“This tax form is too simple and logical,” said no employer ever.
When it comes to filling out tax forms, who wouldn’t welcome a little more simplicity? That’s one reason the IRS is hoping employers will approve of the new Form W-4. In the first major redesign since 1987, the new 2020 Form W-4 incorporates some aspects of the old form while revising or eliminating others.
Here are five key points employers should know about the new Form W-4.
- Why was Form W-4 redesigned?
Form W-4 was given a facelift for 2020 to better reflect changes made to the federal tax code in last year’s Tax Cuts and Jobs Act. The IRS also says the new form will be simpler to use while bringing more transparency and accuracy to the withholding system.
What’s different in the new Form W-4?
The old Form W-4 was called the Employee’s Withholding Allowance Certificate, while the new Form W-4 is simply called the Employee’s Withholding Certificate. You’ll notice the new form drops the word “allowance,” which is significant because the big change in the new Form W-4 is the elimination of withholding allowances. In the past, employees could claim withholding allowances to lower the amount of federal income tax being withheld from their paychecks. The new Form W-4 does away with those allowances.
What does the change mean for employers?
The biggest change for employers is how you calculate federal income tax withholding for new hires. The old income tax brackets are out. For any new employee you hire in 2020 and beyond, the method you choose to calculate federal income tax withholding depends on how you process your payroll. If you have an automated payroll system, you’ll use the Percentage Method Tables. If you have a manual payroll system, use the Wage Bracket Method Tables for Forms W-4 from 2020 or later. The IRS website has a draft you can view for reference.
What do your employees need to know about the new Form W-4?
The big change is that withholding allowances are a thing of the past. The new form has a five-step process for employees to account for all sources of income to determine the appropriate withholding amount. You should also be encouraging your employees to review their withholdings every year using the IRS tax withholding estimator.
Does every employee have to fill out a new Form W-4?
No. All new hires who receive their first paycheck after 2019 are required to use the new form. For employees whose first paycheck was prior to 2020, you can ask them to submit a new Form W-4, but they aren’t required to do so unless they want to change their withholdings. To make changes to their withholdings, they’ll have to complete a new Form W-4. Otherwise, their withholdings will continue to be based on their previously submitted W-4. New employees who fail to submit a Form W-4 will be treated as a single filer with the standard deduction and no other adjustments. However, the employee does not have to fill out the entire form in order to have taxes withheld. For those that only fill in the top section and sign at the bottom, the standard tax level will be deducted.
Those are the main points with the new Form W-4. As with any change, there will be a learning curve and an adjustment period. According to Andy Phillips, director of H&R Block’s Tax Institute, the new form is “like a mini income tax return.” But the IRS has ample resources to help both employers and employees, including a series of questions and answers about the form and a sample letter to help explain the new form to your employees.
Need help sorting it out? Contact Higginbotham’s HR Services for assistance.