Payroll tax withholding for 2021

Federal withholding tax changes for 2021:

The IRS released tax tables for 2021 on December 8, 2020 (Publication 15-T).  Compared to the changes implemented in January of 2020 (see 2020 federal payroll changes create confusion), the 2021 changes will be easier to implement since they build on the changes made last year.  There is also an updated W-4 form for 2021 which appears to be exactly the same as its 2020 counterpart.

As of today and for businesses that have already processed their last paychecks for 2020, updated tax tables are available for Advanced Accounting 8 which includes our normal annual payroll update which checks all payroll divisions for the latest social security limit maximum, which for 2021 has increased from $137,700 to $142,800 (see the SSA's COLA information page).  

Versions prior to Advanced Accounting 8 are not compliant with the latest federal withholding logic for the reasons indicated in our February 2020 blog.

All of the federal ("US") tax codes have been updated including the new codes added last year i.e.:

Legacy tax codes (employees still using a pre-2020 W-4 form):  USS, USM and USH.

New tax codes (2020 or 2021 W-4 form):  UST, USN and USI.

We have tested all of these codes with the updated tax table, and they appear to all be working as expected.

Note that while employees are not required to submit new W-4 forms each year, if an employee wants to make any changes to their withholding or is first hired on/after January 1, 2020, they must use the newer W-4 form.

State withholding tax changes:

We also anticipate logic and/or table changes for at least 14 states.  So far we have already made updates for California, Michigan, Oregon and South Carolina with more to follow.

No W-3/W-2 form changes:

There are no required W-3/W-2 form changes for 2020.   W-3/W-2 forms can be obtained from any number of suppliers including the official forms supplier for Advanced Accounting, Dynamic Systems.  (Dynamic Systems also can provide the new form 1099-NEC and updated 1096 transmittal that replaces 1099-MISC handling for non-employee compensation.  We released an update for printing to that form in late March of this year as a part of Advanced Accounting 8 r3.) 

E-filing for 2020 is now also available:

We have re-tested and been approved by our e-filing partner to begin processing forms through our portal for federal/state e-filing of W-3/W-2 forms for 2020.  Filings can be initiated as early as this week if you have processed your final paychecks for 2020.  

February 1, 2021 is the deadline to file forms W-2/W3 with the SSA:

This due date is the same for all filings, i.e. whether paper or electronic.

How to obtain payroll tax updates for Advanced Accounting 8

Please contact us via support@addsuminc.com or https://www.addsuminc.com or call 1-800-648-6258.

 

TLS protocol changes can cause encrypted e-mail to fail

Advanced Accounting has supported encrypted e-mail since February of 2014 (background details).  In the ever-changing world we live in, nothing stays the same.   Transport Layer Security (TLS) protocols are widely used over a wide spectrum of web communication services ranging from e-mail to web browsing to file transfer protocols (FTP) and more.   Web sites with the https prefixes use these protocols, sometimes referred to as "secure" http (and similarly secure FTP for file transfer).   Web socket calls used in securely communicating with web servers also utilize these transport layers. TLS is the more modern version of what was called SSL (Secure Socket Layer) which had the same goal of providing cryptographic protocols for securely connecting across computer networks.   When sending e-mail, most Simple Mail Transfer Protocol (SMTP) providers now require secure communications using TLS.

TLS first came out in 1999 as an upgrade to SSL.  TLS 1.0 continued to be the standard for a very long time.  TLS 1.1 came out in 2006 with then 1.2 (2008) and 1.3 (2018).  Mail and browser providers however have continued to support TLS 1.0 (until recently).

In October of 2018, Microsoft announced that it would be ending TLS 1.0 and 1.1. support in some of their browsers.  This was planned for the first half of 2020 but has since been delayed, in part.  Meanwhile other providers have started to end their support of TLS 1.0 and 1.1.

In August of this year, we had a custom project that was making secure HTTP socket calls in connection with which users suddenly started to receive messages that we traced to HTTP 1.1 426 upgrade required.  The components used in part to make the secure connections were the same tools we use in other projects requiring secure communications, yet this was the first report of any issue and the custom application had previously worked continuously without issues.

