During the December 5 IRS payroll community telephone conference call, a representative from the IRS addressed a topic creating some confusion in the payroll industry; namely, how to compute federal withholding in 2020 for a new employee who fails to submit a Form W-4 (Employee’s Withholding Certificate).
Currently, if a new employee fails to submit a Form W-4 to his/her employer, the employer withholds federal income tax as if the employee was claiming single filing status with zero withholding allowances. However, the 2020 Form W-4 no longer takes into account withholding allowances. The redesigned 2020 Form W-4 instead uses a five-step process to compute withholding. New Publication 15-T (Federal Income Tax Withholding Methods), which has not been finalized yet, will include the withholding methods available to compute withholding.
According to the 2020 draft version of Publication 15-T (final 2020 version due out in late-December 2019), a new employee who is first paid wages in 2020, and who fails to submit a 2020 Form W-4 to his/her employer, will be treated as if he/she checked the box for single (or married filing separately) in Step 1(c) of the 2020 Form W-4 and made no entries in Steps 2, 3 or 4 (i.e., no withholding adjustments for multiple jobs, dependents, or other adjustments). This is the new default procedure beginning in 2020 for a new hire who does not provide his/her employer with a Form W-4.
The IRS representative noted that this language in Publication 15-T is intended to only refer to the current employer-employee employment relationship, and does not require consideration of any prior employer-employee employment relationship.
For further clarification, the IRS representative went over a few employment scenarios on this topic:
- An employee works for an employer in 2019 and terminates employment before Dec. 31, 2019. The same former employee is rehired by his/her employer in 2020 but does not provide a 2020 Form W-4. The employer should not look back to see if there is a prior year Form W-4 on file. The employer should use the 2020 default procedure.
- An employee is working for an employer on Dec. 31, 2019 and part of January 2020. Employment is terminated later in January 2020. The employee is rehired three months later and does not provide a 2020 Form W-4. The employer should not look back to see if there is a prior year Form W-4 on file. The employer should use the 2020 default procedure.
- An employee is employed on Dec. 31, 2019 and received a paycheck in 2019. The employee never furnished a Form W-4 and continued employment with the employer in 2020. In this scenario, the employer must continue to use the single with zero allowances default that was used prior to 2020 for employees who did not provide a Form W-4. The employer may not use the 2020 default procedure.
- An employee is hired in late 2019. However, the employee’s first paycheck is not until 2020. He/she does not furnish a Form W-4. The employer should use the 2020 default procedure.
IRS lock-in letters. The IRS representative also pointed out that there are special rules for employees who are under the IRS lock-in letter program and who resume employment within 12 months. An IRS lock-in letter specifies the withholding rate and maximum number of withholding allowances to use for an employee whose withholding has not been computed in accordance with IRS guidelines (see Payroll Guide ¶4010). The Dec. 9, 2019 Payroll Updates has further information on this topic.