What Employers Need to Know About The New W-4 IRS Form
The Tax Cuts and Jobs Act (TCJA) significantly changed how employers determine federal income tax withholding in the United States, including Form W-4, the Employee’s Withholding Certificate. The new W-4, which employers are required to request from new hires, determines how much money should be withheld from an employee’s paycheck for federal taxes.
Traditionally employees counted and reported federal tax allowances on W-4 forms, and now they use the new W-4 to calculate exact withholdings.
The recent changes by the Internal Revenue Service (IRS) are intended to make it easier for employees to determine their tax status and how much should be withheld, avoiding potentially painful tax consequences at year-end.
Here’s what employers need to know about how the new W-4 impacts your employees and your withholding processes.
A little background on W-4 allowances
Information and use instructions for the current IRS Form W-4 can be found in Publication 15-T, which includes:
Percentage Method tables for automated payroll systems
Wage bracket method tables for manual payroll systems with Forms W-4 from 2020 or later
Wage bracket method tables for manual payroll systems with Forms W-4 from 2019 or earlier
Percentage method tables for manual payroll systems with Forms W-4 from 2020 or later
Percentage method tables for manual payroll systems with forms W-4 from 2019 or earlier
Alternative methods of figuring withholdings
Tables for withholding on distributions of Indian gaming profits to tribal member
And, finally. how to get tax help
The most significant change — no W-4 allowances
Employees fill out IRS Form W-4 with information employers need to determine the amount of federal income tax to withhold from each of the employee’s paychecks. As part of the TCJA, the IRS separated the form into five steps and removed federal tax allowances.
Previously, the value of withholding allowances was tied to personal exemptions. But since January 1, 2020, employees are no longer able to claim personal or dependency exemptions. That means employees can no longer request adjustments to their withholding via federal tax allowances.
Employees must now use the new W-4, revised in 2020 or later, to indicate specific increases or reductions in taxes and wage income subject to withholding.
These revisions are intended to reduce the form’s complexity and increase withholding accuracy. It uses the same basic information but replaces worksheets with questions that are supposed to make the process easier for employees.
That said, any change to tax law can be confusing — and this was the first major overhaul in 30 years. If your employees have questions about filling out the new Form W-4, point them to the IRS’s FAQs on the 2020 Form W-4 or Tips for Taxpayers Who Need to File a new W-4.
What else do employers need to know?
Not all employees need to submit a new Form W-4. New employees will be required to fill out the new form, but you’ll continue to compute withholding based on the most recent Form W-4 you have on file for everyone else.
That doesn’t mean you necessarily need two separate systems. Even though you’ll be working with legacy Forms W-4 submitted before 2020 and revised forms for new hires, the same set of withholding tables will be used for both. Keep an eye out for additional guidance on the payroll calculations needed based on the data fields on the new and old forms.
Some steps on the new Form W-4 are optional. Of the five steps in the new form, only the first (personal information such as name and filing status) and last (employee signature) are required. The other three steps are only necessary when applicable to the employee’s personal circumstances.
There’s an app for this! If employees have privacy concerns over filling out the optional portions of the revised Form W-4 or otherwise need help providing maximum accuracy, point them to the Tax Withholding Estimator. Results are not shared with the employer, and employees will simply enter the determined amount on Line 4C of the form.
At the end of the day, the new W-4 intends to make tax withholding estimation easier for employees and shouldn’t create a burden for the employer. For the IRS’s efforts to simplify any of its forms, we are grateful.
Heartland’s Payroll+ cloud-based payroll software offers customers a full-service solution, including tax management, payroll, and expert advice on staying up to date with state-specific laws and regulations. Explore the possibilities with Heartland’s Payroll+ today and let us simplify your payroll processes.
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