Revisions to IRS Form W-4: What's the Impact to Employers?
How to prepare yourself and your employees for the revised 2020 Form W-4.
The Tax Cuts and Jobs Act (TCJA) has made significant changes to tax rates, deductions, tax credits and withholding calculations, beginning in 2018. The IRS released new withholding tables for 2018 and 2019, but the Form W-4 remained largely unchanged, continuing to feature an entry for the number of withholding allowances.
On May 31, 2019, the IRS released an "early draft" of the 2020 Form W-4, Employee's Withholding Allowance Certificate. The form includes MAJOR revisions, including new input elements for federal income tax withholding calculations, which may require significant reprogramming of payroll systems, and ongoing employer support of two distinct withholding systems.
To help understand the implications of these changes, Pete Isberg, Vice President of Government Affairs, shared critical insights into the latest IRS guidance, along with what employers need to do now to prepare, in the webinar Revisions to IRS Form W-4: What's the Impact to Employers? Here are his answers to some of the most frequently asked questions about the new Form W-4:
Q: When will employers have access to the new form?
A: The final IRS Form W-4 and instructions are expected to be available by late November 2019 for 2020.
Q. It's not mandatory that existing employees complete the new Form W-4 for 2020. But, are employers required to distribute it so they are aware?
A. Employers may, but are not required to, distribute the 2020 Form W-4 to existing employees. Employers must furnish the 2020 Form W-4 to newly hired employees after 2019.
Q: Do we need to have two payroll systems with the new Form W-4? One for the old withholdings and one for the new withholdings?
A: Employers should be prepared to calculate federal tax withholding based on 2019 and prior Forms W-4 (i.e., allowances) as well as the 2020 Form W-4 inputs, for the foreseeable future.
Q: Would you suggest that the payroll professional review the form and ask questions if they feel there is an employee error - such as on 4b deductions?
A: No; generally employers should not question employees' input on Forms W-4. You might provide a "highlights" guide to warn of possible problems such as overstated deduction adjustments.
Q: Is it OK if someone chooses to not fill out a Form W-4 or if the employee does not return the form?
A: Employers must solicit Forms W-4 at least annually for three years to avoid possible penalties. See IRS Pub. 1586 for details.
Q: Are paper forms required to be on file?
A: If an employee completes a paper Form W-4, then yes, the employer is obliged to keep the form as part of their tax records.
Q. Considering the extra responsibility of the employer, what liability does an error carry for the employer?
A. Employers must accurately apply input from Forms W-4 and calculate withholding in accordance with the new formulas and instructions. Employers may be held liable for amounts that should have been withheld but were not.
Q. How should employees hired on a project basis, whose income varies greatly from pay period to pay, period fill out the form?
A. Employees whose income can vary greatly from pay period to pay period, such as temporary or seasonal workers, should simply follow the instructions associated with the form. If they are concerned about under withholding, they could check the box in step two (2).
Q: Some employees choose Exempt. What constitutes "no tax liability" and what backup proof is needed?
A: No "proof" or backup is needed to claim Exempt, but the employee must sign – under penalties of perjury – that they had no tax liability in the prior year and expect to have no tax liability in the current year.
Q: If someone has claimed Exempt, but not submitted a new Form W-4 by February 15th, what are they supposed to get reset to? Is the IRS going to change the Exempt requirement since they are not requiring employees to file a new Form W-4?
A: If an employee previously claimed Exempt, but no 2020 W-4 is completed, taxes are calculated solely on the filing ("marital") status on file. Employees must file a Form W-4 annually to claim Exempt status.
Q. Can other income, such as rental income, be included in line 4(a); and should it be the gross or net income that is reported?
A. Other income in line 4(a) can include any other (non-wage) taxable income, if the employee would like to have tax withheld from their payroll/wage income to cover the other income. However, the 2020 Form W-4 does not compute self-employment tax, which may apply to additional income earned as an independent contractor. To adjust withholding to account for self-employment income from another source, use the Withholding Estimator at www.irs.gov/W4app, or see IRS Publication 505.
Q: Would an employee need to include their potential stock transaction that is taxable income (estimated value) in Box 4 (a) if it is not known since it would be considered other income?
A: The IRS tax tables will generally withhold accurately on supplemental income that is input through payroll that constitutes wages. However, if an employee is concerned, they could enter an amount in line 4(a) or check the box in step two (2).
Q. Does your employee have to claim the child tax credit on the Form W-4? Can they claim it later when they file their 1040?
A. Yes, lines 2 through 4 are optional. Employees can simply apply child tax credits at year-end if they prefer.
Have more questions?
Watch the webinar anytime: Revisions to IRS Form W-4: What's the Impact to Employers?
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