Form W-4 is going to witness substantial changes in the year 2020 and if you are planning to start a new job in the coming year, the Form W-4 that you will fill out will look a lot different compared to those you filled previously. The IRS is all set to introduce a new W-4 form for 2020 that eliminates withholding allowances. The rationale for the change is to make the W-4 form simpler to complete and to make it easier for the employees to accurately convey to their employers the amount of federal income tax that needs to be withheld from their paychecks. The allowances are going to be eliminated as a consequence of the enactment of the Tax Cuts and Jobs Act of 2017 that suspended all personal exemptions.

Beginning 2020, employees completing a W-4 form will need to fill the updated form if they are starting a new job, or update their status from single to married or if expecting a child, or if they want to adjust their withholding amount. If you don’t have any such changes in the pipeline, then you don’t have to fill the new W-4 form, assuming that you have already submitted a W-4 to your current employer. The new W-4 form is technically still in a draft stage, however, as per IRS, there are not going to be any major changes before it is finalized.

Understanding the major changes in the 2020 W-4 form

With the introduction of the new form, the IRS aims to help employees to adjust their wages, claim tax credits for which they are eligible and to aid the employees in determining their income tax withholding more accurately than the previous W-4 form. Explained below are some important changes that have been made to W-4 form to achieve these goals.

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Withholding allowances have been eliminated

With the passing of the Tax Cuts and Jobs Act, all personal and dependent exemptions have been temporarily suspended. So, the proposed W-4 form no longer contains a line for entering a number of allowances. Previously, the number of allowances was calculated on the basis of the calculations from the Personal Allowances Worksheet. In the proposed 2020 W-4 form, the first page is much more detailed and extensive and new sections have been added that ask specific information regarding withholding such as:

  • Employees have to specify income from multiple jobs, both of the filer and spouse, and this can be done using the online withholding tool of IRS or through the Worksheet 1 contained in the Form W-4.
  • Income from sources other than wages like dividends, interest, self-employment payments, and retirement plans, that don’t have withholding, but the filer wants income tax to be withheld from such sources.
  • Any kind of itemized deductions that are in excess of the standard deduction under the Tax Cuts and Jobs Act, or deductions to which the employee is entitled irrespective of the standard deduction have to be specified.
  • Tax credits for dependents in the form of child and dependent care tax credit and the education tax credit along with foreign tax credit also have to be specified.

Instead of the Personal Allowances Worksheet and the Deductions, Adjustments, and Additional Income Worksheet in the old W-4 form, two worksheets will be included with the 2020 W-4 form. Worksheet 1 is concerning the multiple job calculations specified in Step 2 of the 2020 W-4 form. Worksheet 2 is for additional calculations concerning deductions, if applicable under the optional Step 4.

Revisions to employee filing status

In the old 2019 W-4 form, Line 3 included checkboxes asking the filer if they were single, married, or married but withholding at a higher single rate. Also, if an employee didn’t fill out a W-4 form, this form also defaulted to single with zero allowances.

In the draft 2020 W-4 form, there are three checkboxes, the first one is for single or married filing separately, second one is for married filing jointly and the third one is for head of household. Starting January 1st, 2020, if an employee doesn’t file a W-4 form, by default the filer is treated as single with no other adjustments.

How the 2020 W-4 form affects employers

The same withholding tables can be used for both types of W-4s, the old and the proposed new forms. Employers may fill out the tables separately to parallel systems corresponding to the old and new forms. Employers may also set up a single payroll system that is based on the updated form. This can be done if the data fields present in the new form but missing from older forms are left blank or filled in with zero. Employers also need to note that it is not compulsory for their employees to fill the new W-4 form. The previous allowance entries will be valid for withholding for employees who don’t fill out a new W-4 form. Also, not filling out a new W-4 cannot be treated, for calculating payroll and taxed, as having failed to file a W-4 form. However, from January 1st, 2020, all new hires and any employee who wishes to adjust their withholding must use the new W-4 form.

Implications of Form W-4

With the aid of Form W-4, employers know how much federal income tax needs to be withheld from the paycheck of an employee. By filling the form W-4 accurately, employees ensure that they have the correct amount of federal income tax withheld from their paychecks throughout the year. If the employees don’t fill-up the Form W-4 accurately, it may result in having too little withheld from their paycheck during the course of the tax year, and subsequently, they can end up owing tax to the IRS. On the other hand, if too much tax is withheld, it could result you in getting a refund, but it would mean you have given the federal government an interest-free loan for the year.

In addition to a new W-4 form, the IRS has also launched a revised Tax Withholding Estimator. This allows you to account for credits and deductions and it also gives you an idea of whether you will owe tax or get a refund based on your current withholdings. The IRS has also a dedicated FAQ page on the draft 2020 form W-4.

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