The newly redesigned W-4 form has created many inquiries to our HR Hotline about how to answer questions from employees. While the new form was created to increase accuracy in response to tax changes from the Tax Cuts and Jobs Act of 2017, some are confused about how to fill it out and who should fill it out.
Here are some tips to keep in mind:
- Only newly hired employees in 2020 or any employee with a prior W-4 who wants to adjust their withholding in 2020 needs to use the redesigned form. MRA’s sample communication memo can be downloaded to assist in communicating the changes.
- Give employees a little extra time with the form. While it’s more straightforward, it may be daunting to fill out at first, especially since there hasn’t been a major overhaul of this form since 1987. That means we have gotten used to it looking a certain way and it take time to adjust to change!
- With the previous W-4, there were worksheets in the instructions to help individuals fill out the form. With the new form, there are also worksheets to assist with filing out the form. Employees should slow down and fully read through the instructions. In addition, it will be helpful to have their previous tax return handy because the new W-4 form asks for things like sources of income to determine the correct withholding amount. Some have called it a “mini tax return.”
- The biggest change that individuals are noticing is the removal of the number allowances, which were used to calculate withholding. In the past, if an individual didn’t claim enough allowances, he or she may have overpaid in taxes. If too many allowances were claimed, then the IRS may have been owed money. Since that is no longer applicable under the new tax law, it has been replaced by questions related to multiple sources of income, the number of dependents, and other income or deductions.
- Since the new form has removed federal allowances, it is likely to be incompatible for state tax purposes. Therefore, employers should ensure that both the federal W-4 form and state-specific tax form are filled out by new hires.
- Some individuals may not be open to sharing so much information about other income and deductions on the W-4 form with their employers. In those cases, the IRS encourages individuals the use of their Tax Withholding Estimator tool. The tool asks a lot of detailed questions so it can provide the most precise results to determine how much to withhold. The answers to those questions aren’t shared with the employer; rather the employee can simply enter the determined amount that the tool provides directly onto the form.
- When employees ask specific tax questions, HR and Payroll departments should be careful to balance the desire to be helpful with the new form and refraining from giving tax advice. Instead, steer employees to tax professionals or the IRS-provided FAQs to review the changes. H&R Block also developed a comparison of the old and new form to assist individuals.
- While optional for current employees, the IRS recommends encouraging employees to do a pay check-up, especially right after they have completed their 2019 tax return, to adjust their withholding so it is as accurate as possible. MRA has developed a sample communication memo that can be given to employees explaining what changes have taken place and to encourage a “paycheck check-up.”