It’s official: after a series of draft previews, the Internal Revenue Service (IRS) has released the final 2020 Form W-4 – and it looks significantly different from its predecessor. As an employer, you need to understand the Form W-4 changes and ensure you’re using the new form correctly with your employees. You should also confirm that any payroll software or systems your company utilizes have been properly updated.
To help get you started, we’ve provided an overview of the changes to the Form W-4, as well as how it affects your business and your employees. Because as with any compliance issue, the more prepared and knowledgeable your organization is, the less overall risk, and the more time and money saved down the road.
What’s changed on the 2020 Form W-4?
The 2020 Form W-4 (Employee Withholding Certificate) was changed in an effort to simplify the overall design, accurately reflect current legislative changes to the withholding system, and make it easier for employees to indicate their individual withholding. Download the new W-4 here.
The changes also eliminate the need for complicated additional worksheets that were previously required for employees who worked multiple jobs. The new form is divided into five simple steps, where only Steps 1 and 5 are required for completion. Steps 2 through 4 guide employees through a more straightforward process where they can indicate multiple job or working spouse withholding, claim dependents, or make other adjustments (like additional income not from other jobs, expected deductions or voluntary extra withholding).
What is a withholding allowance and is it still used on the new Form W-4?
A withholding allowance refers to an exemption that reduces how much income tax an employer deducts from an employee’s paycheck. Withholding allowances are no longer used on the new W-4 Form. This is due to legislative changes that have done away with personal or dependency exemptions.
Why did the 2020 W-4 Form need to change?
The new 2020 Form W-4 has been updated to accommodate the changes that were put in place by The Tax Cuts and Jobs Act of 2017, which went into effect in 2018. Among other changes, the Act increased the standard deduction and family tax credits and eliminated personal exemptions. While the IRS made changes beginning in 2018 to their withholding tables, the Form W-4 had not yet been fully updated to reflect these changes.
Who is impacted by the changes to the W-4?
Both employers and employees are impacted by these changes. Employers must ensure that any employee first paid after 2019 (beginning January 1, 2020) completes the new, 2020 Form W-4, and that existing employees wanting to update their existing withholding also use the revised 2020 form.
How is my business affected by Form W-4 changes in 2020?
A Form W-4 should be completed by all of your employees working in the U.S. so that you know how much to withhold from the employee’s paycheck for federal income taxes. This is typically done as soon as an employee is hired along with other required new employee paperwork.
It’s business critical that your Human Resources (HR) departments, payroll departments, and any other roles that involve hiring and onboarding are informed of the recent changes and are working together on the change management for the new form. For additional employer resources explaining the changes to the W-4 Form in 2020, the IRS has published a comprehensive webinar, an overview and an FAQ.
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Do all employees need to fill out the new W-4?
Employers may also choose to proactively inform their employees about the new Form W-4 in 2020, but you should make it clear that they are not required to provide an updated withholding form unless they’d like to make adjustments to their existing selections. A Form W-4 should be completed by all of your employees working in the U.S. so that you know how much to withhold from the employee’s paycheck for federal income taxes.
When should my business start using the new W-4 Form?
Immediately. All employers are currently required to use the new 2020 form with any employees paid for the first time in 2020 (as of January 1, 2020), in addition to any existing employees wishing to make changes to their current withholding.
What happens if my new employees don’t fill out the new W-4 Form?
According to the IRS, “New employees first paid after 2019 who fail to furnish a Form W-4 will be treated as a single filer with no other adjustments. This means that a single filer’s standard deduction with no other entries will be taken into account in determining withholding.”
What happens if my existing employees don’t fill out the new W-4 Form?
Existing employees who you’ve paid prior to January 1, 2020, are not required to fill out the new Form W-4 so their withholding will remain as they’ve indicated on their existing W-4 on file. If they wish to change their withholding they may do so at any time, but you must require that they use the new form for 2020.
Do I need to notify my employees of the changes to Form W-4 in 2020, or require that they provide an updated form?
While you are not required to inform your employees of the changes to the Form W-4, you may choose to do so to be proactive in your communication. Notify employees of these changes at the start of the calendar year, and that with the introduction of the new form it might be a good time to evaluate their current withholding and make any changes as they see fit.
You are also not required by the IRS to ask employees to provide an updated form, but you may do so if you choose – provided you make it clear that employees are not required to complete an updated form – unless they would like to make changes to their existing withholding.
The American Payroll Association has published a customizable letter for employers that helps explain the changes to the 2020 Form W-4 for employees in a simple way, and the IRS has published a comprehensive FAQ with a section specific to employees about the changes.
Can I automate the processing of the new W-4? What are the benefits?
Yes. There are HR Software options for small to midsize businesses that can automate the processing of the new Form W-4, helping to ensure accuracy, safe storage, and an overall reduction in the burden of managing HR – especially the financial burdens caused by noncompliance.
Businesses can save significant time and money when they utilize a software solution that helps streamline the management of hiring, payroll, time and labor, and benefits. Employee satisfaction is also positively impacted when individuals can access a single, complete technology solution to best manage HR practices at their organization.
