The IRS has released the second early drafts of the 2020 Form W-4, Employee’s Withholding Certificate, and the 2020 Publication 15-T, Federal Income Tax Withholding Methods. The Form W-4 has been substantially revised from the pre-2020 version to comply with the income tax withholding requirements of the Tax Cuts and Jobs Act (TCJA). The IRS released the second draft now so payroll system programming can be started. The IRS anticipates no further substantive changes to either the Form W-4 or the Percentage or Wage Bracket Methods for calculating withholding. The IRS will release the final versions later this year after inflation-adjusted numbers affecting the documents are issued
Redesigned Form W-4
Step-by-step process. The draft contains five steps for employees to complete (or to skip if they are not applicable): (1) enter personal information; (2) account for multiple jobs; (3) claim dependents; (4) make adjustments for other income and itemized deductions (optional); and (5) sign and date under penalties of perjury. Steps 1 and 5 are required.
No more withholding allowances. To comply with the TCJA, the draft form no longer uses the concept of withholding allowances but includes lines for money amounts to be used to calculate the withholding amount. The name of the form has changed to Employee’s Withholding Certificate, which eliminates “allowance” from the title.
Multiple jobs. Employees with multiple jobs in the household can use either; (a) the IRS’s Tax Withholding Estimator, (b) the Multiple Jobs Worksheet; or (c) check a box for withholding at a higher rate if there are only two jobs in the household.Claiming exempt from withholding. Employees will claim exempt from withholding by writing “Exempt” in the space below Step 4(c) and completing Steps 1 and 5. There is no longer a dedicated line for employees to claim exempt
The IRS designed the new Publication 15-T to allow employers to figure income tax withholding under the Percentage Method and Wage Bracket Method tables using both the new 2020 Form W-4 and previous versions of the form. There are now five withholding method computation worksheets:
- Percentage Method for automated payroll systems (and either a 2020 or later Form W-4 or a Form W-4 from before 2020);
- Wage Bracket Method for manual payroll systems and a 2020 Form W-4 or later;
- Wage Bracket Method for manual payroll systems and a Form W-4 from before 2020;
- Percentage Method for manual payroll systems and a 2020 Form W-4 or later; and
- Percentage Method for manual payroll systems and a Form W-4 from before 2020
Calculating withholding based on steps in Form W-4
Here is how employers will use the information provided in Steps 1-5 of the draft 2020 Form W-4 to calculate the withholding amount.
Employees who only complete steps 1 and 5 of the 2020 Form W-4. When employees only complete steps 1 and 5, employers will withhold using the appropriate method based on the filing status and wage amounts.
For employees completing one or more additional steps, adjustments are as follows.
- Step 2. When an employee checks the box in Step 2 to account for multiple jobs, the employer will figure withholding from the Form W-4, Step 2, Checkbox Withholding Rate Schedules, which will mean higher withholding. If the employee chooses one of the other two alternatives, the additional withholding will be included with any other additional tax amounts per pay period in Step 4(c) of the 2020 Form W-4.
- Step 3. Employers will use the amount entered by employees in Step 3 to claim tax credits for their children and other dependents as an annual reduction of tax. Employers should use the amount entered in Step 3 even if it is not equal to the sum of any amounts entered by employees on the left in Step 3 because Step 3 may be used to take into account other tax credits. The instructions suggest that if an employee leaves Step 3 blank and enters amounts on the left in Step 3, the employer should consider asking the employee if leaving the line blank was intended.
- Steps 4(a), 4(b), and 4(c). Employers will increase the annual amount of wages subject to withholding by the annual amount shown in Step 4(a) (other income) and reduce the annual amount of wages subject to withholding by the annual amount shown in Step 4(b) (deductions). Employers will increase withholding by the per pay period tax amount in Step 4(c) (extra withholding).
Worksheets and withholding tables
Adjustments for an employer to figure withholding for Forms W-4 submitted in 2020 and forms in an earlier year are described in more detail in the various worksheets. There are now tables for three filing statuses: married filing jointly, single, and head of household. The head of household tables should not be used if the Form W-4 was from before 2020.
What employers should do now While the form and instructions won’t be finalized until later this year, employers should become familiar with the changes and be prepared to implement the new form and withholding procedures in 2020. Because the TCJA did not include a mandate that all employees complete a new Form W-4, the IRS will not require it. While employers may request that each of their employees complete a new form, they may not require them to do so. Also, the new form will be required for all new hires in 2020 and for employees who have completed a Form W-4 before 2020 and want to make changes in 2020
~American Payroll Association