When the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, sweeping changes to Form W-4 became a matter of “when,” not “if.” Those changes—arguably the biggest since the form debuted in 1943—are finally materializing for the 2020 tax year, after a one-year implementation delay prompted by feedback from payroll and tax communities. Let’s provide some context for the current W-4 situation before we highlight the latest updates.
A Quick Review of Why Form W-4 is Changing
TCJA suspends all personal and dependency exemptions for employees as well as their spouses and dependents through tax year 2025. Plus, it greatly alters how itemized deductions are claimed on Schedule A.
Together, these two shifts and a few others have complicated the withholding situation for many taxpayers. The Government Accounting Office even issued a 2018 warning that unless they adjusted their withholding, more than 30 million additional filers would owe taxes in 2019.
Initial feedback on the revised 2019 Form W-4 was somewhat negative, noting that it was perhaps too complex and put too much of a burden on households to calculate their tax liability. That brings us to the next draft revision, released in May 2019 and slated to go into effect for the 2020 filing season, pending public comment.
Understanding the biggest changes in the 2020 Form W-4
As with the earlier draft W-4, the IRS designed the latest update to help employees adjust their wages, claim qualifying tax credits and ultimately come to a more accurate determination of their income tax withholding than the old form allowed for.
Here are some of the most important changes it made to Form W-4 to achieve this goal.
Elimination of withholding allowances
Since the TCJA has temporarily suspended all personal and dependent exemptions, the proposed Form W-4 no longer features a line for entering a number of allowances. Previously, this figure was based on calculations from the Personal Allowances Worksheet.
Instead, the W-4’s first page is now much more extensive and detailed, with new sections asking for specific withholding-related information, including:
- Income from multiple jobs of the filer and spouse, which can be accounted for using the IRS’ online withholding tool or via Worksheet 1 within the Form W-4.
- Nonwage income, such as dividends, interest, self-employment payments, and retirement plans, that doesn’t have withholding, but which the filer wants income tax withheld from.
- Any itemized deductions that exceed the standard deduction under the TCJA (which is significantly higher than it was under previous tax law), or to which the taxpayer is entitled regardless of the standard deduction.
- Tax credits for dependents, namely the child and dependent care tax credit as well as possibly the education tax credit and foreign tax credit.
There are two worksheets that will come with the Form W-4 starting in 2020, replacing the previous Personal Allowances Worksheet and the Deductions, Adjustments, and Additional Income Worksheet:
- Worksheet 1 is for the multiple job calculations referenced in Step 2 of the updated W-4.
- Worksheet 2 is for the additional calculations for deductions, if applicable, under the optional Step 4.
Updates to employee filing status
The old Line 3 from the 2019 Form W-4 included checkboxes asking the filer if they were single, married, or married but withholding at a higher single rate. For employers, this form also defaulted to single with zero allowances if an employee W-4 wasn’t filled out.
The draft 2020 Form W-4 features three checkboxes, for single or married filing separately, married filing jointly, and head of household (the latter should only be checked if the filer is unmarried and pays for half or more of the costs of maintaining a home). Beginning Jan. 1, 2020, if the employee W-4 is not filled out, the default is that the filer is treated as single with no other adjustments.
That means the standard deduction with no further entries would be used in determining withholding; the IRS’ official FAQ states that additional guidance on this matter is forthcoming. The American Payroll Association (APA) has alternatively explained the change as going from the old default of single/zero for no W-4, to a new one of single/two.
Implications for payroll systems and employers
The same withholding tables can be used for W-4s filled out before and after the change. Employers may apply the tables separately to parallel systems corresponding to old and new forms or set up a single payroll system based on the updated form. The latter route is feasible if the data fields contained on the new form but missing from older ones are left blank or filled in with zero.
An important point for employers: Employees aren’t required to fill out new W-4s. If they don’t, their previous allowance entries will continue to serve as a valid basis for withholding. Not filling out a new W-4 cannot be treated, for payroll and tax purposes, as having failed to complete a W-4. However, new hires from Jan. 1, 2020, as well as anyone wishing to adjust their withholding after that date must use the new form.
Preparing for the new W-4 reality
As of mid-June, the IRS was seeking comment on the proposed Form W-4 for 2020. The APA will be providing input and has invited payroll professionals to participate in the process. Also, the IRS just released a draft version of Publication 15-T, Federal Income Tax Withholding Methods, which guides employers on how the new tax withholding will affect their payroll systems and how they calculate the tax withholding.
Even prior to final approval, it’s advisable to start thinking about how your Payroll team can best adjust to the new form and its requirements. CIC Plus can help you streamline the entire onboarding process, including the accurate completion of W-4s, to reduce risk and save time. Connect with us to learn more.