While still technically in draft mode, 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)
- Mortgage Interest
- Charitable Contributions
- 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 draft W-4, read more here.
Back in June of 2018, the IRS took their first swing at updating this form. The payroll industry reacted negatively due to the intrusive, sensitive information required on the form. This information included, income earned at other jobs, and a total of itemized deductions. This was information that employers were uncomfortable requesting from employees. The IRS pulled the suggested changes and delivered updated tax tables on Publication 15 (aka Circular E) and a “Paycheck Checkup” website to help ensure taxpayers were having the correct amount of federal income tax withheld on their paychecks.
The IRS then went back to the drawing board and in May of 2019 released an “early, early” draft of the 2020 W-4. They opened up a comment period that ended around the end of June and worked to finalize the W-4 for 2020. The result was released on August 8th. This mostly final form addresses both the privacy concerns of employers and the need to be able to calculate an accurate federal withholding. The “final” copy of Publication 15-T, released August 13th, 2019, details the calculation for withholding using the new form.
How do these changes affect me?
The main issue for employers today is understanding how this will impact their processes as we get closer to January 1st. Employers will need to decide whether or not to require employees to complete an updated W-4, or choose to calculate withholding using the existing W-4 on file for the employee. Both ways are allowable according to the IRS, however, supporting both versions of the form may be burdensome on employers. As such, some employers may require employees to complete a new W-4 for 2020. This is especially true for employers with “home grown” payroll systems that have limited development availability or skills necessary to create a holistic solution. It’s expected that most major payroll software companies, Integrity Data included, are expected to be able to support both the old and the new form W-4.
The IRS has stated that they have no legislative mandate to require taxpayers to complete a new W-4. However, employers *may* require their employees to complete a new W-4 as part of their business rules. It’s important to understand that ALL employees will be required to use the new form for changes made on or after January 1, 2020. Whether or not employers should require their employees to complete a new W-4 can be dependent upon:
- # of employees
- Whether the process can be automated (e.g. via a self-service portal)
How to help your employees
As payroll professionals, we are not allowed to provide “tax advice” to employees which makes it difficult for us to help our employees complete the form W-4. This is going to be even more of an issue with the new form. There are a couple things you can do to help employees:
- Point them to the instructions for the form.
- Have them use the “Tax Withholding Estimator” from the IRS:
The new Tax Withholding Estimator was released in early August and can be used at any time to assist employees that had a large tax bill or refund in prior years. Employees should check their withholding if they:
- Have two-income families or someone with multiple jobs
- Have seasonal employment or part-year employment
- Are claiming the child tax credit
- Have dependents age 17 or older
- Have itemized deductions in the previous year
- Have high income or a complex tax return
- Had a large refund last year
- Had a tax bill last year
According to the draft release of the 15-T, “the final Publication 15-T and Form W-4 will not be posted for a few months because some dollar amounts cannot be figured before October, there will be no further substantive changes to the Percentage or Wage Bracket Method.” This should allow payroll software companies and payroll professionals sufficient time to prepare for the changes ahead of the 2020 tax year. Integrity Data is committed to partnering with our customers to assist with payroll and HR compliance issues and will stay abreast of this and other issues related to the challenges of our customers.