As employers, we are responsible for processing an employee’s completed W-4 and withholding taxes per their request. Ultimately, we recommend leaving tax withholding decisions to the employee. How an employee completes their W-4 with regard to their withholding is entirely up to them, and between them and the IRS. We’d recommend against giving any guidance on how to complete the W-4, as we are not tax professionals. And the last thing we want is an employee that states next year that we gave bad advice once they complete their annual tax return. We always recommend that an employee seek guidance form their tax or accounting professional on these matters. Another option is to direct employees to the IRS tax calculator which will assist them in setting the best allowances based on their specific situation, and I’ve linked this calculator below.
We’ll outline some of the largest changes below, and here are a couple of useful resources to assist with learning more about the form:
- IRS video: Understanding the 2020 Form W-4 and How to Use it to Compute Withholding: https://www.irsvideos.gov/Webinars/UnderstandingThe2020FormW4AndHowToUseItToCalculateWithholding
- IRS, Treasury unveil proposed W-4 design for 2020: https://www.irs.gov/newsroom/irs-treasury-unveil-proposed-w-4-design-for-2020
- IRS Publication 15-T, Federal Income Tax Withholding Methods, to be released shortly, and which will be helpful to employers, will be available here: https://www.irs.gov/forms-pubs/about-publication-15-t (a draft is currently available here)
- Begin using the updated version of the form for all newly hired employees on/after 1/1/20. (Employees hired before this date may choose to use the new form, but may not be required to do so.)
- Notably, current employees do not have to complete a new W-4 – their previously completed W-4 remains as-is indefinitely. But, current employees can choose to adjust their withholding at any time. If a current employee elects to make changes, they must use the new version of the form. (Note that if a current employee doesn’t elect to complete a 2020 W-4, you’ll continue to compute withholding based on the information from their most recently completed W-4.)
- You may wish to notify current employees of the new form and invite them to visit the IRS’ Tax Withholding calculator (see below) and complete a new form, especially if an employee has faced an unexpected tax bill or penalty, or has experienced a change in marital status, dependents, income, or employment.
- If an employee fails to complete a W-4, the employer must set up their withholding as single, no adjustments.
- If an employee only completes Steps 1 (Personal Information) and 5 (employee signature)–which are the only 2 required Steps–the employer must withhold based on the identified withholding status (item (c) in Step 1), no other adjustments.
Notable changes to the 2020 W-4:
- There are no longer withholding allowances; instead, employees may make adjustments to their tax filing by accounting for other income, deductions, and extra withholding. These will be monetary amounts, versus an allowance.
- Employees are encouraged to speak with their family members, their accountant, evaluate last years’ income, tax credits, and deductions, and utilize the IRS’ Tax Withholding Estimator. Given this, employers should be prepared for employees to require more time to complete the form.
- The form includes five Steps for declaring additional income so that employees can adjust their withholding more accurately. Note that only Steps 1 and 5 are required; all other Steps are optional and are intended to more accurately match their tax liability.
- Step 1: Personal Information (required) – this includes a new status – Head of Household
- Step 2: Multiple Jobs or Spouse Words (optional)
- Step 3: Claim Dependents (optional)
- Step 4: Other Adjustments (e.g., other income (interest on dividends, retirement), itemized deductions that exceed the standard deduction, extra tax withholding) (optional)
- Step 5: Employee signature (required)
- Privacy note: if an employee is concerned about reporting income from multiple jobs or entering in their other income in Step 4, they may check the box for 2(c) or enter additional withholding with the use of the IRS calculator in Step 4(c).
- Exempt from withholding: the instructions state that an employee may claim exemption from withholding if they meet both of the following conditions: 1) they had no federal income tax liability in 2019 and, 2) they expect to have no federal income tax liability in 2020. The instructions also state “If you claim exemption, you will have no income tax withheld from your paycheck and may owe taxes and penalties when you file your 2020 tax return.”
- To claim exemption from withholding, the employee should certify that they meet both of the conditions above by writing “Exempt” on the W-4 in the space below Step 4(c). Then, complete Steps 1a, 1b, and 5. Do not complete any other steps. An employee claiming exemption must complete a new W-4 by February each year.
If you have additional questions, don’t hesitate to give us a call at (877) 880-4772 or create a ticket by logging into your portal.