Oh no! The IRS is changing the W-4! While the final version of the form isn't expected until November, the current draft gives us a good idea of what employers and employees will begin using starting in 2020.
What does this mean for my employees and the taxes they pay (because you know they're going to ask you those questions)? Taxes, payroll, the IRS, their forms, and everything associated with these requirements can all seem so confusing and stressful to employees. These things are often referred to as “adulting” because they bring with them anxiety and fear, and they seem to encourage avoidance. In reality, the changes aren't as daunting as they seem. Here's an overview of what you should know when your employees ask.
The biggest change is that the new W-4 no longer talks about withholding allowances. In other words, there’s no more claiming a number on the W-4. So how does the government know how much money to take out of an employee's check each pay period? Basically, the same general rules apply. Based on the information supplied on the new W-4 form, someone or some computer looks at a chart to determine the expected amount. This is all based on how the employee intends to file her/his taxes after December 31.
The IRS is generally considered a horrible savings bank and slow on the collections. The main goal for many people is to set up withholding at just the right amount so that it comes out even when they file their returns. But this is obviously a personal financial decision.
So what changes have they made in determining withholdings? Let’s walk through the new form step by step. The first step of the new form is the same as the old form: What’s your name, where do you live, all your identifying information, and what is that all-important filing status?
Steps 2-4 are what look different. These steps walk the employee through what can increase or decrease tax liability. Employees should read this carefully, because sometimes the answer is nothing. If that is true, then they get to skip the whole middle of the form!
Step 2: This step determines if the employee has a second job or a spouse that works. If so, the employee has three options available to determine the withholding.
Step 3: This step determines the dependents that the employee can claim and how much they are worth for taxation purposes. This is only relevant if the employee's income will be $200K or less (or $400K or less when filing jointly).
Step 4: This step asks the employee to quantify any other relevant sources of income or deductions that would apply to what s/he could owe the IRS.
Step 5: This one is easy. Sign the form, and then turn it in to you, the employer.
What happens next isn’t magic. In fact, it’s old school. Either the software or the individual responsible for processing payroll will have a chart that takes the status - single, married, or Head of Household - and looks up the employee's salary on a chart to see what the IRS says is owed. That’s it. All those middle steps simply determine which chart to use based on the employee potentially making more money (second job, spouse’s income) or having more income or deductions (dependents, other IRS allowable income, deductions).
It's very important to remind your employees that your Payroll and HR departments aren’t the W-4 police. What they put on the form is entirely up to them, which means they should probably put a little thought into it...and "adult" just a little.