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Workforce Management

2021 W-4 Changes: What HR Leaders Need to Know

It’s time for employers to breathe a sigh of relief. After the massive overhaul of the 2020 W-4 form (its first big update in 30 years) there’s very little different about the 2021 W-4 form, aside from the dates.

The W-4 is still an important part of compliance landscape, completed whenever an employee starts a new job or modifies their withholding status. If last year’s changes passed you by, here’s a refresher course on the new Form W-4.

History of the W-4

The federal income tax is a pay-as-you-go tax: you must pay the tax as you earn or receive income during the year. Form W-4 is used by employees to let their employer know the amount to withhold and pay for federal income taxes on each paycheck. An employee’s elections on Form W-4 provide the employer with the factors needed to accurately calculate withholding. If an employee does not fill out a W-4 correctly, too little tax may be withheld and result in the person owing tax to the IRS when they file their individual return, including potential penalties. If too much federal tax is withheld per paycheck, the individual will overpay the IRS and will receive a refund at the end of the tax year.

For decades, the basis of federal income tax withholding from employees has been marital status and number of allowances. Employees and employers are familiar with terminology such as “Married-3” or “Single-2.” But those designations have changed. With the passage of the Tax Cuts and Jobs Act in December 2017, Congress eliminated withholding allowances as the basis for federal income tax calculation. Because of the sweeping nature of that legislative change, the IRS delayed implementation of a new withholding system in 2018 and 2019. After a few agency revisions and drafts, the redesign of Form W-4 in 2020 now aligns the employee’s withholding elections to the language in the federal tax code.

What Changed for Employees?

Well, it depends on the employee’s situation. If an employee had a year 2019 or earlier Form W-4 on file with their employer, those withholding elections could remain in place. The IRS didn’t require employers to update all existing employees to 2020 W-4 forms-the same will apply for 2021. However, if you plan to switch jobs, or make any changes to your federal withholding elections in 2021, or your employer requires new withholding certificates from all employees in your company, that’s a different story. The 2021 W-4 you’ll fill out will look very different from any you filed prior to 2020.

The 2017 Tax Cuts and Jobs Act made some significant updates to the tax code, one of which was to nearly double the standard deduction (from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for joint filers). This change makes it more advantageous for some filers to take the standard deduction instead of itemizing their deductions. It also eliminates the need for withholding allowances, which aligns with the suspension of personal exemptions.

Better for Employees

The redesign was intended to be easier for employees to fill out and to accurately tell their employers how much federal income tax they want withheld from their pay.

Employees can elect to withhold federal income taxes for 2021 based only on marital status. If they do this, the employee completes only part 1 with their name, address, Social Security number and filing status, and part 5 where they sign and date the form. The result should be less confusion and less time spent navigating the form. It is within optional steps 2, 3, and 4 on the redesigned W-4 Form where the significant changes begin.

New Requirement: Marital Status Box

Married taxpayers or taxpayers who have dependents or more than one job may have to do a little more work. Section 2 asks the employee to specify whether they hold multiple jobs or have a spouse who is also employed.

If the answer’s “yes,” they have to complete Step 2, and then fill out Steps 3 and 4 for just one of the jobs (for the most accurate calculation, the IRS says to use the highest paying job). The IRS helpfully provides a Tax Withholding Estimator calculator to guide employees through the process of estimating their withholdings.

The calculator:

  • Accounts for credits and deductions;
  • Estimates whether the taxpayer will owe or receive a refund based on current withholdings and the amount of tax owed for the rest of the year;
  • Provides guidance for the steps to take if the taxpayer wants to get a refund or if they’d rather get the amount owed as close to zero as possible.

To use the calculator for Step 2, some information from the employee’s pay stubs, and prior year tax returns, needs to be gathered including: The total amount of wages expected to be paid for the year; the amount of any bonuses; total federal income tax withheld; amount of income tax withheld from the last paycheck.

Step 3 is where the employee claims any dependents and deducts the $2,000 per-child tax credit out of their withholding ($500 for non-child dependents). And Step 4 is where employees can make additional adjustments, including having tax withheld for additional income (e.g., interest, dividends or retirement income) or calculate if they choose to itemize their deductions at tax time rather than using the standard deduction.

What to do to Prepare

We suggest reviewing the 2021 W-4 instructions, Publication 505 and the IRS FAQs about the 2020 revisions to Form W-4 online at IRS.gov.

How Paycor Can Help

We’re proud to keep more than 30,000 organizations informed and compliant with federal and state laws and regulations. Since 1990, Paycor has maintained a core expertise in payroll and compliance. We established our compliance expertise in the Cincinnati tri-state area, one of the most complex tax jurisdictions in the country, which is why we’re able to handle payroll and tax complexities in a way our competitors can’t. If you’re a Paycor customer and still have unanswered questions, please contact your payroll specialist for more support.