The New Form W-4: Withholding in 2020 Have Changed for Business Owners
The TCJA tax code overhaul reform, that was signed Dec. 22, 2017, by President Donald Trump, took effect Jan. 1, 2018. Under the law (Pub. L. 115-97), the use of personal exemptions in calculating income tax liability was suspended from Jan. 1, 2018 to Jan. 1, 2026. The IRS revised the federal income tax withholding form and withholding methods in late 2019 to better conform with the new law. As a business owner did you used to enjoy working with withholding allowances to figure out an employee’s federal income tax withholding? Well that is changing.
Starting Jan. 1, 2020, employers are required to use the new 2020 Form W-4, Employee’s Withholding Certificate, and withholding instructions in 2020 Publication 15-T, ‘‘Federal Income Tax Withholding Methods,’’ for new employees and those wishing to change their withholding. The 2020 Form W-4 requires employees to report dollar amounts instead of withholding allowances to calculate income tax.
The employer worksheets in Publication 15-T include instructions for determining withholding for 2020 Forms W-4 and for withholding forms issued before 2020 using the percentage-method tables for calculating federal income tax withholding and the wage-bracket method tables. The 2020 Form W-4 is the IRS’s second attempt at a revision. Bloomberg Tax published a whitepaper about the “New Form W-4 Withholdings in 2020 guide.” If you handle payroll by hand, it may seem intimidating to have to change up your payroll process. You will likely have a lot of questions.
The agency released a substantially revised draft Form W-4 in June 2018 that was to take effect in 2019, but updates were delayed to 2020 to incorporate comments from payroll professionals. Delayed implementation of the 2020 Form W-4 and withholding methods is not expected, a spokeswoman for the IRS told Bloomberg Tax Sept. 26, 2019. ‘‘If an employer’s automated system is not current, we suggest using the manual instructions provided in Publication 15-T.’’
Bloomberg’s white paper covers the multiple steps to be completed for the 2020 Form W-4, how to fill out the income withholding worksheets in Publication 15-T, withholding for nonresident alien employees, and issues related to states. A Forbes contributor Mike Kappel recently wrote an article about the changes titled “6 things to keep in mind about the 2020 W-4 Form” which summarizes the key points. Another interesting resource from Gusto titled “Here’s How to Fill Out the New W-4 Form for 2020.”
What the Form W-4 For 2020 Means For Your Business
The final version of the 2020 Form W-4, Employee’s Withholding Certificate, was issued Dec. 4, 2019. Employees filling out the form no longer are to be able to claim any withholding allowances.
Two early release drafts of the 2020 Form W-4 were issued by the IRS to allow payroll industry stakeholders to comment on revisions. The second revised draft, Form W-4, Employee’s Withholding Certificate, was released Aug. 8, 2019. The earlier version of the 2020 draft, released May 30, 2019, including the word ‘‘allowance’’ in the name of the form.
The form outlines five steps for reporting tax-filing status, whether household members hold multiple jobs, dollar amounts for other income that would not have withholding, and anticipated tax credits and deductions. The form also allows for additional withholding amounts to be applied to each pay period. General instructions and two half-page worksheets accompany the form. The worksheets are not to be filed with the employer.
You Might Have Different Versions Of Form W-4 On File
New hires and employees who need to adjust withholding are required to file the revised form starting Jan. 1, but employers must honor valid forms that are on file if changes are not needed. Employers may ask, but may not require, employees to replace existing forms, and may not treat employees with older forms as failing to submit a W-4.
The treatment of newly hired employees who do not file a valid Form W-4 depends on when wages first are paid, the IRS said Dec. 5.
New employees who are first paid wages in 2020 and do not file a valid form are to be withheld with a filing status of single with no adjustments on a 2020 Form W-4. This treatment includes employees hired in 2019 if the first payment occurs in January.
Employees who are first paid wages before 2020 and do not file a valid Form W-4 are to be withheld with a filing status of single and zero withholding allowances on a Form W-4 issued before 2020. An employee who is first withheld using the pre-2020 default withholding status may not be switched to the 2020 default withholding status.
Withholding Allowances Are Gone
Forbes contributor Mr. Kappel stated that “the thing that really separates the 2020 W-4 form from the 2019 and earlier forms is the elimination of withholding allowances.” By the IRS now taking away withholding allowances for employers came as a surprise. Employers have used withholding allowances to determine income tax withholding for years. If you are not totally familiar with withholding allowances, here is a quick summary from Mr. Kappel “withholding allowances are exemptions from federal income tax. The more allowances an employee claims, the less you withhold from their wages for federal income tax.” Say goodbye to the Personal Allowance Worksheet from page three of the old Form W-4 is now been removed.
