The New Form W-4
Beginning on January 1, 2020, the IRS has issued a new W-4 Form for employees to report their anticipated income tax withholding liabilities. The change is to reduce the complexity of the W-4 and to improve the accuracy of income tax withholdings so that they align with the changes to tax laws made in 2017.
There are five steps to the new Form W-4. Steps 1 and 5 are mandatory, while Steps 2, 3, and 4 are discretionary and should be completed based on each taxpayer’s circumstances:
1: Personal information;
2: Persons with a working spouse, or who hold more than one job;
3: Claiming dependents;
4: Declaring income from other employment or side jobs, for claiming deductions.
5: Signature block
Employees who opt to complete Steps 1 and 5 will have their income tax withholding calculated based on the standard deductions and tax rates.
w-4 Form Information
I’ve been working here before January 1, 2020, so do I need to complete a new form?
No, it is not necessary for employees hired before this date to complete a new W-4. Your taxes will continue to be withheld based on the most recent form you submitted. However, any future changes to withholding requested after January 1, 2020, will need to be reported using the new form.
Under what conditions should I INCREASE my withholdings?
Tax withholdings should increase if:
You have more than one job (including self-employment or a side job), or
Married and filing jointly and have a working spouse. Please note that the instructions on the W-4 state that Steps 3 and 4 should be calculated and reported for the highest-paying job and left blank on the W-4s for any other situations.
If you and your spouse have roughly equal-paying jobs, then it is acceptable to report Step 3 and Step 4 information on either spouse’s W4. The box in Step 2(c) checked on BOTH persons’ W-4s.
Under what conditions should I DECREASE my withholdings?
It may be appropriate to reduce your employment withholding if:
Tax credits are coming to you from Earned Income Credit, Additional Child Tax Credit, or credit from other dependents.
You are eligible for itemized deductions (e.g., IRA contributions or student loan interest deductions).
I have my own side business that I do on weekends, how does the new W-4 affect this?
Persons with income from self-employment or who are Independent Contractors for another employer generally will owe income tax and self-employment tax. The revised W-4 does not calculate self-employment taxes.
Is there computer software that will help me with completing this new form?
Yes, you can log onto the Tax Withholding Estimator at www.irs.gov/W4app and complete the information requested in Steps 2, 3, and 4. Note: The Tax Withholding Estimator is found in the English, Spanish, Chinese, Korean, Russian, and Vietnamese languages. Employees with more complex tax situations use Publication 505, Tax Withholding, and Estimated Tax, which is available on the IRS website. (Note: this link is for the 2019 version; the 2020 update has not yet been published.)
What should I do if a new employee has not provided us with a W-4?
Employees who receive their first paycheck from your company after January 1, 2020, employees who did not submit a W-4 will need to have their withholding calculated as if they reported to be a single filer with no other adjustments. Meaning, a single filer’s standard deduction with no other entries considered in determining to withhold. This approach also generally applies to any employees who previously worked for you and who were rehired in 2020 but did not furnish a new W-4.
I want to ask all my employees to submit new W-4s. Is this permitted?
Yes, it is permissible for employers to ask all employees to provide a new W-4. However, it is not permitted to require this, and any employee who does not turn in a new W-4 must have their tax withholdings continue to be calculated based on the most recent W-4 the company has on file. You cannot treat employees hired before January 1, 2020, as failing to furnish a W-4 if they have an older W-4 on file with you and do not provide a new style W-4. However, any employee who previously worked for you and rehired in 2020 is required to submit a new Form W-4.
I have some employees who want to claim they are “Exempt” from income tax. On the old Form W-4, there was a box they could mark for this. How is this handled now?
An employee may claim exemption from withholding for 2020 if they meet both of the following conditions: they had no federal income tax liability in 2019, and they expect to have no federal income tax liability in 2020. If an employee claims exemption from income tax, they will have no income tax withheld from their paycheck. Please note that as a result, they still may owe taxes and penalties when filing their 2020 tax returns. To claim exemption from withholding, an employee may certify that they meet both conditions above by writing “Exempt” on the W-4 in the space below Step 4(c). Then, complete Steps 1a, 1b, and 5. Do not complete any other steps.
Written by David Norton, HR Business Partner, HR Service, Inc.