IRS Releases Proposed Form W-4 Redesign

On Friday, May 31, 2019, the IRS released a new proposed design of the IRS Form W-4 to be used starting in 2020.  The goal is to make it easier for employees to calculate accurate withholdings under the 2017 Tax Cuts and Jobs Act.  Employees who already have completed a Form W-4 will not be required to submit a new Form W-4 simply due to the redesign.  However, once finalized, the new Form will be required for employees hired on or after January 1, 2020.  

The IRS expects to release a near-final draft of the 2020 Form W-4 in mid-to-late July to give employers and payroll processors the tools they need to update systems before the final version of the form is released in November.

We will keep you abreast once the finalized form is released by the IRS for use.

IRS Issues New Form W-4 and Updates Tax Withholding Calculator

At the close of February, the IRS released an updated tax withholding calculator on IRS.gov and issued a new Form W-4 Employee’s Withholding Allowance Certificate.Employees can use the online calculator to check their 2018 tax withholding following passage of the Tax Cuts and Jobs Act in December 2017. If employees choose to adjust their withholding, they can now complete and submit the revised Form W-4 to their employer.

The IRS also posted new Withholding Calculator Frequently Asked Questions.

The IRS encourages employees to check their paychecks to help ensure they’re having the right amount of tax withheld for their personal situation. The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions, and changing the tax rates and income brackets.

The IRS is not requiring employers to obtain new W-4s from their employees, as it revised the withholding tables to function with the old W-4 for 2018.  However, businesses should notify employees that using the withholding calculator at IRS.gov and, if necessary, submitting the new form W-4 to their payroll department may result in more accurate withholding for the 2018 tax year.

Fine-Tuning Withheld Taxes
In January, the IRS released updated income-tax withholding tables for 2018 that reflected changes made by the tax reform law. The IRS instructed employers to begin using the 2018 withholding tables as soon as possible but no later than Feb. 15. However, because of the significant changes in the new tax code, employees may want to ensure that their current withholding is appropriate. Many employers may have already received inquiries, and now they can direct staff to the new 2018 W-4.

The new W-4 instructions state that if you use the withholding calculator, you don’t need to complete any of the worksheets for Form W-4. This was not stated on the previous W-4 and may indicate that the withholding calculator is the most reliable method to get taxpayers’ withholding closer to their tax liability.

The withholding changes do not affect 2017 tax returns due this April.

Withholding issues can be complicated, and the calculator is designed to help employees make changes based on their personal financial situation.  By encouraging employees to take a few minutes can help them ensure they don’t have too little—or too much—withheld from their paycheck.

A ‘Paycheck Checkup’
By checking their withholding, employees can avoid facing an unexpected tax bill or penalty at tax time in 2019, or prevent having too much tax withheld, the IRS said. With the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.

Employees with simple tax situations might not need to make any changes, the IRS advised. Simple situations include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.

Employees with more complicated financial situations, however, might need to revise their W-4 to make sure they have the right amount of withholding. Among those who should check their withholding are employees who:

• Have two incomes or are in two-income families
• Work only part of the year
• Have dividends or capital gains from securities held in taxable accounts
• Claim the Child Tax Credit, the Earned Income Tax Credit or other credits
• Itemized deductions in 2017
• Have high incomes and more complex tax returns

When using the IRS withholding calculator, employees will need to have their latest pay statement handy, as they will be asked to enter the federal income tax withheld from their last salary payment and the total federal income tax withheld to date in 2018. If employees follow the recommendations at the end of the calculator and change their withholding for 2018, remind them to recheck their withholding at the start of 2019 because a withholding rate adjusted in midyear 2018 will have a different full-year affect in 2019.

Lower Withholding & Bigger Paychecks Help Employees
A mid-February spot survey  polled 1,000 workers who reported that the new withholding rates for 2018 had increased the amount of money in their paycheck. The results showed:

• Take-home pay after taxes rose by 3.5 percent on average, with an average paycheck growing by $130.76.
• 35.7 percent of workers are using the tax savings to pay down debt.
• 12.8 percent are increasing their retirement savings.