Revisions to IRS Form W-4: Are Your Clients Ready?
November 15, 2019
We have known for several years that a new W-4 is coming. The 2019 W-4 is slightly different from its predecessor, but the 2020 form is completely different. The IRS intends to simplify the process with its new form. Whether or not it works out that way remains to be seen. The question now is whether or not your clients are ready for the coming changes?
Earlier in 2019, the IRS released a draft version of the 2020 form. You can check it out on their website. The new form, as it stands, eliminates a number of steps previously utilized for calculating dependents. They have been replaced by just two steps.
A New Withholding Calculator
Accompanying the new W-4 form is the brand-new Tax Withholding Estimator rolled out on August 6. The new Estimator replaces the IRS' old Withholding Calculator. Furthermore, there are instructions in the very first step of the new W-4 form that encourage workers to use the Estimator rather than relying on manual calculations for step three.
Dependent Monetary Value
Perhaps the most notable revision to the W-4 is how dependents are claimed. Prior to the 2019 revision, employees added up the total number of dependents they wanted to claim and entered that number on the W-4. That went away with the implementation of the Tax Cuts in Jobs Act.
The 2019 form required employees to count the total number of dependents and then apply a multiplier based on projected 2019 income. Multiple calculations were added to reach a total. The revised 2020 form simplifies the entire process with just two lines.
The first line assigns a monetary value to each qualifying child. The employee multiplies the number of his or her children by $2,000 and enters the number. The second line does the same thing, except with a $500 value on other dependents. The two numbers are added together and that's it.
The revised W-4 allows for other adjustments as well. For example, employees can elect to have additional withholding in order to cover additional income that will otherwise not be taxed. They can decrease withholding by claiming additional deductions above and beyond the standard deduction.
These other adjustments are optional. Workers can choose to ignore the entire fourth step and allow withholding based only on the previous dependent calculations. There are risks though. Not accounting for other income could mean a tax bill for a person who has significant self-employment income. Not accounting for additional deductions might mean more withholding than necessary throughout the year.
The New Form is Not Required
One of the reasons for revising the W-4 is to shift most of the calculation burden from employee to employer. Unfortunately, that is the downside for your clients. Their HR or payroll staff now has more work to do. Having said that, it shouldn't be too big a deal moving forward.
Please note that the 2020 Form W-4 is still in draft stage. It is not ready for use, nor will it be until the start of the new year. Also note that employees are not required to fill out new forms in 2020. Any employee who previously filled out a W-4 can let things stand as they are. All new employees will be using the 2020 form once it is available.
We encourage employers to educate their employees about the new form. It is especially important that employees understand they can fill out new forms if their withholding for the 2018/19 tax years was off by more than they are comfortable with.