2020 has brought substantial changes to the Form W-4 (Employee’s Withholding Certificate) compared with previous versions of the form. These changes were made by the IRS to comply with new income tax withholding requirements under the Tax Cuts and Jobs Act (Pub. L. 115-97). For instance, in the past, the value of a withholding allowance was based on the amount of the personal exemption. Under the new law, however, employees cannot claim personal exemptions or dependency exemptions.
According to the IRS, the new design reduces the form’s complexity and increases the transparency and accuracy of the withholding system. Although the new form uses the same basic information as the prior version, instead of complicated worksheets, the form uses questions to help make accurate withholding easier for employees to complete. The form no longer uses the concept of withholding allowances to account for additional income, deductions, and tax credits. Instead, the form now includes lines where employees can enter those amounts directly so they can be used to calculate the withholding amount. In addition, the IRS has designed the withholding tables to work with a prior year form or the new 2020 form.
Importantly, the IRS is not requiring that all employees complete the new form. The new Form W-4 must be completed by all new hires in 2020 and by any existing employees who completed a Form W-4 before 2020 and want to make changes to their withholding in 2020. Employers may ask all current employees to complete a new form, but employers may not require all employees to do so.
The IRS is encouraging everyone to use its online tax withholding estimator to perform a “paycheck checkup” to help make sure the right amount of tax is withheld from paychecks. Completing this checkup may help protect against having too little tax withheld and facing an unexpected tax bill or penalty. Employees may also want to have less tax withheld up front, receive larger paychecks, and get a smaller refund.
In addition to online FAQs for both employers and employees and the tax withholding estimator, the IRS also released Publication 15-T (Federal Income Tax Withholding Methods) to help explain how withholding is calculated with the prior year and 2020 Forms W-4.
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