The IRS has released the final version of the 2020 Form W-4, Employee’s Withholding Allowance Certificate. The final version is little changed from a second draft of the form, released last August.
Employees do not have to submit a new Form W-4 to their employers merely because of the form redesign. However, starting in 2020, the following types of employees must use the redesigned form:
1. new employees; and
2. employees hired before 2020 who need to adjust their withholding.
Along with the redesigned 2020 Form W-4, the IRS released a revised Publication 15-T, Federal Income Tax Withholding Methods.
Draft form was controversial
Forms W-4 for previous years allowed taxpayers to adjust the amount of withholding from their paychecks by simply increasing or reducing the number of withholding allowances on Form W-4, Employees could also ask for additional amounts to be withheld. However, the Tax Cuts and Jobs Act eliminated the personal and dependency exemptions, rendering the withholding allowance approach obsolete. Therefore, the IRS had to change the form.
The first draft of the 2020 Form W-4 faced controversy over:
1. complexity; and
2. privacy considerations.
The first draft of the 2020 Form W-4 required five steps to determine how much federal income tax to withhold from an employee’s paycheck. The first and last steps are simple and were retained in the second draft and final form: step 1 is for the employee’s personal information and filing status; and step 5 is the employee’s signature block. However, the middle steps were more complex.
Revised Draft Form—Privacy Concerns Acknowledged, Complexity Remains
The revised draft Form W-4 retained the five-step process of the original draft Form W-4. However, the revised draft form added a caution about privacy concerns to step 2. The step-2 choices remained essentially same, but the revised draft form cautioned taxpayers to choose one of the first two of the three available options if they had privacy concerns.
The step-2 choices in the revised draft were:
1. use the IRS on-line estimator to determine the correct amount of withholding;
2. use the Multiple Jobs Worksheet in the instructions “for roughly accurate withholding”; or
3. if there are only two jobs in the household—for example, if each spouse on a joint return has one job—simply check the box on line 2 of the Form W-4 for each job. However, this option is accurate only if both jobs have similar pay; otherwise, excess tax may be withheld.
Final Form—Almost Identical to Revised Draft
The IRS did not anticipate further changes to the second draft form beyond minor updates for inflation. True to their word, the IRS released a final 2020 Form W-4 that differs from the second draft only in some minor wording changes and clarifications.
The final form, unlike the draft, suggests that, to be accurate, a taxpayer with multiple jobs submit a 2020 Form W-4 for all jobs.
The final form also lacks the cautionary note about privacy concerns that was added to the second draft. However, the IRS expanded the privacy discussion in the 2020 Form W-4 instructions.
Steps 3 and 4 unchanged
Step 3 of the 2020 Form W-4 requires the taxpayer to enter a dollar amount for dependents, rather than asking for the number of allowances, as on the 2019 Form W-4. Step 4 is optional and used for additional adjustments.
These two steps in the final form are identical to the second draft form.
Final Instructions Also Little Changed
Except for the expanded privacy discussion, the final instructions for the 2020 Form W-4 are relatively unchanged from the second version of the draft instructions. The Instructions have been revised to clarify a number for points. For example the instructions for step 2 add information about the relative accuracy of using either option (a) the IRS on-line estimator or option (b), the Multiple Jobs Worksheet contained in the form instructions.
The final instructions also:
• update inflation adjustments;
• provide tax tables; and • add reference to new Form 1040-SR, U.S. Tax Return for Seniors.
By Robert Recchia, J.D., M.B.A., C.P.A.