“The information contained in lock-in letters is to change to reflect the 2020 Form W-4,” the IRS said.
Starting with lock-in letters sent in 2020 for employees who filed a 2020 Form W-4, employers are to withhold as if the employee is single and checked the box in Step 2c of Form W-4. If, after a lock-in letter is sent, the employee asks the IRS in 2020 for a different withholding rate, the specified rate is to be stated in terms of the information provided on the 2020 Form W-4.
The default lock-in letter in 2019 requires the employer to withhold as if the employee had the filing status of single and claimed zero allowances. Employers are to honor existing lock-in letters from 2019 and earlier unless they are replaced with a new letter.
Three fields for the employer’s name and address, the employee’s employment date, and the employer identification number are unnumbered.
The 2019 Form W-4’s Line 5 for the total number of allowances was replaced by Steps 3 and 4 for employees to indicate dollar amounts. Steps 2, 3, and 4 may be skipped if they do not apply to the employee.
All data fields on the 2019 form were renumbered on the 2020 form, though some retained the same purpose and similar wording. The following steps were revamped or renumbered on the 2020 form:
Step 1: The filing status ‘‘Married, but withhold at higher Single rate’’ was removed. A ‘‘head of household’’ status was added that may be selected by unmarried employees paying more than half the costs of maintaining a home that includes a qualifying individual.
Line 4 on the 2019 form, used to indicate whether the employee’s name is different from what is shown on their Social Security card, was replaced with an unnumbered notice to contact the Social Security Administration about name and card mismatches.
Step 2: Employees are to use this field if they work more than one job at the same time or are married filing jointly and their spouse also works. Employees are instructed to do one of the following: 2a, use the Tax Withholding Estimator for withholding guidance; 2b, use the Multiple Jobs Worksheet and enter additional withholding amounts on 4c; or 2c, check the box to request a higher withholding rate.
The instructions recommend that only employees with two jobs in their household check the box in Step 2c for both jobs. However, employees with one job in the household may check the box in Step 2c to increase withholding, the instructions said.
Employees with privacy concerns are encouraged to use the Step 2 options to avoid reporting amounts on Steps 4a and 4b.
Step 3: Employees enter the amount of tax credits that they expect to claim. This amount reduces the amount of tax withheld.
Step 4a: Employees enter the amount of other estimated income that does not come from a job. This amount increases the total amount of taxable wages.
Step 4b: Employees enter the amount of deductions that they expect to claim other than the standard deduction. This amount reduces the total amount of taxable wages.
Step 4c: Employees enter any additional tax amount to be withheld each pay period. Step 4c replaced the 2019 form’s Line 6, and the wording of that field generally did not change. Employees only are to enter amounts on Steps 3, 4a, and 4b for one job in the household. The instructions recommend that these lines be completed for the highest-paying job to ensure more accurate withholding.
The draft form does not have a data field for employees to claim exemption from federal income tax withholding, which was Line 7 on the 2019 form. Employees are to fill out Step 1 and Step 5 and write ‘‘Exempt’’ in the space under Step 4c.
Employers providing electronic Forms W-4 are to create a field for employees to claim exempt from withholding. The field also must include language for employees to certify that they had no federal income tax liability in 2019 and expect to have no federal income tax liability in 2020.
Nonresident aliens are to check ‘‘single’’ and write ‘‘NRA’’ on the form under Step 4c. Further instructions are to be provided in Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens.
Employers are to continue to provide a space on electronic Forms W-4 for NRA employees to claim withholding.
Three early-release drafts of Publication 15-T, ‘‘Federal Income Tax Withholding Methods,’’ were issued by the IRS. The latest draft was released Nov. 4, 2019.
The 24-page draft publication has five withholding worksheets for employers, includes information on revised percentage-method and wage-bracket method tables for calculating federal income tax withholding, and applies 2019 amounts to the formulas. The draft also includes withholding guidance regarding alternative methods, gaming distributions, and periodic pension and annuity payments.
The publication’s worksheets and tables show what the 2020 versions would look like using 2019 tax parameters.
