During our December 5, 2019 webcast, Preparing for payroll year-end and 2020, we surveyed more than 3,000 participants about the challenges they are facing to incorporate the significant changes included in the 2020 Form W-4 and the related federal income tax withholding calculations.

2020 Form W-4 changes

Due to changes under the Tax Cuts and Jobs Act (TCJA), revisions were needed to the Form W-4 to eliminate personal allowances and to add fields for employees to more accurately reflect the tax credits and deductions available starting in 2018. The expanded form includes a new step 2 to adjust taxable income for multiple jobs and/or a working spouse, step 3 to claim dependent exemptions and step 4 to take into account other adjustments to taxable income and deductions.

Employees are required to submit a 2020 Form W-4 only if they began work for the employer after December 31, 2019, claimed exemption from federal income tax withholding in 2019 or wish to make other changes to the Form W-4 for 2020. The result is that employers must continue to process Forms W-4 submitted prior to January 1, 2020 that do not contain the new fields of the 2020 Form W-4. This means that employers must update the fields for housing employee Form W-4 data, confirming that the updated Form W-4 database is able to accommodate information from the old and new form.

Federal income tax withholding

The 2020 federal income tax withholding formulas and tables are designed to work with the old and new Form W-4. To accomplish this, there are now two tables used in the calculation: (1) a table for employees with Forms W-4 from 2019 and earlier years or Forms W-4 from 2020 and later where step 2 is not checked and (2) another table for 2020 Forms W-4 where step 2 is checked.

Similarly, there are two tables to use when computing income tax withholding for certain nonresident aliens, one table for employees with Forms W-4 from 2019 and earlier years and another for employees with Forms W-4 from 2020 or later years.

Employer challenges

Payroll system updates are doubly complex because extensive changes are needed not only to the federal income tax withholding calculations but also to the framework that houses employee Form W-4 data. The final 2020 Form W-4 and annual percentage method for automated systems weren't available until early December, forcing employers to perform system testing with temporary data and delaying final testing until close to the deadline.

Yet another challenge is how employers will communicate to employees the significant upcoming changes to the Form W-4 and how they will accommodate the expected increase in employee requests for assistance while limiting employer liability for providing personal income tax advice.

Finally, many states continue to use the Form W-4 for state income tax withholding purposes although personal allowances will continue to factor into the state calculation in 2020. Employees will need to be aware of the potential impact on state income tax withholding if submitting a 2020 Form W-4 and the options available to them if state personal allowances will continue to apply in 2020.

Webcast polling results

Participants of our December 5, 2019 webcast were asked to respond to several questions about their preparedness for 2020 and what method they will use, if any, to assist employees in understanding the new Form W-4. On the following pages are the polling results.

Which of the following was your greatest employment tax challenge in 2019?

How confident are you that your employer will meet the new Form W-4 and income tax withholding requirements for 2020?

Which of the following is your business planning to deploy to assist your employees with understanding the 2020 Form W-4?

Are you planning on having a third-party accounting firm support your call-in center for employee Form W-4 questions?

How confident are you that your business is prepared to meet changing state Form W-4 requirements?

———————————————

———————————————
ATTACHMENT

EY Payroll News Flash