Many Americans were upset with their 2018 tax returns, which was the first under the Trump Administration’s Tax Cuts and Jobs Act. Much of that frustration was due to a misunderstanding of the new tax law, which is designed to allow workers to keep more of their paycheck, rather than giving the government an interest-free loan.
More change is on the horizon for employees and businesses alike, as the Internal Revenue Service is expected to continue its rollout of the tax law by releasing a new W-4 form for use in 2020. The purpose of the new form is to make withholding more accurate, with the ultimate goal being that workers neither owe, nor are owed, come April.
Since the Tax Cuts and Jobs Act eliminated personal exemptions from the federal tax code, the W-4 is being updated to reflect as such.
“The basis for those withholding allowances was personal exemptions. People would count themselves, their spouse, their dependents and count on the number of exemptions and put down the number of allowances,” said Pete Isberg, head of government relations at ADP. “They don’t exist anymore, so why would you have withholding allowances based on exemptions when the value of exemptions is zero? So that’s essentially the change. There are no more personal exemptions, it’s been translated to allowances. They had to come up with other ways to permit people to adjust their tax withholding for other factors.”
Isberg, who has viewed the W-4 draft that is expected to be released for public consumption by the end of the month, said the IRS addressed the privacy concerns many had with the draft released last summer for public comment. For instance, the draft asked for employees to disclose to their employer their spouses’ annual income, which many were uncomfortable with. However, to get the withholding correct for a family with two earners, an employer needs to know the full family income.
“They seemed to come up with a couple nice ways to do this,” Isberg explained. “One is to deal with it on a worksheet in the back and convert it to an additional amount to withhold. And additional amount to withhold per pay is not new, but that’s one way to get around this. Secondly, there seems to be a check box, which is quite easy. It just says check here if you have two earners in the family. It’s very easy for folks to do. I don’t know if that’s going to be on the final form, but what we saw was carefully done and well done.”
Isberg noted that existing employees at an organization will not have to fill out a new W-4 form but advised that those employees check their withholding and adjust it accordingly. New hires will feel the brunt of these changes, Isberg said, as it will no longer be a quick process on the first day of orientation.
“The onboarding part of filling out paperwork is going to grind to a halt where you might actually need to give people like an hour in a quiet room and a phone so they can call home to figure out all the different variables,” Isberg said. “Because who remembers their full-year tax deductions from last year? It’s not going to be as easy as it used to be, and it might be time consuming.”
Aside from the adjustments to the onboarding process, Isberg said that employers will have an interesting year ahead once the W-4 changes are released, as it could drastically change how states go about their tax returns. Isberg noted that most states that have an income tax are tied to the federal tax code, so the withholding allowances from federal W-4 often apply for state tax purposes as well.
How states respond could leave employers being faced with maintaining dual systems for taxes.
“We may see some significant announcements from the states regarding the federal withholding allowances and some states might elect to create their own W-4 form with withholding allowances if they want to keep them,” Isberg said. “And it may depend on how they are tied to the federal tax code. Or they may significantly revise their whole withholding regime. But that’s going to be late 2019 and effective in 2020, so are employers going to have time respond and to reprogram their systems if a state comes out in November/December with an entirely new withholding regime?”
The IRS has a withholding calculator for public use, which employers should encourage their employees to utilize to make sure they are withholding the correct amount.
W-4 FUTURE ROUNDUP
Paying a Lower Share
Corporate America is paying their smallest share of federal income tax revenue in nearly 60 years, writes Aimee Picchi of CBS News. Picchi discusses how the IRS tax figures are fueling a continuous debate between right and left concerning the impact of the 2017 Tax Cuts and Jobs Act.
Preparing for Tax Season
Kathryn Vercillo provides tips for how workers can prepare for the 2019 tax season in this article for SavingAdvice.com. Vercillo approaches this advice column from the standpoint of collecting a larger refund on your income tax return.
How Many Allowances?
Rocky Mengle gives readers a breakdown of what allowances are and how an employee should go about filling out their W-4 in this Yahoo Finance article. Mengle covers all angles and answers pertinent questions concern tax filing in a comprehensive and worthwhile read.
About the Author
Brett Christie is a staff writer at WorldatWork.