Is the new Form W-4 causing payroll problems?

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If you haven’t reviewed at the new IRS Form W-4, it’s changed, including:

  • Effective Jan. 1, 2020, all new hires must use the new Form W-4
  • Allowances are no longer used for the redesigned Form W-4
  • New filing status – Head of Household
  • Existing employees do NOT have to complete the new version
  • The default status for new hires who do not complete a Form W-4 after 2019 will be Single, No Adjustments
  • Future changes require employees to use the 2020 version to adjust withholdings

Several of our clients have questions about software inconsistencies they are seeing between payroll systems and the new Form W-4 calculation accuracy. They want to avoid employees from being under or overtaxed and getting a large tax burden or refund at year’s end.

Answers / Resources

Here’s what we found that might help to answer some of your burning Form W-4 questions.

According to the IRS Pub. 1586, “Employers must solicit Forms W-4 at least annually for three years to avoid possible penalties.” That doesn’t mean all employees must complete a new Form W-4 in 2020.

Employees can use the IRS’ Withholding Estimator to help them determine the amount to be withheld and their filing status. To prepare, employees should gather these documents: recent pay statements (spouse if applicable), other sources of income, and the employee’s most recent tax return.

Vice President of Government Affairs, Pete Isberg, hosted an ADP webinar called “Revisions to IRS Form W-4: What’s the Impact to Employers.” Below are some commonly-asked questions he answers during that webinar, which you can access on the ADP website.

  • It’s not mandatory that existing employees complete the new Form W-4 for 2020. But, are employers required to distribute it so they are aware?
  • Do we need to have two payroll systems with the new Form W-4? One for the old withholdings and one for the new withholdings?
  • Would you suggest that the payroll professional review the form and ask questions if they feel there is an employee error – such as on 4b deductions?
  • Is it OK if someone chooses to not fill out a Form W-4 or if the employee does not return the form?
  • Are paper forms required to be on file?
  • Considering the extra responsibility of the employer, what liability does an error carry for the employer?
  • How should employees hired on a project basis, whose income varies greatly from pay period to pay period, fill out the form?
  • Some employees choose Exempt. What constitutes “no tax liability” and what backup proof is needed?
  • If someone has claimed Exempt, but has not submitted a new Form W-4 by February 15, 2020, what are they supposed to get reset to? Is the IRS going to change the Exempt requirement since they are not requiring employees to file a new Form W-4?
  • Can other income, such as rental income, be included in line 4(a); and should it be the gross or net income that is reported?
  • Would an employee need to include their potential stock transaction that is taxable income (estimated value) in Box 4 (a) if it is not known since it would be considered other income?
  • Does your employee have to claim the child tax credit on Form W-4? Can they claim it later when they file their 1040?

The IRS also offers answers to general, employee, and employer frequently asked questions, including:

General and Employee

  • Where can I download the new Form W-4?
  • Why redesign Form W-4?
  • What happened to withholding allowances?
  • Are all employees required to furnish the new Form W-4?
  • My tax situation is simple. Do I have to complete all the steps?
  • What happens if I only fill out Step 1 and then sign the Form?
  • When should I increase my withholding?
  • When should I decrease my withholding?
  • I want a refund when I file my tax return. How should I complete the redesigned Form W-4?
  • Why do I need to account for multiple jobs (Step 2)? I have never done that before.
  • Which option in Step 2 should I use to account for my multiple jobs? Which is more accurate? What if I don’t want to reveal to my employer on my W-4 that I have a second job?
  • The instructions above Step 3 say that in multiple job households, adjustments in Step 3 – 4b are to be on only one form and that withholding will be most accurate if the adjustments are made on the Form W-4 for the highest paying job. But, what happens if pay at two jobs is relatively similar or if changes in pay result in another job becoming the highest paying?
  • What if I have side work where I’m not treated as an employee?
  • What if I don’t want to reveal the amount of my non-job income, such as income from earnings on investments or retirement income, on my Form W-4 (Step 4(a))?
  • Is there a computer program I can use to help me complete Form W-4?

Employer

  • Are new employees first paid after 2019 required to use the redesigned Form?
  • How do I treat new employees first paid after 2019 who do not furnish a Form W-4?
  • What about employees paid prior to 2020 who want to adjust withholding from their pay dated Jan. 1, 2020, or later?
  • May I ask all of my company’s employees paid before 2020 to furnish a new Form W-4 using the redesigned version?
  • Will there still be an adjustment for nonresidential aliens?
  • When can we start using the new 2020 Form W-4?

If you need help with your payroll, give us a call.