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Q. Do all employees have to use the new W-4?
A. No. For employees hired before 2020, their W-4s can remain in place. You can ask these employees to use the new form, but they are not required to do so. You can explain that withholding will continue based on the form they previously submitted and you will continue to withhold for these employees based on their previous forms. Employees hired after 2019 must use the new form.
Q. Should employees hired prior to 2020 who wish to adjust their withholding from pay January 1, 2020 or later use the new form?
A. Yes. Employees hired before 2020 who wish to adjust their withholding must also use the newly redesigned W-4 form. Additionally, if a new employee doesn’t submit a W-4 after 2019, you must treat them as a single filer with no other adjustments.
Q. What happened to allowances?
A. Allowances have been replaced by a new five-step process designed to make completing the W-4 more accurate. The IRS has updated its Tax Withholding Estimator, which is designed to guide employees through the process of estimating their withholdings. This calculator helps your employees account for credits and deductions, predict a tax refund or amount owed and provides guidance on aligning their withholding as closely as possible to their actual tax obligation.
Q. How do employees account for spousal income or a second job?
A. As before, employees’ tax liability is based on combined income from all sources, including second jobs and a spouses’ income. Additional tax (and potentially, penalties as well) may be due at the time of filing if withholding is not sufficient to meet tax obligations. Therefore, employees may want to make adjustments in order to reflect a spouse’s income or other additional income. This is done in Step 2 on the new W-4, and it provides three options for declaring additional income. These different options give the employee the ability to adjust their withholding with varying levels of accuracy, privacy and ease of use. If the employee has a second job, he or she can use the Tax Withholding Estimator to determine the most accurate amount to be withheld without disclosing additional employment.
Q. Will our software require two systems for the two different forms?
A. You don’t need two different systems since the same set of withholding tables will be used for both sets of forms. However, you’ll need to program your payroll system to accommodate the existing withholding calculation, as well as the new method.
1FAQs on the draft 2020 Form W-4, Page last reviewed or updated August 14, 2019, Internal Revenue Service, https://www.irs.gov/newsroom/faqs-on-the-draft-2020-form-w-4
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Insights from Ayco InnerCircle 2021