Prepare to steer your new hires through the updated IRS form for calculating how much federal tax is withheld from employees’ paychecks.


What has changed in the new IRS 2020 W-4 Form? 

  • Line for listing withholding allowances removed
  • The addition of questions on number of children, or other dependents
  • Option to adjust withholding amount based on other income, or expected deductions
  • No line for claiming exemption from withholding
  • The addition of the ‘head of household’ status

A major federal tax law overhaul passed by Congress just over two years ago has led to many big changes. Including the way American workers determine how much Uncle Sam takes from every paycheck. The latest change involves an update to the IRS Form W-4.  Which workers typically submit to their employer when they’re hired, or when they have a major life change. For example, getting married or becoming a parent.

The IRS has made a couple of changes to the form since the passage of the tax law with the aim of making it simpler. And for people who are single and earn income from one employer, it’s fairly easy to complete. However, employees who have more than one job or who are married and file their taxes jointly with a spouse who works have to go through several steps to figure out their withholding tax.  

If you’re a business owner who plans to hire employees this year, you will have to ask them to fill in the newly updated IRS Form W-4. It’s a good idea to familiarize yourself with the changes. As you or your human resources department staff will have to help your new hires complete the form before they can receive their first paycheck.

What’s Changed    

Prior to the tax law changes, employees would enter a number of personal exemptions on their W-4. Then, that would determine how much income tax their employer would withhold from their pay. But the changes in the tax law no longer allow employees to claim personal exemptions.  

The updated form allows workers to reduce the tax withheld from their paycheck if they have itemized deductions and other income adjustments such as contributions to retirement accounts. It also adds a new marital status: “Head of household.”

Employees hired after Jan. 1, 2020, are required to use the updated form. Any employees hired before this year who get married or are going to have a child should also use the new form to ensure their withholding tax is estimated properly.  

For employees who are single and working only one job, completing the updated Form W-4 should be pretty straightforward. All the IRS requires is the employee’s name, address and filing status. In this example, the filing status would either be single or married, but filing their taxes separately from their spouse.

Form W-4 also includes a section for workers who plan to claim children as dependents when they file their tax return. Those who earn $200,000 or less and are filing as single, and those who make $400,000 or less and are filing jointly with their spouse, are eligible for a child tax credit.  

Employees also have the option to fine-tune the amount of tax withheld from their paycheck by accounting for extra non-work income, such as dividends or interest. And if they plan to claim more than the standard deduction, the form has an option for reducing the amount of tax withheld.

Online Calculator

For employees who have more than one job or are married and filing jointly with a spouse who works, completing the otherwise simple form will require a couple of extra steps. Fortunately, the IRS has set up an online tax withholding calculator.  

You may want to direct employees to the online tax withholding calculator. Which has formulas to determine an employee’s tax withholding under different scenarios. Such as if they or their spouse earns income as an independent contractor.

Navigating the estimator requires answering a series of questions about household income and taxes. The responses are used to create an estimate of how much income tax an employee will owe and how much of that they’ve already paid in, whether through direct estimated tax payments or from tax withheld from their paychecks.  

The online worksheet lets users apply the standard deduction. It’s $12,400 for a single filer and $24,800 for a married couple filing jointly. Or itemize deductions by factoring qualified expenses, such as mortgage interest, charitable donations, and medical expenses. The calculator also lets you calculate the impact of tax credits, such as for purchasing an electric car.  

Once completed, the estimator shows whether the user’s current withholding has them on track to owe, get a refund at tax time or have a zero balance. And it generates instructions on how to apply the information to fill in the W-4.  

Users may have to reference information in the previous year’s federal income tax return. Married couples or those filing jointly will need the same documents from their spouse or partner. 

Good To Know 

If you have a new employee whom you’re paying for the first time this year and who hasn’t filed a W-4, their withholding tax will be set as if they were a single filer with no adjustments. Employees that you paid before this year don’t have to file a new W-4. You should continue withholding taxes from their pay based on their existing W-4.  

The IRS has rolled out a spreadsheet to help small business owners determine how much federal income tax to withhold from their employees’ pay as they transition to the updated W-4 this year.  

Of course, if you use an automated payroll system like FINSYNC’s all-in-one cash flow management platform, which has updated withholding tax tables built-in, you don’t have to use the spreadsheet.