The Tax Cuts and Jobs Act of 2017 overhauled numerous provisions of individual tax law, including reducing statutory tax rates amongst the different income tax brackets and suspending personal exemption amounts. These changes required employers to adjust their employees’ withholdings with revised tax tables while using the historical Form W-4. These law changes, combined with the withholding changes, saw individual refunds decrease over $300 million for the 2019 filing season.
In December 2019, after several drafts and major revisions, the IRS issued a redesigned Form W-4 which will go into effect January 1, 2020. This form is intended to better reflect the new law and remove the concept of “allowances,” as those were based on the personal exemptions that are no longer used. Employers must use the 2020 Form W-4 for all employees hired after 2019 or any employees wanting to adjust their withholdings. The IRS published a draft version of Publication 15-T that discusses in detail the tax withholding methods. The final version is expected to be released in mid-December 2019.
Employers should continue to use a Form W-4 previously furnished by an employee until such time that the employee wishes to adjust their withholdings. If an employee is rehired in 2020, they will need to furnish a new Form W-4 using the revised form.
Although the new form has five sections, only steps one and five are required. Employees are encouraged to complete steps two through four if they have multiple jobs, a working spouse, dependents, or other income and deduction items that they would like considered in determining their withholding.
As an employer, you should not provide tax advice on the completion of Form W-4. However, it may be helpful to make your employees aware of the tax withholding estimator provided by the IRS at www.irs.gov/W4app.
If you have any questions about the new Form W-4 or are looking for more information regarding the completion of the form and calculation of tax withholding amounts, be sure to reach out to your CRI advisor.