2020 Tax Updates for Business Owners
Most of the changes to the federal income tax system under the Tax Cuts and Jobs Act of 2017 went into effect in 2018; however a few key changes are effective for the 2020 tax year. The biggest change is to the W-4 employee withholding forms, which went into effect this year, and is already causing confusion for both employees and employers.
Form W-4 changes
The Form W-4 is being changed for the first time since 1987, so all businesses will need to start using the new form, and more importantly, be able to explain it. The W-4 is form used to determine what amount an employer should withhold from an employee’s paycheck for income tax purposes. The IRS says the purpose of the changed W-4 is to increase transparency, simplicity, and accuracy. For example, the changes in federal tax law no longer allow personal exemptions or dependency exemptions, and the old W-4 was tied to these exemptions. The following are the most important things to be aware of in using and explaining the new W-4:
1. Not every employee must fill out the new W-4: The only employees that are required to fill out the new W-4 are those who will receive their first paycheck in 2020, or those making changes to their withholding. The employers are not required to have current employees fill out a new W-4. IRS Publication 15-T has a table which can be used to calculate withholding, whether you are using the new or old W-4.
2. No more withholding allowances: With the elimination of withholding allowances, the process of determining what amount should be withheld from one’s paycheck for taxes, be- comes a bit more complicated. Whereas on the previous W-4 form, an employee would choose filing status, allowances, and an additional amount to withhold, the new form requires an employee to fill out a worksheet if they work other jobs, or if their spouse works, then multiply dependents by a certain dollar amount, and then choose the option to have an additional amount withheld.
3. Some tips to help employees fill out the new form: Employees filling out the new W-4 will most likely have some questions. Some anticipated questions and answers are provided below.
a . Does an employee have to fill out every step of the form? No, only Step 1-personal information, and Step 5: signature, are required to be filled out by an employee. If Steps 3—4 apply, they should be completed so that an employee’s withholding will more accurately match their tax liability. Step 2 of the form requires an employee to disclose a second job; however, if an employee does not want to reveal that they have a second job to an employer, they can request that a specific amount be withheld in another part of the form to compensate for not disclosing the second job earlier.
b . Can most employees expect about the same tax refund when they file for 2020? Most likely, not. The changes in the form are designed to help increase the accuracy for taxes owed. If this plays out the way the IRS expects, most employees’ with- holding will be more accurate in relation to the amount they owe in taxes, than in previous years. This increased accuracy may result in smaller tax refunds at the end of the year.
4. No change to Georgia G-4 tax withholding form: Although some states use the federal W-4 form for state tax withholding as well, not all states do. For example, Georgia has its own tax with- holding form, the G-4, which has not changed.
Business Insights is hosted by the Law Firm of KPPB Law (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB Law, practicing in the area of corporate law and governance.
Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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