8517 / How did suspension of the personal exemption impact employer withholding requirements and Form W-4 for employees?

Late in 2019, the IRS released a simplified, final version of the new Form W-4. The new Form W-4 uses a multi-step process to calculate withholding. Form W-4 now asks for information regarding: (1) the employee’s personal (identifying) information, (2) whether the employee has multiple jobs or a spouse who works, (3) information about any dependents, (4) optional other withholding adjustments (such as extra withholding or to account for itemizing deductions).

Beginning in 2020, new employees are required to complete the final Form W-4. Existing employees with an old Form W-4 on file are not required to complete the new form, but employers are permitted to ask them to complete the new Form W-4.¹ Under certain “change in status” events, however, employers are required to provide employees with a new form.

The IRS and Treasury have proposed regulations on the new withholding requirements that apply given the suspension of the personal exemption for 2018-2025. The regulations confirm that employers are not required to provide existing employees with the redesigned Form W-4. For employees who had a Form W-4 on file prior to 2020, withholding can continue to be based on that form. Employees, however, now have the option of requesting that their employer withhold additional tax based on outside income. Employees can use the new IRS tax withholding estimator to help them accurately fill out Form W-4.

If the employer has new employees who fail to properly complete the Form W-4, beginning in 2020, the employer can treat the employee as single, and calculate withholding based on the standard deduction and no adjustments.²

When an employee experiences a “change in status” that will impact the employee’s withholding for the current year, the employer must generally provide the employee with a revised Form W-4 within 10 days if the change reduces the number of withholding allowances permitted.³ Change in status can result from a change in wage levels, availability of withholding allowances (for example, an increase in the number of children qualifying for the child tax credit).⁴ If the total effect of the changes together with any other changes affecting the employee’s anticipated tax liability is not anticipated to result in an amount of tax to be deducted and withheld from the employee’s wages under IRC Section 3402 for the year that is less than the employee’s anticipated tax liability under Subtitle A, the employee is not required to furnish a new withholding allowance certificate.⁵

If, on any day during the calendar year, the employee experiences a change of status that increases the employee’s withholding allowance, the employee may furnish the employer with a new form claiming the withholding allowance to which the employee is entitled. For changes in status reasonably expected to impact the next calendar year, the employer must provide a new form by the later of (1) within 10 days after the change occurs, or (2) December 1 of the calendar year of the year in which the change occurs.⁶ (If the change of status, when considered with any other changes to the employee’s tax liability, is not anticipated to result in an amount of tax to be deducted and withheld from the employee’s wages for the employee’s next year that is less than the employee’s anticipated tax liability, the employee is not required to furnish a new withholding allowance certificate.)

The regulations further clarify that the employer is not required to ascertain whether the withholding allowance claimed by the employee is greater than those to which the employee is actually entitled.⁷ Withholding allowances include various deductions (including the standard deduction and itemized deduction) and credits that the employee discloses, and are determined based on the employee’s anticipated filing status.

Under the new withholding regulations, the IRS (or published guidance) may direct an employer to submit employees’ withholding certificates to the IRS.⁸ Further, the IRS may notify the employer that an employee is not entitled to claim more than a certain withholding allowance. This may happen, for example, if the IRS finds that the employee’s statements on the withholding certificate were materially false (or if the IRS lacks sufficient information to decide).⁹ If the employer receives a notice from the IRS with respect to a particular employee, the employer must give a copy of the notice to the employee within 10 business days.