IRS Releases Draft of Newly Designed Form W-4 for Use in 2020

(Parker Tax Publishing June 2019)

The IRS issued a draft of the 2020 Form W-4, Employee's Withholding Allowance Certificate, which has been redesigned in light of changes made by the Tax Cuts and Jobs Act of 2017. In the new version of Form W-4, withholding allowances are no longer used since personal exemptions, to which the withholding allowances were previously tied, were eliminated by the TCJA for years 2018 - 2025. Draft Form W-4 and W-4 FAQ (IRS website).

Last week, the IRS released a draft version of the 2020 Form W-4, Employee's Withholding Allowance Certificate, which has been redesigned in order to assist taxpayers in determining the correct amount of yearly tax withholding in light of changes made by the 2017 Tax Cuts and Jobs Act (TCJA). The IRS said that it will also be releasing draft employer instructions related to the draft Form W-4 soon and will be issuing more information in the future relating to Form W-4.

The revised Form W-4 is divided into 5 steps. The only two steps required for all employees are Step 1, where the employee enters personal information, such as name and filing status, and Step 5, where the employee signs the form. According to the IRS, if Steps 2 through 4 apply to a taxpayer, the taxpayer's withholding will more accurately match that taxpayer's tax liability if they are completed.

Where a taxpayer only fills out Step 1 and signs the form, the IRS said that the taxpayer's withholding will be computed based on his or her filing status's standard deduction and tax rates, with no other adjustments.

According to the W-4 FAQ posted on the IRS's website, a taxpayer should increase withholding if (1) he or she holds more than one job at a time or if the taxpayer and his or her spouse both have jobs (Step 2), or (2) the taxpayer has income from sources other than jobs that are not subject to withholding. The IRS notes that, if a taxpayer does not make these adjustments, the taxpayer will likely owe additional tax when filing his or her tax return and may owe interest and penalties. With regard to income from other sources, the IRS advised that the taxpayer can pay estimated tax instead of having extra withholding.

The IRS notes that a taxpayer should decrease his or her withholding if he or she is eligible for income tax credits such as the child tax credit or credit for other dependents, and/or is eligible for deductions (other than the standard deduction).

For taxpayers with multiple jobs, the revised Form W-4 provides the following three options from which to choose in calculating the amount of tax withheld:

Option 1: For maximum accuracy and privacy (to avoid revealing to an employer on the Form W-4 that a taxpayer has multiple jobs), the taxpayer can use the calculator at irs.gov/W4app. The taxpayer will be guided to enter an additional amount to withhold on Line 4c and the taxpayer will need to know the approximate amount of pay for each job, but the taxpayer will need to enter the additional amount on the Form W-4 for only one of the jobs. If pay for any of the jobs changes significantly, the taxpayer will need to furnish a new Form W-4 to have accurate withholding.

Option 2: If the taxpayer does not have access to the online calculator but wishes to have roughly accurate withholding while retaining privacy, the taxpayer may use Worksheet 1 on page 3 and similarly be guided to enter an additional amount to withhold on Line 4c. The taxpayer will need to know the approximate amount of pay for each job, but will need to enter the additional amount on the Form W-4 for only one of the jobs. If pay for any of the jobs changes the additional withholding amount in the lookup table, he or she will need to furnish a new Form W-4 to have accurate withholding.

Option 3: If there are only two jobs held at the same time in the taxpayer's household, the taxpayer may check the box in Step 2 on the forms for both jobs. The standard deduction and tax brackets will be divided equally between the two jobs. The taxpayer would not need to furnish a new Form W-4 to account for pay changes at either job. According to the IRS, this option is less accurate - more tax than necessary may be withheld from the taxpayer's wages - but the taxpayer in this situation generally won't have too little tax withheld (i.e., the more similar the earnings at the two jobs, the more accurate this option will be). The IRS notes that this option reveals to the taxpayer's employer on his or her W-4 that the taxpayer has multiple jobs in his or her household.

With respect to the question of whether an employer will need two systems for processing Forms W-4 - one for forms submitted before 2020 and another for forms submitted after 2019 - the IRS said that it depends. The IRS notes that the same set of withholding tables will be used for both sets of forms. According to the IRS, employers can apply these tables separately to systems for new and old forms. Or, the IRS said, rather than having two separate systems, an employer may prefer to use a single system based on the redesigned form. To do this, the employer can enter zero or leave blank information for old forms for the data fields that capture the information on the redesigned form but was not provided to the employer under the old design. The IRS said that additional guidance will be provided on the payroll calculations needed based on the data fields on the new and old forms.

For a discussion of employee withholding on Form W-4, see Parker Tax ¶212,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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