Have questions about the new W-4 form for 2020?
Datatech’s support department has received numerous calls this year regarding the 2020 W-4 changes. Some customers have reported employees noticing less withholding, some don’t understand the form, and others inquire whether they can continue using the old form. Below are some resources we hope will assist customers with these questions.
Why the new form?
Per the IRS “The new design reduces the form’s complexity and increases the transparency and accuracy of the withholding system. While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.” Click here for more information.
In some cases, while troubleshooting withholding differences with customers, we noticed employees did not accurately count their allowances on the 2019 W-4 form. This corresponds to the IRS statement that the new form will increase accuracy of withholding amounts by eliminating the worksheets. In addition, because tax code has changed, even when following the instructions for calculating allowances on the 2019 W-4, inaccurate withholdings would result.
We’ll discuss how the previous method of calculating allowances equates to directly entering tax credits and how to verify current withholdings for employees.
Allowances vs. Credits
History of Child Tax Credits & How to Calculate Allowances
Starting in 1997, tax filers received an annual Child Tax Credit of $500 per child. To account for this credit on payroll check withholdings, an additional allowance was added per child to the W-4 form. Basically, one allowance equates to about $500 in annual tax credits.
Over the years the Child Tax Credit was increased. Beginning in 2018, the Child Tax Credit became $2,000 per year (This is set to return to $1,000 in 2025). To equate $2,000 in annual tax credits, each eligible child would need to be counted as 4 allowances (4 x $500 = $2,000). For a weekly pay cycle, this would reduce your base federal tax withholding by $38.46 per child ($2,000 / 52 weeks).
With the 2018 W-4, the instructions for calculating the Personal Allowances was shifted to a worksheet on page 3. Additionally, with a new credit for non child dependents, in section F individuals were instructed to add 1 additional allowance for other eligible dependents. (This is equivalent to the $500 credit for other dependents on the 2020 W-4.)
Other factors, including income levels, also would need to be taken into account to accurately calculate allowances. Below is the Personal Allowance Worksheet from the 2019 W-4 form:
Another issue with this worksheet is that beyond the personal tax exemption, there are no other tax credits for yourself/spouse/head of household in the tax code. Therefore, adding these as allowances caused further inaccurate withholding calculations.
The new W-4 form eliminates the issues that cause inaccurate tax withholdings.
Instead of having to add 4 allowances per child to equal one $2,000 child tax credit, the new form simplifies the entry. Now the number of eligible children are simply multiplied by the credit to arrive at the total annual Child Tax Credits they receive. Other non child dependents are multiplied by the annual $500 credit.
How to compare tax deductions using Allowances vs. Child Credits
As mentioned above, there are two issues when comparing 2019/Prior W-4 settings to 2020 W-4 settings.
As an example, we’ll compare a single employee with 2 children. Taking into account there are no personal credits, allowances of 8 (2 X 4) using the 2019 W-4 Form setting is equivalent to using the 2020 form and Dependent credits of $4,000 (2 x $2,000).
If the employee account has less than 8 allowances with the 2019 W-4 setting, there will be less withheld because the full amount of credits are not being applied.
The second issue would be seen if the allowance worksheet WAS properly filled out and the employee counted 10 allowances (including 1 for self (line A) and 1 for single (line D) and 8 for children (line E)). In this case, the employee would have too little withheld because self credits are no longer part of the tax code.
So, in either case, the new 2020 W-4 form will result in more accurate withholdings.
How to verify Federal Tax Withholding Calculations
To verify the withholding of a check, you can use the worksheet on page 7 of publication 15-T to calculate the tax using the withholding tables. Below is an example of the Wage Bracket Method Calculation.
Step 1 determines the applicable Taxable Wages. If the employee has no additional income or deductions on their W-4 in 4a or 4b, the final Adjusted Wage Amount will equal their taxable wages from their payroll check.
In Step 2, you use the corresponding tables in the publication to find the tentative/base tax withholding.
In Step 3, the total of annual child tax credit is divided by the number of pay periods in the year to arrive at your credit for this payroll check.
This amount is subtracted from the tentative/base witholding amount to arrive at the final withholding amount.
Calculating Using Datatech Software
When using the publication tables, be aware that the amounts are based on ranges of income and rounded withholding amounts. In the software, the subject wages are annualized. Then the base tax is calculated and the excess wages are multiplied by the respective tax bracket percentages. This annual withholding amount is divided by the number of pay periods to arrive at the final check withholding amount. Therefore, the software calculation will not match the table amount exactly, but will be close.
In the example above, the calculated worksheet withholding resulted in 55.08. With the same corresponding wages and child tax credits, the result in Datatech’s software is a withholding of 53.65.
If you have questions as to how the software is arriving at a Federal Tax Withholding calculation, you can open an unprinted check in the Batch Check entry window. Click on the Recap tab > click in the Federal Income Tax field > and press the F12 key. This will display the full calculation formula specific to this check as shown in the following image:
Can new employees use the old form?
According to the IRS, all new employees first paid after 2019 must use the redesigned form. Similarly, any other employee who wishes to adjust their withholding must use the redesigned form.
To assist employees in filling out Step 2 of the form, the simpliest question to boil down to is how many children and other dependents does the employee have. A supervisor or HR staff might help an employee multiple the number of children by $2,000 and other dependents by $500 to complete that step.
In addition, many employees were used to having extra tax withheld and getting a tax refund at the end of the year. So, if an employee wishes to have extra withholding that would be entered in Step 4c.
The form may seem overwhelming at first, but we hope this article helps you understand the changes and help your employees complete the form correctly.
If you have any questions regarding the software calculations, please email email@example.com and we may update this article with future FAQ’s.
The information presented in this article should not be construed as legal, accounting or tax advice. Our employees are not accountants or lawyers and they do not provide accounting, tax or legal advice. You should consult with a professional advisor familiar with your particular factual situation for advice concerning specific accounting, tax or legal matters before making any decisions.