The Tax Cuts and Jobs Act of 2017 (“TCJA”) included several changes to the calculation of payroll tax withholding and employee deductions. Though it has taken some time to fully implement these changes, the IRS has now released the final version of the updated Form W-4 for 2020 (and forward).
The IRS released updated withholding tables in 2018, but did not make any significant revisions to the Form W-4 at that time. In May 2019, the IRS released a draft of the updated Form W-4. The final version of the updated form was released on Dec. 4, 2019.
The new Form W-4 has been re-named ‘Employee’s Withholding Certificate’, reflecting the fact that the form no longer uses personal allowances. Instead, the new Form W-4 assigns dollar values to each adjustment and applies those values as credits against an employee’s basic withholding amount. This should make it easier for employees to complete the form and understand the effect of each adjustment.
The updated version has been expanded and is now a full page (plus three pages of instructions, worksheets and tables). It also has more detailed instructions for employees to fill out the sections, now labeled Step 1 through Step 5. Only Step 1, the employee’s personal information, and Step 5, the employee’s signature, are required; Steps 2, 3 and 4 (regarding household jobs, dependent credits, and other adjustments and deductions) are optional. However, no adjustments will be applied if the employee leaves Steps 2-4 blank. An employee who only completes Steps 1 and 5 should have his or her payroll taxes withheld in accordance with the default rate associated with the filing status indicated in Step 1.
Employees are not required to submit a new Form W-4. Employers may request updated forms from existing employees, but may not require them to submit new forms. However, new employees hired in or after 2020, as well as any existing employees making changes to their Form W-4 or submitting an annual exempt Form W-4, will be required to use the new version.
As such, some employers may need to maintain separate payroll systems to process payroll using both prior and new Form W-4 versions. Employers who receive updated Form W-4s should be prepared for the potential difficulty of integrating a new payroll system alongside their existing system. Employers who use payroll providers or PEOs should discuss the changes for tax year 2020 with their providers as soon as possible. Employers who handle payroll internally should meet with their tax consultants to plan for the change and make sure their programs are able to handle the dual systems.