Payroll, Regulations & Compliance

New in 2020 – Changes to Federal Income Tax Withholding

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Have you ever received a large refund after filing your annual income taxes? Or, maybe you owed a significant amount back to the IRS? In either case, your federal income tax withholding was a factor.

Withholding tax is the amount your employer withholds from your paycheck and pays to the IRS in your name [1].

Once your actual tax amount is calculated at the end of the year, any over- or under-payment is figured. If you paid too much, you get a refund. If you didn’t pay enough, you owe the difference.

But processing refunds and tracking bills is laborious for the IRS. This began the search for a way to reduce large discrepancies, allowing taxpayers to keep more money in their pockets throughout the year. The solution was to completely redesign how withholding tax is calculated, resulting in an entirely new W-4 form.

The new form, called Form W-4: Employee’s Withholding Certificate, goes into effect on January 1st, 2020. It eliminates allowances entirely and instead estimates taxes as dollar amounts. The form asks a series of questions concerning an employee’s specific income and tax situation. Steps 1 (Personal Information) and 5 (Signature) are the only required steps, though filling out Steps 2-4 will render the most accurate calculation.

The IRS provides a helpful online tool called the Tax Withholding Estimator [2] to assist with the calculation. A draft of the new 2020 Form W-4 [3] can be viewed on the IRS website, along with a helpful FAQ guide [4].

Once the form is submitted, employers will update the employee’s tax information to ensure taxes are accurately withheld from each paycheck.

What does this mean for employees?

Beginning January 1st, 2020, new employees or employees wishing to change their withholding will be required to use the new form.

What does this mean for employers?

Beginning January 1st, 2020, all W-4s must be submitted using the new form. There will be no grace period offered by the IRS.

If employees have the current version W-4 on file that is fine—they do not need to submit a new form. However, if they want to make changes to their withholding on or after January 1, 2020, they will need to use the new form.

An employer may request that current employees fill out new forms, but they cannot require it. And if they do request it, they must explain that it is not required and that they will continue to be withheld based on their current W-4 on file.

Tilson

At Tilson, we are working with our technology partners to update our software to receive the information on the new W-4. We will send out updates as they develop.

To view or modify your current withholding, using the Tilson online HR portal, follow these simple steps:

Tilson recommends completing a Paycheck Checkup [5] on the IRS website at least twice a year. Doing so will keep your withholding in check and reduce the chances of having a tax bill at the end of the year.

Conclusion

It’s never too early for employers to start talking with their employees about the changes in withholding and the new W-4 form. This will eliminate confusion and guarantee a smooth transition as we look ahead to a bright new year!

Please consult your tax advisor for any additional questions regarding changes to your W4 and tax withholdings.

 

[1] https://www.irs.gov/individuals/employees/tax-withholding

[2] https://www.irs.gov/individuals/tax-withholding-estimator

[3] https://www.irs.gov/pub/irs-dft/fw4–dft.pdf

[4] https://www.irs.gov/newsroom/faqs-on-the-draft-2020-form-w-4

[5] https://www.irs.gov/paycheck-checkup