Late last year, word from the IRS was that we could take a sneak peek of the new W-4 in March of this year. Read more here about the information we had at that time.
As background, the Tax Cuts and Jobs Act (TCJA) – passed in December of 2017 – made significant changes to how federal tax is calculated for individual taxpayers. In an effort to help taxpayers ensure they properly withheld federal taxes for 2018 and 2019, they created the “Paycheck Checkup” calculator. Per Notice 2018-92, the 2019 W-4 form continues to mirror the W-4 from recent years for the time being.
On March 7, 2019, Scott Mezistrano from IRS Industry Stakeholder Engagement and Strategy made some important statements about the planned update to the W-4 for tax year 2020. That information was reaffirmed on May 2, 2019 by Mezistrano. The current IRS plan is to release an “early, early” draft by the end of May. At that time, they are open to hearing feedback from the industry in relation to the form. The draft form will be posted on IRS.gov: http://irs.gov/draftforms.
The IRS will then take the industry feedback with the intent to deliver a “final, early” draft in the summer of 2019. At that point, the only expected changes will be for inflation adjustments that will be included with the “final” form in the fall of 2019.
Other changes regarding the 2020 W-4
What’s all this mean for the payroll industry?
- Most payroll software companies will have to update their systems to accommodate the renovated 2020 W-4.
- Employers will have to use the new form after January 1, 2020.
One big question on the minds of many is “Will employers be required to obtain an updated W-4 for all employees?” Scott addressed that question on the May 2nd IRS Payroll Industry call. Essentially, the IRS does not have the legislative authority to require employees to provide an updated W-4. Therefore, the new form is being designed to be backward compatible with the current withholding calculation. Thus, there will be no IRS requirement to obtain updated W-4s from your employees.
Another major concern is how this will affect state withholding calculations that are based on federal W-4 and federal taxable wages. Many states have withholding rules that use the federal wage base for estimating withholding on the employee paycheck. However, based on the changes to taxable fringes at the federal level, this wage base may be in conflict with state regulations on taxable fringes.
At this point, it’s difficult to ascertain how impactful this will be to payroll software companies and whether or not they will be able to maintain backward compatibility. There’s a concern that systems will have to support two different federal withholding calculation methods. That, in addition to the potential state withholding calculation changes, has payroll software and service providers on edge.
One thing is for sure, change is coming and we promise to be your partner in human resources and payroll compliance. Stay tuned to our blog for updates.