2020 W-4 Changes: What HR Leaders Need to Know
2020 W-4 Changes: What HR Leaders Need to Know

2020 W-4 Changes: What HR Leaders Need to Know

If there’s anything consistent about government, it’s that we can always expect to be kept on our toes when it comes to rules and regulations. Heading into a new decade, we’ve all got a lot to focus on, but one of the most important transformations to pay attention to is the new Form W-4. That old standby that everyone has to fill out when starting a new job or modifying withholding status has received a major overhaul for 2020. As it’s the first big update in 30 years, the new form could be a head-scratcher for both employees and the payroll team.

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’s Changing for Employees?

Well, it depends on the employee’s situation. If an employee has a year 2019 or earlier Form W-4 on file with their employer, those withholding elections can remain in place. The IRS is not requiring employers to update all existing employees to 2020 W-4 forms. However, if you plan to switch jobs, or make any changes to your federal withholding elections in 2020, or your employer requires new withholding certificates from all employees in your company, that’s a different story. The 2020 W-4 you’ll fill out will look very different from the one you’ve filled out in previous years.

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.

Employees Should Benefit

The redesign is 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 2020 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 2020 W-4 instructions, Publication 505 and the IRS FAQs about the 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.

Talk to a Consultant

More to Discover

How to Pay 1099 Employees

How to Pay 1099 Employees

As the gig economy grows more employers are looking to hire independent contractors (aka 1099 workers). But since paying independent contractors isn’t a walk in the park, many employers are looking for step-by-step instructions. Here’s a breakdown of everything you need to know: How Do I Pay a 1099 Worker? This subject is something you will need to discuss in detail with the person you’re hiring for the job. Often, they will have a written contract that stipulates how and when they should be paid. The two most common methods of payment are hourly and by the job or project. Some independent contractors — such as attorneys — prefer to be paid on retainer, which means you pay them a lump sum at the beginning of each month in return for a...

States with Salary History Bans

States with Salary History Bans

Requesting job applicants’ salary histories has been a pretty common practice for employers over the years. Recruiters and hiring managers often use this knowledge to exclude people from the candidate pool, either because the applicant is “too expensive” or their previous salary is so low, hiring managers think the person is poorly qualified or inexperienced.Businesses have also used previous salary information to calculate new hire compensation—a process that can perpetuate pay disparity between women and men. To address this inequality, several states and municipalities have enacted bans on asking for previous salary information, although laws vary in terms, scope and applicability. The states and territories that have enacted salary...

Case Study: Buy Sod

Case Study: Buy Sod

Buy Sod Inc. Partners with Paycor to Pay Employees & Maintain Tax Compliance “Because we’re a niche company, our administrators sometimes have trouble uncovering and implementing best practices. But when we partnered with Paycor they brought the expertise and thought leadership to help us overcome tough challenges like the new EEO-1 report. Paycor has the patience, knowledge and resources to help us stay ahead of problems and grow.” - Jennifer Hillard, Director of People and Culture Why Buy Sod Inc. Chose Paycor In 2002, three family businesses came together to create a network of sod farms that operate and distribute around the country. But with ten locations and eighteen different payrolls to process, Buy Sod Inc. struggled to...

Webinar: Compliance in 2020: What You Need to Know

Webinar: Compliance in 2020: What You Need to Know

A new year brings new compliance issues employers should be monitoring at the federal, state and local levels. To help your organization prepare for what’s ahead, our compliance team will outline key changes in 2020 and trends in the areas of payroll, tax and HR compliance.Speakers: Arlene Baker and James SchwantesArlene Baker is a Senior Compliance Analyst with over 40 years of payroll and tax experience. She’s a member of the National Payroll Reporting Consortium focusing on IRS compliance, and she’s been a member of the national and local APA for 25 years. In 2003, Arlene was awarded the Ohio Payroll Professional of the Year award. James Schwantes is a Compliance Analyst with a legal and tax background. Prior to working at Paycor in...