March 6, 2020
With all the rushing around to complete their taxes, employees may not be aware of the new W-4 form which could affect their taxes, if not this year, potentially next year.
Employees becoming more educated on the new W-4 form will provide another way to help ensure that they get the most out of their taxes. The new form eliminates the “personal exemption” component of calculating taxes for the employee and instead, calculates taxes based on answers to a few personal questions. Only new employees in 2020 will be required to fill out the redesigned form, which was released in early December 2019. Even though current employees are not required to fill out the new form, the new tax calculations could change whether or not they owe taxes when they file in 2021, depending on whether their withholding status changes.
IRS has pointed out that because of the tax reform law in 2018, last year there were people who owed money and weren’t expecting that – not completing the new W-4 could potentially create the same situation for these employees again during the next tax season. Even though the IRS has stated that the new W-4 form is more streamlined, many employees and their employer are not sure how to interpret the changes. Employees are encouraged to consult their legal tax adviser to check on how it affects their individual tax situation.
Essentially, the IRS has said that the new form will make it easier for employees to adjust their wages and claim qualifying tax credits to get a more accurate determination of their income tax withholding. With some tax experts, the jury is still out on if this will actually be the case. Payroll industry experts were consulted by the IRS when designing the new W-4 to make it as easy to understand as possible. There are a few things employers should know about the new form in order to better communicate its benefits to their employees.
First, the whole idea of personal exemptions was suspended which potentially increases the child tax credit and makes it available for more people. In addition, the standard deduction was greatly increased for everybody, which could mean that more people are going to take it instead of itemizing.
Every taxpayer who claims a child dependent will receive a maximum tax credit of $2,000 per child under the new form. The previous W-4 form calculated taxes based on the number of allowances claimed, so employees who don’t file a new W-4 may not receive the full benefit of the updated tax credit if they qualify. The IRS recommends that employees check with their legal tax adviser for assistance on checking on their withholdings every year.
In early 2020, the IRS launched its upgraded Tax Withholding Estimator , a calculator to help employees determine how much to withhold from their taxes. The tool addresses issues like changes in income, withholding status and multiple jobs. The calculator provides information to help employees fill out the new W-4. Employers are encouraged to share this information regarding the new W-4 form and the tax calculator tool above with their employees.
Having your employees understand the forms they are required to fill out & making it easy to fill them out & make changes periodically is important not only during the on-boarding stage but throughout their employment. It will ultimately reinforce their decision and confidence that made you their employer of choice. We work with our clients to incorporate this. Let’s start a conversation today to solidify this type of confidence with your employees.