The I.R.S. Form W-4 informs employers the amount of federal income tax to withhold from employees. This form should be filled out by a new employee at the start of their employment, and entered into the employer’s payroll system within the first pay period in which the employee works.  When an employee’s tax filing status changes, marriage or birth of a child, this form should be updated. Accurate paycheck withholding is important for both the employer and the employee. Employees facing an unwelcome bill and possible penalties at tax time could place them in an unfortunate situation. 

Effective January 1, 2020 the IRS issued a new Form W-4, reflecting changes to the federal tax code from the Tax Cuts and Jobs Act which took effect last year. The new design has done away with the old list your allowances here, and simplified the process or in some cases completely confused others. Not to worry, we are here to help you understand it and be able to answer your employee’s questions when they fill it out. If you need more backup, the American Payroll Association has provided a sample letter to help guide employees on filling out the form.

The new form no longer bases allowances on personal exemptions, but information on sources of income and how you file your taxes – married, single, head of household, now determine your tax withholding. It accounts for second jobs, self-employment income, dividends, interest as well as the number of dependents to calculate the appropriate tax withholding.

Employees may be concerned sharing details about second jobs or sources of additional income with their employer.  To address this concern, the IRS has created an estimator tool which prints out the W4 with the calculated amount of withholding listed on the “extra withholding” line without sharing details on how it was calculated.

The new form is very simple for employees if they have only one job, no spouse or dependents and use the standardized deduction when filing their taxes. If that is the case, all employees need to provide is their name, address, Social Security number and filing status, then sign and date the form.  If their taxes are more complicated, it will likely take them more time to fill out the form. Consider allowing employees take them home and complete with their spouse or tax adviser if they wish.

Does everyone have to complete a new Form W-4?

No. Only newly hired employees in 2020 are required to complete the new form. Employers can ask all workers to fill out the new form, but the I.R.S says it’s optional for them to complete it.