The New Face of Federal Tax Withholding in 2020

It may be the biggest change to knock on the door of your payroll office since the Tax Reform Act of 1986 (for those who still remember that).

Sure, Obamacare (now known as the Affordable Care Act) was big, but that affected large employers and full-time employees. The 2004 increase in the Federal Labor Standards Act’s (FLSA) salary test threshold was big – and so is the current proposed threshold increase, but they only affect employees who meet the duties tests and earn over the old thresholds and under the new. Even size, state, and industry-specific biggies like Equal Employee Opportunity (EE0) Component 2 reporting, employer liability for Social Security taxes on tips, Pennsylvania Act 32, and New York home health care wage parity impact only limited segments of the payroll community. But 2020 Federal withholding tax is different.

It impacts every employee, of every employer, of every size, in every state, and every industry. That’s pretty “every”. Not sure what it’s impact will be on you and your workforce? Read on…

It impacts every employee, of every employer, of every size, in every state, and every industry. That’s pretty “every”. 

Background:

At the end of 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), calling for – among many other things – the revision of the Federal tax withholding system. The goal was to more accurately estimate withholding throughout the year so that employees end up with smaller refunds and larger net paychecks – effectively stimulating the economy by putting more spending money into the hands of taxpayers. Since the law was enacted on December 22, 2017 it was too late for the IRS to implement withholding change for 2018, and they set their sights on 2019. But, due to the complexity of the law, the IRS delayed regulatory action until 2020.

And this year, they’ve been very busy preparing – starting with inviting Viventium and other stakeholders to participate in a contracted study. They released the draft 2020 Form W-4 on May 30 of this year and invited commentary on it and on the draft Publication 15-T which was issued on June 6.

Upcoming milestones announced by the IRS:

  • A final-except-for-the-numbers draft of the W-4 (originally slated for July, but delayed).
  • A really-final form with inflation-adjusted numbers in November.
  • A final Publication 15-T with actual withholding tables also close to year-end.

What’s Going to Change:

To meet the TCJA’s goal of more accurate withholding, the IRS is collecting more information on the face of the W-4, instead of referring taxpayers to the 3 worksheets of prior years. The following data items are new on the form. Note that all are optional, except the first two:

Mandatory:

    1. No more allowances. The concept of withholding allowances such as Married-3, Single-2, is passé. This corresponds to the new personal tax return (Form 1040) which no longer uses personal or dependent exemptions.
    2. Three filing statuses. Head of Household is new, until now, it was just Single and Married.

Optional:

    1. 2 jobs in the household. If your employee works at ONE additional job, OR the spouse also has ONE job, checking this box will signal employers to use a different set of withholding tables and result in more accurate withholding.
    2. Number of qualifying children/dependents for the child/dependent tax credit.
    3. Annual child/dependent credit. This is the number of children/dependents from item #4 multiplied by applicable credit. This amount reduces employees’ tax withholding amounts.
    4. Annual other income. Non-wage income that would not otherwise have withholding such as interest and dividends. This amount increases employees’ taxable wages for withholding computations.
    5. Annual deductions. Anticipated deductions other than the standard deduction, derived from a worksheet which employees can complete. This amount reduces employees’ taxable wages for withholding computations.

Who’s Going to Change:

Will all employees in the country be required to complete a new W-4? No! Although originally a possibility, this proposal was shelved as too great an upheaval for the employment community. So, the answer to the question is a resounding, “no.”

Instead, any employee starting work on or after January 1, 2020 must complete the new Form W-4. Similarly, any existing employee changing his/her W-4 (e.g., for a change in marital status, or a desire to increase exemptions), must use the new form. But don’t worry, if an existing employee does not submit a new form, the IRS provides you with instructions as to how to use the existing pre-2020 form under the new withholding system. Please note that even if they have no changes, existing employees may be encouraged to submit a 2020 form to initiate more accurate withholding and minimize the risk of large over- or under-payments at tax time. It’s also important to educate your employees that once they do submit a 2020 form, there is no going back; they can’t change their mind and say, “My accountant says my 2019 form will actually result in more accurate withholding.” It’s a burn-your-bridges deal – once a 2020, always a 2020 (at least until 2021.)

What About those “Exempts”:

This hasn’t changed. If an employee writes EXEMPT on Line 4d for the 2020 form, he/she must submit a new W-4 by February 16, 2021. Similarly, 2019 exemptions expire on February 17, 2020. If a 2020 W-4 is not submitted by that Monday, withholding for that employee will be calculated as Single with no further adjustments. The IRS anticipates releasing further guidance on this issue.

What About Nonresident Aliens?

As in the past, there will be additional amounts to add to the withholding for nonresident aliens. The IRS will issue instructions about this in the final Publication 15-T.

What Should I Do Now?

Our compliance experts recommend the following action steps:

  1. Familiarize yourself and your key HCM staff with the layout, content, and instructions of the draft W-4, the draft Publication 15-T, and related IRS FAQs.
  2. As before, encourage employees to use the IRS Tax Calculator to perform a “paycheck checkup” and calculate their most accurate withholding.
  3. If you are processing in-house using payroll software, ask your vendor about its preparedness to implement 2020 changes, and request specific timelines for new releases.
  4. If you outsource to an HCM provider, inquire about their progress in supporting 2020 changes and their projected project completion date.
  5. Register for our upcoming webinars on how to prepare for federal tax withholding in 2020.
  6. To learn more about Viventium’s seamless solutions for 2020 withholding and other legislative and regulatory developments, request a demo here.
  7. Follow Viventium on our social media channels for the latest developments on 2020 withholding.

Yonina F. Shineweather, CPA, Consulting Director, Viventium Compliance Services

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