The Definitive Guide to W-4 Federal and State Withholding Forms

Do you need to complete a new W-4? Learn what updates have been made to the form and how to navigate the new design.

A comprehensive guide to the new W-4 Withholding Form

What is the W-4 form?
What are the federal W-4 form requirements?
What are some common mistakes with completing the W-4 form?
How has the federal W-4 been updated recently?
What are the five steps on the new 2020 W-4?
What new changes are in store?
What variations exist in states’ withholding requirements?
What are some common FAQs on the W-4 and withholding?

The Inland Revenue Service (IRS) has released an updated version of the W-4 Employee’s Withholding Certificate for 2020. The new design is vastly different from previous versions, replacing numbered allowances with straightforward questions. In addition to the form’s dramatic new look, personal and dependency exemptions have been removed, as per the 2017 Tax Cuts and Jobs Act. These changes, coupled with new worksheets and updated tax credits, can make the new W-4 appear confusing at first glance. This guide is designed to help you and your employees navigate the new IRS updates and complete the form with confidence.

What is the W-4 form?

The Employee’s Withholding Certificate, or W-4, is used to calculate how much federal tax is withheld from an employee’s paycheck. This calculation is based on the employee’s personal data, such as filing status and family size. Due to the variable nature of this data, the withholding total can fluctuate from year to year. Therefore, employees are advised to update their forms annually.

The Wage and Tax Statement, or W-2, is used in conjunction with the W-4. Calculations provided by the W-4 are placed alongside the employee’s annual earnings to generate the W-2.

Key Takeaway: The W-4 dictates how much federal tax employers must withhold from an employee’s paycheck.

What are the federal W-4 form requirements?

Current employees with a valid W-4 on file are not required to complete a new form simply due to the redesign. The data on the existing W-4 can be used to calculate withholdings if the employee does not need to update his or her filing status or adjustments. However, if a new form is required, the employee must complete the updated 2020 version.

Who is required to complete the new 2020 form?

The W-4 form is only applicable to employed individuals. It does not compute self-employment tax and can only be used if the employer is able to withhold earnings. A new form is typically required under the following circumstances:

  1. A new employee is hired – Newly hired employees who are first paid after 2019 must complete the updated 2020 W-4.
  2. An employee experiences a relevant life event – If an employee gets married, divorced, or has children, he or she must complete a new form to reflect changes in filing status and/or dependency credits.
  3. An employee applies for an exemption – Employees who record zero federal tax liability for 2019 and expect to record zero liability for 2020 may apply for an exemption. To do so, eligible applicants must write ‘exempt’ on the form.

If a new W-4 is required but not completed, the employee must be treated as a single filer with no adjustments. This action often increases an employee’s withholdings to ensure enough federal tax is collected throughout the year. To avoid this ‘default’ scenario, employees are advised to complete and update their forms annually.

Self-Employment

Although the W-4 form does not compute self-employment tax, it does take into account secondary jobs that do not withhold federal income tax. Information from the second job is used in conjunction with the employee’s main job to calculate appropriate withholding.

Key Takeaway: New hires and those who experience relevant life events must resubmit an updated form. Valid forms submitted before 2020 will be used if an existing employee does not submit a new one. If a new form is required and not completed, the employee will be considered a single filer with zero adjustments.

W-4 Compliance Form

What are some common mistakes with completing the W-4 form?

A W-4 form is considered invalid if it includes unauthorized changes or false data. You can avoid the following mistakes by reading through all available instructions and entering the most up-to-date information.

  • Completing another applicant’s form – It is illegal for employers to complete a W-4 on behalf of the employee.
  • Completing unnecessary sections of the form – Only sections one (personal information) and five (employee signature) are required. Only employees claiming dependents, secondary jobs, or additional adjustments need to complete sections two to four.
  • Accepting an invalid form – Employers must ensure that the form they accept has not been illegally modified. If an employee has edited the language or structure of the form, an employer has the right to reject it.
  • Not reminding employees when a new form is required – Employers must remind employees to update their W-4s before December 1 of each year.
  • Giving unsolicited advice to employees – Employers are not permitted to advise or tell employees to enter specific information. Instead, they can direct employees to the instructions on the form, IRS troubleshooting tools, and available worksheets.

Tip: The Tax Withholding Estimator provided by the IRS can help both employees and employers generate accurate calculations.

Key Takeaway: Employers cannot complete an employee’s form or give advice on what to write. They also have the right to reject an illegally modified copy and request a new one.

How has the federal W-4 been updated recently?

The new 2020 W-4 underwent several revisions in 2019 before the final version was released on December 5. The recent updates can be broken down into two categories: the content and the design.

1. The Content

The 2017 Tax Cuts and Jobs Act reshaped how W-4 calculations are made. Changes to child credits, deduction limits, and income brackets have impacted how much an employer can withhold, as well as the type of adjustments an employee can claim.

  • No personal exemption – One of the biggest changes affecting the W-4 is the elimination of the personal and dependency exemption. This option has been removed from the form completely.
  • Updated child tax credit – The maximum child tax credit has been increased, as well as the threshold to claim the credit. For example, a single filer can claim the tax credit if he or she earns less than $200,000, as opposed to $71,201 required in 2019.
  • New dependent tax credit – Employees are now permitted to claim $500 for each eligible dependent that is not a child.

