Employers can ensure their workforce gets the most out of their taxes by educating them about the new W-4 form, an IRS spokesperson says.
The new form eliminates the “personal exemption” component of calculating taxes for working individuals and instead, calculates taxes based on answers to a few personal questions. In 2020, only new employees will be required to fill out the redesigned form, which was released last Thursday. While seasoned employees aren’t required to fill out the new forms, the new tax calculations could change whether or not they owe taxes when they file in 2021, depending on whether their withholding status changes.
“Because of the tax reform in 2018, last year there were people who owed money and weren’t expecting that,” says Eric Smith, spokesperson for the IRS. “If you don’t complete the new W-4, the situation could potentially arise again.”
Even though the IRS says the new W-4 form will be more streamlined, employers aren’t sure what to make of the changes.
“The IRS has indicated that this change will make it easier for employees to adjust their wages and claim qualifying tax credits to get a more accurate determination of their income tax withholding. However, the jury is still out on if that will actually be the case,” says Cheryl Larson, president and CEO of the Midwest Business Group on Health.
Smith says the IRS consulted experts in the payroll industry while designing the new W-4 to make it as easy to understand as possible. But he says there are a few things HR should know about the new forms in order to communicate its benefits to the workforce.
“The whole idea of personal exemptions was suspended,” Smith says. “That greatly increases the child tax credit and makes it available for more people. Also, the standard deduction was greatly increased for everybody, meaning more people are going to take it instead of itemizing.”
Every taxpayer who claims a child dependent will receive a max tax credit of $2,000 per child under the new form. Since the previous W-4 calculated taxes based on the number of allowances claimed, employees who don’t file a new W-4 may not receive the full benefit of the updated tax credit if they qualify.
“It’s always a good idea to check your withholdings every year, and the IRS always recommends that regardless of the tax reform,” Smith says.
Next month, the IRS will launch its upgraded Tax Withholding Estimator, a calculator to help individuals determine how much to withhold from their taxes. The tool addresses issues like changes in income, withholding status and multiple jobs. The calculator can be found on the
“We very much encourage HR to use [the calculator] and share it with the workforce to help them determine how much they should withhold,” Smith says. “If you can incorporate it into your financial wellness strategy, all the better.”
