Updated January 12, 2021
It had been 33 years since the last major update the W-4, so most people working today have been filling it out by habit or memory for years (or even decades). But as of January 1, 2020, all of the employees you hire will need to complete the new Form W-4 as part of their onboarding paperwork.
Seems simple enough, but the new form is a bit of a departure from how most people are used to doing things. Some accountants and tax professionals are even describing the updated employee withholding worksheet as a mini tax return — and nobody gets intimidated by those, right?
Here’s a clear look at all the questions employers (and their employees) are likely to have about the updates the IRS has made:
Your existing employees can use the new form if they want to update withholdings for any reason (or after a life change like getting married or having a baby). Other than that, your current employees will not be required to complete a new W-4 — and you will continue to calculate payroll tax withholding based on the information from their most recent W-4.
The new W-4 is designed to accomplish two things: first, make the form easier for workers to complete. And second, to line up better with the elimination of withholding allowances after the passage of the 2017 Tax Cuts and Jobs Act (TCJA), which prevent employees from claiming personal exemptions or dependency exemptions.
“This change makes sense now that exemptions and deductions are gone, but this won’t be easy for the average person to complete if they’re used to the old form,” says Ufuoma Ogaga of Goshen Bookkeeping & Consulting. “If your employee has questions about the new W-4, it’s worthwhile to suggest they consult a tax professional to make sure they do this right. Nobody likes surprises at tax time.”
The new form appears complicated mostly because of the instructions and charts that accompany it, but it’s more straightforward than the previous version of the W-4 when you dig into it.
“Most employees won’t know there’s a new form before they start their job with you, so it might be helpful to give anyone you are onboarding a heads up that they’ll need to know information about A, B, or C before they come in. Preparation will help them better complete the form — and feel better about their answers,” explains David Perry of Latitude Bookkeeping Services.
The American Payroll Association has even created a letter you can use to help inform your new employees about the change.
If you use a cloud-based payroll service provider or an HR service provider, it might be helpful to your new staffer (and you) to have them self-onboard at home before their first day so they can gather any information they need to complete their W-4. Remember that your employees must complete a W-4 prior to their first paycheck.
Employees are only required to fill in step 1 and step 5 on the new W-4. The other three steps are optional if they do not apply to that employee. Skipping them may mean that their withholding won’t match up with their tax liability, so it’s important that employees take their time and understand what the form is asking for.
Jan Haugo, Intuit ProAdvisor and bookkeeper, advises employers and employees to look at the form to help feel less overwhelmed by the changes. “The instructions are intimidating. While you can’t offer advice or tell an employee how this will impact their paycheck, you can be available to walk through the instructions step by step. The steps that are required are easy — it just feels daunting.”
The IRS has also launched an updated Tax Withholding Estimator. This comprehensive withholding calculator walks employees through the process of estimating their withholdings.
Your employee will enter their personal information including name, address, and their filing status. Note that for any employee who does not have a completed W-4 on file, you will calculate withholdings at the higher “Single” rate.
This section applies to employees who have more than one job or are married and filing jointly with a working spouse. The IRS offers some guidance here for employees to determine whether they need to complete this step and where to look for additional instructions. Option (a) provides the most privacy for the employee’s information, according to the IRS, as well as the most accurate calculations.
If your employee has dependents, they will complete this section. Single taxpayers with an income of $200,000 or less ($400,000 if married filing jointly) are now eligible for the child tax credit as a result of the TCJA as well.
Here, the employee can account for other income not from jobs or add in additional deductions or withholdings.
The employee will sign and date the form, and you will complete the Employer section.
The new Form W-4 is available for download from the IRS website or you can find a printable 2021 Form W-4 and detailed instructions on our site. And if you’re wondering if this new form means you’ll have to calculate federal payroll taxes based on both W-4s from 2019 and prior and for the new format, you’re correct. You can ask your employees to fill out the new form, but you cannot require them to complete it.
It’s also likely that each state will follow the federal government’s lead and update their forms to sync up with this one. Be on the lookout for those updates over the coming months.