The IRS has unveiled a draft of the employer publication to make use of the 2020 draft Form W-4 to compute payroll check withholdings in Publication 15-T, Federal Income Tax Withholding Methods. The publication is being issued to assist employers in getting systems ready for 2020 withholding.
The nine page publication has 2 pages devoted to instructions, a full page Employer’s Withholding Worksheet outlining calculations for both the wage bracket and percentage method of withholdings, a page of withholding method tables, and ends with five pages containing the wage bracket method tables.
The draft publication has only the weekly wage bracket withholding tables and uses the 2019 values. The final version will contain all of the bracket withholding tables and will be updated for the 2020 values.
The employer worksheet for employees that file new W-4s for 2020 has the employer compute an annualized income for the employee based on the current payroll. That annualized income is used to determine the withholding for the employee. The employees are instructed to enter dependent credit information and income/deduction adjustments only on the W-4 for the highest earning job for the tax filing unit (such as the higher earning spouse for a married couple that each has one job, or the higher earning job for a single individual who holds two jobs).
The worksheet serves to translate the data provided on the revised Form W-4 into a withholding amount. The draft Form W-4 contains the following information:
That data moves onto the worksheet on page 4 of Publication 15-T:
While there are an infinite number of possible W-4 entries and numbers the employer will receive, looking at some example calculations using the worksheet can help understand how the new W-4 relates to the amounts actually withheld.
Mary turns in her W-4. She enters her address and checks the head of household box in Step 1. She signs the form in Step 5 but makes no entry in Steps 2-4. She is paid $1,000 on a weekly payroll.
Mary’s employer computes her withholding as follows. First, the employer multiplies Mary’s taxable wages for the pay period ($1,000) times the 52 weekly pay periods in the year, entering $52,000 on line 1c.
Since Mary’s filing status is head of household, the employer will enter 2 on line 1d. The employer than uses that factor and multiples it by 4,200, entering 8,400 on line 1f. As there is no amount entered on line 4a of Mary’s Form W-4, the employer also enters 8,400 on line 1h. Again, since Mary did not fill in Step 4, there is no amount on line 4b. Thus, Mary’s adjusted annual wage amount is $52,000 less $8,400, or $43,600.
Mary’s employer now reduces that down to a weekly amount by dividing by 52 since the company pays on a weekly pay period, resulting in an adjusted wage amount per pay period of $838.46.
Mary’s employer uses the wage bracket method to compute withholding. Using the instructions for Step 2, lines 2a and 2b, the employer looks up her pay period wages in the wage bracket method tables for income tax withholding. The table bracket Mary falls in is the one from $830-$840, and her withholding as head of household is $72.
Assume Mary’s employer decides to use the percentage method to compute her withholding. In this case the calculation begins with annual adjusted wage amount from line 1j of the worksheet, or $43,600.
The employer uses the standard withholding rate schedule for the head of household filing status. In that case, the initial calculation from table results in the total of $1,385 plus 12% the amount of Mary’s annual adjusted wage amount in excess of $23,800, or $19,800:
To get the withholding per pay period, the annual amount calculated is divided by 52 (the number of weekly pay periods in the year), arriving at $72.33 to be withheld from the week’s paycheck.
Assume Mary is married and her job has higher wages than that of her spouse. The couple has one dependent child under age 17 and expects their income to be less than $400,000. They do not have other significant income, they expect to claim the standard deduction in lieu of itemizing and do not expect to have any other deductions. Mary and her spouse want to avoid owing tax on their tax return and this represents their primary goal.
Mary and her spouse each check the box in Step 2 on line 2 to force a higher rate of withholding for their two jobs. Only Mary completes Step 3. In that step, she enters $2,000 for their dependent child and carries that number down to line 3. She does not enter any additional income on line 4a or additional deductions on line 4b. She does not request any additional withholding on line 4c, nor does she claim exemption from withholding on line 4d.
Mary’s employer uses the wage bracket method. This time the employer again multiples Mary’s $1,000 payroll for the week by 52 weekly pay periods in the year, arriving at $52,000.
This time the employer enters 0 on line 1d since Mary has checked the box on line 2 in Step 2. That results in no amount to be subtracted for the personal exemptions on line 1f and, as well, there is no addition for additional income nor subtraction for an additional deduction. Thus, Mary’s annual adjusted wage amount is $52,000.
Since the wage bracket amount tables are being used by the employer, the $52,000 annual adjusted wage amount is divided by 52 (number of weekly pay periods in the year), arriving back at a $1,000 weekly adjusted wage amount. The employer goes to the wage bracket amount table and selects the initial withholding amount. Although the standard withholding amount would be $86, since Mary had checked the box on line 2 of Step 2 to have the higher withholdings, the initial withholding amount for her is $90.
However, the employer is not done yet since Mary listed a dependent child under the age of 17 on her W-4. The $2,000 total amount will be divided by 52 (again, the annual number of weekly payroll periods) which amounts to $38.46. The employer would use this weekly credit value on line 3c, and subtract this amount from the initial withholding amount, resulting in the amount of $51.54 ($90.00 – $38.46).
Assume Mary had filed a Form W-4 in 2019 claiming one allowance and married status, but does not file a new Form W-4 for 2020. The employer uses the allowances and status from the 2019 Form W-4 to calculate Mary’s withholding.
In this case, the employer would begin filling in the worksheet on line 1l, entering “1” for the number of allowances. The employer enters $4,200 on line 1m, which is $4,200 times the number of allowances claimed (1). The adjusted annual wage amount would be the $52,000 annualized earnings reduced by $4,200, or $47,800. That number is divided by the number of pay periods in the year (52), coming to an adjusted wages amount of $919.23.
The employer takes Mary’s adjusted wage amount and consults the wage bracket method table to determine the withholding amount. In this case that amount is $75.00.
The IRS is taking comments in at this time regarding the new W-4 form and employer computation using that form. When the draft W-4 was issued on May 31, 2019 the IRS indicated that the agency expects to release a “near final” Form W-4 in mid-to-late July. Presumably a similar near final version of Publication 15-T would be released around the same time to allow employers to update systems to take into account the new calculations.