In 2020 we see a new fresh version of the Employee’s Withholding Allowance Certificate (W-4 Form), which is now called the Employee’s Withholding Certificate. Although the IRS claims this will make it easier for employees to have accurate withholding, we think it may take longer to complete and cause some initial confusion among employers and employees.
We’ve highlighted some of the updates below, but we recommend that you take the time to familiarize yourself with the new form, review the IRS’s FAQs, and contact your payroll provider to ensure proper updates were made to existing software.
So, what’s new?? The main change to this form is the change in the allowance worksheet. Most employees show up to complete their new hire paperwork and just know what they will claim on their tax forms, e.g. Single and 1 exemption or maybe Married with 4 exemptions. The term allowances and exemptions are now a thing of the past since the Tax Cuts & Jobs Act (TCJA) signed into law in December of 2017. The new version of this form seems to be a representation of the changes in the tax system, which hadn’t seen fresh paint in 30 years.
There are now 5 steps to completing the form and the IRS has created some additional tools to allow employees to get as close to their necessary tax withholding as possible.
Step 1 – complete basic personal information and continue to check a box to be Single or Married filing separate, Married filing jointly, or Head of Household.
Step 2 – is a section for those who work multiple jobs or have working spouses. Here employees can be redirected from the form to get assistance by using the IRS provided estimator Tax Withholding Estimator or are directed to other pages of the form for assistance. In this section employees only need to complete option (a), (b), or (c). If the employee chooses to use the estimator be aware that it will direct them away from the form and before they can begin they will need the following:
1. Most recent pay statements for themselves and their spouse
2. Information on other sources of income
3. Have their recent tax return handy
Step 3 – this is where employees will claim their dependents, again, this section has gone from a count of dependents to an amount, $2,000 for children under 17, and $500 for all others.
Step 4 – employees are taken through some optional adjustments, such as income from other jobs, or other deduction they may claim on their tax returns.
Step 5 – must contain the employee’s signature.
Here at TPPS we realize that this new form could pose some problems for employees and employers and will likely delay the on-boarding process. Please keep in mind, current employees who were hired prior to 2020 do not need to complete this form, but it is recommended for anyone with major tax changes or who received high bills/refunds on their last tax return. New employees hired as of 1/1/2020 need to complete the new version of the form. For more questions or any assistance with your HR and Payroll needs, Just Ask Us.
The following is an example scenario using the IRS online calculator:
Lupe is Married with 1 child under the age of 17 and 1 other dependent. She makes $90,000 annually and her husband makes $80,000 per year. She chooses to use the IRS available Tax Withholding Estimator for Step 2. Lupe is paid weekly is planning to contribute $4,000 to a tax-deferred 401k plan and her current Federal Withholding Amount is set to $500. She will also contribute to an HSA in the amount of $2,500. Her spouse is paid every 2 weeks and will not participate in any 401k and currently has a Federal Withholding Amount of $350. Her spouse does expect to receive a bonus this year of about $5,000 and isn’t sure if his employer will tax it appropriately or not. Lupe skipped the section on additional adjustments. And chose to not itemize deductions on the estimator but she did have the estimator take her through the dependent tax credits where she could list her 1 child under 17.
The Estimator returned information that told Lupe she could expect a credit and her current withholding amounts set to $500 (Lupe) and $350 (Spouse).
But Lupe would rather get a smaller refund and put some more money in her pocket for vacation this year so she decides to move the scale on the refund to $3,500 rather than $13,906 and this changes her results. The estimator then gives her some other options and information regarding her withholding amounts according to her desired refund amount.