Unfortunately, the W-4 form that each new employee fills out for federal tax withholding purposes will cause significant confusion in the near term. The old form declared number of exemptions and the new form declares dollar values. One complication is that only new employees or those requesting a change need to use the new form. So for the time being, most employee federal forms are of the 2019 or Earlier variety, and some will be the 2020 or Later variety. Additionally, there is a significant lowering of the tax withholding for many employees if they use the new W-4. This will undoubtedly cause many confusing questions from employees. Note that so far, I am not aware of any states that have changed their W-4 format. Since most states accepted the old style form (they accepted the same information as the old W-4), new employees may have to fill out two forms instead of one. Consult with your state.
The use of the new form data would require significant changes to the file maintenance tax screen for each employee as well as changes to the withholding formula. Since my retirement is weeks away, I will not be making these changes. However, there is a method to translate from the new form information back to exemptions that the payroll system requires.
Anyone who is in charge of processing payroll must have a copy of the current IRS publication 15-T. This publication outlines how to manually calculate the appropriate tax amount to withhold. It now has Wage Bracket tables for the 2019 or Earlier method and the new 2020 or Later method.
Click to download from IRS Pub 15-T
| In short the method will be: |
| Use the new 2020 W-4 and page 7 outline with tables to manually calculate what the correct tax withholding should be. |
| Translate STATUS to appropriate status for payroll system. |
| Use the tables associated with 2019 or Earlier method to arrive at number of exemptions that yield appropriate tax withholding. |
The publication outlines the Wage Bracket Methods using data from both types of forms. Page 7 outlines the 2020 or Later method, page 22 outlines the 2019 or Earlier method. I would not print the entire document unless you need to, but I would print pages 7 and 22, and I would also print the corresponding tables for each method that corresponds to your pay frequency. I found that if I am doing multiple look ups, it is easy to get lost in the document and pull numbers from the wrong table. Printing just the tables that apply to your company will avoid that mistake.
On the new W-4, Step 1(c), the employee declares their filing status: Single, Married, Head of Household. There is no Head of Household on the old form (some may remember it from very long ago). In the payroll system tax information, you can only use S or M, and you should always specify the matching tax table for each as FEDS or FEDM. So you may have to do some translation based on what they check as their status and whether or not they put a check in the box on the W-4 in Step 2(c).
Looking at the status they choose in Step 1(c) and whether or not they put a check in Step 2(c), here is how you should translate their status in the payroll tax information screen:
| Single or Married filing separately, ignore box in step 2(c) | Use Single status in payroll and FEDS table |
| Married filing jointly and NO check in step 2(c) | Use Married status in payroll and FEDM table |
| Married filing jointly and YES check in step 2(c) | Use Single status in payroll and FEDS table |
| Head of Household, ignore box in step 2(c) | Use Single status in payroll and FEDS table |
The whole idea behind this method is to then manipulate the number of exemptions in the payroll system so the system will come to the correct tax withholding. As you work through this and test withholding results, keep in mind that the payroll system accepts the number of exemptions to be any number from 0-98. Entering 99 exemptions is a magic number that the system recognizes as saying "Exempt - Don't withhold any tax." So while the government tax tables show up to 10 exemptions in the columns across, if you need to lower the tax, just add another exemption or two. You can expect that increasing the exemption by one will lower the tax withholding amount by $20 to $35, depending on how high the income and how frequently you are paid. You cannot enter negative exemptions.
So with the employee new W-4 in hand, and using the outline on page 7 and the corresponding tables that match your pay frequency, you can manually calculate the appropriate tax withholding. You should use a pay amount that is representative of their normal pay period. You should follow the page 7 instructions as they are outlined, and you do NOT translate anything - you use the data just as it is written. You should stop your calculation with the result in Step 3 line 3(c). The final step 4 adds an additional tax amount the payroll system will allow you to enter separately. One very important caution, each method starts with the taxable wages for the payroll period. Remember that you must deduct from their gross wage any pretax deduction for insurance or retirement before you lookup the wage amount in the tables.
Once you have arrived at what the tax withholding amount should be, since the payroll system withholding method uses number of exemptions, you need to find what settings for exemptions will yield that amount of tax. So using the filing status that you are converting to in the payroll system (table above), and their taxable wage from page 7 line 1a (not including any modifications to the wage further down the page that you may have used in the new calculation of their tax), look in the tables that go with the 2019 or Earlier method and find the corresponding wage line in the table. Read across the number of exemptions and find the number of exemptions that result in the correct amount of tax. You can then use that converted status (M or S) and that number of exemptions to setup their tax information in the payroll system. If the employee's new W-4 on line 4(c) has an extra amount of tax to withhold, you can set this as the additional tax in the payroll screen.
There may not be a perfect match between the two methods, especially if the employee's wages vary greatly from period to period. But then again, new employees are going to have significant differences in their withholding simply because they use the new form. Below is a table showing results for a SINGLE person with the corresponding Bi-Weekly taxable wages (there were no special amounts on this employee's new W-4). The middle column shows what the new tax calculation would be, the far right column shows what status you would put in the payroll tax information for the employee with those wages to get the same tax.
| Wage=$1000 | Tax=$56 | Single-2 |
| Wage=$1500 | Tax=$116 | Single-2 |
| Wage=$2000 | Tax=$175 | Single-2 |
So using the method outlined above, you can come very close to the tax withholding that you desire. If an employee's wages change significantly (by several thousand dollars per year), you should run this process again to see what it yields. On the tax information screen, you have the option of using FIXED withholding. But use this with caution - it is very unlikely that you would ever use it. Fixed withholding declares that whatever amount you enter in this field will be taken out on EACH paycheck and the system will not perform any calculations. It is more common that you may want to use the Extra Withholding field if the employee has declared it on their W-4 line 4c.
Remember that withholdings do not determine what an employee ultimately pays to the government (assuming they file a tax return at the end of the year.) If you withhold too much, they get a larger refund. If you withhold too little, they owe money with their tax return. Note that employees may be subject to a penalty if they have not paid 90% of their tax liability throughout the year. So you want this to be as accurate as possible, but there is a good range to work within. Some employees like to have too much withheld so they get a larger refund, but as an employer, your job is to make it as accurate as possible given what they have declared on their W-4.
As a practical matter, this payroll system is used primarily by employers who pay consumers, often at sub-minimum wage. Remember that the only way for a consumer to get back any tax withheld when their real tax liability is zero, is to file a tax return. This can be time consuming and cost more than it is worth, so then they donate that tax withheld to the government. Setting the number of exemptions in the tax information screen to 99 (for either the federal or state) will cause the tax withholding to be zero. An employee with filing status of single needs to make over $12,350/year before any tax is actually due.
If an employee ever questions their tax withholding, you don't need to call me. Simply use the appropriate method above based on what version of the W-4 you have on file. Keep in mind that each separate method may yield significantly different results depending on what version of the W-4 they have on file.
Look in the Training Videos section of my website to see how to use the Manual Checks function to test your calculations and results.