Draft withholding tables and worksheets using inflation-adjusted amounts for 2020 were issued Nov. 28, 2019, as an attachment to the Nov. 4. draft of Publication 15-T. The tables, which are to be included in the finalized Publication 15-T, indicate that the value of a withholding allowance for 2020 is $4,300.
The automated percentage method is the only method that allows for withholding for 2019 forms and 2020 forms using one set of tables. The method also is the only one to require annualizing wages. The four-manual methods calculate tax based on wages paid for each pay period.
Methods for 2020 Forms
All withholding methods compatible with 2020 Forms W-4 include a fixed amount of wages exempt from withholding instead of allowance amounts based on the number of personal exemptions claimed by an employee.
The equivalent of zero, two, or three allowances is factored into Publication 15-T withholding methods for 2020 forms, depending on the employee’s filing status and whether the box in Step 2c is checked.
For Forms W-4 with the Step 2c box checked, the fixed amount is zero.
For Forms W-4 when the Step 2c box is not checked, an employee who selects the status ‘‘Married and Filing Jointly’’ has $12,900 annually subtracted from taxable wages (equivalent of three withholding allowances, 2020 figure); an employee selecting single or head of household has $8,600 subtracted from taxable wages (equivalent of two withholding allowances, 2020 figure).
Worksheet 1, the automated-percentage method, includes the fixed amount of exempt wages in the calculation of the annual adjusted wage amount. Worksheet 2, the wage-bracket method for 2020 forms, and Worksheet 4, the manual percentage method for 2020 forms, include the fixed amount of exempt wages in the formula that creates the withholding tables.
Withholding under 2020 forms also requires adjustments depending on amounts included in Steps 3, 4a, or 4b of Form W-4. On Worksheet 2 and Worksheet 4, other income amounts and deduction amounts are converted into pay period amounts from annual amounts. Tax credits are converted into pay period amounts on Worksheets 1, 2, and 4.
All methods for 2020 forms have a standard withholding rate schedule and a higher withholding rate schedule. The higher withholding schedule is to be used with 2020 Forms W-4 with the checkbox in Step 2c selected.
The tables for 2020 forms also contain schedules for those claiming head-of-household status.
Methods for 2019 Forms
Withholding allowances claimed on Forms W-4 issued before 2020 are to continue to apply unless a change is needed. Employers are to calculate withholding without needing to convert information provided on older forms into information requested on the revised W-4.
Each withholding method that may be used for forms issued before 2020 requires subtracting from wages the number of allowances claimed, multiplied by an allowance amount ($4,300 in 2020).
The wage-bracket method tables and manual percentage-method tables for older forms are to have the same structure as those in effect for 2019, with no changes to the calculation of the amount of tax to withhold.
Withholding for Nonresident Alien Employees
Publication 15-T contains instructions for withholding taxes on nonresident alien employee income. The amount of federal income tax to withhold applies to nonresident aliens performing services in the U.S. who have wages subject to withholding.
To calculate withholding, employers must determine if a nonresident alien employee submitted Form W-4 from 2020 or from an earlier tax year. Employers then add to the wages paid to the employee for the pay period the additional amount shown in the accompanying tables for the corresponding payroll period.
The draft publication sets additional amounts using 2019 tax parameters for Forms W-4 submitted for 2020 and later. The additional weekly amount is $234.60, the biweekly amount is $461.50, and the daily amount is $46.90. For Forms W-4 submitted before 2020, the additional amounts are $153.80 for a weekly payroll period, $307.70 for biweekly, $30.80 for the daily amount. Rounding to the nearest dollar is allowed.
The method for nonresident alien employees does not apply to supplemental wage payments if the 22% optional flat-rate withholding is used to calculate withholding or the 37% mandatory flat-rate withholding method was applied on supplemental pay.
Under the U.S.-India income tax treaty, nonresident alien students from India and business apprentices are not subject to the withholding adjustment procedure.
For some small businesses, this might be a bit of a learning curve to get used to.
Most managers or HR people won’t become overnight experts on the new W-4 form or the new process for income tax withholding. And that’s OK—there’s a definite learning curve with new things like this.
Don’t freak out if you’re initially confused. It takes time and repeated research to get to know the changes like the back of your hand.
So just realize that there’s a learning curve for these Form W-4 changes. And if you’re still stressed and confused and are the San Diego area feel free to contact Huckabee CPA for a free consultation. Just an FYI we don’t always do payroll separately for small business but can handle payroll services as a piece of our accounting, tax and CFO packages.