Changes are coming to one of the most ubiquitous tax forms, so taxpayers—and businesses— need to be prepared.
Most commonly referred to as Form W-4, the Employee’s Withholding Allowance Certificate determines the amount of Federal Income Taxes to be withheld from an employee’s paycheck. Employees fill it out when they start a new job, have a change in marital status, or some other material change in their financial situation occurs such as a spouse getting a new job or when adding dependents for birth or adoption.
The IRS encourages everyone to use the Tax Withholding Estimator to perform a quick paycheck checkup to protect against having too little tax withheld and facing an unexpected tax bill. This is even more important following the recent changes to the tax law for 2018 and beyond.
In December 2017, the Tax Cut and Jobs Act (TCJA) was signed into law and, after being delayed a year, changes to Form W-4 are going into effect for the 2020 tax year.
Let’s take a look at some of the biggest changes coming in 2020:
The elimination of withholding allowances on the form itself
Allowances are no longer used for the redesigned Form W-4 to increase transparency, simplicity and accuracy. In the past, the value of a withholding allowance was tied to the amount of the personal exemption. With the new law, you cannot claim personal exemptions or dependency exemptions.  Instead, allowances are represented as actual dollar amounts based on formulas found on the new form.
Changes to Employee Filing Status
Employees will still have three options to choose from in the new form, but they are slightly different. The options have gone from:
- Single or married filing separately
- Married filing jointly
- Head of household.
- Married but withholding at a higher rate.
If no status is filled out, the default is single with no adjustments.
Impact on Employees
Employees who have filled out a W-4 in 2019 or before are not required to fill out a new W-4 in 2020.
Impact on Employers
Employers must be prepared for two scenarios for the adoption of the new form:
- Employees hired after January 1, 2020 will need to fill out the new W-4
- Anyone wishing to adjust their withholding after January 1, 2020 must use the new form
Check your Payroll Solution
Businesses should ask if or when their payroll solution will be offering the new form. Make sure the same withholding tables are used for either the old or new form. Since employee’s who filled out a W-4 prior to 2020 do not have to fill out another form, it is important that the payroll system correctly account for the withholding and not flag an employee as not having filled out the form.
Employers should also look for a payroll solution that implements effective dating throughout the system. It should also provide the reporting and analytics to quickly identify missing W-4s and help identify which employees are subject to the new form or are compliant using the old form.