At first, the web server provider of the application we were communicating with indicated that they had not made any changes.  Based on some posts we had seen related to the plug-in components we use to make the secure calls, however, we realized that this was happening probably due to their dropping TLS 1.0 (which they later admitted was the case).  While our program settings indicated that if one layer protocol failed then proceed to try the next available layer, it turns out that the third party component was failing after a refusal of TLS 1.0 to connect, and then would simply stop trying.  The solution was to change the internal handler's SSL options to start with TLS 1.1 and then continue trying from there, which did solve the problem.

Other providers have since also started to drop at least TLS version 1.0.  We realized this could happen when sending e-mail within standard Advanced Accounting, so we updated our encrypted e-mail "send" program with a change similar to that made in the custom project that brought out this issue in August. That update was made available in September and included in Adv 8 rel. 4 (see our prior blog where we also described this issue).  E-mail can suddenly stop working for a variety of reasons typically related to issues such as required changes to passwords, or the requirement that the sender e-mail address match the authentication logon ID which is now typically the case, and these changes are often made by providers without any advance warning.  This is also the case if a mail provider suddenly drops TLS 1.0 support: encrypted e-mail will then stop working.

While we've had almost no additional reports of this issue from our users so far, and while they don't manifest themselves always in the same way in terms of an error response, earlier this month we had an Advanced Accounting 7i user suddenly experience a problem sending e-mail and it turned out to be, in part, this issue.   While Advanced Accounting 7i isn't being formally updated, we were able to solve the issue for this user using the newer components that are used with Advanced Accounting 8.

More information

Advanced Accounting 8 releases 3 and 4

Since its initial release in late September of 2019, there have been three additional Advanced Accounting 8 releases.  Release 2 in part dealt with the rather significant payroll changes that went into effect in January of 2020, but also included all of the updates made to the software since the initial release.   Release 3 was completed by mid-May of this year and several of its features were mentioned in a pre-release blog published in March.  Release 4 is being officially released today, October 31, 2020.

Here are some of the new features and enhancements included in releases 3 and 4:

• Support for new IRS form 1099-NEC and the revised form 1096 as previously announced (with a related update to vendor maintenance, i.e. AP option A; rel 3)
• Inclusion of a report editor (new option UT-R) allowing end users to edit certain report layouts (more details below) with changes to all programs where end user report editing is now possible (rel 3)
• Related in part to the above, the print AP checks program (AP-F) includes support for MICR encoded check printing with the ability to have different custom modified check formats for each company that has been established (rel 3)
• Allowing more flexibility in some commonly used options to allow other programs to be topmost (rel 3)
• New Salesperson Payment Detail Report (PR-I-B) which provides the details behind receipts for a given salesperson both currently assigned or when invoiced and for any desired data range including an outline of issues associated with receipt tracking (rel 3)
• Dashboard and SY-A changes to allow for monitoring of inventory balances
• Encrypted e-mail send enhancements (rel 3: if e-mail failed to send, wasn't providing an end user response in the Adv 8 version and then also allowing for a second attempt; rel 4: updated for newer underlying components, and also overcoming an issue whereby if an ISP stops supporting TLS 1.0 the next supported server SSL protocol is then used, otherwise a STAT DISCONNECTED could result)
• Sending encrypted e-mail involving customer codes with illegal file creation characters such as a slash could create GPF's when creating the RTF file (resolved, rel 4)
• Cancel button in the backup option changes to "exit" when complete (rel 3)
• Zero amount checks were being printed if discounts/credits were involved in creating the zero amount (this has been the case in every prior version until now - rel 4)
• Sort option H (Product code/Ship City/Order Date) under print open S/O list (SO-B) wasn't allowing access to the from/thru product code ranges as it was in the last Adv 7i releases (rel 4 - resolved)
• New feature in part documented under UT-F (Global Startup Options) allowing you to use an environment variable to load a company on startup so that you can have different users startup with different companies with a single installation of the software; the software now supports four different startup methods (rel 4)
• New Transfer Cust Balance option (AR-K) added and available for the first time which allows for easy transferring of invoices or credits from one customer to another (rel 4) (somewhat similar to the option to transfer vendor balances that has existed in the software for many years)
• Implemented a restriction that already existed in the sales order quick report (SO-M) into the sales invoice reprint option (SO-N) option based on the security permission SY-C-C for sales orders entitled "Allow user to print reports showing other salesperson numbers?" which has also been clarified in the SY-C-C Maintain User Permissions option (rel 4)
• Added the optional Emp/Slsp # associated with user logon codes in the SY-C-D Security Permissions Report (rel 4)
• List salesperson issues in AR-A and SO-A resolved (rel 4)
• New Open/Save/Paste Text option under Tools along the top menu bar (rel 4); while the existing "Clip" option has a somewhat similar function, this new option also allows you to directly open and save text files and also provides the ability to change the font size
• In the generic export (UT-J-A), allow older style type V overlay fields to be exported; screen enhancements re: key field from/thru ranges (rel 4):
• In the export option under Print Customer General Information (AR-H), add customer class (start date and last date were added in rel 2) and improve the export output (rel 4)
• The full details of an AR voucher (AR-B) can now be viewed from the Customer options button and then Vouchers in Enter/Change Customers (AR-A)
•  All three help format files updated throughout the course of releases 3 and 4 - the PDF version now consists of 611 pages

