This blog was last updated on September 14, 2021
The IRS has released a draft version of the new 2020 Form W-4, Employee’s Withholding Allowance Certificate. It represents the most sweeping changes to this form since the Current Tax Payment Act of 1943 was passed, requiring employers to withhold taxes from employee payroll and remit them to the IRS on their behalf.
The form has been completely overhauled due to the Tax Cuts and Jobs Act (TCJA), resulting in massive changes in format and substance. One of the most noticeable differences in the 2020 draft form is the absence of a line for allowances, formerly Line 5 in the 2019 version. Allowances played a key role in the calculation of withholding, and the 2020 draft proposes to remove this line and replace it with fields meant to provide information relating to the calculation of withholding.
New fields on Form W-4
One of these fields is the addition of a “Head of Household” checkbox in Step 1, field 1c. A direct result of the TCJA, this checkbox is meant for unmarried people who pay more than half the costs of keeping up their home for themselves and a qualifying individual.
Another difference in the 2020 draft is the expanded emphasis on multiple jobs and how that factors into the withholding calculation process. Step 2, “Account for Multiple Jobs,” was added in the 2020 draft. While this status was formerly more visible in the calculation worksheets that accompany the form, a new checkbox was added for those employees who have more than one job, or are married and filing jointly, in order to facilitate proper withholding on payments.
Privacy protections on spousal and outside income
For some employees, disclosing spousal income and outside income to an employer feels like a violation of their privacy. To get around this issue, Step 2 also contains a checkbox provision that simply indicates to the employer that there are multiple sources of income. This may result in too much withholding being taken out but generally should not result in the taxpayer being surprised with an unexpected tax bill the following year.
Similar to the new Step 2, Steps 3 and 4 brings calculations to the forefront on the main W-4 form. Step 3 (Claiming Dependents) and Step 4 (Other Adjustments) were previously a part of the calculations worksheet in the 2019 version of the form, whereas now they are front and center in the 2020 draft. Calculating withholding using these elements is not new, but their presence in the main form is new for the 2020 draft.
Changes in withholding calculation
In addition to these form changes, the way in which withholding is calculated has also been altered. While previous W-4 calculations used the amount paid to the employee, the 2020 draft proposes that the necessary payroll adjustments must be calculated before using the withholding tables provided in the appendices.
This presents certain challenges to businesses whose employee payroll fluctuates from one pay period to the next, implying that more frequent withholding calculation is required in order to withhold the proper amount. Furthermore, if proper calculations are not done on a more frequent basis, the resulting withholding may impact net salary or annual tax liability for the payee. These consequences are the result of changes to the form that were intended to simplify the process but in actuality may have added complexity for taxpayers tasked with adapting to this change.
Unintended consequences of Form W-4 changes?
Despite IRS Commissioner Charles Rettig’s recent comments that “the primary goals of the new design are to provide simplicity, accuracy and privacy for employees, while minimizing burden for employers and payroll processors,” the changes to the W-4 have not gone without notice from industry business groups. A recent letter to Commissioner Rettig from the Padgett Business Services Group highlighted the complications the 2020 Draft W-4 would present for businesses if finalized.
According to Roger Harris of Padgett, the new calculation process presents a new burden for both businesses and service providers in requiring them to maintain two or three parallel calculation and filing processes in order to account for the changes when filing both federal and state withholding information. In its efforts to minimize industry burdens associated with requiring existing employees to provide the new version of the W-4, the IRS may have overlooked the complexity associated with maintaining payroll systems that administer withholding taxes and related Form W-2 reporting.
Maintaining systems for withholding
Specifically, employers will need to maintain systems to administer withholding taxes related to employees relying on the older versions of Form W-4. New employees (and some existing employees) will be required to submit the new version of Form W-4, which will require the employer to maintain a withholding system that allows for the optional higher withholding, as well as a system that allows employees to input the new types of data reflected on the form. Effectively, this means that employers will need to maintain three sets of payroll tax withholding systems to accommodate the older and newer versions of the form.
The IRS is currently accepting comments relating to the 2020 draft version of the W-4, with draft instructions to release at a later date. The IRS plans to release another draft version of Form W-4 by the end of July, hinting that this should be the “close to final” version, with the final version anticipated to be released in November.
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