Updates – Tax Calculator & 2020 Draft W-4.

IRS Launches New Redesigned Tax Withholding Estimator for Paycheck Checkups

The IRS has alerted the payroll community about the launch of a new IRS Tax Withholding Estimator online tool. It replaces and expands the old IRS Withholding Calculator [IR 2019-139, 8/6/19; e-News for Payroll Professionals, Issue No. 2019-08, 8/6/19].

The new tool offers a robust, mobile-friendly, step-by-step way for workers, as well as retirees, self-employed individuals and others to tailor the amount of income tax withheld from their wages and pension payments. In designing the Tax Withholding Estimator, the IRS listened to the concerns of payroll professionals and other stakeholders.

As a result, the new tool features:

  • The ability to more effectively target either a tax due amount close to zero or a refund of around $500.
  • The ability to calculate self-employment tax for a user who has self-employment income in addition to wages or pensions.
  • Automatic calculation of the taxable portion of any Social Security benefits.

The IRS continues to urge everyone to do a paycheck checkup and review their withholding for 2019. This is especially important for taxpayers who faced an unexpected tax bill when they filed this year, those who have a major life change in 2019.

Those most at risk of having too little tax withheld include those who itemized in the past but now take the increased standard deduction, as well as two-wage-earner households, employees with non-wage sources of income and those with complex tax situations.

Second Draft 2020 Form W-4 Says No Further Substantive Changes

On August 8, the IRS posted the second draft 2020 Form W-4 (Employee’s Withholding Certificate) on its website. The IRS says it is providing this second version of the 2020 form now so that the programming of payroll systems can begin.

The 2020 Form W-4 has been highly anticipated by the payroll community due to the numerous changes being made to it as a result of the enactment of the Tax Cuts and Jobs Act in late-December 2017.

On May 31, the IRS issued the first draft 2020 Form W-4. This draft was significantly redesigned from the 2019 version of the form, now containing a series of five steps for employees to complete (if applicable).

The second draft 2020 Form W-4 changed the title of the form by removing the word “allowance.” The concept of withholding allowances is no longer being used, which was previously tied to the amount of the personal exemption. Due to changes in the law, personal exemptions are no longer a central feature of the tax code.

Some other small adjustments include changing the name of Step 2 from “Account for Multiple Jobs” to “Multiple Jobs or Spouse Works.” This step is for employees who hold multiple jobs at the same time or are married filing jointly and the employee and his/her spouse both work. The instructions note to consider checking the box in Step 2 if there are only two jobs in the household. The standard deduction and tax brackets will be divided equally between the two jobs.

There is also a change for claiming exempt from federal income tax withholding for 2020. On the first draft, employees claiming exempt would write the word in box 4(d) of Step 4 “Other Adjustments (optional).” The second draft removes box 4(d) and instructs employees claiming exempt to write the word in box 4(c) of Step 4.

The IRS explains that the computation of withholding has not changed from the first draft 2020 Form W-4. The IRS expects the final version 2020 Form W-4 to be issued in the late-fall 2019. The IRS adds that although the final version will not be issued for a few months, there will be no further substantive changes.

That said, the IRS is permitting comments on this second draft until September 9, which may be emailed to: WI.W4.Comments@IRS.gov.

Publication 15-T. The IRS expects the second draft of new Publication 15-T (Federal Income Tax Withholding Methods) to be issued in mid-August 2019. The first draft was issued in early-June 2019 and contains three sections to aid employers in determining federal income tax withholding. This second draft will expand on the first draft, including separate computations for figuring withholding for employees who file a 2020 Form W-4 in 2020 and for a 2019 or earlier Form W-4.