New UT-R Report Designer option (rel 3):

No prior version of Advanced Accounting has allowed for end user modification of report layouts.  Custom modifications relating to report layouts were typically provided by us or a third party developer.  Prior to the Windows versions, custom formats could only be changed by also changing the source code.  The ability to provide an integrated report designer option that could be used to modify report layouts in standard menu options wasn't possible until we added that capability to the underlying development system in September of 2005 (TAS Premier Rel. 1).   The report designer is the same tool that is used in the development system itself.  There were a number of reasons why however we still did not include it with the accounting software.   One reason related to the fact that we encrypt report (and screen) layouts, and we had to come up with a solution for that (which we have).  Another reason is because we had users who did not want the software to be capable of being changed from outside of the software (which it can't be without our encryption tools).  Another reason related to being able to more flexibly deal with custom report layouts in a way that they would not conflict with future updates (that issue we dealt with long ago in provide custom report layout changes, but only as directly controlled by us).  And more.

At the same time, users may want to on their own initiative delete non-essential language or add their own or change the way labels or other text appears on certain business essential documents.  Or add include images, or make position changes, etc.  

Starting with release 3, there are some 26 report formats relating to 12 different options that can be modified by end users including all of the essential types of documents that fall into the category of the most likely layout that users might want to change including sales orders, sales invoices, quotes, AR statements, point-of-sale tickets, AP checks, purchase orders and pack slips. As additional options are identified, they will be added.

Adv 8 r3's UT-R Report Designer interface

Documentation for use of this option is included in the updated help files, but we would encourage users to contact us so that we can jump on your system and provide some additional guidance. 

Previously too when custom report changes were made, those changes would be in effect for all companies established in that installation yet often in multi-company situations, the desired change was really intended only for one of those companies.   Further, also for the first time in standard Advanced Accounting, we support MICR encoded checks which have to be specific to one company.  So not only do we rename the standard report layout to a different name (in part to resolve any chance of a future update conflict) but we also place that layout in your company's data folder where related programs using the layouts currently available for modification now look, so that any changes will only apply to that company.   Previously changed layouts can be edited/updated or even deleted at any time but only by users with assigned access rights to the new UT-R option.  The software remains protected from edits made from outside of the accounting program.

Depending on interest and demand, we may provide additional training materials specific to this option in the future.

Advanced Accounting updates are installed in succession and each builds on the last.  So a system on release 2 would first have release 3 installed and then release 4.  For standard system users and those we have modified, we install these updates remotely and at no additional charge.

Payroll tax holiday for whom?

One of the definitions of a holiday is some amount of time that exempts a person or company from a given requirement, duty or assessment.  When a state has a sales tax holiday, it means that no sales tax is collected from consumers on that day.   Nothing is later remitted: the business and consumer is fully exempted from payment of the tax.  Or when an employee is allowed to take off a day for a federal holiday or some holiday that their employer recognizes, the employee is not expected to work an additional day in the future.  

The most recent suddenly declared United States payroll tax holiday however is not a holiday at all, but only a deferral.  And its immediate implementation without advance planning and forethought coupled with its timing towards the end of a calendar year has made it very unattractive for businesses to implement.

