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Changes Coming to IRS W-4

In an effort to more accurately withhold employee wages in accordance with the 2017 Tax Cuts and Jobs Act (TCJA), the Internal Revenue Service (IRS) announced plans in September 2018 to implement a new version of Form W-4, Employee’s Withholding Allowance Certificate, by this year.

However, due to a negative response from the payroll and tax community, the IRS pushed the implementation of the new form to 2020 and released a draft of the proposed re-design on May 31 of this year.

Public comment is now encouraged on the draft before a second is released in July.

“The new draft Form W-4 reflects important feedback from the payroll community and others in the tax community,” Chuck Rettig, IRS Commissioner, said in a statement. “The primary goals of the new design are to provide simplicity, accuracy and privacy for employees while minimizing [the] burden for employers and payroll processors.”

The big idea is that come April 15, taxpayers should neither owe, nor be owed, any particular amount.

While newly hired employees typically complete Form W-4 so their employers can calculate the correct amount of taxes to withhold from each paycheck, the TCJA made significant changes to tax rates, deductions, tax credits and personal exemptions. 

A re-design of Form W-4 was therefore in order to ensure taxpayers would not be pre-paying for taxes not truly owed to the IRS or underpaying or being subject to penalties if they could not pay in the required amount of time.

However, since the revisions would require significant re-programming of payroll systems and ongoing employer support, the IRS and Treasury delayed the rollout of the new Form W-4 to 2020 to integrate feedback received from payroll firms and tax preparation companies over the last year that would best help taxpayers calculate their correct withholding amounts while shifting the burden of more difficult calculations to their employers.

In addition to disclosing their filing statuses and number of dependents, new hires will now be expected to include annual dollar amounts for non-wage income (such as interest, dividends and retirement), itemized and other deductions (such as home mortgage interest and charitable deductions) and expected tax credits.

Employees also will need to complete a worksheet to determine the total annual taxable wages for all lower paying jobs in their household, using previous Forms 1099, paystubs or last year’s tax returns.

Therein lie the primary concerns with the new draft: privacy and level of difficulty.

Should employees be sharing spousal and family income with employers? Should employees be asked to disclose to employers work they do outside of their full-time jobs? Will employees struggle to fill the form out correctly and will employers be forced to offer training?

The answer is not a simple “yes,”, but because tax rates rise as incomes do, taxpayers will now have the resources necessary to help them determine their correct withholding amount.

Plus, there are many caveats, beginning with the fact that employees are not required to have tax on non-wage income withheld from their paychecks. Instead, they can pay estimated tax on such income using Form 1040-ES, Estimated Tax for Individuals.

However, if they would like to use Form W-4 to have tax for this income withheld from their paycheck, they now have two options:  (1)they can report the income on line 4a, or (2) if they do not want to report this income directly to their employer, they can use the withholding calculator at www.irs.gov/W4app. The calculator helps calculate the additional amount of tax that should be withheld from one’s paycheck and that amount can be entered on line 4c without needing to report additional private financial information.

The new version of the form also allows taxpayers to check a box indicating their desire to have more tax withheld without having to share certain details with their employers.

Employees who previously submitted Form W-4 in any year before 2020 will not be required to submit a new form merely due to the re-design, as employers can continue to calculate withholding based on the information from an employee’s most recently submitted W-4.

However, the IRS does encourage taxpayers to check their W-4 calculations if they had too much or too little tax withheld after filing their 2018 taxes earlier this year, or if they have experienced any major life changes, such as a marriage or a new child.

The IRS is expected to release the final 2020 form, as well as related tools, guidance and information, in November to allow employers and payroll processors time to familiarize themselves with the new process and update their systems.

In an effort to continue to improve the draft of Form W-4 for 2020, the IRS currently is accepting public commentary until July 1. Anyone is welcome to submit comments to WI.W4.Comments@IRS.gov.