The New Form W-4: What You Need to Know

There’s a new form in town. The IRS has updated Form W-4, the Employee’s Withholding Certificate, for the first time in roughly 30 years. This revision is long overdue. The old form was fraught with confusing worksheets and tax jargon. The new form should reduce some of the complications associated with calculating withholding amounts for employees’ paychecks. It’s intended to give a more accurate and complete assessment of an employee’s withholding amount, better matching up with the amount that will be due at tax time.

A Balancing Act

Figuring out the right amount of tax to withhold from an employee’s paycheck is a balancing act. The ideal scenario, according to the IRS, is a perfect balance of money withheld and taxes owed. Take out too little, and your employee will owe more at tax time. Take too much, and they’ll probably get a bigger refund. They’ll appreciate that until they realize that they’ve let the IRS use their money interest-free all year.

What’s Different about the New Form W-4?

Here’s a quick rundown of the changes for 2020 and what employers need to know about the new and improved Form W-4.

No more allowances. The most significant change is that the new Form W-4 no longer uses allowances to calculate withholding amounts. Previously, withholdings were calculated based on personal exemptions – the amount of money a taxpayer could legitimately deduct from taxable income in a year based on the number of dependents in the household. Personal exemptions were eliminated when the 2017 Tax Cuts and Jobs Act went into effect. In their place, the standard deduction and child tax credit were raised.

A five-step process. There are now five steps for employees to complete when filling out the new Form W-4. Steps 2, 3, and 4 may or may not apply based on each individual’s situation. If they do not apply, skip to Step 5.

1. Fill out personal information (name, address, social security number, etc.). Everyone must complete this step at a minimum. 
2. Record multiple jobs and spousal income.
3. Fill in the number of dependents you have.
4. Record any other adjustments, such as income from other sources, other deductions you typically take, or an additional withholding amount.
5. Sign and date the form.

Who Needs to Fill this Out?

Starting in 2020, all new employees will need to use the new Form W-4. Existing employees do not have to fill out the new form. Their withholdings will continue to be calculated based on the old form.

You may want to encourage your employees to do a periodic payment assessment, especially if they have a change in their life situation. Marriage, divorce, births or adoptions are always a good time to reassess their tax withholding status and fill out a new Form W-4 if needed.

What if I Have a New Employee Who Hasn’t Submitted This?

If you have a new employee who hasn’t filled out and returned the new Form W-4, the IRS will treat them as a single filer with no other adjustments. While this may be what’s needed in their situation, it may not be. This status could result in too little withholding during the year, which means a higher out-of-pocket tax payment at tax time. Encourage them to fill out and return this form as soon as possible.

Need Help?

If you have questions about implementing the new 2020 Form W-4 within your company, call Adams Accounting Solutions. We’ll walk you through the changes and help you better understand and explain the impacts this form may have on your new employees this year.