The Tax Cuts and Jobs Act (TCJA) is about to significantly change how employers determine federal income tax withholding—and the Form W-4 itself. Keep reading to learn more about how these changes could impact your employees and your withholding processes.
A little background
Earlier this year, the IRS released a draft of the new Federal Income Tax Withholding Methods (Publication 15-T). The draft included:
- An Employer’s Withholding Worksheet, which allows employers to calculate 2020 withholding using either previously completed Forms W-4 or the newly designed draft form
- Percentage Method Tables
- Wage Bracket Method Tables, which include three filing statuses: single, married filing jointly and head of household
The biggest change? No more allowances.
Employees fill out IRS Form W-4 (Employee’s Withholding Certificate) with information employers need to determine the amount of federal income tax to withhold from each of the employee’s paychecks. As part of the TCJA, the IRS separated the form into five steps and removed withholding allowances.
Previously, the value of withholding allowances was tied to personal exemptions. But starting January 1, 2020, employees won’t be able to claim personal or dependency exemptions anymore. That means employees can no longer request adjustments to their withholding via allowances. Now, they’ll need to use the revised 2020 Form W-4 to indicate specific increases or reductions in taxes and wage income subject to withholding.
These revisions were intended to reduce the form’s complexity and increase withholding accuracy. It uses the same basic information but replaces worksheets with questions that are supposed to make the process easier for employees. That said, any change to tax law can be confusing—and this is the first major overhaul in 30 years. If your employees have questions about filling out the new draft Form W-4, point them to this helpful FAQ from the IRS.
What else you need to know
Not all employees need to submit a new Form W-4. New employees will be required to fill out the new form, but for everyone else, you’ll continue to compute withholding based on the most recent Form W-4 you have on file.
That doesn’t mean you necessarily need two separate systems. Even though you’ll be working with legacy Forms W-4 submitted before 2020 and revised ones for new hires, the same set of withholding tables will be used for both. Keep an eye out for additional guidance on the payroll calculations needed based on the data fields on the new and old forms.
Some steps on the new Form W-4 are optional. Of the five steps, only the first (personal information such as name and filing status) and last (employee signature) are required. The other three steps are only necessary when applicable to the employee’s personal circumstances.
There’s an app for this! If employees have privacy concerns over filling out the optional portions of the revised Form W-4 or otherwise need help providing maximum accuracy, point them to the IRS estimator at www.irs.gov/W4app. Results are not shared with the employer, and employees will simply enter the determined amount on Line 4C of the form.