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As promised, in IR-2019-98 the IRS issued the first draft release of the Form W-4 for 2020 and frequently asked questions (FAQs) for employers and employees about the revisions to the form. In the next few weeks, the IRS plans to issue draft instructions for employers and will request comments from the business community at that time.

By way of background, under the Tax Cuts and Jobs Act of 2017 and effective January 1, 2018, and through December 31, 2025, the personal exemption deduction is suspended; however, the law allowed the IRS to administer the federal income tax withholding rules under IRC Section 3402 without regard to this provision for tax years beginning before January 1, 2019. (TCJA Section 11041.)

In September 2018, the IRS issued an extensively modified draft Form W-4 for use in 2019, but announced that, as a result of feedback from payroll and tax professionals, it would delay extensive changes to the form until 2020. Like the 2018 edition, the 2019 Form W-4 continues to contain line 5 on which employees can claim withholding allowances.

Proposed changes to the 2020 Form W-4

New section 3 of the draft 2020 Form W-4 would give employees the option of claiming an allowance of $2,000 for each qualifying child under age 17 and $500 for other qualifying dependents when the employee's income is $200,000 or less ($400,000 or less if married filing separately).

In new section 4 of the draft 2020 Form W-4, employees may optionally request other adjustments to their federal income tax withholding by entering dollar amounts for:

1. Additional nonwage income such as interest, dividends and retirement income
2. Deductions other than the standard deduction from income for the household, such as itemized or other deductions
3. Any additional amount of federal income tax the employee wishes to have withheld each payroll period

Note that unlike in the draft 2019 Form W-4, step 4 does not include the option to enter income from multiple jobs. Instead, the 2020 draft Form W-4 adds step 2 to the Form W-4 where employees are instructed to use the IRS calculator or the Form W-4 worksheets to estimate any additional withholding required and to enter that amount as "any additional amount you want withheld in each pay period" in step 4.

Impact on employers explained

The IRS offers the following FAQs for employers concerning the revised 2020 Form W-4.

• Does this mean our software will need two systems — one for forms submitted before 2020 and another for forms submitted after 2019?

Not necessarily. The same set of withholding tables will be used for both sets of forms. You can apply these tables separately to systems for new and old forms. Or, rather than having two separate systems, you may prefer to use a single system based on the redesigned form. To do this, you could enter zero or leave blank information for old forms for the data fields that capture the information on the redesigned form but was not provided to you under the old design. Additional guidance will be provided on the payroll calculations needed based on the data fields on the new and old forms.

• How do I treat employees hired after 2019 who do not submit a Form W-4?

New employees who fail to submit a Form W-4 after 2019 will be treated as a single filer with no other adjustments. This means that a single filer's standard deduction with no other entries will be considered in determining withholding. The IRS and the Treasury Department anticipate issuing guidance consistent with this approach.

• Are employees hired after 2019 required to use the redesigned form?

Yes. Beginning in 2020, all new employees must use the redesigned form. Similarly, any employees hired prior to 2020 who wish to adjust their withholding must use the redesigned form.

• What about employees hired prior to 2020 who want to adjust withholding from their pay dated January 1, 2020, or later?

Employees must use the redesigned form.

• May I ask all my employees hired before 2020 to submit new Forms W-4 using the redesigned version of the form?

Yes. You may ask, but as part of the request you should explain that:

• they are not required to submit new Form W-4

AND

• if they do not submit a new Form W-4, withholding will continue based on a valid form previously submitted.

For those employees who furnished forms before 2020 and who do not furnish a new one after 2019, you must continue to withhold based on the forms previously submitted. You are not permitted to treat employees as failing to furnish Forms W-4 if they don't furnish a new Form W-4. Note that special rules apply to Forms W-4 claiming exemption from withholding.

• Will there still be an adjustment for nonresident aliens?

Yes. The IRS will provide instructions in the 2020 Publication 15-T, Federal Income Tax Withholding Methods on the additional amounts that should be added to wages to determine withholding for nonresident aliens. Additionally, nonresident alien employees should continue to follow the special instructions in Notice 1392 when completing their Forms W-4.

Ernst & Young LLP insights

Payroll software providers will need to begin immediately to consider how systems would be configured to accommodate the proposed federal income tax withholding calculation. Changes potentially needed to electronic Form W-4 systems should also be considered.

The proposed Form W-4 would be far more complex and employees could struggle to understand how to complete it correctly. Accordingly, employers should consider the extent they would provide Form W-4 training or other assistance to their employees.

Finally, the draft Form W-4 would likely not conform for state income tax withholding purposes. Accordingly, states that currently use the Form W-4 could require that a unique state form be used.

For more information on the states that allow for use of the federal Form W-4, see our special report here.

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