A Guide to the 2020 Form W-4 Updates

Introduction

Everyone’s familiar with the classic W-4 “Employee’s Withholding Allowance Certificate” -- every employee in the United States is asked to fill one out upon starting new employment. But come the 2020 tax year, the IRS is going to roll out a brand-new W-4 with an overwhelming multitude of changes. We’ve already got an early peek, and the once universally recognizable form now looks very unfamiliar.  

The W-4 is already a notoriously complicated document, and the IRS has announced that there will be no grace period in order to adjust to the new setup -- on January 1st, 2020 employers are mandated to use the new regulations. It’s more important than ever to be familiar with the upcoming changes. That’s what this article is about: preparing your payroll staff for 2020. 

The W-4 “Employee’s Withholding Allowance Certificate” has traditionally allowed employees to declare allowances based on exemptions, which dictate the amount of tax the employer withholds from a paycheck. 

However, in December of 2017 United States President Donald Trump signed into law the largest overhaul to the United States Tax Code in three decades -- the Tax Cuts and Jobs Act (TCJA) [IR-2019-98, 5-3-19]. It changed the way employee tax withholding will be calculated, and as such drastic revisions to the W-4 are being implemented.

Recently, the IRS released second early draft versions of the 2020 Form W-4 and the instruction Publication 15-T for employers to review. We recommend taking a close look at both of those links (and keep the W-4 open in another tab, you’ll need it later on during this article). While these are not the official complete versions, they are close to final and the IRS suggests using them to begin preparations for 2020.  

“Although the final form W-4 will not post for a few months, there will be no further substantive changes,” the IRS told the Bradenton Herald. “One of the primary reasons the IRS is releasing the drafts is so that this draft and the forthcoming draft Pub. 15-T can be used for programming payroll systems now.”

The Name

The first thing you may notice on the new form is a change to the name itself. The 2020 Form W-4 cut the word “allowance” from “Employee’s Withholding Allowance Certificate.” The primary issue with the word, as you’ll see, was that the most notable change to the W-4 completion process was … 

The Removal of Allowances

As we mentioned earlier, traditionally employee tax withholding was calculated by the use of allowances which were based on personal exemptions built into the tax code. Because the TCJA removed personal exemptions from the tax code, a new system was put in place. 

Now, employees will directly provide the employer with an amount to increase or reduce taxes and amounts to increase or decrease the wage subjected to income tax withholding. This is meant to reduce under-withholding -- which means you may have more taken out of your check during the year, but if all goes according to plan, you'll have to pay less at tax-time or get a larger return. This may sound complicated, but thankfully there are also … 

Additional Worksheets

The new draft includes two brand new worksheets to help employees calculate their withholdings: a multiple jobs worksheet to help calculate income from various sources, and a deductions worksheet for employees who plan to claim itemized deductions such as medical expenses, donations to charity, and other applicable expenses.

Multiple Jobs Section 

In addition to a multiple jobs worksheet, if your household has only two jobs you have the option to check a box indicating “multiple jobs” rather than calculating combined income. The IRS does note that it may result in more income being withheld than necessary. 

Exempt Status

One major change from an early draft of the 2020 Form W-4 is the note to write “Exempt” on the form in the space below Step 4(c) if an employee meets the criteria to claim exemption from tax withholding (the criteria being that they have (no federal income tax liability in 2019 and expect to have no federal income tax liability in 2020). 

So now we’ll walk through the employee form step-by-step, to help you understand how an employee will fill out the new 2020 Form W-4. If you kept the W-4 open in another tab, great! It’s helpful to reference it as you read this section (here it is again if you didn’t). Once again, bear in mind that at the time of this article’s writing, the 2020 Form W-4 is not complete, so these steps are still subject to revision. But, the IRS issued these documents early specifically so you could be prepared come January 1st, 2020.

First, let’s go over a few bases you’ll want to have covered before your employees even sit down to fill out the forms.

It’s important to keep in mind that not all of your employees are required to fill out the 2020 Form W-4. Anyone who completed a W-4 in 2019 may continue to use that form, though if they wish to make changes to their tax filing they will be required to use the new version. It may be tempting to require your employees to update their forms to the 2020 version across the board for consistency’s sake, and the tax code does allow you to make that request. 

But if you do, the IRS also requires you to inform your employees that they are not mandated to do so. Nor can you treat any employees who do not update as if they failed to fill out a W-4. In short, you can ask them to switch to the new W-4, but you can’t order them to. It may help to let them know that by re-examining their pay, because the average tax return is over $2,800, they may be able to have less tax removed from their paycheck. 

When your employees complete the forms, we recommend that you have a private room with a phone available so that they can call an accountant, tax professional, or family member to collect information -- otherwise, you could simply allow them to take it home and return with it. Employees with privacy concerns can avoid providing detailed information on household income by only providing a final number in Step 4. Special instructions will also still apply for non-resident aliens, and the IRS plans to issue guidance in that area.

