IRS Issues 2020 Withholding Tables

IRS Publication 15-T (Federal Income Tax Withholding Methods) has been finalized. The publication includes 2020 percentage method and wage bracket withholding tables, withholding adjustments for nonresident alien computations, alternative methods for figuring withholding, and the tables for withholding on distributions of Indian gaming profits to tribal members. Withholding calculations are quite different than in previous years due to changes in the federal income tax law and the redesign of Form W-4.

The publication has seven sections.

Section 1 of the publication contains the percentage method withholding tables for automated payroll systems. The IRS says that this method works with both Forms W-4 from 2019 or earlier, and Forms W-4 from 2020 or later. This method also works for any amount of wages. This method works for any number of withholding allowances claimed if the Form W-4 is from 2019 or earlier. Tax rates in the tables range from 10% to 37%.

Section 2 of the publication contains the wage bracket method tables for manual payroll systems (payroll calculated entirely on paper) with Forms W-4 from 2020 or later. The IRS notes that these tables cover only up to approximately $100,000 in annual wages. If an employer can’t use these tables because taxable wages exceed the amount from the last bracket of the table (based on filing status and pay period), the employer should use the percentage method tables in Section 4.

Section 3 of the publication contains the wage bracket method tables for manual payroll systems with Forms W-4 from 2019 or earlier. The IRS notes that these tables cover only up to approximately $100,000 in annual wages and up to 10 allowances. If an employer can’t use these tables because taxable wages exceed the amount from the last bracket of the table (based on marital status and pay period), or the employee claimed more than 10 allowances, the employer should use the percentage method tables in Section 5.

Section 4 of the publication contains the percentage method tables for manual payroll systems with Forms W-4 from 2020 or later. This method works for any amount of wages.

Section 5 of the publication contains the percentage method tables for manual payroll systems with Forms W-4 from 2019 or earlier. This method works for any number of withholding allowances claimed and any amount of wages.

Section 6 of the publication contains alternative methods for figuring withholding (formerly in IRS Publication 15-A prior to 2020). Alternative methods include computing withholding based on annualized wages, average estimated wages, and cumulative wages. These methods may be used instead of the percentage method and wage bracket methods discussed earlier. The IRS advises employers to use the method that best suits their payroll system and employees.

Section 7 contains the tables for withholding on distributions of Indian gaming profits to tribal members (formerly in IRS Publication 15-A prior to 2020).

Other Notes

IRS Publication 15-T supplements IRS Publication 15 (Employer’s Tax Guide) and IRS Publication 51 (Agricultural Employer’s Tax Guide). Employers may also use the Income Tax Withholding Assistant for Employers to help compute federal income tax withholding.

Withholding from supplemental wages. The IRS says that Publication 15-T may be used in certain situations to figure federal income tax withholding on supplemental wages, but the methods of withholding described in Publication 15-T can’t be used if the 37% mandatory flat rate withholding applies or if the 22% optional flat rate withholding is used to figure federal income tax withholding. For more information about withholding on supplemental wages, see section 7 of IRS Publication 15.

Withholding on periodic pension payments. Although IRS Publication 15-T may be used to figure federal income tax withholding on periodic payments of pensions and annuities (see Section 5 of publication), the methods of withholding described in the publication can’t be used to figure withholding on nonperiodic payments or withholding on eligible rollover distributions. For more information about withholding on pensions and annuities, see section 8 of IRS Publication 15-A (Employer’s Supplemental Tax Guide).

Withholding adjustment for nonresident alien employees. Pages 3-4 of IRS Publication 15-T explain how to compute the withholding adjustment for nonresident alien employees.  The withholding calculations for nonresident alien employees are different than for other employees, because nonresident alien employees are not entitled to the standard deduction that is built into the withholding tables. An employer must add an amount to the wages of nonresident alien employees performing services in the U.S. in order to figure the amount of federal income tax to withhold from their wages. The amount is added to their wages solely for calculating federal income tax withholding. The amount isn’t included in any box on the employee’s Form W-2 and doesn’t increase the income tax liability of the employee. The amount also doesn’t increase the Social Security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer.

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