Changes Made to Withholding Calculations
In Part 2, we took a look at the changes to the employee entry window for the new W-4. Part 3 covers the changes made to the withholding calculations so you know what to expect when employees fill out the new form.
Example #1: 2019 W-4
In this example, the employee is married with one child. On the 2019 W-4 Personal Allowances Worksheet, the employee enters 1 for lines A, B, D and 4 for line E. This is a total of seven exemptions:
On the Batch Check Entry, after entering a payroll check with $914 in wages, the program determines that $12.20 should be withheld for federal income tax:
Example #2: 2020 W-4
What happens when the same employee fills out a 2020 W-4? In this case, the employee will enter $2,000 on line 3 for the child tax credit and check the Married box for the filing status. This is what the employee settings will look like:
On the Batch Payroll Check window, when the same wages of $914 are entered for the employee, the program calculates a deduction of $7.40:
At this point you might be wondering what is going on. Which is the correct amount to withhold for this employee: $12.20 or $7.40?
The answer is both amounts are correct. But one amount is more accurate than the other.
The Long Answer
To see which amount is more accurate, you actually have to do this employee’s tax return. (If you don’t like doing your own taxes, you may want to skip this part.)
We will assume that the employee earns $914/week resulting in total wages for the year of $47,528 (line 1 on the 1040).
The employee only has a standard deduction of $24,400 (because he is married). Line 11a on the 1040 is $24,400.
Taxable income (line 11b) is $23,128 ($47,528-$24,400).
Tax on that amount (line 12b) is $2,387 (see page 65 of the 1040 instructions).
The employee has one child eligible for the child tax credit, so $2,000 goes on line 13b.
Line 14 is $387 ($2,387-$2,000).
There are no other taxes, so the total tax on line 16 is $387.
Dividing $387 by 52 weeks in the year, we get $7.44.
Based on the 2020 W-4, having $7.40 withheld from each check means the employee will have been slightly underwithheld during the course of the year and owe $2.08 at the end of the year.
That means the $7.40 withholding amount is much closer to the actual amount the employee owes than the $12.20 amount.
Having $12.20 withheld per check with the settings from the 2019 W-4 means that the employee will have had more withheld than they owe when they file their taxes. This will result in a refund of about $247. The reason that more is withheld with the 2019 W-4 is that the exemption method of adjusting taxable wages is much less precise than using actual dollar amounts.
A note about rounding: By default, the program has always rounded the withholding amount to the nearest ten cents. You can now change the rounding setting in the federal tax rate file to round to the nearest cent. Using this setting, the program will actually withhold $7.45 per check. This provides the most accurate withholding. With this example, withholding $7.45 per check would have resulted in a total of $387.40 being withheld, and the employee getting a .40 refund.
Other new options are available to round up or down to the nearest whole dollar or to always round up to the nearest whole dollar.
The Short Answer
Withholding calculations made using the 2020 W-4 information are more accurate than calculations made using the 2019/prior W-4 information. Employees that fill out a new W-4 should see their withholding adjusted to more closely match what they owe at the end of the year, provided:
- The wages an employee earns each week are relatively consistent.
- The employee works the entire year.
How do I know the withholding amounts are correct?
Publication 15-T from the IRS has the instructions for calculating withholding amounts on page 5, with tables to use on page 6. (The draft version available now includes tables with 2019 tax rates.) You can follow the steps on page 5 to calculate the amounts and verify the amounts calculated by the program.
Please do not call Datatech Customer Support to confirm whether or not a specific withholding amount is correct.
If you think a withholding amount is not correct, first use the new Deduction Explainer feature. First display a check entry on the Batch Payroll Check Entry window. Click on the Recap tab page first, then click on the Recalc button at the bottom of the Tax Deductions group. Then click on the Federal Withholding entry and press [F12]. A window similar to the following will open with an explanation of how the program arrived at the withholding amount:
You can press Ctrl+C to copy the information in the window to clipboard. If you think a calculation is incorrect, this may help you in comparing what the program is doing to the worksheet in Publication 15-T.
If you verify that a withholding amount is not correct, Datatech Support personnel will need the information from the Deduction Explainer window to assist you in troubleshooting the issue. Use Ctrl+C to copy the information to the clipboard and paste it into an email when contacting Datatech Customer Support.
Part 4 of this series will wrap things up.