Starting next year, Form W-4 will look a little different.
When the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, it was only a matter of time before sweeping changes would affect Form W-4, too. And those changes—arguably the biggest since the form debuted in 1943—are finally coming to fruition for the 2020 tax year.
The main reason for the change? According to a press release from the Treasury and the IRS, the new Form W-4 “reduces the complexity and increases the transparency and accuracy of the withholding system.” In other words, the IRS is trying to prevent under-withholding and reduce the likelihood of owing additional taxes. So come April 2020, taxpayers shouldn’t owe money or receive a refund.
Here’s Why We Have a Revised Form W-4
Back in 2017, the TCJA brought about significant tax reform in the US. Implementing the most significant tax changes in over 30 years, the TCJA changed tax rates, expanded certain deductions (including the standard deduction), and eliminated others (such as the personal exemption for individuals and their dependents). The breadth of these changes affected tax liability—and, therefore, tax withholding—for nearly every US taxpayer. The changes also required revising over 400 IRS forms, including Form W-4.
Now, after two years of development, feedback, and multiple drafts, the final version of Form W-4 2020 will be released by the IRS this November.
The revised form must be used by all US employers beginning January 1, 2020.
So What’s Actually Changing on Form W-4?
One of the goals of the TCJA was to simplify and streamline US tax law. For some, the existing Form W-4 and its series of allowances and worksheets to adjust withholding amounts is a confusing, imprecise process. That’s why the revised form eliminates the concept of allowances altogether. The new form also has more options for employees to get a more accurate withholding amount.
All told, here are the new data items you can expect to input on the new Form W-4—in four easy steps.
Mandatory Data Items:
- Say goodbye to “the total number of allowances you are claiming.” On the revised Form W-4, the concept of withholding allowances (such as Married-3, Single-2) is a thing of the past.
- Step 1: You’ll have to claim one of three filing statuses: “Single” or “Married filing separately,” “Married filing jointly,” and a new addition: “Head of Household.”
Optional Data Items:
- Step 2: Additional Household Income Due to Multiple Jobs: If applicable, employees will enter the full-year income associated with any second job. This can be a second job the employee holds or the annual wage income of any spouse.
- Step 3: Claim Dependents: This is where you’ll put the number of qualifying children and/or dependents for the child/dependent tax credit.
- Step 4: Other Adjustments: This section asks employees to enter estimated nonwage income not subject to withholding (such as interest and dividends) or estimated subtractions to income based on expected deductions. Under the new Form W-4, amounts entered for both additional income and deductions will be full-year amounts, rather than per-payroll amounts. That means employer payroll systems will need to be modified to include full-year estimates.
What Should You Do To Get Your Business Ready For The Form W-4 Changes?
Taxpayers aren’t the only ones affected by the changes to Form W-4. As an employer, a seamless adoption of the new form means your internal teams need to be aligned with—and prepared for—the incoming revisions.
“Communicate with your employees now to tell them about the incoming Form W-4 changes, what it means for them, and what needs to happen to prepare for 2020,” said Marnee Kugler, the HR Specialist at Velocity Technology Solutions. “You don’t want to procrastinate.”
For your IT Team: Due to the various calculation changes on the new W-4, employers will need to adjust their ERP software accordingly. So that means service providers with payroll software, like Infor’s CloudSuite HCM, will have to update their system with the appropriate patches.
Infor, for example, is gearing up to deploy these necessary patches before the end of the year.
But prepping for the changes doesn’t end there: Once the new patches are released, your company’s IT team needs to execute rounds of testing to ensure the new Form W-4’s fields, tables, and calculations are properly implemented and functioning before the first paycheck of 2020 hits.
For Your HR Team: Don’t wait until the craziness of the tax season and start educating your employees now. You can start by familiarizing yourself and your staff with the draft W-4 and all related IRS FAQs. You should also encourage employees to use the IRS tax calculator to perform a “paycheck checkup” and calculate their most accurate tax withholding.
If you’re a Velocity customer and currently using Infor for your HR and payroll software, our DevOps team is here to serve as an additional resource, too. If you have questions about what the changes mean for your software—or even need assistance accelerating the testing phase—we’re here to help.
Not an Infor customer? Whatever platform you’re using, our DevOps team will work with you to to make the transition as seamless as possible.