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The Internal Revenue Service released a completely redesigned form W-4, “Employee’s Withholding Certificate” for use on and after January 1, 2020. Intended to simplify the form as well as to reflect changes enacted in the Tax Cuts and Jobs Act of 2017, the form has unfortunately created quite of lot of confusion for employers and employees alike. This article will sort through the most common issues faced by California employers.
The New Form is Not Mandatory for Old Employees
Employees joining the company before January 1, 2020, should have completed the “old” W-4, calculating the number of “allowances” affecting the amount to be withheld from their paychecks. Allowances included the employee and additional allowances for the employee’s spouse and qualified dependents.
Unless the employee has a change in circumstances such as a new baby or change in filing status (new marriage, divorce), no new form is required. The employer may continue to withhold federal taxes based on the “old form” on file. Payroll processing providers, such as Paychex, and self-help software (Quickbooks, Zero, etc.) continue to support the “old” system.
New Employees or Changed Circumstances Require a New Form
Employees added to payroll on or after January 1, 2020 should complete the new form. The 2017 tax act eliminated personal exemptions/allowances, so the new form asks just a few questions about filing status and dependents. Additional sections refine the amount of withholding by adjusting for more than one job and by allowing the employee to request an additional amount of withholding over what is required by law. All new employees should complete sections 1 and 5. Sections 2, 3 and 4 should be completed only if they apply.
Exempt From Withholding?
Often, an employee will want to claim “exempt” in order to take home more money in their paycheck. As before, employees are allowed to write “exempt” on the form. But also as before, the employee must sign the form under penalty of perjury that they qualify as exempt under the law: the employee had no federal tax liability in 2019 AND does not expect to have any federal tax liability in 2020. This is actually pretty rare, so be sure to provide the entire 4-page form to your employee. The instructions explain the requirements for exemption from withholding.
Calculating the Amount to be Withheld
Once an employer receives a completed form, the next step is calculate the amount to be withheld from each paycheck. Fortunately, payroll service providers and software companies have updated their systems to calculate based on either the “old” form or the 2020 data. If you prepare payroll in-house with commercial software, you may have to perform “maintenance” or other software updates before you can implement the 2020 changes. Contact your service provider or software vendor for assistance if you run into issues.
If you are preparing payroll manually, stop doing that! Trust me, you will save hours of time time and trouble every month by switching to a payroll provider or payroll software. There are literally dozens of companies that provide low-cost payroll solutions.
But if you insist on going it alone, download a copy of IRS Publication 15-T for detailed instructions on the “wage bracket method” versus the “percentage method” and “alternative methods” in special cases.
Your State May Not Use the Federal Form
Many, if not most, states have not “conformed” to the federal changes in computing withholding, instead retaining the old “allowance method. Therefore, your new employees should complete two (2) forms, the federal W-4 and the employee withholding certificate for your state. Again, most payroll service providers and software vendors have this worked out, but if you are shopping for a new payroll solution be sure to ask how they will deal with state differences.
As always, New Options Business Services is there to help! Check out the resources below or give us a call to discuss your particular payroll issues. We will connect you to a qualified accountant, bookkeeper or consultant to select the best plan for you.