Knowledge and Insights

The IRS has completely changed income tax withholding with the release of a new W-4 form for 2020.  There are differing opinions on whether this is a good thing or not.  If filled out correctly, the form should approximate the correct withholding for a person.  The form is very different from prior year W-4s, however, and that is the crux of the matter: will the person filling it out do so correctly and will they want to disclose certain information to their employer?

Note that there now will be different versions of form W-4 in use; the new 2020 form is not mandatory. Only those employees whose first paycheck is in 2020 must use the new form. If a current employee wants to change any information related to the W-4, however, they must fill out the new form.

The new W-4 is different in the following ways:

• It’s divided into five sections:
  • • Personal Information
    • Multiple Jobs or Spouse Works
    • Claim Dependents
    • Other Adjustments (optional)
    • Signature

   

• There are no withholding allowances, which is the biggest difference between 2020 and 2019 (and previous) forms. For employers, there are two new tax withholding tables that go with the new W-4 form: percentage method tables for automated payroll systems and wage bracket method tables for manual payroll systems.  Payroll service providers, such as ADP or Paychex, will have these new tables up and running.  If you are an employer that processes payroll in-house, the downside for you is that you must use both the old and new payroll withholding tables.

• Employees will now claim dependents or other deductions on the form, before filing their annual tax return, and will need to do some calculations.  Be wary, however, if you are a person that counts on a nice refund after filing your tax return. If you claim dependents on the new W-4, it will reduce the amount withheld during the year, thereby decreasing any potential refund. To reduce your withholding during the year, you can claim dependents by multiplying the number of children by $2,000 and/or other dependents by $500.

• The new form now has a place to indicate multiple jobs, which employees might not want to reveal to employers, as well as deductions.  This does not have to be submitted to the employer, but if it is, the employer is required to keep this form until it needs to be updated again.

• The new form still has filing status boxes to check and spaces for items like other income, not from jobs (i.e., interest, dividends, Social Security).  If someone fills out the latter, it will be a permanent record in their personnel file.

There is an IRS calculator available, which I did for myself as a test, to see how your withholding may stack up for the upcoming year.  I recommend you go there for a look at your potential tax situation.  It’s pretty simple to follow and the IRS encourages everyone to use it to perform a paycheck checkup. It’s on the IRS website at this link: https://www.irs.gov/individuals/tax-withholding-estimator

There’s also a sample employer notice about the W-4 changes from the IRS, at this link https://www.mercadien.com/wp-content/uploads/2020/02/Sample-Employer-W-4-Notice.pdf. Employers may find it helpful to provide this to their employees.

According to the IRS, the recent changes to Form W-4 are intended to make tax withholding calculations and amounts more accurate and easier to complete and adjust.  While increased awareness of the process by employees and employers may be one by-product of the W-4 changes, confusion and miscalculations may be others.  Please don’t hesitate to contact me with any questions about business or personal tax withholding or planning. I am happy to assist and can be reached at [email protected] or 609-689-2465.