If you currently rely on a payroll software solution at your business, be sure that it has been properly updated and reprogrammed for the 2020 Form W-4.
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How are existing employees affected by changes to the 2020 Form W-4?
Below are more detailed explanations of what employees should do if they’d like to increase or decrease their withholding using the new form, as well as to ensure they receive a refund. Those employees who hold multiple jobs by different employers or have a spouse who work also have a different process to follow than previously required.
Important Note: While you may provide an explanation of the changes to the Form W-4 as an employer, you should always direct your employees to seek formal tax advice and individual counseling from a licensed professional.
What steps are employees required to complete on the new W-4 Form?
The new form is divided into five steps, with the only required steps for ALL employees being Step 1 (personal information and filing status) and Step 5 (signature). Step 2 is required if an employee holds more than one job at a time or is married filing jointly with a spouse who also works. Step 3 (Claim Dependents) is required if the employee will earn an income of $200,000 or less (or $400,000 if married filing jointly). Step 4 (Other Adjustments) is optional.
When should employees increase or decrease their withholding on the new W-4?
If an employee is seeking advice on increasing or decreasing their withholding, it is best to direct them to a licensed Certified Public Accountant (CPA) or another financial adviser. You can also point them to the IRS FAQ that explains typical scenarios for increasing or decreasing withholding.
How should an employee fill out their W-4 if they’re looking to increase the amount of their refund?
The IRS states that it redesigned the W-4 not only to reflect changes in legislation but to also make it easier and more transparent for an employee’s withholding to accurately match their tax liability.
But if an employee would prefer to have more tax than required withheld from a paycheck (to ensure they get money back in the form of a refund upon filing), then the IRS advises that they increase their withholding in Step 4c. An employee simply designates how much additional they would their employer to withhold from their paychecks.
It’s important to note that even if an employee doesn’t request extra withholding, they may still get a refund as a result of available, eligible tax credits (including the Earned Income Credit, the Additional Child Tax Credit, or the American Opportunity Credit).
How has the Form W-4 changed for employees with multiple jobs?
In the past, additional detailed worksheets were required for employees who worked multiple jobs. The IRS suspects that oftentimes, due to confusion or lack of understanding of directions, these worksheets were not completed correctly or simply not included, as required.
Under Step 2, the new Form W-4 lists three distinct, simplified options for employees who work multiple jobs and/or are choosing to file jointly with a spouse who also works. The new form allows employees to choose one of these options, which as the IRS describes “involve tradeoffs between accuracy, privacy and ease of use.”
As a general rule, employees who work multiple jobs (or are filing jointly with a working spouse) should be aware that more money should be withheld from the combined pay for all the jobs they hold, as tax rates increase as income increases.
Note that it’s essential for employees who work multiple jobs to make accurate, necessary withholding upfront on their W-4 to avoid penalties or the need to pay additional tax upon filing. For a more detailed explanation of Step 2 (a), (b) or (c) on the new form, please consult the FAQs on the 2020 Form W-4 provided by the IRS.
How does the new W-4 affect employees who do side work as independent contractors?
For those employees who may do additional work (such as independent contracting) outside of their job at your business, they should generally expect to pay both income tax and self-employment tax.
Because the Form W-4 (both the old form and the newly revised one for 2020) is designed primarily for employees who aren’t required to pay self-employment tax, it doesn’t include a section or step for calculating it. According to the IRS, employers should advise their employees that if they’d like to make an adjustment to their W-4 for self-employment income they receive outside of their job at your business, they should use the available Tax Withholding Estimator or refer to the IRS Publication 505 for more information.
Where can employees go for help in completing the new Form W-4?
The IRS provides a detailed FAQ on the 2020 Form W-4, with a dedicated section for common employee questions. Additionally, employees should use the Tax Withholding Estimator in completing their Form W-4, as needed.
As an employer, be sure it’s made clear to your employees at both the time of hire and throughout their tenure at your business how they may request and complete changes to their withholding. An automated payroll system can help simplify this process for employees and employers alike, while ensuring new employees fill out all required new hire forms.
And a reminder that while an employer should offer accurate explanation of required tax forms to their employees, any individual tax advice or guidance should be obtained by a licensed professional.
Whether it’s catching up on the new 2020 Form W-4 or any other of the fast and frequent compliance-related changes businesses face throughout the year, it can be a struggle to manage the complexity of it all. Deciphering which compliance areas apply to your organization is challenging enough, let alone ensuring you are properly following local, state, federal and agency regulations.
Because of this complexity, businesses often find themselves in a reactive mode after it’s too late – burdened with too much time spent on fixing non-compliance, penalties, or fines. But with the right resources and expertise your business can move from a reactive mindset to a proactive compliance management program.
Partnering with an HR service provider can provide you with the expertise and guidance you need – whether it’s keeping up with changing tax or labor laws, understanding workers’ compensation insurance, or hanging the right workplace posters in your office. And knowing that compliance is covered by a trusted partner gives you back the time you need to successfully run your business.
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PrismHR’s nationwide network of HR Service Providers can offer customized, expert guidance on the local, state, or federal level to give you both peace of mind and more time to focus on running your business. Learn more and get matched with an HR partner in our network.