Earlier this year, the IRS rolled out its new version of Form W-4, the Employee’s Withholding Certificate that enables employers to determine how much federal income tax to deduct from employee paychecks. The passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 made sweeping changes to the internal revenue code changing tax rates, deductions, tax credits and personal exemptions, thus necessitating a new Form W-4. While the IRS previously released a revised 2018 and 2019 withholding table in the wake of the TCJA, in general, the W-4 remained unchanged until the 2020 version, which was the first major update to the form since 1987.
Who Should Fill Out the New Form W-4?
Taxpayers are only required to fill out the new form if they start a new job with a new employer this year. Additionally, employees who have experienced a major life change, like getting married or having a baby, may need to complete the new form in order to make adjustments to their current withholding.
For those employees who wish to fill out the new form, but who did not start a new job or experience a life change, completing the new W-4 in combination with the IRS recommended paycheck checkup can be beneficial in terms of determining accurate withholding. According to tax experts, the amount withheld should be as close to matching the amount of tax owed as possible. Not having enough withheld will result in a large tax bill, but withholding too much would be like giving the IRS an interest free loan.
All rehires (people fired because of COVID-19, but rehired AFTER 30 days) are required to fill out a NEW W4.
Can I Ask Every Employee to Fill Out the New W-4?
While employers can ask all of their existing employees to fill out the new form, it is completely optional. In the absence of the new form, their most recent W-4 will be used to calculate federal withholding.
Is the New Form Difficult to Fill Out?
According to the IRS, the update “reduces the form’s complexity and increases the transparency and accuracy of the withholding system.” That said, employers should be aware that employees can find the completely overhauled form confusing. One survey found less than half of respondents felt prepared to update their W-4 on their own and many felt confused as to what information they needed to complete the form. As compared to the previous version, the new W-4 will likely require more time for employees to complete.
What Are the Most Notable Changes to the 2020 Form W-4?
Here are the two most notable changes to the new Form W-4:
Allowances Are Gone: The allowances question no longer exists, as it does not align with the new tax law, which eliminated personal exemptions and increased the standard deduction and the child tax credit. Instead, the new W-4 asks how many children and dependents the taxpayer has.
Five-Step Process: The new 2020 form takes a five-step approach, but for those with a simple tax situation, non-applicable questions can be skipped and a standard-deduction can be taken. The five-steps include basic information, dependents, other adjustments, and signature and date. Some have described the new approach as being similar to filling out a mini income tax return.
This year, employers will have two separate Form W-4s to manage for their employees, which may create confusion and take additional time and resources to manage. Axcet HR Solutions can provide the help small business owners need when navigating payroll and payroll tax laws. Contact us today.