What You Need To Know About The Revamped 2020 Form W-4

By Joshua Prince, CPA, Manager
January 2020

The IRS recently released a completely revamped 2020 Form W-4, Employee’s Withholding Certificate. The new format requires businesses to change the way they determine the amount to withhold for Federal income taxes from an employee’s pay. These changes may significantly impact the way businesses handle payroll, including calculating withholding taxes, reporting it correctly on employee paystubs and W-2 Forms, and maintaining a dual payroll system that integrates the new withholding format alongside the existing one. In general, the purpose of Form W-4 is for an employee to determine the correct amount of Federal income tax to be withheld from their pay. The new form no longer determines withholding based on withholding allowances, instead, it adjusts tax withholding based on an employee’s expected income and deductions from other sources as entered on the Form W-4. It is important for employers and employees to understand how the new format impacts payroll and tax filing requirements.

Employers:

  • Are existing employees required to submit a new Form W-4?  No. Employees who furnished Form W-4 before 2020 are not required to provide a new 2020 Form W-4, but they may do so to adjust withholding. Employers must continue to withhold based on the forms previously furnished for existing employees who choose not to submit a new 2020 Form W-4.
  • Are new employees required to use the redesigned Form W-4?  Yes. As well, any existing employees who wish to adjust their Federal withholding in 2020 must do so using the redesigned Form W-4.
  • How is withholding calculated under the new 2020 W-4?  In the past, withholding was determined based on the number of allowances selected by the employee on the Form W-4. The new forms and instructions shift many of the calculations to the employer because withholding is now determined based on the employee’s filing status, other sources of income and deductions, and their tax rates.
  • Is my payroll system prepared to handle two different withholding structures – the old and new?  Employers should absolutely consider whether their payroll system is prepared to handle the dual methods - the old withholding method (i.e., number of allowances) and the new withholding method (i.e., actual income and deductions). You may need to maintain separate payroll systems and be prepared for integrating a new internal payroll system alongside the existing one. Please consult with your payroll service or PEO, and tax advisor.

Employees:

  • Am I required to submit a new Form W-4 for 2020?  No. If you provided your employer with a Form W-4 before 2020, you do not need to submit a new form simply because of the redesign. Employers will continue to compute withholding based on the information from your last Form W-4. New employees hired in or after 2020 will be required to submit the 2020 Form W-4.
  • How can I withhold additional Federal taxes to cover other sources of income?The redesigned Form W-4 makes it easier for you to have your withholding match your tax liability. 
    • Step 4(a) allows you to enter the total of your other estimated income for the year for which there is no tax withheld, such as interest, dividends, and certain retirement income. Taxpayers with self-employment income often make the related estimated tax payments quarterly. If you have only small amounts of self-employment income, you might want to include those amounts in this calculation. Your withholding will be computed based on this additional income and the income tax rates applicable to your filing status.
    • Alternatively, you can use the worksheets on page 3 of the IRS tax estimator at www.irs.gov/W4App and enter the resulting dollar amount on Step 4(c). If you or your tax advisor have made your own computations, simply enter the dollar amount of additional tax to be withheld from your pay in Step 4(c).
  • Can I adjust my Federal withholding to account for dependents and itemized deductions?
    • Dependents – Yes. Step 3 allows you to enter the number of qualifying children and other dependents for which you receive tax credits.
    • Itemized Deductions – Yes. The form’s default withholding is computed based on your filing status’s standard deduction, but if you expect to claim itemized deductions instead and want to reduce your withholding, enter them in Step 4(b). A deductions worksheet is available along with the Form W-4

While it is apparent that the new Form W-4 is more complicated than its predecessors, some of you may not feel confident to complete the new Form W-4. Please contact your MichaelSilver tax advisor or Joshua Prince at 847.982.0333 if you have any questions.

Joshua Prince, CPA serves as a Manager in the Tax Department at MichaelSilver. He works primarily with high-net-worth individuals and flow-through entities within a variety of industries, including real estate, financial services, family offices, and professional service organizations. Josh has provided income tax planning and compliance services for more than 9 years, helping clients formulate tax planning strategies for their personal and business needs. He is an active member of the Illinois CPA Society Flow-through Committee. He received his B.A. from the University of Illinois at Urbana-Champaign, M.S. in Accountancy from UIC, and M.S. in Taxation from DePaul University.