Proposed regulations for new W-4 and withholding process focused on accuracy

Is the IRS right to keep harping on about how the W-4 and the withholding process should more accurately reflect your tax liability or should it just acknowledge reality by noting that most taxpayers want that large tax refund?

Or to put it another way, since most employees don’t think about withholding, why make the W-4 harder to complete?

We may never know the answers to those questions. But it really doesn’t matter, since the only opinion that counts is that of the IRS. And the IRS has again dug in its heels in proposed regulations covering the new and improved W-4 and the withholding process.

Bottom line: Accuracy wins.

Since the form is already operational, the IRS is allowing you to put most of these provisions into effect retroactive to Jan. 1, 2020.

What’s new for employers

To avoid confusion and nomenclature problems, a withholding allowance—in the singular—still exists, according to the proposed regs. This new withholding allowance is the total of all the adjustments employees can take on their W-4s.

And just for the record, the IRS has given itself permission to use the phrase “withholding exemption” and “withholding allowance” interchangeably.

Withholding using single/no allowance. Under the regs, you must withhold as if employees are single and claim no withholding allowance (i.e., as if they made no adjustments in Steps 2, 3 or 4 of their W-4s) if they don’t file new W-4s by Feb. 15 of the next year to continue the exemption, or if they refile because they’re the subject of lock-in letters.

Contrast: In both situations, you used to be able to withhold on the basis of older W-4s you knew were valid.

Invalid forms. The regs clarify that you must consider W-4s invalid if employees claim an exemption from withholding and also make entries in Steps 2, 3 or 4 of their forms. The regs maintain the rule that you should withhold on the basis of old W-4s you know are valid, if employees don’t provide you with new, valid forms.

Additional withholding. Employees can account for unearned income in Step 4(a) and for additional earned income by checking the box in Step 2(c) of their W-4s. The regs clarify that you must comply with employees’ request for additional withholding only after all regular withholding is deducted (i.e., federal, state and local taxes) and only to the extent they won’t be left with $0 net pay.

What’s new for employees

The proposed regs contain a boatload of provisions affecting employees. Some provisions requiring employees to refile their W-4s weren’t included in the instructions to the 2020 W-4, so it would be a good idea to communicate them to employees. That way, they can ensure the accuracy (there we go again) of their withholding for the remainder of the year.

Tweaks to the current change-in-status rules. Existing rules require or allow employees to refile their W-4s. The proposed regs retain this rule, with the following changes:

  • Employees must refile within 10 days of no longer being able to claim head of household status
  • Anyone who gets married anytime during a year can file or refile their W-4 to change their status to married filing jointly. Flip side: Married employees who anticipate filing separately must elect single status on their W-4s.

A new exception to the refiling rule allows employees to maintain their current filing status if they end up paying more taxes. Nonetheless, the regs state that in all cases, employees whose anticipated filing status changes to single must furnish new W-4s by Dec. 1 to take effect the next year, or within 10 days of the change.

New changes in status. In addition to refiling W-4s when there’s been a change in marital status, the regs consider it a change of status requiring a new W-4 if unmarried employees work two jobs, but they check the box in Step 2(c) on a W-4 for only one job. The regs, confirming the W-4 instructions, say employees must refile and check the box on both forms.

Employees experience a change in status requiring a new W-4 if they complete Step 4(b) of their W-4s, but reasonably expect their tax deductions will decrease by more than $2,300 from the amount they’ve taken into account in completing Step 4(b).

Likewise, employees experience a change in status requiring a new W-4 if they complete Step 3 of their W-4s, but reasonably expect their tax credits will decrease by more than $500 from the amount they’ve taken into account in completing Step 3.

Safe harbor. The regs provide a new safe harbor of sorts, under which employees won’t have to refile their W-4s within 10 days:

  • Employees or their spouses have multiple W-4s in effect on which they haven’t checked the box in Step 2(c) and they expect an increase in regular wages to not exceed $10,000
  • If the net total effect of changes will be less than the tax withheld for the year, so their income tax liability remains unaffected.