The W-4 is changing. On September 20, 2018, the Internal Revenue Service (IRS) announced that the major revisions previously proposed to the 2019 Form W-4, Employee’s Withholding Allowance Certiﬁcate, will be delayed to 2020. In August 2019, after releasing the second draft of the 2020 W-4, the IRS released the second draft of Publication 15-T, Federal Income Tax Withholding Methods, for 2020.
There are a number of changes coming to the W-4. Specifically, it takes a five-step approach for entering information; requires that the taxpayer enter dollar amounts, rather than simply entering the number of withholding allowances; and eliminates/replaces certain categories that were on prior forms.
The five-step approach is as follows:
1. Enter personal information
2. Account for multiple jobs
3. Claim dependents
4. Other adjustments (optional)
5. Sign and date
Every employee must complete Steps 1 and 5. If an employee fills out only these steps, withholding will be based on his or her standard deduction and tax rates, with no other adjustments. Steps 2 through 4 apply to an employee’s personal or financial situation, so if an employee enters data in these steps, the IRS states that withholding will more accurately match his or her tax liability.
To begin with, the W-4 is renamed. The 2020 W-4 takes the word “allowance” out of its title and is renamed “Employee’s Withholding Certificate.” This revision to the name is consistent with the fact that employees may no longer claim withholding allowances. Second, the new revised form also takes away any line for exemption, which had appeared on the earlier version of the 2020 draft as Line 4d.
Next, Publication 15-T, Federal Income Tax Withholding Methods includes separate computations for figuring withholding for employees who file a 2020 Form W-4 in 2020. W-4’s from prior years remain valid because there were no changes requiring the submission of a new Form W-4 to the employer.
As discussed, a new line in the W-4 is asking employees to enter estimated nonwage income not subject to withholding. This estimate may include interest, dividends, and retirement income but not income from any other jobs. Currently, employees with nonwage income must convert such amounts to equivalent per-payroll additional amounts to withhold.
Although exemptions have gone away, the form allows for reducing the amount of withholding if the employee itemizes. Specifically, the form states: “If you expect to claim deductions other than the standard deduction and want to reduce your withholding, use the Deductions Worksheet on page 3 and enter the result here.”
The final Form W-4 will not be posted until late fall, but the IRS reports that “there will be no further substantive changes to the Percentage or Wage Bracket Method.” Therefore, employers may now begin programming their payroll systems or request from their payroll providers timing as to when the payroll program will be up to date with the proposed changes.
Source: CCH Tax Group 7/12/19, Covington 8/9/19, ADP 9/25/19