Impact on State Withholding
In some cases, when employees fill out the W-4, the allowances claimed were also used for state withholding calculation purposes. Most states have their own equivalent to the federal W-4 form, which employees must fill out if they wanted to use a different number of allowances for state withholding.
Because the new W-4 form does not have allowances, it now means that employees must complete the state equivalent form to provide the number of allowances they are claiming for state withholding purposes.
In California, the state equivalent form is the DE 4. Other states generally have their own forms which you will need to have employees fill out when they are hired.
Some states may not have their own certificates and have relied on the federal W-4. These states may be revising their certificates (Maine), creating their own certificates (South Carolina and Nebraska) or may adapt their withholding calculations to use the new federal W-4 form (New Mexico).
We will be updating the state withholding calculations as soon as possible when new instructions become available. In the meantime, it may be necessary to temporarily use 2019 withholding tables and methods until new programming can be completed for these states.
Handling Exempt Employees
One change from the old federal withholding settings is how exempt employees are handled. Previously, you would enter 99 for the federal allowances to prevent any withholding from being calculated. The new method is to select the “Exempt” setting for the W-4 entry in the Federal Taxes group on the employee setup window. This setting should only be used if the employee writes “Exempt” below line 4(c) on the W-4.
Handling Fixed Withholding Amounts
One trick that some customers have used in the past to withhold a fixed amount from each check is to enter 99 in the federal allowances entry and the total amount the employee wants withheld from each check in the Additional Withholding entry. The 99 allowances ensures that no tax is calculated as a result of the standard tax table calculations. This results in the program simply using the additional withholding amount for federal withholding.
This type of workaround can still work with the new W-4 settings. For instance, you might first determine the annual income tax withholding amount for an employee. Then enter an amount greater than that in the dependent credit entry to zero out the annual federal income tax liability calculation. Then enter the amount you want withheld in the Additional Withholding entry as before.
Some Useful Links
American Payroll Association 2020 Form W-4 (including a sample letter you can use to explain the new form to employees)