With those notes out of the way, let’s walk through each step of the form just as you would if you were the employee filing. 

1. Personal Information

For some employees, sections one and five may be the only steps needed. If that’s the case, filling out the new W-4 should only take a few minutes. In section one, the employee is asked to provide a full name, address, social security number, and declare whether or not they are declaring as a single filer, a married filer, or a head of household (a new option that applies if you’re paying more than half the costs of keeping up a home for yourself and a qualifying individual). 

2. Multiple Jobs or Spouse Works

This area allows you to account for multiple employers, if you have them. You can pick one of three ways to do this. The first and simplest is a checkbox for married couples with only two jobs between them. 

The second option is to complete the Multiple Jobs Worksheet on page three, and then enter the results in section 4(C) on page one. On the worksheet, you’ll answer questions about your highest paying jobs (so have income handy, you’ll need specific numbers). If you have multiple jobs that pay more than $99,000 a year or work more than three jobs, you’re probably going to have to move on to the next step and use the online estimator. 

The third option requires a computer, on which you’ll use a link to a tax withholding estimator online (another incentive to send your employees home with the form). A copy of recent pay stubs and your most recent tax returns are required for the estimator.  It’s important to note that if you do have multiple jobs, and you plan on completing steps three and four -- you are only supposed to complete those steps for one job, specifically the highest-paying job. 

3. Claim Dependents

Despite the removal of allowances, fortunately, you can still claim dependents under the child tax credit. You can do it here. If your income is $200,000 or less if single/head of household (or $400,000 or less when married) you’ll get a $2,000 deduction per child under 17 (as of December 31st) that lives with you for at least half the year. You can also claim a $500 tax credit for other dependents like a parent or older child who live in your home. 

4. Other Adjustments

There are a couple of things you can do in section four. In 4(A) you can have tax withheld from other expected income that isn’t subject to tax withholding, to prevent having to make payments on it come tax-time. Please note that this section should not include income from any employment. In 4(B), you can factor in deductions you expect to claim from the new deductions worksheet that we mentioned earlier. 

This includes charity donations, work expense write-offs, student loan interest, and other tax deductions. You can view a list of available deductions here. Lastly, section 4(C) allows you to add any additional tax you personally decide to have withheld -- this includes anything from the Multiple Jobs Worksheet, Line 4. If you choose to have additional withholding, you can expect a reduction in the amount you owe or a bigger refund at the end of the year.

5. Sign Here

The most simple step of all: sign and date the document declaring that all information you provided is true to the best of your knowledge under penalty of perjury.

Now that we’ve strolled through the new 2020 Form W-4 in the eyes of an employee, let’s take a look at how your payroll team will handle it. Since the changes will occur swiftly, there are bound to be hiccups -- it’s important that your team understands the system inside and out in order to be ready to mitigate any problems that may occur. 

While both employees in payroll and those forced to fill out a new W-4 may not be thrilled with the new system, it might be beneficial to let them know that the TCJA was signed into law in 2017 and doesn’t allow any other options. 

We also highly recommend that you have your payroll staff walk through the form several times themselves in order to become familiar with it. If they’re misinformed about the changes, they’ll likely accidentally misinform employees. But make sure they know not to dump all the information they learned about the old W-4s, since those will be in use alongside the new form for some time to come.

It’s important to note that you won’t necessarily need two software systems for forms submitted before and after 2020, since the same set of withholding tables will be used for both. The IRS plans on issuing additional guidance, and part of the reason the early drafts of Publication 15-T were issued was to assist software manufacturers in preparing their software by 2020. 

While we’re on the topic of payroll software, the IRS issued guidance that if you require your employees to fill out W-4s digitally you should provide a space where they may note “exempt” if they qualify for tax withholding exemption -- on the paper version they would write this after section 4(c).

It’s also important to note that in the case an employee did not submit a W-4 by tax time, you’re required to submit their information as a single-filer with no adjustment. The IRS additionally plans to issue material in accordance with this standard. 

So here are the four steps for employers handling the new W-4s.

1. Straight Filers

Employees who simply filed straight with steps one and five of the 2020 Form W-4 are the easiest for you to take care of. You simply withhold the required amount based on wage and filing status. That’s it. 

2. Multiple Jobs

A check in the multiple jobs box in step two means that you must calculate withholding from the Percentage Method or Wage Bracket tables. This often means higher withholding. If the employee chose to use the worksheet or the online calculator, the additional withholding will be found in section 4(C). 

3. Dependents

Here you’ve got tax credits for children and other dependents. Always use the line on the right hand side even if it’s not equal to the total of the lines on the left (as other credits may be factored in). 

4. Additional Withholding

The last step shows you how much to increase the annual wages based on withholding in 4(a), how much to reduce annual wages based on 4(b), and how much to withhold per pay period based on 4(C).

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