2. The Design

In addition to the changes in content, the new 2020 W-4 has undergone a complete redesign. The form is now comprised of five sections. Each section consists of straightforward questions regarding the employee’s income, deductions, adjustments, and credits.

Instead of entering numbered allowances, employees must enter dollar amounts for each adjustment. For example, on the 2019 form, eligible employees were asked to enter 4 if they wanted to claim a tax credit for one child. However, on the new 2020 form, eligible employees must now enter $2,000 for each child. All entries on the new 2020 pertaining to adjustments must be entered in dollar amounts.

Key Takeaway: The new form is made up of five sections. Employees must enter dollar amounts instead of using the old numbering system.

What are the five steps on the new 2020 W-4?

The new 2020 W-4 tax form consists of five sections. Employees are only required to complete sections one and five as well as all other sections that apply to them.

  • Step 1: Personal Details – Employees must enter all required personal data, such as name, address, and filing status.
  • Step 2: Multiple Jobs and Spousal Income – Employees must enter information regarding any additional jobs relevant to their taxes. The new form gives employees three methods of entering this data.
  • Step 3: Dependents – To claim a dependent, employees must earn less than $200,000 ($400,000 if filing jointly). Each eligible child is recorded at $2,000, and non-child dependents are recorded at $500.
  • Step 4: Other Adjustments – Self-employment income, deductions, and extra withholdings can be entered in section 4, if applicable. If an employee is claiming exemption from withholding, he or she must write ‘exempt’ in this section.
  • Step 5: Sign and Date – The employee must sign and date the form.

Employers can use the IRS Income Tax Withholding Assistant and updated Publication 15-T to determine how much money to withhold from the employee’s paycheck.

Key Takeaway: Employees must follow steps one through five, only completing the sections that are relevant to them.

W-4 Compliance Form

What new changes are in store?

Under the 2017 Tax Cuts and Jobs Act, the personal exemption was suspended until 2026. Therefore, the W-4 form may undergo another update to accommodate the reintroduction of this allowance after 2026.

It is unclear whether additional revisions will be released over the coming years. The decision to make any more adjustments depends on the success of the current 2020 form and how the new design fares during tax season.

What variations exist in states’ withholding requirements?

Employees are typically required to pay both state and federal income tax. As a result, two W-4 forms may be necessary to calculate accurate withholdings. In some cases, states use the federal W-4 form as a guide for their own system. Therefore, recent changes to the 2020 form may impact state documents.

For example, states that use the federal form to calculate state taxes may need to update their own processes to accommodate the changes in the law. Colorado, Delaware, Idaho, Nebraska, New Mexico, North Dakota, Oregon, South Carolina, Utah, and Wisconsin have announced that they have or will be rolling out new state-specific W-4 forms to reflect the updated tax laws and federal design.

It’s worth noting that Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not levy a state income tax. Therefore, the updates made to the federal form will not affect state-specific W-4 requirements.

What are the potential repercussions of incorrect filing?

Incorrect W-4 calculations can result in tax discrepancies. If an employee underestimates federal tax withholdings, he or she may face a surprise tax bills when it comes time to file. These discrepancies not only deliver severe financial blows but can also come with steep penalties. The following two actions can result in fines and/or prison time.

  • Underreporting Estimates – Employees may face a penalty of $500 if they underestimate their federal tax withholdings. However, the penalty is waived if the employee owes less than $1,000 in federal taxes after all current withholdings have been assessed.
  • Entering False Data – A criminal penalty may apply if an employee willfully enters fraudulent or false information or fails to submit details that would increase withholdings. Employees can face a $1,000 fine and/or up-to one year in prison if convicted.

Employers are only required to calculate withholdings based on the data supplied by the employee and are not required to verify the information.

Key Takeaway: Underestimating withholdings or entering fraudulent information can result in fines and/or prison time.

What are some common FAQs on the W-4 and withholding?

See below for some common questions about the new 2020 W-4.

What is a lock-in-letter?

If the IRS believes that an employee has underestimated his or her withholdings, they will send a lock-in-letter to the employer. Once received, the employer must follow the instructions outlined in the letter and withhold the amount based on the updated calculations. Employers must disregard previous W-4 forms and honor the calculations provided by the IRS.

Does an employer have to accept a form that contains false information?

An employer can reject a form if the employee has revealed to them that the data is false. If the form contains information that the employer believes to be false, he or she cannot reject it. However, if the form has been illegally altered, the employer can request a new copy.

Can an employer complete an employee’s W-4?

No. The employee must complete his or her own W-4. You can send and collect W-4 forms with our tree tool here – 100% secure, no credit card required. 

Do employers need to remind employees to complete a new W-4?

Employers must remind employees to submit a new W-4 before December 1 if their personal or financial details have changed or are set to change over the coming year.

The 2020 W-4 redesign aims to address the new tax laws and simplify the process for all parties. Only time will tell if these updates will garner the desired results. In the meantime, understanding how and when to complete a W-4 can help both employers and employees calculate accurate withholdings and avoid penalties.

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