December 4, 2019
The more questions we answer, the more that get asked. So let's
address the latest set of questions now.
Question: If employees don't complete new forms, must we change
them to zero as a default, since there will be no withholding allowances?
Answer: No. Employees don't have to refile the 2020 form. In
fact, most probably won't. So their pre-2020 W-4s with withholding allowances
continue to be valid.
Withholding allowances aren't really going away. They show up in
Worksheet 1, on Line 1g, if the employee has filed the 2020 W-4 or on Line 1k,
if the employee has an earlier W-4 on file. They also show up in the traditional
percentage method tables, which is the adjunct to Worksheet 5.
The IRS has
inflation-adjusted the amount that appears on Lines 1g and 1k. For 2020, this
amount is $4,300.
Question: If our IT department can't reprogram the payroll
system in time for the first or even second payroll of 2020, can we continue to
withhold based on the 2019 tables without subjecting the company to penalties?
Answer: Probably not. Admittedly, programming for 2020
withholding will be more complicated than programming in past years. But the
IRS issues new withholding tables every year, and it expects employers to be
able to comply.
If your IT department can't comply with the more rigorous
demands of programming Worksheet 1 and the accompanying percentage method
tables by the first payroll of 2020, you can take the following steps:
For employees who have pre-2020 W-4s on file, your IT department
can program the traditional, withholding allowance-based percentage method
tables (i.e., the tables used in conjunction with Worksheet 5). That should be
easier to do, since it's familiar.
Then, use the 2020 wage bracket tables for new hires who start
in the beginning of January and for employees who have updated their W-4s.
Extra work for you: Be sure to feed the amounts you withhold manually into the
payroll system once it's up and running, since you must ensure that employees'
year-to-date accumulations are correct, your tax deposits are correct, and your
first quarter Form 941 is correct.
Question: Where on the 2020 W-4 would employees take into
account their cafeteria plan and pretax 401(k) amounts? In Step 4, Line 4c? Or
would that in be in Step 3, since a credit would have the same effect as a
pretax deduction?
Answer: In general, employees have never accounted for their
pretax deductions on their W-4s. Pretax deductions lower W-2, Box 1 income. The
benefit comes when employees file their 1040s, since their annual income will
be lower.
Employees account for tax credits in Step 3, not pretax
deductions. A pretax deduction and a tax credit probably do have the same
effect, but they're not the same thing. A pretax deduction reduces gross pay,
while a tax credit reduces modified adjusted gross income.
Line 4c is for
indicating to an employer that you want more taxes withheld, not less.
Help by communicating with employees
Employees should be informed about the coming changes to the
W-4. The American Payroll Association has been kind enough to prepare a model
memo (or email) you can send to employees.
You can also find
articles and how-tos on our website.
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