In addition to all of the administrative problems with a past mid-year drastic change in payroll withholding and its implication for tax filings and returns is the very unappealing aspect that employees who no longer work for the same company after the end of the year will be leaving their employer with a tax bill.  The timing is especially acute during a time of year when many temporary hires are made for the holiday season, and because often employees make career changes after the end of the year.  Why would any employer therefore want to participate?

In addition, the constitutionality of the change is in question and there are congressional efforts to overturn its implementation which would put employees and employers in an even bigger hailstorm of administrative problems if they were to implement this now.  Even if implemented, the $4,000 threshold has been ill-defined in terms of its the practical application in specific reference to a bi-weekly pay period.  Employers could easily run afoul of implementing its provisions.

The U.S. social security system represents a contract with the American people not only because of amounts that employees and employers alike have paid into the system over many decades but also because it represents the kind of financial security system that should be provided to the citizenry of any advanced, modern society.

While our accounting software users could implement this change without need of any payroll modifications from us (except for problems that may be created with W-2 and 941 filings), we have from the beginning recommended to our users to stay the course.  Keep withholding and remitting social security taxes exactly as you have.  The small interim benefit is temporary, it would increase your administrative costs, and you may be left holding the bag.

More information

White house and IRS memorandums:

https://www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

https://www.irs.gov/pub/irs-drop/n-20-65.pdf

Other resources:

https://www.cnbc.com/2020/09/14/why-trumps-payroll-tax-cut-may-be-a-lose-lose-for-workers-and-firms.html

https://www.inc.com/diana-ransom/payroll-tax-holiday-executive-orders-phase-4.html

https://taxfoundation.org/trump-payroll-tax-history-of-payroll-tax-holidays/

https://thehill.com/business-a-lobbying/business-a-lobbying/516600-businesses-states-pass-on-trump-payroll-tax-deferral

https://www.politico.com/news/2020/09/15/businesses-reject-trump-payroll-tax-plan-while-postponing-their-own-tax-bills-414899

 

SBA PPP loans: a loan is a loan until it isn't

As many of our customers asked us questions this past month related to the handling of Paycheck Protection Program (PPP) loans including how to book incoming loan funds and setting up in some cases new checking accounts (which is not required in connection with a PPP loan) and more, we started to see a lot of misguided information that was being posted in terms of how to handle these funds, resulting in considerable confusion.  Part of the confusion has also been the short time frame in which this program was put together and released, and the lack of clear guidance for businesses in terms of understanding and applying related rules, some of which have continued to change on an almost weekly basis.   Keep in mind however some of the following important concepts:

(1) A loan is a loan.  The fact that in this unusual case the loan may be forgiven, forgiveness does not occur until it has been given.  Incoming funds would be treated as quite simply a loan payable.   We do recommend setting up a new general ledger (GL) account in your current liability section for "PPP loan" for each company that you receive these funds.  It makes absolutely no difference, for accounting purposes, whether you receive those funds into an existing account or into a new account:  it is still a loan payable and the only question is which GL asset account it affects (i.e. increases).  Even as the funds are being used for the intended purposes, no accounting entries would apply that are different than normal.  Just as if you received a loan from a bank to buy a piece of equipment, the loan payable account doesn't change until/unless you make repayments of the loan.  Only when the loan is actually formally forgiven (which requires a special application to be completed) and you know precisely whether some or all will be forgiven should the loan account be adjusted (see #5).

(2)  Continue to process payroll, rent and other expenses in the same way that you always have.  You don't start to suddenly process these somehow differently than before.  You don't, nor should you, pay these out of a separate account.   If the PPP funds physically exist in a separate account, you would transfer funds from that account to your regular account for rent or gross payroll (not including payroll taxes that are solely paid by the company) but the only accounting entry involved is decreasing one cash/checking GL account and increasing another.  (In Advanced Accounting, GL-L Transfer Bank Accounts Funds accomplishes that very easily.)

