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Adapting to the New Federal W-4

The 2020 Form W-4 introduced the most significant changes employers have seen in some time. We thought we’d take a closer look at some of the early experiences employers are having with the new Form W-4.

On the surface, the changes to the W-4 are pretty straightforward: All mentions of “allowances” were removed and the standard deduction was updated, all in order to align the new form with the Tax Cuts and Jobs Act of 2017 (TCJA), which substantially revised the tax code.

Below the surface, there were more complicated reasons to issue a new Federal W-4. The first tax filing season after TCJA caused many taxpayers who had previously received a refund or had no liability to suddenly owe taxes. That was, in part, because the IRS and Treasury Department changed the withholding tables and not everyone had sufficient tax withheld from paychecks. The Government Accounting Office warned about this particular risk, but many employees didn’t choose to update their withholding.

The updated Form W-4 is designed to help taxpayers adjust to the TCJA and ensure more accurate and transparent holding. But it’s only part of the solution. The IRS also developed an online withholding calculator employees can use to check whether sufficient tax is being withheld. So how are employers and employees using these tools in response to the W-4 changes so far?

To Fill Out a New W-4 or Not to Fill Out a New W-4 …

… that’s the question many organizations are asking, and it’s a complicated one.

Technically, employees do not need to fill out a new W-4 if they have a valid one on file. Someone who correctly completed their W-4 back in 2013 could still use it instead of a 2020 or later Form W-4, if they chose to.

However, there are specific situations in which filling out a fresh W-4 is required, or at least advised.

  • Anyone hired on or after January 1, 2020, must use the revised form. The updated W-4 may also be necessary if an employee goes through certain life changes (e.g., getting married/divorced, having or adopting a child, buying a home, starting a second or third job, etc.) and wants to fully account for them in their withholding.
  • Indeed, the 2020 W-4 handles marital status and multiple jobs quite differently than older forms did, so it’s prudent for employees to think about what those changes mean for tax withholding and whether a W-4 resubmission is merited.
  • The TCJA’s elimination of personal exemptions, its increase of the standard deduction and its changes to tax credits such as the child tax credit are also important considerations when it comes to filing a new W-4.

While employers cannot force employees to fill out a new W-4 if they were hired before 2020 and don’t have any circumstances that would necessitate doing so, they can still advise workers to complete a new form for purposes of accuracy. And the IRS itself recommends regularly checking your withholding, regardless of major tax code changes like TCJA.

Which brings us to the next big dimension of the employer response to the new W-4 – the IRS Tax Withholding Estimator.

The Tax Withholding Estimator, Explained

The IRS Tax Withholding Estimator is an online and mobile-friendly tool for checking your current withholding to see if it’s adequate. The IRS calls this process a “paycheck checkup,” and it’s something worth doing from time to time, but especially in the context of TCJA and the 2020 W-4.

Just look at some of the trends in tax refunds post-TCJA to see why. The average refund for tax year 2018 was down slightly from tax year 2017. Likewise, in early filings for tax year 2019, the number of refunds issued by the IRS was down 5% from 2018, although the typical check was a few dollars higher. As the L.A. Times noted, insufficient withholding is a major cause of this trend.

On the bright side, the Tax Withholding Estimator is easy to use from any internet-connected device. All you’ll need is a recent pay statement, information about any other income sources, and a copy of the previous year’s tax return. You’ll want to have all this information at the ready because the estimator is only as good as the data provided; it doesn’t know anything about you before you begin.

Some employees may have greater need of the Tax Withholding Estimator than others. The American Payroll Association summarized the IRS’s guidance on who in particular should prioritize the Tax Withholding Estimator, a group that includes:

  • People with income from self-employment, capital gains and/or dividends
  • Anyone who plans to work for only part of the year
  • Employees with multiple jobs who need up-to-date withholding across all of them
  • Individuals who have filled out the W-4

Between them, filling out a new W-4 and using the Tax Withholding Estimator are two essential tools available to employees and employers as they navigate the changing tax withholding landscape.

Need to Closely Monitor State Withholding Form Developments

The introduction of the new Federal Form W-4 has had a cascading effect on state withholding forms. States that previously used the Federal W-4 have had to decide whether they will continue to use the revised Federal W-4 or create their own withholding form. For example, Colorado has decided to use the new Federal W-4, while Nebraska has created its own State W-4. Employers should continue to monitor state developments closely to ensure they are using the appropriate withholding forms.

CIC Plus can also help ease any concern about managing state and local tax withholding and keeping you up to date on all relevant changes. Learn more.