The Tax Cuts and Jobs Act (TCJA) made some changes to U.S. taxes that meant significant modifications to the systems the IRS uses to administer the law. Perhaps the most notable of these changes was the elimination of the personal exemption, as this concept was the basis on which employee withholding had been calculated for decades. The Treasury and IRS have responded by issuing a revised Form W-4 Employee’s Withholding Certificate to be used starting in 2020, and they have also released new proposed regulations and online tools designed to help employers and employees transition to the new system.
To assist with computing income tax withholding, the redesigned Form W-4 no longer uses an employee’s withholding allowances, which were tied to the value of the personal exemption. Due to TCJA changes, employees can no longer claim personal exemptions. Instead, income tax withholding using the redesigned Form W-4 will generally be based on the employee’s expected filing status and standard deduction for the year.
The Form W-4 is also redesigned to make it easier for employees with more than one job at the same time, or married employees who file jointly with their working spouses, to withhold the proper amount of tax.
In addition, employees can choose to have itemized deductions, the child tax credit, and other tax benefits reflected in their withholding for the year. As in the past, employees can choose to have an employer withhold a flat-dollar extra amount each pay period to cover, for example, income they receive from other sources that is not subject to withholding. Under the proposed regulations, employees now also have the option to request additional withholding by reporting income from other sources not subject to withholding on the Form W-4.
In general, the proposed regulations are designed to accommodate the redesigned Form W-4 and the related tables and computational procedures in Publication 15-T, Federal Income Tax Withholding Methods.
To answer the question that’s probably at the top of everyone’s list, the proposed regulations and related guidance do not require employees to furnish a new Form W-4 solely because of the redesign. Employees who have a Form W-4 on file with their employer from years prior to 2020 generally can continue to have their withholding determined based on that form.
The proposed regulations permit employees to use the new IRS Tax Withholding Estimator to help them accurately fill out Form W-4. As in the past, taxpayers may use the worksheets in the instructions to Form W-4 and in Publication 505, Tax Withholding and Estimated Tax, to help them fill out this form correctly.
The proposed regulations also address a variety of other income tax withholding issues. For example, the proposed regulations provide flexibility in how employees who fail to furnish Form W-4 should be treated. Starting in 2020, employers must treat new employees who fail to furnish a properly completed Form W-4 as single and calculate their withholding using the standard deduction and no other adjustments. Before 2020, employers in this situation were required to treat the employee as single and claim zero allowances.
In addition, the proposed regulations provide rules on when employees must furnish a new Form W-4 for changed circumstances, update the regulations for the lock-in letter program, and eliminate the combined income tax and FICA (Social Security and Medicare) tax withholding tables.
New Online Resources
The IRS has also launched two new online tools to help employers and employees adjust to the new system. Those tools are:
- The Income Tax Withholding Assistant for Employers, a spreadsheet-based tool designed to help employers, especially small businesses, easily transition to the redesigned withholding system. Further explanation of the new rules can be found in an IRS webinar, Understanding the 2020 Form W-4 and How to Use it to Calculate Withholding (video), available on the IRS’s video portal.
- A new and improved Tax Withholding Estimatorthat employees can use to help determine how much tax they should have withheld from their pay. The updated estimator incorporates the changes from the redesigned Form W-4 that employees can fill out and give to their employers this year. The IRS urges everyone to use this resource to determine if they need to adjust their withholding this year. A short video gives more information on the IRS Tax Withholding Estimator.
If you have any questions about the new withholding rules or the revised Form W-4, please contact your CRI advisor.