401k planning

The IRS recently released a draft of its new Form W-4.  While the new form is not expected to be made available until 2020 employers should be aware of how the new format will affect payroll systems.

Form W-4

Employees complete W-4 forms to tell employers how much federal tax to withhold from each paycheck.  The new form is designed to make withholdings more accurate resulting from the Tax Cuts and Jobs Act.  Rather than ask for the number of withholdings as under the current form, the new form will ask several questions related to income and deductions.

According to the IRS May 31, 2109 press release, “The new form uses a building block approach that replaces complicated worksheets with straightforward questions that make it easier for employees to determine a more accurate withholding.  While it uses the same underlying information as the old design, the new form uses a more personalized, step-by-step approach to better accommodate individual taxpayer needs.”

2019 Form W-4 2020 Form W-4 (draft)
Number of withholding allowances Checkbox for multiple jobs or optional higher withholding
Per-payroll additional amount to withhold Full-year child and dependent tax credits
Full-year other (non-wage) income
Per-payroll additional amount to withhold
Full-year deductions (over the standard deduction amount)

Multiple calculation methods

Because existing employees will not have to complete a new W-4, employers must still observe their current W-4 withholding allowances.  However, for employees hired after 2019, the 2020 version will be the only valid W-4.  Not requiring existing employees to submit the new W-4 will ease the administrative burden, but it also means that payroll systems will need to accommodate the existing withholding allowance calculation, as well as the new method.  This will cause reprogramming to many payroll systems.

Expected timeline

The IRS noted that the new W-4 form is in draft and is subject to a public comment period until the beginning of July.  A close to final version is planned for late July after which employers and payroll administrators can start making programming changes. A final version is expected in November.

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