At the end of 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), calling for the revision of the Federal tax withholding system, among other things. The goal of TCJA is to more accurately estimate withholding throughout the year so that employees end up with smaller refunds and larger net paychecks. Due to the law’s complexity, the IRS delayed regulatory action until 2020.
As part of preparations for the upcoming change, payroll and HR company, Viventium, and other stakeholders were invited to participate in a contracted study where drafts of the 2020 Form W-4 and Publication 15-T were released. HHAeXchange sat down with Yonina F. Shineweather, CPA and Consulting Director of Viventium’s Compliance Services, to better understand the upcoming changes and whom they will impact.
HHAeXchange: What’s going to change about Federal tax withholding in 2020?
Yonina Shineweather, CPA, Viventium (YS): In order to meet TCJA’s goal of more accurate withholding, the IRS will be collecting more information on the face of the W-4, instead of referring taxpayers to the three worksheets of prior years.
Whom will this change affect?
YS: The 2020 Federal Tax Withholding will impact just about everyone — employees and employers of every size and in every state and industry.
What new data items can we expect to find on the form?
YS: You’ll see seven new data items, two of which will be mandatory. I’ll outline them for you here:
Mandatory data items:
- No more allowances. The concept of withholding allowances such as Married-3, Single-2, is passé. This corresponds to the new personal tax return (Form 1040) which no longer uses personal or dependent exemptions.
- Three filing statuses. Single or Married filing separately, Married filing jointly (or qualifying widow(er), and a new addition – Head of Household.
Optional data items:
- Two jobs in the household. If your employee works at one additional job, OR the spouse also has one job, checking this box will signal employers to use a different set of withholding tables and result in more accurate withholding.
- Number of qualifying children/dependents for the child/dependent tax credit.
- Annual child/dependent credit. This is the number of children/dependents from item #4 multiplied by applicable credit. This amount reduces employees’ tax withholding amounts.
- Annual other income. Non-wage income that would not otherwise have withholding such as interest and dividends. This amount increases employees’ taxable wages for withholding computations.
- Annual deductions. Anticipated deductions other than the standard deduction, derived from a worksheet which employees can complete. This amount reduces employees’ taxable wages for withholding computations.
Are all employees required to submit a new Form W-4?
YS: No. Employees who submitted Form W-4 in any year before 2020 are not required to submit a new form. Employers can continue to compute withholding based on the information from the employee’s most recently submitted Form W-4, using the new IRS instructions.
Only employees starting work on or after January 1, 2020 must complete the new Form W-4. Similarly, any existing employee changing his/her W-4 (e.g., for a change in marital status) must use the new form.
What happens if an existing employee wants to change his/her W-4 but doesn’t submit a new form?
YS: There is no option for this. Any employee wishing to change W-4 information after January 1, 2020 must use the new form.
*Note that even if they have no changes, existing employees may be encouraged (but not required) to submit a 2020 form to initiate more accurate withholding and minimize the risk of large over- or under-payments at tax time.
Can an employee make changes to their 2020 form after submitting?
YS: Yes. As in prior years, an employee can always submit a new W-4 with revised information. However, once an employee submits a 2020 form, he/she cannot subsequently submit a 2019 form.
What about those “Exempts”?
YS: The conditions for claiming exemption are still the same, but the process has changed. If an employee wishes to certify that he/she meets the two conditions for claiming exemption from withholding, he/she should write “Exempt” in the space below Step 4(c), complete Steps 1 (personal information) and 5 (signature) and not complete any other steps on the form. Employees claiming exemption from withholding must submit Forms W-4 by February 16, 2021. Similarly, 2019 exemptions expire on February 17, 2020. If a 2020 W-4 is not submitted by that Monday, withholding for that employee will be calculated as Single with no further adjustments.
Will there still be an adjustment for nonresident aliens?
YS: As in the past, there will be additional amounts to add to the withholding for nonresident aliens. The IRS will issue instructions about this in the final Publication 15-T. Additionally, nonresident alien employees should continue to follow the special instructions in Notice 1392 when completing their Forms W-4.
What can I do to prepare for the change?
YS: There are a few things you and your employees can do now to prepare. Start by familiarizing yourself and your key HCM staff with the draft W-4, the draft Publication 15-T, and related IRS FAQs. Encourage employees to use the IRS tax calculator to perform a “paycheck checkup” and calculate their most accurate tax withholding.
Lastly, if you are processing in-house using payroll software, ask your vendor about its preparedness to implement 2020 changes. If you outsource to an HCM provider, inquire about their progress in supporting the 2020 changes and their projected completion date.