New W4: What You Need to Know about the Changes in 2020

Many tax forms stay the same from one year to the next, which makes it simple for keeping track of necessary paperwork for your employees and contract workers. But there are times when the IRS updates the forms and/or tax laws, and it is essential that you maintain compliance with these changes as needed. This year, a new W4 form was released, with updated information that needs to be gathered from all employees.

As an employer, what do you need to know about this new form? Some of the information is similar to previous versions of the W4, but there are unique changes that every employer needs to know about. Here is an overview of what you need to know about the W4 changes:

Release of the New W4 Form

The latest version of the W4 form was released on December 4, 2019. This new document went into effect on January 1, 2020. These changes were proposed in 2017 through the Tax Cuts and Jobs Act, but the IRS needed time to finalize the new form and prepare it for implementation.

This update has been a long-time coming. The last time significant changes were made to the W4 form was in the 1980s. The goal of this update is to simplify the form, making it easier for both employees and employers. Instead of filling out complicated tax worksheets, employees now answer straightforward questions.

Every employee needs to have a completed W4 form on file with your company. The problem with the previous form was that many people thought it was complicated to list personal information for accurate tax withholdings. Now, the form is designed with simple worksheets and clear questions, helping individuals with more accuracy in the calculations of their federal withholding.

Most Significant Change: Allowances No Longer Assist

Multiple changes were made to Form W4, with the most significant being that there are no longer allowances listed on the withholdings form. Instead, the employee follows a list of steps that walk the person through the details to ensure the right withholdings.

Overview of New W4 Steps

Here is an overview of the steps listed in the new W4 form:

  • Step 1 – Personal Information: The first part of the form remains the same as before. The employee needs to provide identification information, including name, address, and Social Security number. Additionally, the intention for filing needs to be listed: single, married filing jointly, etc.
  • Step 2 – Other Income: One of the biggest changes in the new W4 is a place where other income is accounted for. In this step, the employee should list money earned from other jobs or a spouse’s income. Listing this information ensures the most accurate withholding estimate. An IRS withholding estimator can be used, or there is a Multiple Jobs Worksheet that gives a rougher estimate. This step only needs to be completed if an employee has more than one job or another source of income in the household from their spouse. If the employee only has one job or is married and filing separately, then Step #2 can be skipped.
  • Step 3 – Dependents: Next, tax credits are calculated based on claiming dependents. In the past, this information was called “allowances,” now they are “tax credits.” The current rates for claiming dependents are based on the filer’s income. If a person earns $200,000 or less (or married filing jointly with an income of $400,000 or less), then a tax credit of $2,000 per child is offered for dependents younger than 17. $500 per dependent is available for other people 18 and older, including an older parent in the household. These tax credits are phased out for filers who earn more than the income thresholds listed above.
  • Step 4 – Misc Income Sources: Step #2 determined whether the employee has other sources of household income that needs to be considered. Step 4 is used to calculate other sources of income that are not related to a job. Examples of income that fall in this category include dividends, interest, and/or retirement income. Additionally, other deductions are listed here if the filer chooses to not take the standard deduction. This step is not required, but it provides the filer with more accuracy in their withholding amount. In this section, employees have the option to enter extra withholding if desired, indicating the additional amount that should be taken out of their paychecks.
  • Step 5 – Signature: Finally, the form is not valid without an employee signature in step 5. A date must be placed by the signature as well.

Note: If the employee will be claiming exemption on their taxes, then they should fill out step 1, write the word “Exempt” in Section 4(c), then sign in step 5.

Who Needs to Fill Out the New W4 Form?

Every employee needs to have a current W4 form on file with employers. This information is used by the employer in calculating withholdings and paying the appropriate taxes to the IRS. It has been used for decades to determine the right amount of federal income tax withholding, which is a calculation that varies from one person to the next.

Any employee starting a new job on or after January 1, 2020, must fill out the new Form W4. As an employer, it is your responsibility to ensure that you are using the correct form as new employees are onboarded into your payroll system.

If you have current employees with the old W4 form, it is not necessary to make them fill out the updated form. But it might be a good thing for current employees to update their forms as desired. It is recommended that employers do a “payment checkup.” It can be beneficial for employees to review the withholdings to ensure accuracy at all times.

Additionally, employees should fill out a new tax form when a major life change is experienced. For example, a marriage, divorce, or new baby changes the number of tax credits that can be claimed.

Why Accuracy is Important with Tax Withholdings

Accurate calculations for tax withholdings are important to dial in the amount that will be owed for the income received each year. Withholding too little will result in the need for the filer to pay a tax bill when it is time to file for the year. In some cases, penalties could be incurred, which increases the overall amount that needs to be paid.

The best way to avoid these big tax bills and potential penalties is by increasing the withholding amount if multiple incomes are in the household. For example, employees often choose to increase withholdings when they have more than one job or a spouse who is working as well.

On the other hand, withholdings should be decreased based on if additional tax credits will be applied to the calculations. Certain deductions can reduce a person’s liability for the year, such as deducting student loan interest.

The IRS has an online tax withholding estimator that can be used to walk employee’s through all of the important details. Withholding too much means that the filer is giving the government an interest-free loan. While it’s nice to get money back in the form of a tax refund, it’s better to avoid loaning money to the IRS for no reason. The goal with the estimator is to dial in the right amount to get as close to zero as possible on tax filing calculations.

Employer vs. Employee Responsibility

These W4 changes have the biggest impact on employees because they hold the responsibility for determining the right amount that needs to be withheld. As an employer, you hold the responsibility for providing the correct form and ensuring that you have a W4 for each employee. Then, the information on the W4 form is used for payroll calculations to determine the amount you need to be withholding from each paycheck.

It is important that you are familiar with these changes. It is likely that employees will ask questions about filling out the forms, especially when they see a different W4 than what they have seen in the past. As an employer, you shouldn’t be offering advice about the information that should be submitted on the form – the employee should talk to an accountant for personal recommendations. But you can offer general recommendations regarding the structure of the form and how it will affect the withholdings from the employee’s paychecks.

Professional Payroll Advice and Services

Keeping up with changing tax laws and different tax forms can be a challenge! As a small business owner, you shouldn’t be spending your valuable time calculating payroll withholdings. Instead, let an experienced bookkeeping and accounting team handle the details – freeing up your time to focus on other responsibilities within your company.

If you have questions about the new W4 form or need assistance with anything else related to bookkeeping and accounting, then our team is here to assist. We specialize in small business accounting services, with personalized service packages to meet your unique needs. Call us at Easier Accounting: (888) 620-0770.