In August, 2019, the IRS posted an “early release” of the 2020 W-4 available to the payroll industry, knowing that this form may cause some disruption. The release of the 2020 W-4 comes as a result of the passage of the 2017 Tax Cuts and Jobs Act (TCJA). Subsequently, the IRS took a few swings at updating this form to be compatible with the changes in how individual federal income tax is calculated on form 1040 filed by taxpayers.
As a reminder, the TCJA:
Eliminated personal “exemptions”
Doubled the standard deduction
Increased child tax credits
Eliminated and/or restricted several itemized deductions
SALT (State and Local Tax)
Other Deductions (e.g. Un-reimbursed employee expenses and Tax prep fees)
The changes in how federal income tax is calculated needed to be factored into how the payroll industry calculates federal withholding on employee paychecks. Specifically, since personal exemptions were eliminated, the use of allowances on line 5 of the existing W-4 is inaccurate in calculating accurate withholding for employees to avoid large tax bills and refunds during tax filing season.
We have put together an in-depth breakdown of the new W-4
Step 1: Enter personal information
This section of the form resembles the prior form in that the employee completes name, SSN and filing status.
Step 2: Select whether “Multiple Jobs or Spouse Works” or
Use the estimator or
Complete 4(c) “Extra withholding”
The new Publication 15-T provides two sets of tax tables that is dependent upon whether or not the checkbox in 2(c) is marked.