If you’re like most people, you probably haven’t updated your W-4 in a long time. Unless you’ve changed jobs or undergone a life-changing event such as getting married or having kids, you likely have more of a “set-it-and-forget-it” mind frame about W-4s. However, since the tax reform bill passed in December 2017, the IRS is urging everyone to do a “paycheck checkup” to make sure their W-4 withholding amounts are accurate. Read on to find out what’s changed, and how you can help ensure your employees have the right amount of tax taken out of their paychecks.
What changed with the 2020 W-4?
The tax reform, known as Tax Cuts and Jobs Act (TCJA), changes tax laws that impact federal tax withholding. While the TCJA includes a number of updates, affecting virtually all taxpayers’ returns, the key tax reform changes include:
- Increased standard deductions.
- Eliminated personal exemptions.
- Increased child tax credits.
- Limited or discontinued itemized deductions.
- Additional credits for dependents.
- Updated tax rates and brackets.
As a result of these changes, the IRS updated tax withholding tables and has released a number of W-4 revisions to reflect the new tax law. And on December 4, the IRS released the final version of the 2020 W-4.
What the 2020 W-4 means for employees?
While taxpayers aren’t required to submit a new W-4, all of your employees should review their withholding to determine if they will need to submit a new W-4 for 2020. Checking withholding is especially important for individuals if they:
- Are a two-income family.
- Have two or more jobs at the same time.
- Work a seasonal job or only work part of the year.
- Claim credits like the Child Tax Credit.
- Have dependents age 17 or older.
- Itemized deductions on their 2017 returns.
- Have high incomes or a complex tax return.
- Had a large refund or tax bill for 2017.
The sooner your employees check and adjust their withholding, the better. If employees have too little withheld, they can make adjustments and avoid an unexpected tax bill or even a penalty when they file next year. On the other hand, if your employees have too much tax withheld, they can change their withholding and enter more allowances so they get more money in their paychecks throughout the year. Either way, the sooner your employees make adjustments, the more time there is for withholding to take place evenly during the rest of the year.
How employers can help employees navigate the W-4 changes?
Understandably, your employees may need support as they navigate the paycheck checkup process. By providing guidance, you can make the process less daunting. Here are the main things you should do to help your employees ensure their withholding is correct:
- Distribute this one-page flyer to your employees as a reminder to complete their paycheck checkup.
- Direct employees to the Tax Withholding Estimator that the IRS created to help them determine what their withholding should be. To use it, employees will need their most recent tax return and most recent pay stub from each job.
- Share the final 2020 Publication 15-T, Federal Tax Withholding Methods, which describes how to calculate withholding using the wage-bracket and percentage methods, and includes broader and updated tables.
- Refer employees to the IRS recorded webinar: “Understanding the 2020 Form W-4 and How to Use it to Calculate Withholding." This hour-long webinar includes everything from a detailed breakdown of the W-4 changes to a Q&As related to those changes.
- Emphasize to employees that the withholding calculator is only as accurate as their answers. To ensure accuracy with the calculator estimates, employees need to make sure they’re not guessing on answers. Once they’ve completed the withholding calculator form, they’ll have an estimate of their 2020 tax liability and an indication of whether they need to make adjustments to their current withholding.
- Refer employees to additional IRS resources:
- For employees with more complex tax situations, refer them to Publication 505, Tax Withholding and Estimated Tax. These particular employees need to use Publication 505 instructions instead of the withholding calculator to determine their appropriate W-4 withholding amounts. Employees that should use Publication 505 as a guide are taxpayers that:
- Owe self-employment tax.
- Owe alternative minimum tax.
- Have tax on unearned income of dependents.
- Have long-term capital gains or qualified dividends.
- Owe certain other taxes.
- Distribute the 2020 W-4 to your employees in case they need to submit changes.
- To stay up-to-date on the latest tax reform updates, visit the IRS.gov tax reform page and also check out their tax reform tax tips. Remember to share any pertinent tips with your employees.
- We will continue to provide information as we have it. To make sure you don’t miss updates, subscribe to the B2E Solutions blog and follow us on LinkedIn to receive this information and much more!
Less stress is best.
As everyone knows, taxes can be tricky. By helping your employees through the paycheck checkup process, you’re potentially helping them to avoid unnecessary headaches when tax time rolls around. And if you help employees avoid tax-related stress, you make their lives easier and ultimately allow them to focus on the work that matters!
Editor's note: Updated on 12.30.19 with the most up-to-date information.