New IRS Publication 15-T, Federal Income Tax Withholding Methods, provides employer procedures for withholding for wages on revised Form W-4. The IRS has released a draft version of the publication to offer employers a first look at the new procedures.
Form W-4 Redesigned
The IRS has redesigned the 2020 Form W-4, Employee’s Withholding Allowance Certificate. Beginning with the 2020 form:
- employees will no longer be able to request adjustments to their withholding using withholding allowances; and
- 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.
The draft 2020 Form W-4 is broken up into five steps:
- enter personal information;
- account for multiple jobs;
- claim dependents;
- other adjustments (optional); and
- signature and date.
Comment: An employee will complete Steps 2, 3, and/or 4 only if relevant to his or her personal or financial situation. For these steps, the employee shows adjustments that will affect the withholding calculations.
Employer Withholding Based on W-4 Steps
Employers will determine withholding based on the steps listed on Form W-4.
Steps 1 and 5 only.
All employees must complete Steps 1 and 5 (filling in their personal information, filing status, and dated signature). For employees who complete only Step 1 and Step 5, the employer will withhold using the appropriate method based on the employee’s filing status and wage amounts.
If the employee checks the box on line 2, indicating that there are only two jobs in the household, the employer will calculate withholding using the special “higher rate” Percentage Method or Wage Bracket Method tables provided in Publication 15-T. This will mean higher withholding for the employee.
If the employee chooses one of the other two alternatives in Step 2 (using either the IRS calculator at www.irs.gov/W4App, or Worksheet 1 in the Form W-4 instructions), the additional withholding will be included, per pay period, in Step 4, line 4c of Form W-4, along with any other additional tax amounts.
Step 3 of Form W-4 asks the employee to multiply the number of qualifying children under age 17 by $2,000; and multiply the number of other dependents by $500. The employee adds these, and includes the total amount on line 3.
Employers will use the amount on line 3 as an annual reduction of tax. Employers will use the amount that the employee entered on line 3 even if it does not equal the sum of any qualifying children and dependent amounts entered on the left in Step 3, because line 3 may be used to take into account other tax credits.
Comment: If line 3 is blank, but there are amounts entered on the left in Step 3, the employer should ask the employee to enter an amount on line 3 (even if zero).
Step 4, lines 4a and 4b.
Line 4a asks about additional income other than wages, and line 4b asks about additional deductions other than the standard deduction. Employers will increase the annual amount of wages subject to income tax withholding by the annual amount entered on line 4a, and reduce the annual amount of wages subject to income tax withholding by the annual amount entered on line 4b.
Step 4, line 4c.
Line 4c asks the employee if he or she wants any additional amount withheld each pay period. Employers will increase per pay period withholding by this amount.
Employer Withholding Worksheet
Publication 15-T includes an Employer Withholding Worksheet that will be used for Forms W-4 that employees submit for 2020 or later, as well as adjustments for an employer to calculate withholding for Forms W-4 that employees submitted in an earlier year. Revised Percentage Method and Wage Bracket Method tables will be used for both prior year Forms W-4 and for Forms W-4 for 2020 and later.
Caution: The Percentage Method and Wage Bracket Method Tables in the draft Publication 15-T are based on the 2019 inflation adjustments. The IRS will provide the 2020 inflation-adjusted amounts in Notice 1036 and the final Publication 15-T for 2020 when they are available.
Purpose and Frequently Asked Questions
The IRS expects the redesigned Form W-4 to reduce the form’s complexity and increase transparency and accuracy in the withholding system.
The IRS has made available a Frequently Asked Questions (FAQs) page on its web site for answers to questions employers and employees may have about the changes in the Form W-4 and determining withholding.
By Robert Recchia, J.D., M.B.A., C.P.A.