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Final Version of 2020 Form W-4 is Here!

Posted Tuesday, December 10, 2019 6:27 am

Last week, the IRS released its long-awaited final version of the 2020 Form W-4.  A revised Form W-4 has been in the works to implement all the changes made following the 2017 Tax Cuts and Jobs Act.  Some highlights of the new form are discussed below.

Title ChangeThe title of the form has changed to “Employee Withholding Certificate” since the revised form no longer uses withholding allowances.  In the past, the value of a withholding allowance was tied to the amount of the personal exemption, but because of changes in the law, employees can no longer claim personal or dependency exemptions.

Step 1One difference from prior forms is the expected filing status.  The new form changes “Single” to “Single or Married Filing Separately” and includes “Head of Household.”  The form no longer has “Married but withhold at higher Single rate.”

Step 2Step 2 is only for employees who have more than one job at the same time or are married and their spouse also works.  Tax rates increase as income rises and the employee or employee and spouse can claim only one standard deduction on their tax return regardless of the number of jobs they hold.  Without an adjustment on the W-4, withholding takes into account the full standard deduction for each job and does not take into account the higher income for more than one job.  Thus, if the employee has more than one job at a time or is Married Filing Jointly and the employee’s spouse works, more money should usually be withheld from the total pay of all the jobs together than would be withheld if each job was considered by itself.  Step 2 provides three different options from which employees can choose to make the necessary withholding adjustment.

  1. Option 1 (Step 2(a)) is to use the Tax Withholding Estimator on IRS.gov. This option gives the employee the most accuracy and privacy and avoids revealing to the employer that the employee and/or spouse has multiple jobs.  The Estimator will give the employee an additional amount of withholding to enter on Step 4(c) for one of the jobs.
  2. Option 2 (Step 2(b)) can be used if employees do not have access to the online estimator, but wish to have reasonably accurate withholding while keeping their privacy. Employees complete the multiple jobs worksheet on page three using the tables on page four of the form to calculate an amount of additional withholding to enter on Step 4(c) of the form for only one of the jobs.
  3. Option 3 (Step 2(c)) can be used if the employee or employee and spouse hold just two jobs at the same time. They check the box in Step 2(c) on each of their Forms W-4 for both their jobs.  Employers will then apply special withholding tables with lower thresholds for each tax bracket to figure withholding for each of the two jobs.  This will increase withholding for each job.  This option is less accurate than the others, but it is the easiest.  It gives married employees with a working spouse similar withholding to checking the old “Married but withhold at higher Single rate” box on the prior Forms W-4.  However, on the new form, this option is not tied to marital or filing status so it is now available to Single or Head of Household filers with two jobs. 

Step 3Step 3 is not required, but allows employees to adjust their taxes by claiming a credit for dependents.  More information on these credits is available in IRS Publication 972, “Child Tax Credit.”   As part of the total amount in Step 3, employees may include estimates of other tax credits, such as education.  Rather than increasing withholding allowances, which is the approach used in prior Forms W-4, on the 2020 form, these credits will directly offset the amount of withholding.  In addition, the calculation for dependent credits is made directly on the face of the form.

Step 4Step 4 allows employees to make adjustments to their withholding for additional income, deductions, and extra withholding.  This step is also where employees identify they are non-resident alien or they can claim exempt from withholding.

  1. In Step 4(a), employees enter other estimated annual income such as certain investment and retirement income. Employees should not put any withholding amount from jobs here.  If employees estimate self-employment income here, the employer will only be able to withhold amounts for income tax.  Step 4(a) will not cover withholding for Social Security and Medicare taxes.
  2. Employees can adjust their withholding for itemized deductions less the standard deductions and/or other adjustments to income such as student loan interest or deductible IRA contributions by entering an annual amount in Step 4(b). These amounts are determined by completing the deductions worksheet on page three of the form.
  3. Step 4(c) is for extra withholding and allows employees to specify an additional amount of tax per pay period for their employer to withhold. This is similar to line six on the 2019 Form W-4.
  4. Step 4 is generally not required, but employees who are non-resident aliens or who are eligible to have no withholding should use the space below Step 4(c). In the space below Step 4(c), employees designate their non-resident alien status by writing in capital letters “NRA” or designating they are exempt from withholding by writing the word “Exempt.”  The “NRA” designation is not new, but it is a change for employees who are eligible to claim exempt from withholding.  The IRS changed the form so that designating exempt would be similar to designating NRA.

Step 5Step 5 is where the employee signs the form.  Form W-4 is invalid without a signature.  If an employee does not sign the form, the employer will apply the default withholding.

Do all employees need to submit a Form W-4 for 2020?

No.  Employees who have submitted Form W-4 in any year before 2020 will not need to submit a new form.  Employers can compute withholding based on information from employees’ most recently submitted Form W-4.  If, however, an employee is hired after 2019 or existing employees choose to adjust their withholding after 2019, they must use the revised form.  Even though not required, the IRS strongly encourages employees to consider completing an updated Form W-4 because (1) the withholding from the revised form will be more accurate and (2) due to the numerous tax reform changes, the IRS is encouraging everyone to do a paycheck checkup to make sure they are still withholding the right amount for their situation.  That being said, employers can ask, but cannot require existing employees to submit a 2020 Form W-4.

What if a new employee hired in 2020 does not submit a 2020 Form W-4?

In the absence of a valid 2020 Form W-4, the employer must withhold using the default withholding rule, which says that the employer will treat the employee under the Single filing status and make no other adjustments.

How do employers figure federal income tax withholding for the 2020 Form W-4?

Since the new form has no withholding allowance adjustment, the calculations are based on dollar amounts shown on the form.  Starting in 2020, the IRS will release the new Publication 15-T, which includes the federal income tax withholding methods and table.  Since employers will also have to withhold based on existing Forms W-4, the computations in Publication 15-T will allow employers to figure withholding regardless of whether the employee has a Form W-4 from an earlier year or provides a new 2020 Form W-4.  Publication 15-T also allows employers to figure withholding based on their payroll system, automated or manual and their withholding method of choice.  More information and the latest draft of Publication 15-T is available here.

Source:  IRS Video:  Understanding the 2020 Form W-4 and How to Use it to Calculate Withholding

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