Operations Insights
October 30, 2019

The finishing touches for Form W-4: What you need to know before Jan. 1.

As Halloween transitions to half-price candy day, we can officially welcome the next, most festive of all holiday seasons: year-end compliance season. This year, it’s not just handbooks and health care enrollment – there’s also a revised tax form coming your way.

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I’ve yet to hear my first holiday carol in the grocery store, but I’m already thinking ahead to 2020 and what it has in store. There’s the Summer Olympics in Japan, a U.S. Presidential Election, near-constant references to “hindsight,” and, perhaps most exciting – revised tax forms!

What’s that? You’ve been so focused on the new overtime regulations (understandably so) that you need a little update on those tax forms? Well, you’ve come to the right post. You’ll be a 2020 Form W-4 (that’s the revised form) pro faster than you can say “Little Drummer Boy.”

Refresh my memory, why do we need a revised form?

Way back in 2017, the Tax Cuts and Jobs Act (TCJA) brought about significant tax reform in the U.S. Implementing the most significant U.S. tax changes in over 30 years, the TCJA changed tax rates, expanded certain deductions (including the standard deduction), and eliminated others (such as the personal exemption for individuals and their dependents). The breadth of these changes affected tax liability — and, therefore, tax withholding — for nearly every U.S. taxpayer. The changes also required revision of over 400 IRS forms, including Form W-4, which instructs employers how to withhold federal income taxes from employee pay.

Because Form W-4 affects employers, employees, payroll processors, and tax preparers, just to name a few, it demanded special attention and TLC. Now, after two years of development, feedback, and multiple drafts, the final version of Form W-4 2020 will be released by the IRS in November.

The revised form must be used by employers beginning Jan. 1, 2020.

What’s different about the 2020 Form W-4?

One of the goals of the TCJA was to simplify and streamline U.S. tax law. For some, the existing W-4 and its series of allowances and worksheets to adjust withholding amounts is a confusing, inexact process. The revised form eliminates the concept of allowances altogether, instead walking employees through, at most, five steps, one of which is simply signing the form.

Does the revised form support the TCJA’s goal of simplification? It depends who you ask.

While the IRS boasts that the revised form improves transparency, if employees desire accurate withholding, additional worksheets, calculators, and information may still be required. On the other hand, employees with multiple sources of income may find it easier to estimate and request additional withholding as needed for second jobs or other revenue streams.

What does this mean for employers?

Through the end of 2019, employers should continue to use the current Form W-4 for all new hires and withholding changes. Then, for all new hires and withholding changes that occur on or after Jan. 1, 2020, the revised form must be used.

Perhaps you have a few questions, such as:

Are employers required to collect a 2020 Form W-4 for all existing employees?

No. While the TCJA implemented many changes, it failed to grant the IRS the authority to require everyone to adjust their withholding amounts by completing new forms. This means that employees hired before Jan. 1, 2020, with an existing Form W-4 on file do not have to submit an updated form simply due to the redesign. However, when and if employees wish to adjust their withholding, they must use the revised form.

Employers, meanwhile, can continue to compute withholding based on the information from the employee’s most recently submitted Form W-4 (as long as the employee was hired prior to Jan. 1, 2020).

How is withholding calculated?

The IRS will provide two withholding tables: Standard and Step 2. Step 2 refers to the second “step” of the 2020 Form W-4, which allows employees to account for multiple sources of income.

Put simply, employees who complete “Step 2” of the revised Form W-4 will have their withholding determined at a higher rate based on the Step 2 table. All other employees will have their withholding determined using the Standard table.

For existing employees with prior year Forms W-4 on file, their allowances will be converted to a reduction of wages, then the Standard table will be applied.

For a preview of these withholding tables, see IRS Draft Publication 15-T. The official tables, adjusted for inflation, will be provided in the final version of Publication 15-T.

What if an employee has no Form W-4 on file?

Currently, when a valid Form W-4 is not on file, the employee is treated as “Single with no allowances.” With the elimination of “allowances,” for 2020 and beyond, employees with no valid Form W-4 on file will be assigned the status “Single with no adjustments.”

Withholding for the “Single with no adjustments” status will differ from the previous “single with no allowances” status. Employees with this status are more likely to be under-withheld in 2020, owing additional tax (and possibly interest and penalties) when filing their tax returns. Therefore, employees are advised to submit an accurate W-4.

How will this work with state income taxes?

It depends. Some states use allowances in calculating state tax withholdings, and some—though not all—of these states have drafted and adopted their own state versions of Form W-4. In other states, the revised federal Form W-4 may fulfill both state and federal needs. (And, of course, some states do not collect income taxes). Employers with state tax withholding responsibilities will need to determine whether updated forms are required in the applicable states.

What should I do to prepare, and to help my employees prepare?

As noted, employees are not required to complete a 2020 Form W-4. However, the accuracy of their tax withholding (and the chances of not having to pay in on Tax Day) may be improved with completion of the revised form—particularly for employees who have struggled to account for (or simply forgotten) multiple sources of income, life events, or other changes.

To assist employees (and relieve employers from the awkward position of providing tax advice), the IRS provides a Tax Withholding Estimator that employees can use to independently assess whether to complete a revised Form W-4.

Meanwhile, employers can learn more about the draft forms, and await the final version, through the following IRS resources:

Disclaimer: The information provided in this post is provided for informational purposes only and should not be relied upon or construed as legal advice and does not create an attorney-client relationship. You should review with your legal advisors how the laws identified in this post may apply to your specific situation.

Read more on compliance and legislation updates on Ceridian’s blog

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