It is unlikely IRS will send mailings to all employers about the new Form W-4 (Employee’s Withholding Certificate) that is required for new hires after 12/31/2019. Here, we’ll give you some information and links to the forms and publications you’ll need to be in compliance with the new system.
As we’ve mentioned here, the W-4 form has been redesigned to gather the information necessary to accurately determine employee withholding under the new tax law. Employers are required to use the new system for new hires after 12/31/2019. For employees hired before 1/1/2020, the old system may continue to be used. Employees may choose to submit a new W-4 form to their employers, and take advantage of the improved accuracy of their withholding, but employers may not demand they do so, unless the employee claimed exemption from withholding in 2019. Employees are only required to complete Step 1 and Step 5.
So, starting in 2020, many employers will have to deal with two different systems to calculate their employees’ federal income tax withholding. That is, a new regime brought about by the tax law changes, and the old, now inaccurate system they’ve used for many years.
Fortunately, many employers use computer systems to calculate their payrolls, and the new system should be built-in. Software updates will be required to integrate the new system. Note that Medicare and Social Security (FICA) tax withholding is unchanged.
IRS has created an Excel spreadsheet for employers who calculate payroll manually.
Most employers are comfortable with the old withholding system, which was based on personal exemptions. At the time of this writing, IRS had not released the new Circular E (Employer’s Tax Guide).
However, a draft version for 2020 is available here. IRS released the new calculation publication Publication 15-T on 12/27/19.
For employers who manually calculate payroll, the old system utilized tables based on filing status, payroll frequency, and number of exemptions. The new system uses an ‘adjusted wage amount’ and tables based on filing status, payroll frequency, and whether the employee checks the box on Step 2 (c) of the new W-4.
In common practice, employees are likely to look at the new W-4 form, throw up their hands, and only complete the required Steps 1 & 5. We think employees should at least complete Step 3 if they have dependents and this is their only job.
Since the new system potentially gathers information capable of calculating an employee’s actual tax bill, the calculation could be much more complex. In addition to determining an employee’s ‘adjusted wage amount’, the employer may need to complete 3 additional steps to determine the final amount to withhold. The ‘adjusted wage amount’ differs from the employee’s gross pay only if the employee has entered an amount in Step 4 (a) or 4 (b) of the new W-4. We don’t think many will utilize those boxes. For employers, the calculations are not complex, but few people enjoy adapting to a new system.
The new W-4 does not include a line for claiming exemption from income tax withholding like the previous versions had. That option is still available, and the instructions for claiming exemption are on the second page of the W-4.
Most employees who complete the required Steps 1 and 5, and the Step 3 dependent section if applicable, will have a fairly close approximation of their tax bill withheld. Our advice is for employees to complete the required Steps 1 & 5, Steps 2 and 3 if applicable (but only on one W-4 if they have multiple jobs), and then utilize the Tax Withholding Estimator on the IRS website after they’ve received a paycheck for a full pay period to fine-tune their withholding.
The Iowa W-4 form is also revised for 2020. In the prior version, the W-4 and Centralized Employee Registry Reporting Form (child support reporting) were both on one page. In the new version, the child support data is moved to its own page.