Are You Ready?
Big Changes to the 2020 Federal W-4 Withholding Form
Are you ready? As most of you have heard, on January 1st, 2020, the IRS is releasing a revised Federal W-4 withholding form along with new payroll rules as a result of the Tax Cuts and Jobs Act (TCJA) legislation that was enacted in early 2018. These new requirements will impact more than just the federal withholding certificate, they will require changes to how payroll is calculated for an employee’s withholding, and thus requires changes to payroll software. For PeopleSoft NA Payroll, these might be some of the biggest changes to the core PeopleSoft tax tables since NA Payroll was introduced.
But how do these changes affect you? Well, there are some requirements that will have to be considered in your 2020 payroll planning. According to the American Payroll Association guidelines, you will have to update your payroll software (i.e. PeopleSoft) by 1/1/2020 to be compliant as the new W-4 withholding form is required for all new employee hires and any employee withholding updates that occur in 2020. Therefore, you will need to apply Tax Update 19-E (Due ~December 6th) to have the necessary updates in your PeopleSoft system. At this time, PeopleSoft is not planning to update the legacy HTML Federal W-4 form, only the PDF version that is available for self-service, which is an issue for many customers that can’t or won’t allow PDF functionality due to its security and compatibility issues and it’s limited data validations. Then there’s the additional issue for those states that still currently utilize the federal withholding form as their state form and haven’t stated their intent for 2020 (SC, UT, CO, DE, ND, NM).
Mix all this together into an extremely tight timeline and the result will be an exhausted payroll team that that also has to deal with year-end processing at the same time. But there is a path, with the PS WebSolution SmartTax W-4 solution along with the upcoming PeopleSoft 19-E tax update, PeopleSoft customers can have a fully compliant withholding option that solves all these issues and more, and a new implementation usually takes less than 4 days.
See below for additional details about the notable changes to the 2020 W-4 withholding form and payroll tax tables from the American Payroll Association.
Noteworthy changes in the draft form
The 2020 federal withholding W-4 draft contains five steps for employees to complete (or to skip if they are not applicable). The draft form includes an Employers Only section for the employer’s name, address, and employer identification number when the IRS requests copies.
No more withholding allowances: To comply with the TCJA, the draft form no longer uses the concept of withholding allowances but includes lines to be used to calculate the withholding amount. The change is because the TCJA removed personal exemptions, on which withholding allowances were based, as a central feature of the tax code. One addition is a head of household filing status option.
Multiple jobs: The IRS instructs employees in households with multiple jobs to use either the IRS estimator or Multiple Jobs Worksheet on page 3 of the form.
Additional worksheets: The draft includes two worksheets and a table for employees with multiple jobs (higher and lower paying jobs).
- Multiple Jobs Worksheet is for employees who do not want to use the IRS withholding calculator or use the checkbox to indicate two jobs in the household.
- The IRS said withholding would be most accurate if the employee enters the result for the highest paying job.
- Deductions Worksheet is for employees who will claim itemized deductions (qualifying home mortgage interest, charitable contributions, or state and local taxes (up to $10,000), and medical expenses (in excess of 10% of income).
Notable New Requirements
Employers should continue to use the 2019 Form W-4 through December 31st, 2019. The IRS reminded employers “that this draft Form W-4 is not for current use, but is a draft of the form to be used starting in 2020.” Employees who submitted a Form W-4 in any year before 2020 will not be required to submit a new form merely because of the redesign. Employers can continue to compute withholding based on the information from the employee’s most recently submitted.
- How do I treat employees hired after 2019 who do not submit a Form W-4?
- New employees who fail to submit a Form W-4 after 2019 will be treated as a single filer with no other adjustments. This means that a single filer’s standard deduction with no other entries will be taken into account in determining withholding. The IRS anticipates issuing guidance consistent with this approach.
- Are employees hired after December 31st, 2019 required to use the redesigned form?
- Beginning in 2020, all new employees must use the redesigned form. Similarly, any employees hired prior to 2020 who wish to adjust their withholding must use the redesigned form.
- What about employees hired prior to 2020 who want to adjust withholding from their pay dated January 1, 2020, or later?
- Employees must use the redesigned 2020 form.
- May I ask all of my employees hired before 2020 to submit new Forms W-4 using the redesigned version of the form? Yes. You may ask, but as part of the request you should explain that:
- (1) They are not required to submit a new Form W-4, and
- (2) If they do not submit a new Form W-4, withholding will continue based on a valid form previously submitted. For those employees who furnished forms before 2020 and who do not furnish a new one after 2019, you must continue to withhold based on the forms previously submitted. You are not permitted to treat employees as failing to furnish Forms W-4 if they do not furnish a new Form W-4. Note that special rules apply to Forms W-4 claiming exemption from withholding.
- How do I treat employees hired after 2019 who do not submit a Form W-4?
No more withholding allowances
One of the biggest changes, beginning with the 2020 Form W-4, is that employees will no longer be able to request adjustments to their withholding using withholding allowances. Instead, employees will use the new 2020 Form W-4 to provide employers with amounts to increase or reduce taxes and amounts to increase or decrease the amount of wage income subject to income tax withholding.
The draft Form W-4 no longer uses the concept of withholding allowances but includes lines to be used to calculate the withholding amount. The change is because the TCJA removed personal exemptions, on which withholding allowances were based, as a central feature of the tax code.
Exemption from Withholding
On the draft version of the 202 withholding form, you may claim exemption from withholding for 2020 if you meet both of the following conditions:
- You owed no federal tax in 2019 and you expect to owe no federal income tax in 2020.
- You expect to owe no federal income tax in 2020 if you expect the same result in 2020. If you claim exemption, you will have no income tax withheld from your paycheck and may owe taxes and penalties when you file your 2020 tax return.
To claim exemption from withholding, certify that you meet both of the conditions above by writing “Exempt” on Form W-4. If you claim an exemption from withholding, you will need to submit a new Form W-4 by February 16, 2021.
Form W-4: FAQs on the draft form
The IRS published 20 frequently asked questions (FAQs) and their answers for the draft form @ https://www.irs.gov/newsroom/faqs-on-the-early-release-of-the-2020-form-w-4
It’s not too late. PS WebSolution SmartTax W-4 will bring you and your organization into full compliance by automating your withholding form process for employees and applicants. And it only take 3-4 days to fully install, implement and unit test, all in time for the January 1st, 2020 deadline. For additional information, contact email@example.com or firstname.lastname@example.org, 1(877) 571-7829.
Written by Tyger Vollrath
Tyger Vollrath is the Founder and COO of PS WebSolution. He has over twenty years of experience with PeopleSoft and a frequent speaker and contributor of HCM content.
* Taken from Steve Hodgson, CPP, CPLP Form W-4 and Tax Updates Guide.
** PS WebSolution does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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