Earlier this year, the Internal Revenue Service (IRS) unveiled a draft of a proposed new Form W-4, Employee’s Withholding Allowance Certificate, that will make accurate withholding easier for employees starting in 2020. Undergoing additional changes in August, the IRS recently released the second draft of the form which will likely be its final transformation before being released later this fall.

What Is the Form W-4?

Form W-4 is used by employees to establish their marital status and determine the number of withholding allowances for federal income tax withholding calculations — allowing employers to withhold the correct amount of income tax from employees’ pay. In addition, many states use this form for state withholding purposes.

Employers are required to have each new employee complete a Form W-4, but they aren’t required to request any additional updates from the employee, unless desired by the employee. Although, employers are not required to routinely submit these forms to the IRS, they are encouraged to retain the forms and other records of employment taxes for a four-year period.

Why the Change?

With the significant tax changes of the Tax Cuts and Jobs Act (TCJA), came modifications to tax rates and withholding calculations, among many other things. At the start of 2018 and 2019, employees weren’t required to complete a new Form W-4 because the revised withholding tables were designed to work with the existing W-4. However, it did result in confusion for many taxpayers.

The newly designed Form W-4 is aimed at reducing the form’s complexity and increasing the transparency and accuracy of the withholding system. While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions making accurate withholding easier for employees.

The Main Revisions

The impending Form W-4 brings many changes to its predecessor. Although, not all the new input elements are required, many employees may choose to use them. DM Payroll Services has highlighted the key revisions below:

Number of Allowances: This historic major input element found on 2019’s Form W-4 Line 5 has been eliminated on the updated form. Instead there will be checkboxes on Line 2 to leverage in instances of multiple jobs or to elect for optional higher withholdings.

Claim Dependents: Employees will be able to directly enter the expected full-year tax credits related to dependents on Line 3 up to $2,000 for each qualifying child under the age of 17 and $500 for other dependents.

Other Adjustments: New to the Form W-4, this section allows employees to enter information related to other income, deductions and withholdings. Line 4(a) provides an opportunity for employees to enter estimated full-year, non-wage income not subject to withholding, such as rental income, interest and dividends. Estimated full-year deductions, such as state and local taxes up to $10,000, mortgage interest and charitable contributions above the standard deduction amounts can be placed on Line 4(b). Lastly, on Line 4(c) employees can enter an additional amount to withhold each pay period. It’s important to note Line 4(c) only asks for a per-payroll entry versus the full-year estimates for Lines 4(a) and 4(b). Employers will need to convert these entries to a per-payroll period amount to calculate the income tax to withhold.

What’s Next?

Employers need to start planning for the change, especially any existing file structures that rely on employee Form W-4 data. New Form W-4s should also be collected from each employee at the start of 2020 to ensure accurate withholdings. This is also a good time to remind employees to do a “paycheck check-up” using the IRS’ Tax Withholding Estimator to ensure their withholdings are as desired. Consider starting to map out your communications to employees about these changes and how your business will implement the process.

Working with DM Payroll Services, you could avoid all the paper shuffling a task of this nature causes. Leveraging our MyInfo self-service site, a new W-4 Form can be pushed out to all your employees to easily complete online. Once completed, our system will map the W-4 Form data to the right place in our payroll system to ensure accurate withholding on your employees’ paychecks. The electronically signed document will also be saved in the employee’s document folder for safekeeping. Contact us to learn more about our payroll processing services and how we ensure your employees’ paycheck withholdings are accurate.