In response to changes in federal taxes by the Tax Cuts and Jobs Act (TCJA) passed in December of 2017, the IRS released an early draft of the new 2020 W-4 on May 30th. Read more about the reasons for the change here.
This new form will require payroll software and service providers to change how they calculate withholding for federal taxes on the employee paycheck. In the past, payroll professionals relied on a calculation from the Circular E (Pub. 15) and the included tax tables to calculate the proper withholding based on federal taxable wages in the paycheck for the employee.
For this new calculation, the IRS has released a draft of Publication 15-T that outlines the new calculation. Whether or not the withholding calculation and tax tables will stay in Pub 15-T or migrate back to the Circular E at the end of the year is yet to be determined.
Pub. 15-T outlines both a wage bracket and percentage method to calculate federal withholding. While there are still different rates for “Single,” “Head of Household,” and “Married Filing Jointly,” there is also a new “Higher” withholding rate and wage bracket table for each of the filing statuses. This higher rate is primarily used for dual income households and simplifies the completion of the W-4 for most employees. Employees also have the ability to use two new worksheets as part of form W-4 to better estimate the proper withholding for their household. This is especially helpful for employees with more complex tax situations. As before, employees do have a way to file “Exempt” on the W-4.
One of the big questions for employers is, “Will my employees be required to complete an updated W-4 for 2020 payrolls?” The answer to that is – not necessarily. The IRS does not have the legislative authority to require employees to complete a new W-4. From the IRS perspective, the completion of a new W-4 is at the discretion of the employee. However, employers MAY require their employees to complete a new W-4 as part of their company policy.
Due to the fact that the IRS cannot require employees to complete a new W-4, Pub. 15-T outlines a method of translating a prior-year W-4 to the new withholding calculation. It’s our belief, that most payroll systems will likely follow suit and support both the old and new W-4 forms and build the “translation” into the software calculations. Payroll companies are just now getting their first glimpse at these changes as well, so time will tell on how this plays out.
The employer’s withholding worksheet has four steps:
- Step 1 – Adjust the employee’s wage amount. The first three lines are used to calculate the employee’s annual wage amount. The following lines provide for adjustments based on the employee’s filing status and amounts entered in Lines 4a and 4b of Form W-4.
- Step 2 – Figure the tentative withholding amount. The tentative withholding amount is calculated based on the employee’s adjusted per pay period wage amount or adjusted annual wage amount, filing status (Box 1c of the 2020 Form W-4 or Line 3 on previous forms), and whether the employee checked the box in Step 2 of the 2020 Form W-4 (to be withheld at a higher rate).
- Step 3 – Account for tax credits claimed by the employee.
- Step 4 – Figure the final amount to withhold. Line 4a is for any additional withholding amount requested by the employee.
The IRS has opened up a 30-day comment period on both the draft of the 2020 W-4 and the new 15-T. In addition, the American Payroll Association’s Government Relations Task Force IRS Issues Subcommittee, of which our own Tom Franz is a member, plans to submit comments on the draft 2020 Form W-4 and Publication 15-T. Comments on the Form W-4 are due on July 1; comments on Publication 15-T are due on July 8. If you would like to be involved in the APA process, fill out the Contact Us form on the APA website. If you would prefer to submit your comments directly to the IRS, you may send an email to email@example.com.
Integrity Data is your partner in payroll compliance and we will continue to closely monitor this information and keep you up to date as new details arise. Continue to follow our blog and sign up for our Payroll User Group to stay in the know!