"Paycheck Checkup" will help Avoid an Unexpected tax bill!

January 14 2020

Categories: HR Solutions

The Questions You Need Answered

Financial Wellness

Financial wellness is a hot topic.  Why is it such an important issue for employers?

  • Employees are not well informed on financial topics.
  • Employers have made the correlation between financial stress and how it impacts the wellness of the employee. Not only does financial stress impact health care costs, but also productivity.

When employees are hurting, it affects your business and profit margins.  When an employee is not financially stable, it creates financial stress which suppresses the immune system and makes people sick.  A sick workforce impacts profitability with higher health care costs and lost productivity.  Financial stress has an impact on an employee’s ability to concentrate at work.  In fact, nearly half of employees report they are stressed dealing with their financial situation; 47% in 2018.  Helping employees with their financial problems leads to better profit margins and loyal employees who make the most of their paycheck and appreciate their benefits.  One way employers can help is by suggesting a “paycheck checkup.”

Everyone should check their federal income tax withholding for accuracy.  It is especially important if life changes have occurred, such as dependents turning age 17, working only part of the year, or becoming a two-income family.  A surprise tax bill makes everyone miserable and stressed.  Will your employees OWE taxes in 2021 for the 2020 tax year?

Due to the Tax Cuts and Jobs Act (TCJA) tax reform bill that became law in 2017, changes for wage withholding were effective almost immediately in 2018.  The 2018 Form W-4 was issued soon after the law became effective.  It included only the most critical changes necessary to follow the law.  More significant changes to the W-4 were in the works for 2019, however the IRS realized it would take too long to update payroll systems to make all the necessary changes at once.  Therefore, the changes are being made in the 2020 tax year, resulting in the new W-4 form.

What happened to withholding allowances?

Allowances are no longer used for the redesigned form.  In the past, the value of a withholding allowance was tied to the amount of the personal exemption.  Due to changes in law, taxpayers cannot claim personal exemptions or dependency exemptions.

Are all employees required to furnish a new form W-4?

No. Employees who have furnished form W-4 in any year prior to 2020 are not required to furnish a new form merely because of the redesign.  Employers will continue to compute withholding based on the information from the employee’s most recently furnished form W-4.  The IRS strongly encourages employees to consider completing an updated W-4 for these reasons:

  • Withholding will be more accurate
  • Due to the changes from tax reform, it is a good idea to do a paycheck checkup to make sure withholding amounts are still correct for the employee’s situation

Are employees first paid after 2019 required to use the redesigned form?

Yes.  All employees first paid after 2019 must use the designated form.  Any other employee who wishes to adjust their withholding must use the redesigned form.

How are employees treated who are first paid after 2019 who do not furnish a form W-4?

Employees first paid after 2019 who fail to furnish a form W-4 will be treated as a single filer with no other adjustments.  This means that a single filer’s standard deduction with no other entries will be taken into account in determining withholding.  This treatment also generally applies to employees who previously worked for you who were rehired in 2020 and did not furnish a new W-4.

What about employees paid prior to 2020 who want to adjust withholding from their pay dated January 1, 2020 or later?

Employees must use the redesigned form.

Do employees paid before 2020 need to furnish the new redesigned form W-4?

They can be asked, but it needs to be explained that:

  • They are not required to furnish a new form W-4, and
  • If they do not furnish a new form W-4, withholding will continue to be based on a valid form previously furnished

For those employees who furnished forms before 2020 and who do not furnish a new one after 2019, employers must continue to withhold based on the forms previously furnished.  Employers are not permitted to treat employees as failing to furnish form W-4 if they don’t furnish a new form.  Note that special rules apply to form W-4’s claiming exemption from withholding.

Will there still be an adjustment for nonresident aliens?

Yes.  The IRS will provide instructions in the 2020 Publication 15-T, Federal Income Tax Withholding Methods, on the additional amounts that should be added to wages to determine withholding for nonresident aliens.  Nonresident alien employees should continue to follow the special instructions in Notice 1392 when completing their form W-4.

When can the new 2020 form W-4 start to be used?

The new 2020 form W-4 can be used for wages to be paid in 2020.

Tax Withholding Estimator

 Even though the IRS does not require all employees to complete the revised form, and even if an employee’s tax situation has not changed, it is highly recommended that a “payroll checkup” is performed to see if adjustments are necessary to current withholdings.  Use the IRS Tax Withholding Estimator by following the link below to conduct the checkup.


Why Use the Estimator?

The IRS encourages everyone to use the Tax Withholding Estimator to make sure the right amount of tax is being withheld from an employee’s paycheck.  Great reasons to check withholding:

  • Checking withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time.
  • Some employees may prefer less tax withheld up front, so more is received in paychecks, making their tax refund smaller at tax time.

When Should the Estimator be Used?

If withholdings were changed for 2019, the IRS suggests rechecking withholding at the start of 2020.  A mid-year withholding change in 2019 may have a different full-year impact in 2020.  So, if a new W-4 is not filed for 2020, withholding might be higher or lower than preferred.  Also, if a major life change has occurred such as marriage, birth of a child, adoption or purchasing a home, the estimator should be used.

Using the Estimator

Before using the estimator, have the following documents handy:

  • Most recent pay statements, and if married spouse’s pay statement
  • Information for other sources of income, if applicable
  • Most recent tax return

The estimator’s results will only be as accurate as the information entered.

To Change Withholding

The results from the Tax Withholding Estimator will help employees complete a new W-4 to be submitted to the employer as soon as possible.  Since withholding takes place throughout the year, it is better to take this step sooner than later.

The Tax Withholding Estimator does not ask for personal information such as name, social security number, address or bank account numbers.  The IRS does not save or record the information entered on the estimator.

The Tax Withholding Estimator works for most taxpayers.  Instructions for more complex tax situations can be found in IRS Publication 505, Tax Withholding and Estimated Tax.  This includes taxpayers who owe alternative minimum tax or other taxes, and people with long-term capital gains or qualified dividends.

Completing a 2020 Form W-4

Instructions for completing the new form W-4 are included with the form.

  • Employees must complete Steps 1 and 5
  • Complete Steps 2 through 4 only if they apply to the employee’s specific situation
    • Step 1: Personal Information
    • Step 2: For households with multiple jobs
    • Step 3: Used to claim tax credits for dependents
    • Step 4: Used for other adjustments (additional income such as interest and dividends, itemized deductions that exceed the standard deduction, and any extra tax to be withheld)
    • Step 5: Employee signature

The IRS takes privacy seriously and suggests that if an employee is worried about reporting multiple jobs in Step 2 or other income in Step 4(a), it is recommended to use Step 2(a) or (b) to enter an additional withholding amount in Step 4(c) respectively.  To determine the additional withholding amount, the withholding estimator can be used.

#teamkoppinger recommends consulting a tax advisor for any questions regarding withholding.  Conduct a “paycheck checkup” soon to avoid an unexpected tax bill or penalty with next year’s return.

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