4, Employee’s Withholding Allowance Certificate. The new withholding form, which is mandatory for all employees hired in 2020, incorporates several major revisions and could require significant reprogramming of your company’s payroll systems.
After the Tax Cuts and Jobs Act (TCJA) of 2017 completely revamped tax rates, deductions, and credits, the IRS’s first attempt at designing a new withholding form did not go well. Taxpayers and accountants alike complained that the complicated new form was like a mini tax return. It also required taxpayers to disclose information—such as a spouse’s earnings and interest or dividend income—which many employees preferred not to share with their employers.
Eventually, the agency scrapped the new form. It published new withholding tables designed to reflect the new tax rates, but the Form W-4 for 2018 and 2019 remained largely unchanged from previous versions.
The new 2020 Form W-4 takes a different approach. It removed obsolete questions about allowances and personal exemptions. It also offers several methods for taxpayers with more than one source of income to calculate their withholding without disclosing other income sources or amounts to their employers.
One of these methods, an online Tax Withholding Estimator, lets taxpayers perform a detailed review of their income and withholding. This new tool can be found on the IRS.gov website at https://www.irs.gov/individuals/tax-withholding-estimator. For those who cannot access the online calculator or who prefer not to use it, the Form W-4 also provides a paper-based multiple jobs worksheet that lets two-income households estimate withholding.
For maximum accuracy and privacy, however, the IRS recommends using the online Tax Withholding Estimator. In fact, the agency encourages all taxpayers to use the online tool to perform a “paycheck checkup” to make sure the right amount of tax is being withheld.
Your responsibilities as an employer
As an employer, you must furnish the 2020 Form W-4 to all new employees hired after Dec. 31, 2019. You are required to keep the completed form on file and to use it to determine the appropriate amount of federal income taxes to be withheld from each paycheck. Any new employee who fails to turn in a 2020 Form W-4 should be treated as a single filer with no other adjustments.
Employees who have previously furnished a Form W-4 in any year before 2020 are not required to furnish a new form. But any previously hired employee who wishes to adjust his or her withholding must use the new form. In addition, employees who claim “exempt” status are required to provide a new Form W-4 every year.
While you may choose to ask all employees to complete the 2020 Form W-4, you cannot require them to do so if they have previously submitted an earlier version. This means you might need to maintain two payroll systems for the foreseeable future—one using inputs from the 2020 Form W-4 and another to calculate withholding based on 2019 and prior forms.
As an employer, you should not question or adjust employees’ input on Forms W-4. You might provide some general guidance about possible problems but, to avoid liability, you should steer clear of giving advice or specific instructions for calculating withholding.
Instead, refer them to their own tax advisor or to the IRS website. The website also contains additional information about special situations such as workers who are independent contractors, have self-employment income, or are classified as nonresident aliens.