How the New Form W-4 Affects Employee Withholding and Your Payroll

On December 5th, the Internal Revenue Service (IRS) released the 2020 Form W-4, Employee’s Withholding Certificate 2020 Form W-4. It features a new look and several new input fields that replace the “withholding allowances” box. Employees will be disappointed with their tax bill if they fill out the new form incorrectly, highlighting the importance of the new form. 

“While the new form may at first cause confusion for employees, these changes will ultimately enable employees to set and adjust withholding to achieve a result like a specific tax refund amount,” said Jack Adams, Chief Client Officer of YPD and James Hamlin & Co. “That said, the new form requires employees to remember specific lines from their most recent income tax return, in order to properly complete the new Form W-4. Filled out correctly, the 2020 Form W-4 improves the results for those with multiple jobs and two-earner families.”

Important factors regarding the 2020 Form W-4 include:

What is New: The IRS 2020 Form W-4 shifts several computations from the employee to the employer. There is a new checkbox for multiple jobs and two-earner households, replacing a difficult and potentially confusing nine-step worksheet in the 2019 version. If the employee checks this box, the tax tables divide the standard deduction and tax brackets equally between two jobs, so tax rates apply at roughly half of the income threshold that normally applies. The updated form also contains new payroll inputs including full-year child and dependent tax credits, full-year other income and full-year deductions. These new fields simplify the process for employees, but requires the employer to convert full-year expected tax credits to reduce per-payroll tax withholding and use full-year deductions to reduce per-payroll wages subject to withholding.

New Hire Implications: On the their first day, employers often ask new employees to complete a handful of forms (e.g., I-9, W-4, direct deposit authorization). With the new IRS 2020 Form W-4 changes, employees may need more time to complete the form, to call their accountant or their spouse to look up details from last year’s return, such as deductions, tax credit or other income. If existing employees are happy with their current withholding, they can leave their 2019 or prior Form W-4 in effect. All employees hired after January 1, 2020, must use the new form.

Potholes: The new form may confuse employees and employers until they become familiar with it. Pothole #1: the form asks for “deductions other than the standard deduction.” The number the IRS intends for this line is the expected deductions over the standard deduction amount, rather than total deductions. Pothole #2: if an employee is in a two-earner household and the person opts to check the box in Step 2, both spouses should check the box, but only one of them should fill out Step 3 and Step 4 of the form.

We can help you through this form. Call us with any questions you may have!