New Way of Calculating Income Tax
As mentioned in Part 1, one of the reasons the IRS changed the W-4 is to improve accuracy of withholding amounts. Recent changes to how federal income tax is calculated have increased the standard deduction and eliminated exemptions. The IRS changed the W-4 to bring this form more in line with the new methods of calculating income tax. The dollar amounts on the new W-4 should result in more accurate withholding than the old exemption based system.
As you look at the new W-4, you’ll see that there are four key dollar amounts that the employee may provide in Steps 3 and 4 of the form. Your employees will not need to provide an amount for each of these lines. If they do provide an amount for any of these lines, then you will need to enter it on their employee account.
Four Key Dollar Amounts
Dependent Credits (Step 3): This will likely be the most commonly used amount for employees with children under 17. The employee will multiply the number of qualifying children by $2,000 and enter the dollar amount. Other dependents qualify for a $500 credit.
Other Income (Step 4a): If the employee has other income that doesn’t have any tax withheld, the employee can enter the dollar amount of that income (or an estimate of the total other income) here. When calculating withholding amounts, the program will add other income to the employee’s wages to determine the total taxable income.
Deductions (Step 4b): If the employee will have itemized deductions, the employee can enter the total itemized deductions over the standard deduction here. The program will deduct this amount from the employee’s taxable income before calculating the withholding tax.
Additional Withholding (Step 4c): This is the same as the additional withholding amount from the older W-4 form. The program will add this amount to the withholding amount it calculates based on the employees wages, dependent credits, other income, and other deductions.
In addition to these four dollar amounts, we have added a checkbox to indicate whether or not the employee checked the “Two Jobs” box on Step 2.
Employee Entry Changes
Here is a screenshot of the redesigned main employee entry window:
(We have changed the Quick Employee Entry window and the Employee Setup window in Human Resources with the same entries.)
We have reorganized the old Tax Settings group into three individual groups. Tax Settings now contains two general settings. Federal Taxes contains all of the entries that relate to federal taxes and the W-4. State Taxes contains the information that relates the state and local withholding.
Under the Federal Taxes section, the W-4 entry is new. Actually, this entry corresponds to the old “Need W-4” checkbox that was on the Employee Info tab page. We have changed this entry to be one of four values:
- 2019/Prior: This will be the default for most employees where the Need W-4 box was not checked. The program assumes that all employees that did not have this box checked had filed a W-4 using the 2019 or prior year form. When you select this option, the program will display entries for the allowances and additional withholding.
- W-4 Needed: The program will display this option on any employee account where you had checked the Need W-4 box. This indicates the employee has not provided a completed W-4 form to you.
- 2020+: This setting indicates the employee provided a completed W-4 from 2020 or later. When you select this option, the program will display entries for the four dollar amounts and the Two Jobs checkbox.
- Exempt: This setting should be used when the employee provided a completed 2020 or newer W-4 and indicated that they are exempt from federal withholding on line 4d of the W-4.
Head of Household Option
The Head of Household option will be available on the Marital Status entry once you have closed the 2019 payroll year and the current year is 2020 or newer and you have selected 2020+ for the W-4 setting. (The IRS does not allow the Head of Household filing status to be used with the previous W-4 form.) Until you have closed the 2019 payroll year, the Marital Status entry will only have Married and Single available.
When an employee has filled out the 2020 version of the W-4, you will enter the amounts in Step 3 and Step 4 into the corresponding entries. Check the Two Jobs box if the employee checked that box on Step 2.
That’s all there is to entering information from the new W-4 form.
Part 3 of this series will take a look at the new federal income tax withholding calculations, how the new W-4 changes the amounts that are withheld, and how you can be sure the correct amounts are getting withheld.