IRS Issues Final Version of 2020 Employee Withholding Form (1)

The final version of the 2020 withholding form was issued Dec. 4 by the Internal Revenue Service.

Form W-4, Employee’s Withholding Certificate, included revisions that clarified instructions from the second draft that was released in August. In comparison to the second draft, no substantial changes were made to the form’s data fields, which outline five steps for reporting dollar-amount adjustments to withholding.

Updated instructions for the form’s Step 2, which provides options for employees to adjust withholding in households with multiple jobs, explain the degrees of withholding accuracy using the IRS online withholding tax estimator, the Step 2b worksheet, or the check box that instructs employers to withhold using a higher rate schedule.

The instructions also expanded to include how employees may limit information provided on the form using the options in Step 2 or by indicating additional withholding per pay period in Step 4c.

The table that is to be used with the Multiple Jobs Worksheet was updated with annual withholding amounts, which employees using the worksheet may use to determine additional withholding to report in Step 4c. The deductions worksheet was updated to reflect standard deduction amounts for 2020.

Starting Jan. 1, 2020, the revised Form W-4 is required to be used by new-hires and employees making adjustments. However, employers must honor valid pre-2020 forms that are on file if changes are not needed. Employers may ask, but may not require, employees to replace existing forms, and may not treat employees with older forms as failing to submit.

The IRS is not to grant a compliance grace period for implementing the form and compatible withholding methods, the agency said in September. Employers that do not update payroll systems by Jan. 1 should use the manual withholding instructions in Publication 15-T, it said.

Withholding amounts are to be calculated using the worksheets and tables in Publication 15-T, “Federal Income Tax Withholding Methods.” The automated percentage method, published by the IRS Nov. 26, is compatible with 2020 Forms W-4 and forms issued before 2020. The publication’s two wage-bracket method tables and two manual percentage-method tables are year-specific. A final version of Publication 15-T is expected to be released by Dec. 31.

Turning to the New Form

Employers could start using the new form as of Dec. 5, said Pete Isberg, vice president for government affairs at ADP LLC.

“For example, somebody applying for a new job in December that might get their first paycheck in January, this is the form they should be filling out,” Isberg said during a teleconference on the new Form W-4. “We’ll see how quickly employers can accommodate that.”

Additionally, employees could be surprised with a tax bill if the form is filled out incorrectly, Isberg said. Employers and employees should understand the new form and how mistakes can be avoided.

“While the updated form may initially elicit some confusion for employees, these important changes will ultimately simplify the ability to set and adjust withholding to achieve desired results, such as a specific tax refund amount,” said Isberg, who also is president of the National Payroll Reporting Consortium, which represents a group of payroll service providers.

Although the form is generally good news for employees, they may find it necessary to look up details from last year’s individual income tax return to determine how much income to withhold.

The previous Form W-4 “was basically a 30-second exercise” to complete, Isberg said. “Now, it’s probably going to take a little bit longer.”

The withholding form and instructions are being revised to reflect the elimination of personal exemptions in the tax code overhaul (Pub. L. 115-97) that took effect Jan. 1, 2018. Withholding allowance amounts were directly tied to the number of personal exemptions, and the IRS had to change the form and withholding methods to better conform with calculating tax liabilities under the new law.

A third early release of the employer withholding instructions was issued Nov. 4 and included a section titled “Alternative Methods for Figuring Withholding.” The 24-page publication, which was expanded from the previous draft’s 18 pages, included withholding guidance regarding periodic payments of pensions and annuities and new employees who fail to submit Forms W-4.

The alternative-withholding section said employers must use a modified calculation method to determine the amount of federal income-tax withholding for nonresident alien employees. The section included guidance on annualized wages, average estimated wages, cumulative wages, and wages from part-year employment.

The new Form W-4 marks the second attempt by the IRS aimed at revising the form. The agency released a draft in June 2018 that for the first time asked employees to provide dollar amounts expected to be earned from second jobs and by other household members, along with nonearned income and potential tax credit amounts.

Advisory Group Calls for More Guidance

The release of the 2020 Form W-4 comes about two weeks after the agency’s Internal Revenue Service Advisory Council recommended that all employees submit a new federal income-withholding form by October 2020 and that employers help workers with this process. The council, in its 2019 report presented Nov. 20 to the IRS, said the agency should clarify the rules and procedures for federal income tax withholding in 2020. The rules are complex and confusing, especially to employees, said the report, which listed concerns about Form W-4 as the advisory council’s top issue.

Additionally, the council “believes that many employees will not complete and submit a new Form W-4 or W-4P to their employers due to the changes and the confusion the employees will have in completing the new form and using the estimator,” the report said.

In addition to updating the withholding estimator, the council recommended that the IRS further clarify the rules and procedures for 2020 and require employees to submit a new 2020 W-4 by Oct. 1, 2020. The agency should encourage employers to distribute the 2020 instructions to all employees or provide them with the link to the document’s location on the IRS website.

(Updated to include comments from Pete Isberg, vice president for government affairs at ADP LLC.)