How payroll professionals can give employees the tools they need to be informed while being careful to not give tax or legal advice.
The 2020 Form W-4, Employee’s Withholding Certificate, got its first major overhaul in nearly 35 years thanks to the Tax Cuts and Jobs Act. The IRS overhauled the form to make it less complex and to increase the transparency and accuracy of the withholding system.
Key Points to Share with Employees
- Any new employee and anyone who makes withholding changes in 2020 will need to complete the revised form.
- The IRS is not requiring all employees to complete the revised form and has designed the withholding tables so they will work with both the new and prior year forms.
- Even though employees aren’t required to complete the revised form, they may want to consider performing a paycheck checkup using the IRS tax withholding estimator.
- If employees do not submit a new W-4, withholding will continue based on their previously submitted form.
The American Payroll Association put together a sample letter for employers to use to communicate this information with their employees.
Things for Employees to Gather Before They Complete the Form
Before completing the 2020 Form W-4, employees should read the instructions that are included with the form. They must complete Steps 1 and 5. Steps 2, 3, and 4 are optional, but completing them will help ensure that their federal income tax withholding will more accurately match their tax liability.
Step 1 is for personal information; Step 2 is for households with multiple jobs; Step 3 is used to claim tax credits for dependents; Step 4 is for other adjustments (additional income such as interest and dividends, itemized deductions that exceed the standard deduction, and extra tax you want withheld); and Step 5 is where the form is signed. If an employee is worried about alerting employers to second jobs or sharing details about investment income, they can use the withholding estimator to calculate their amount and enter it on a separate “extra withholding line” without giving details on how it was calculated.
Here’s a list of things needed to complete the steps:
- Gather the most recent pay statements, and if married, for your spouse too.
- Gather information for other sources of income you may have.
- Have the most recent income tax return handy.
- Use whole dollar amounts in the estimator.
The IRS provides a list of frequently asked questions that will help employees fill out the form as well. Payroll professionals should not question an employee on what information they provide on the W-4. If the IRS determines that an employee does not have enough federal income tax withheld, they will notify the employer to increase the amount of withholding tax by issuing a “lock-in” letter that specifies the withholding arrangement permitted for the employee. You can read more about withholding compliance questions and answers here.