January 16, 2020 | HR Compliance | Posted by Ascentis
What employers need to know about the new W-4 form
No matter what role you have in the workforce, you’re probably familiar with the W-4 form, the form that tells employers how much tax to withhold from an employees’ paycheck. The W-4 is sort of the flagship for IRS documents, a form that just about everybody has filled out at some point in their working lives. Completing it is a prerequisite to starting a new job for all American workers.
The W-4 is all the more familiar because it remained virtually unchanged for three decades. With the implementation of the Tax Cuts and Jobs Act in 2020, though, the W-4 has undergone its first major update since 1990. According to IRS.gov, these changes are intended to “increase the transparency and accuracy of the withholding system [by replacing] complicated worksheets with more straightforward questions that make accurate withholding easier for employees.”
Ideally, the new W-4 will also make the withholding process easier for employers. Even so, the new system will take some getting used to, especially on the payroll side of the equation. Let’s take a look at what’s new and what’s staying the same.
The end of allowancesFormerly known as the “Employee’s Withholding Allowance Certificate,” the W-4 is now simply called the “Employee’s Withholding Certificate.” That’s because allowances, once a cornerstone of the W-4, have been phased out in favor of a series of questions designed to help users estimate their withholdings.
Under the old system, the more allowances an employee claimed, the less money would be withheld from their paychecks. Now employees and employers are both encouraged to use the IRS Tax Withholding Estimator, which is designed to help users determine the levels of deductions they can expect. (Early reports suggest that the new calculator is considerably more useful and less confusing than its predecessors, which should be good news for employees and employers alike.)
The shift away from allowances also reflects the elimination of personal exemptions for each member of a household. The old system of allowances was closely tied to those exemptions, which were removed from the tax code in 2018 in an effort to improve the accuracy of household withholdings.
Following the steps
- Step 1: Enter personal information - This step includes name, address, and marital and head-of-household status for unmarried individuals.
- Step 2: Multiple jobs or spouse works - This step provides instructions for employees who hold more than one job, or for a married employee with a working spouse who is filing jointly. This is especially useful for households with a significant disparity between the two spouse’s earnings.
- Step 3: Claim dependents - This step allows employees to claim deductions for each minor child in their household. The Tax Cuts and Jobs Act has expanded the number of people who qualify for a child tax credit to include individuals earning $200,000 or less and households earning $400,000 or less.
- Step 4: Other adjustments - This step allows employees to enter optional items such as income not from jobs, non-standard deductions, or additional taxes they choose to withhold.
- Step 5: Employee signature - This step should be self-explanatory, but it’s also quite necessary — an unsigned form will automatically default the filer to “Single.”
- Note - Steps 2, 3, and 4 are optional. Employees who either don’t meet those criteria or don’t wish to make any of those claims can simply provide their personal information and signature and be done with the process.
Who needs to complete the new W-4?The implementation of the new form doesn’t mean that employers need to get a new W-4 on record for every employee. All previously completed W-4 forms remain valid. The IRS notes that "employers will continue to compute withholding based on the information from the employee's most recently furnished Form W-4."
Any employee hired after January 1, 2020, however, is required to complete the new W-4. Using the new form is also recommended for any employee starting a new role or who has undergone a major life event such as marriage, divorce, or the birth of a child. Existing employees might also wish to request a new W-4 to improve the accuracy of their withholdings — people working multiple jobs or households where one partner earns significantly more than the other may find Step 2 beneficial, for instance.
For any employees who choose not to submit a new W-4 form, employers can continue using their existing W-4 to determine how much tax to withhold. IRS Publication 15-T offers guidance to help employers figure out the correct withholdings.
What else can employers do to adapt to the new W-4?Employers should be aware that employees are allowed to make changes to their W-4 forms at any time and as many times as they wish. For instance, an employee may want to update their W-4 to reflect a bonus or a temporary change in pay. The most recently signed form will be their W-4 of record. Employers can assist by making sure their human resources teams educate all employees on the new W-4 options and their potential advantages, and also be sure to provide enough time and opportunity for any interested employees to make their desired changes.
As with any major change in the payroll tax world, there is sure to be a learning curve and a fair bit of initial confusion. While the changes may appear relatively simple to accommodate, they could easily create a mess for an outdated payroll system. Fortunately, Ascentis payroll services have been updated to adapt to and integrate with the new requirements. That’s one more reason that it pays to have our knowledge and adaptability in your corner in the coming tax season.