The Internal Revenue Service has revised Form W-4 – Employee’s Withholding Certificate – changing the way that employees communicate to their employers how much they want withheld from their pay for Federal income taxes. The new form is required to be used by any new employee who is first paid after 2019, or any employee who wishes to change his or her withholding after 2019.
Previously, employees used Form W-4 to calculate the number of allowances they were entitled to for withholding purposes. The number of allowances, combined with an employee’s filing status, frequency of pay, and rate of pay, would determine the amount of tax withheld from each paycheck. The number of allowances claimed was loosely connected with the number of personal exemptions the employee was entitled to on his or her tax return. Since the deduction for personal exemptions is currently suspended under the Tax Cuts and Jobs Act, the IRS determined a new system was needed for calculating withholding.
In place of allowances, the new W-4 allows employees to customize the amount of withholding by entering additional income and deduction amounts, or by using a withholding calculator on the IRS website. The IRS recommends that employees who have multiple jobs, or have spouses that work, use the online calculator to get the most accurate withholding amount. If employees do not add this information to the W-4, withholding will be determined based solely on their filing status and wages. Employers will use the information provided and the tables and worksheets in publication 15-T to calculate withholding.
Employees who have previously completed a W-4 are not required to complete the new form. Employers must continue to use information previously provided to calculate withholding. What this means is that, for the foreseeable future, employers will need to calculate withholding in two ways: using the allowance method for employees who have not completed a new W-4 and using the new method for all other employees.
An employer may ask employees to furnish new W-4s; however, the employer must explain to the employees that:
- They are not required to furnish a new Form W-4, and
- If they do not furnish a new Form W-4, withholding will continue based on a valid form previously furnished.
Many states use an allowance system for calculating withholding, similar to what was previously used by the IRS. Typically, employee withholding for these states was determined based on the information entered on the Federal Form W-4. Generally, employees had the option to complete a state-specific withholding form if they desired, to claim a different number of allowances for state purposes than for Federal. Completing a state-specific withholding form will now be required for any state that continues to use an allowance system for withholding. In Minnesota, a Form W-4MN must be completed by any employee who is completing the new federal form W-4.
While the new withholding calculation method should be more accurate, the requirement for employers to continue to calculate withholding under the old method for some employees, and to have separate withholding certificates for state purposes makes the process more complex overall. To learn more, contact a Boulay advisor at 952-893-9320 or learnmore@BoulayGroup.com.
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