Draft 2020 Form W-4, Employee’s Withholding Allowance Certificate, makes significant changes to the prior form. In particular, the 2020 form:
- takes a five step approach;
- requires that the taxpayer enter dollar amounts, rather than simply entering the number of withholding allowances; and
- eliminates/replaces certain categories that were on prior forms.
Beginning with the 2020 Form W-4, employees will no longer be able to request adjustments to their withholding using withholding allowances. Instead, using the new Form W-4, employees will provide employers with dollar amounts to increase or reduce taxes or to increase or decrease the amount of wage income subject to income tax withholding.
Caution: Employees do not have to submit a new Form W-4 to their employers merely because of the form redesign. However, starting in 2020, all new employees must use the redesigned Form W-4, and so do employees hired before 2020 who need to adjust their withholding.
In conjunction with the draft Form W-4, the IRS also released a draft of new Publication 15-T, Federal Income Tax Withholding Methods, for tax year 2020. The draft release of Publication 15-T offers employers a first look at the new steps to calculate federal income tax withholding.
The five steps to filling in the draft 2020 Form W-4 are:
- enter personal information;
- account for multiple jobs;
- claim dependents;
- other adjustments (optional); and
- signature and date.
Comment: Every employee must complete Steps 1 and 5. But if an employee fills out only these steps, withholding will be based only on his or her standard deduction and tax rates, with no other adjustments. If Steps 2 through 4 apply to an employee’s personal or financial situation, the IRS states that withholding will more accurately match his or her tax liability if the employee completes them.
Step 1 – Enter Personal Information
The personal information required for Step 1 is essentially the same as that required on the prior form, with one significant exception. The checkboxes for filing status on the 2020 draft form are:
- single or married filing separately;
- married filing jointly; and
- head of household.
For 2019, the options were:
- married; and
- married but withholding at the higher single rate.
Thus, for 2020, there is a new option for head of household. Married filing separately, which was also not included as an option on the 2019 form, is included in the line for single, but the option for married, but filing at the higher single rate is eliminated.
Step 2 – Account for Multiple Jobs
The line in Step 2 of the draft 2020 W-4 is new. It provides the taxpayer with three options:
- use the IRS calculator at www.irs.gov/W4App to determine the correct amount of withholding;
- use Worksheet 1 in the instructions and enter the results on line 4c “for roughly accurate withholding”; or
- if there are only two jobs in the household, simply check the box on line 2 of the Form W-4 for each job.
The form warns that checking the box may result in more tax than necessary being withheld.
Step 3 – Claim Dependents
Employees use line 3 if they expect to claim the child tax credit or credit for other dependents. Rather than simply asking for the number of allowances, as on the 2019 Form W-4, the draft 2020 Form W-4, requires the taxpayer to enter a dollar amount for dependents:
- $2,000 for each qualifying child; and
- $500 for each dependent who is not a qualifying child.
Employees can also use line 3 to enter an estimated amount for other credits they expect to claim, such as the education tax credit or the foreign tax credit.
Step 4 – Other Adjustments (optional)
In addition to asking what, if any, additional amount the taxpayer wants withheld (line 6 on the 2019 Form W-4), lines 4a and 4b in Step 4 of the 2020 draft form ask for the following information.
- Line 4a – Enter the amount of other income that is not subject to withholding, if the taxpayer wants tax withheld from that income. The taxpayer should not include income from other jobs, but may include interest, dividend, and retirement income.
- Line 4b – If the taxpayer wants to reduce withholding due to deductions other than the standard deduction, the taxpayer should use Worksheet 2 in the instructions and enter the result on line 4b.
Line 4c is for any additional amount of tax the taxpayer wants withheld (equivalent to line 6 of the 2019 form).
Line 4d is for a taxpayer who expects to have no tax liability for the year and claims exemption from withholding (similar to line 7 on the 2019 form).
Comment: If any of lines 3-4b apply, they must be completed on only one Form W-4 per household. The IRS states that withholding will be most accurate if taxpayers complete these lines on the Form W-4 for the highest paying job in the household.
Step – 5 Signature
The signature block, and employer information below it are similar to the 2019 Form W-4.
Purpose of Form
The stated purpose of IRS in creating the new Forms W-4 is “more accurate and transparent withholding.” It does appear that if taxpayers follow the revised form, their withholding will be more in line with their tax liability, resulting in fewer surprises at tax filing time.
To answer questions about the new form, the IRS has created a FAQ page on the early release of Form W-4.
By Robert Recchia, J.D., M.B.A., C.P.A.