The Tax Cuts and Jobs Act became law in December 2017. The law involves significant changes to the W4 that employers must comply with at the start of 2020. Of particular note, the TCJA significantly changes the way deductions are itemized on Schedule A and it suspends all personal and dependency exemptions for your employees and their spouses through 2025.
Withholding Allowances Eliminated & New Sections Added
The 2020 Form W-4 does not have lines to enter the number of allowances. What used to be much simpler has been replaced with a much more complex form. There are now five steps required to complete the W-4. Employees can choose to complete only Step 1, in which case the standard tax rate will be applied with no deductions or adjustments.
The new form which was released in August requires completion of multiple sections. The IRS has stated that they do not foresee any more changes to the form. These new sections include recording of income from multiple sources. These can be calculated using Worksheet 1.
Individuals must account for non-wage income, including income from dividends, interest earned, self-employment, as well as retirement plans.
The 2020 W-4 includes a line for tax credits for dependents. In particular, child and dependent care, education, and foreign tax credits.
Finally, the form also requires individuals to list itemized deductions that are in excess of the standard deduction allowed under the TCJA.
New Worksheets for the 2020 W-4
The TCJA replaces the earlier Personal Allowances Worksheet as well as the Deductions, Adjustments, and Additional Income Worksheet. They are being replaced with Worksheet 1 for multiple job calculations, and Worksheet 2 for making additional calculations for deductions.
Employees Can Still Use the Old W-4
Employees hired before 2019 can file using the old W-4. Employees hired after 2019 are required to use the redesigned form. However, any employee wishing to make changes to their withholdings are required to use the 2020 W-4 going forward.
It may not necessarily required to purchase new software to complete the both old and new W-4’s. The same withholding tables will work with either. However, employers must make sure that they are using the appropriate tables and follow any software specific instructions for inputting the data.
New Withholding Tables
The IRS plans to release updated withholding tables in November. These will include the typical adjustments for inflation. Because there are significant changes to allowable deductions, it is important to provide this information to employees as soon as possible so that they can make any necessary adjustments before the end of the year.
Greenlink can help you ensure that your 2020 W4’s are compliant with the latest regulations. We invite you to contact us at (480) 385-2525 to learn more about our services and discuss the needs of your business with our team.