Everything You Need to Know About the New Form W-4

The 2020 Form W-4 was released in December with just weeks left in the year. As the year winds down, are you prepared to handle the new Form W-4 in 2020?  If you are scrambling to figure out how this will affect you in the new year, below is a basic guide to help you get started!

WHY is there a new Form W-4?

Most employees can recall their first day starting a new job and filling out the Form W-4, but does one really understand the form when filling it out?  The form has complicated jargon that isn’t used on an everyday basis.  Many people complete the form without fully understanding it, which ultimately costs them.  If you fill out the form incorrectly and you end up withholding too much (and receive a refund), you are essentially giving away an interest-free loan.

The new Form W-4 is meant to be simplified so employees can more accurately depict how much federal income tax should be withheld from their paychecks.  The form uses the same underlying information as the old one, but eliminates some of the complex worksheets with more straightforward questions to increase accuracy.

WHO needs to submit the new W-4?

Employees who have submitted the W-4 form in a year prior to 2020 will NOT need to re-submit the form.  Employers will continue to compute the withholding based on the information from the most recent W-4. Starting in 2020, all employees starting a NEW job will need to fill out the new form.  The form will also need to be filled out for life changing events, such as getting married or having a baby.  Anyone who wants to simply adjust their withholding amount will also need to fill out the form.

WHAT do COMPANIES need to do to prepare?

Since current employees won’t be required to submit the new W-4, all employer payroll systems will need to be updated to accommodate the existing withholding allowance calculation, as well as, the new calculation.  There will now be two Federal Tax Tables. Employees with 2019 W-4 Forms or earlier, will be taxed utilizing the “Standard Withholding Rate Schedules.” New W-4 employees will be taxed utilizing the new tax table.  Additionally, Step 2 of the form asks about Multiple Jobs.  If the box is checked, the new table must be used, but if unchecked the Standard table will be used.

WHAT is the biggest change?

The W-4 will no longer feature a line to enter in a number of allowances, which was tied to personal exemptions in the Personal Allowances Worksheet.  This change stems from the 2017 Tax Cuts and Jobs Act that temporarily suspends personal and dependent exemptions until 2025. The new form is now titled “Employee’s Withholding Certificate” verses “Employee’s Withholding Allowance Certificate.”  The form is now broken out into 5 steps.  Here is a link to the final form for reference: 2020 Form W-4.

In addition to the new Form W-4, the IRS also released a NEW Tax Withholding Estimator.  This calculator walks you through steps to help you estimate your withholding.  It’s a great tool to use to ensure you are taking the right amount of taxes out of each of your paychecks.

Will the New Form W-4 Truly Simplify Everything?

It is up for debate whether or not the new form really simplifies the process as it is meant to do.  Some worry it will be more complicated for employees as they will have to perform multiplication on their own (Step 3) and could cause errors.  Tax Exempt is also not on the form; however, it is still allowed.  If you take a look at the fine print, it notes if the individual is tax exempt, they need to hand-write “Exempt” in the space below 4(c).  This is something that employees might not know they have to do.  Additionally, the electronic PDF used for e-sign OnBoarding does not include an input for this.

What are the next best steps for employers?

Whether the form is simplified or even more complicated, employers have no choice but to prepare for the change in the limited time we have left before the new year.  The first steps would be to ensure your payroll systems will be updated and ready to go by January 1^st, 2020.  Second, it is advised to consult with your accountant or local tax professional for guidance on how to handle any gray areas of the new Form W-4.