Employers may still have questions about implementing the revised 2020 Form W-4 and new withholding methods, but no transition period for compliance should be expected, the IRS said Sept. 26.
“At this time, IRS does not anticipate the delayed implementation of the 2020 Form W-4,” said Robyn Walker, a spokeswoman for the Internal Revenue Service. “If an employer’s automated system is not current, we suggest using the manual instructions provided in Publication 15-T.”
Starting Jan. 1, 2020, employers are required to use the 2020 Form W-4, “Employee’s Withholding Certificate,” and the withholding instructions in Publication 15-T, “Federal Income Tax Withholding Methods.”
Changes to Form W-4 and the withholding methods were required because the tax code overhaul (Pub. L. 115-97) suspended until Jan. 1, 2026, the use of personal exemptions in calculating income tax liability. Updates initially were to take effect for 2019, but were delayed to 2020 to incorporate comments from payroll professionals.
For many employers, compliance would depend on the ability of software providers and third-party payroll processors to update systems to incorporate the changes, said Fred A. Basehore, CPP, a senior manager at KPMG LLP.
“I don’t know how relevant a transition period is going to be if the software vendor and or outsource vendor has not appropriately updated their systems to accommodate these new withholding methods,” Basehore told Bloomberg Tax on Sept. 24.
A transition period of four to six months would be ideal for payroll professionals to communicate with service providers and test the new form and withholding methods, said Basehore, a member of Bloomberg Industry Group’s Payroll Advisory Board.
The American Payroll Association does not intend to ask the IRS to allow additional time to update payroll systems, Alice Jacobsohn, the association’s senior manager of government relations, said Sept. 26.
Early-release drafts of the withholding form and methods were issued to allow employers and payroll professionals to comment. The second drafts of the documents, released in August, may be used for programming payroll systems, the IRS said.
The second draft of Publication 15-T includes five sets of withholding instructions for employers, including revised percentage-method and wage-bracket method tables for use with 2020 Forms W-4. Amounts for 2019 are applied to the formulas and are to be updated with 2020 amounts in the finalized version, which is expected to be released in November.
The 2020 Form W-4 was renamed “Employee’s Withholding Certificate,” in the second draft, removing the word “allowance” from the title. A data field for employees to claim exemption from withholding, Line 7 on the 2019 version of the form, was not included.
Questions about the transition to dollar amounts from withholding allowances, dual-withholding systems, and the new process for employees to claim exempt from withholding were asked during a Bloomberg Tax webinar Sept. 18. Some of the questions are answered below:
What Will Happen to Withholding Allowances?
All withholding methods compatible with 2020 Forms W-4 include a fixed amount of wages exempt from withholding instead of allowance amounts based on the number of personal exemptions claimed by an employee.
The equivalent of zero, two, or three allowances is factored into the Publication 15-T withholding methods for 2020 forms, depending on the employee’s filing status and whether the box in Step 2(c) is checked.
Withholding allowances claimed on Forms W-4 issued before 2020 are to continue to apply, unless a change is needed. Employers are to calculate withholding without needing to convert information provided on older forms into information requested on the revised W-4.
Each withholding method that may be used for forms issued before 2020 requires subtracting from wages the number of allowances claimed, multiplied by an allowance amount ($4,200 in 2019). The wage-bracket method tables and manual percentage-method tables for older forms are to have the same structure as those in effect for 2019, with no changes to the calculation of the amount of tax to withhold.
New hires and employees who need to adjust withholding are required to file the revised form starting Jan. 1, 2020, but employers must honor valid forms remaining 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 a W-4.
Will Employers Need 2 Systems to Withhold Tax?
The revised publication contains a percentage method for automated systems, two manual percentage methods, and two wage-bracket methods. The manual percentage methods and the wage-bracket methods require separate withholding tables for 2020 forms and for forms issued before 2020. Employers with 2019 forms that remain on file would need to use two sets of withholding tables and calculations.
However, the percentage method for automated payroll systems uses one set of annualized withholding tables that may be used for 2020 Forms W-4 and older forms.
How Will Employees Claim Exempt From Withholding?
Based on instructions for the draft 2020 Form W-4, employees would write “Exempt” in the space under Step 4(c). Employers providing electronic Forms W-4 would need to create a field for employees to claim exempt from withholding. The field also would need to include language for employees to certify that they had no federal income tax liability in 2019 and expect to have no federal income tax liability in 2020.
IRS resources are available for employers to communicate income tax withholding changes to employees.
The IRS in August updated its online income tax tool, the Tax Withholding Estimator, to help employees review tax liabilities and update Forms W-4 to reflect desired withholding changes.
Employers also may provide to employees with Publication 5330, “Reminder from the IRS and the American Payroll Association,” and Publication 5303, “Paycheck Checkup Can Prevent a Tax-Time Surprise.” The publications direct employees to the withholding estimator and more detailed income tax guidance.