As you may recall, the IRS released a brand new form W-4 in 2020. The 2020 update was a complete overhaul to the form that most of us had been using for decades. The changes were so significant that AccuPay wrote three PayDay educational emails about it. You can read them on our blog by typing “W-4” in the search box.
While we thought the new W-4 could be the “big news” in payroll for 2020, we couldn’t have been more wrong! Because so much has transpired since the new form rolled out a year ago, and because the 2021 W-4 has stayed basically the same as the 2020 update, we thought it would be a good time to review what employers’ requirements are regarding the “new” W-4 form as well as some “best practice” suggestions to help employees.
The 2020 W-4 – What Was the Big Deal?
For as long as we all can remember, employee W-4 federal income tax withholding forms have requested the same information, are you married or single, and how many “allowances” are you claiming. Due to income tax law changes resulting from new tax law effective January of 2018, “allowances” no longer have any income tax relevance (they do for most states, but not the IRS). Therefore, the IRS spent 2 years creating a new W-4 consistent with current federal income tax law. Starting in 2020, the W-4 no longer asks about an employee’s number of “allowances,” but does contain “5 steps” of information which an employer can use to determine an employee’s federal income tax withholding per the updated IRS tax withholding tables (These tables, attached to the form, have only some minor adjustments for 2021). The new W-4 forms are essentially a “mini personal income tax projection” to include income amounts, deductions, tax credits, filing status, etc—the exact types of items which individuals report in their annual Form 1040 federal income tax returns.
Since these new W-4 forms are so different than the ones we have used in the past, employees will certainly have questions when completing them for the first time. The IRS does not require employers to obtain new W-4’s for all existing employees, but any new hires must use the new form, as well as existing employees who wish to make a change to their federal withholding. (Most payroll softwares, including AccuPay’s systems, are programmed to correctly calculate withholding for employees who completed the W-4 either pre-2020 or 2020 forward.)
Can employers require all employees to use the new W-4 Form?
Not for current employees who have a pre-2020 W-4 already on file. Employers can encourage employees to use the new W-4 form, but cannot require them to use the new form. Employees who do not complete the new forms must have withholdings based on their existing pre-2020 W-4 forms they currently have on file with their employers.
Should employers communicate these changes with their employees?
AccuPay encourages employers to notify existing employees about the updated forms (and also notify them that they are not required to use the new form until they wish to change their W-4 form). Our first PayDay on this subject matter contained a recommended employee notification which employers can “cut and paste” to advise employees if they so choose.
We do not recommend that employers advise their employees on how to complete their W-4 forms, but we do encourage employers to provide any or all of the following educational materials to their employees to help them make their own decisions on their W-4 submissions to employers:
Our first PayDay titled New W-4 for 2020–No Exemptions, contains some employee guidance on how to complete the new W-4 forms—feel free to hand this PayDay out to your employees, along with a link to the IRS Tax Withholding Estimator.
Our second PayDay titled AccuPay Guide to Completing New W-4 contains more specific and practical guidance to employees on how they can complete the new W-4 forms—to include which “steps” should be included for “normal” tax patterns and which steps (all of them) will provide the most accurate withholdings for more complex tax factors in an individual’s tax profile—we tried to make this “practical” for easier employee use.
The IRS has an online video/taped webinar instructing individuals on how to complete their W-4, step by step, with audio and visuals of the W-4 (70 minutes in length).
What about state withholding certificates?
Each state has had different withholding requirements in the past, some simply using a copy of the employee’s W-4 form with allowances, and many having their own, unique W-4 withholding form. Indiana uses a Form WH-4 for state/county tax withholdings (with the county information being included on the WH-4 form). Indiana continued using the same WH-4 form in 2020 for state and county income tax withholding purposes, and we also have seen and expect most other states to continue or initiate their own unique withholding forms which are consistent with each state’s income tax laws. Every employer should check with the states they withhold in as to the withholding forms to be used for January of 2021 forward.
We expect employee questions to continue about the new federal W-4 forms, and AccuPay’s goal is to help clients provide answers to employee questions and to pass along “best practices.” Our sense is that the majority of people are unaware of their W-4 options and requirements. AccuPay’s staff has been discussing and working with this new W-4 for a year now, so we are prepared to provide resources to help our clients deal with employee questions.