(3)  Keep separate track of what you use the PPP funds for outside of your accounting system or use a method, such as job cost codes, that have no accounting impact.   Do not try to convolute good accounting practices to try to account for how the funds are used to meet IRS tax requirements.  Most users will be best off using a spreadsheet program for this purpose.  Or, in Advanced Accounting, users could use the job cost module to keep track of funds used for PPP purposes, which can be used in an integrated or non-integrated manner and tied to transactions that do not otherwise impact your overall general ledger.  In this regard, you could set up PPP "job" with certain tasks (payroll, rent) under it or use different job codes for different PPP expense types, the sole purpose of which would be to generate reports later for complete the forgiveness form and for monitoring purposes to ensure compliance.  

(4) Generally accepted accounting practices often differ from tax handling practices.  Do not offset your payroll, rent or other accounts based on how PPP funds may be applied to meet loan criteria.  Your expenses are your expenses.  For tax purposes, your tax return preparer can net those off against expenses if that's what the IRS continues to decide they want; you just need to make sure that the funds are used for the applicable expenses and within the applicable time limits (the percentage and number of weeks have since changed from that they were, so keep in touch with your tax adviser in that regard).

(5)  If the loan is forgiven, write-off the loan in full or in part to an Other Income account in your books (on that future date when it is officially forgiven).  Tax handling aside, don't sacrifice you accounting system for the whims of tax requirements, even though your accounting system will still have all of the details that your tax accountant will ultimately need. Generally accepted accounting principles would require that you recognize a forgiven loan as "other income."  The IRS instead does not want it to be included in income but instead offset to expenses.   But again, good accounting practices are not the same as tax accounting requirements.  Your books should accurately reflect your financial position and follow accepted accounting practices.

More information.

COVID-19 paid sick leave and payroll tax credits: preliminary information

The Department of Labor, Treasury and IRS have released preliminary bulletins concerning the Families First Coronavirus Response Act (FFCRA) passed on March 18, 2020, an expansion of the Family Medical Leave Act:

Department of Labor:

Families First Coronavirus Response Act: Questions and Answers

Families First Coronavirus Response Act: Employer Paid Leave Requirements

Families First Coronavirus Response Act: Employee Paid Leave Rights

 

IRS:

Treasury, IRS and Labor announce plan to implement Coronavirus-related paid leave for workers and tax credits for small and midsize businesses to swiftly recover the cost of providing Coronavirus-related leave (March 20, 2020, IR-2020-57)


This guidance is limited to sick leave paid specifically to employees who meet one of six specific criteria as outlined in the foregoing links.  

The IRS indicates that further guidance will be forthcoming "next week."  There are questions surrounding the tax handling, withholding, and payroll tax "credits" that employers will be able to take.   Employers have to provide sick pay for eligible employees but do not have to take the tax credits (which if they do, appear to have to then need to be added to company business income for 2020) and there can be complications/conflicts with any existing sick leave plans and policies.

Amounts paid (subject to the per day maximums based on which of the criteria applies) represent taxable income to the employee and normal social security/medicare taxes and federal and state (if applicable) income tax withholdings apply, and are subject to normal reporting requirements; but, the employer can apparently then take gross wages, and the FICA/medicare match or some portion thereof along with applicable health insurance premiums paid relative to the sick or care-providing employee as a credit against the next payroll tax deposit that is due.  Our interpretation of how this will work, so far, is that all of the amounts paid to the employee should be treated as ordinary income and therefore all of the normal deductions would apply (there are references out there to these amounts are not being subject to FICA; that does not appear to be the case).   Normal FICA/medicare, federal and state withholding tax, and other elective deductions apply to the gross wage amounts paid (which in Advanced Accounting should be classified as "Sick pay" with possible sick pay accrual adjustments if you already have a sick leave policy).   Amounts withheld for state/local income taxes should again be processed and paid in the normal way.  Payroll tax amounts would be transferred to accounts payable as usual (PR-M in Advanced Accounting) and initially calculated in the same way.  Calculated credits for amounts related to COVID-19 sick leave benefits would then be entered as a credit memo/voucher in Advanced Accounting's AP-B which then can be taken prior to making the EFTPS tax payment. The gross wages paid along with calculated health insurance premiums and FICA/medicare matches may need to be preferably credited to a "sick leave tax credits" income account or some other miscellaneous income account when making the AP-B credit memo, rather than directly reducing any of the original expense accounts.

It is unclear what, if any, payroll withholding logic changes will need to be made depending on reporting requirements that may evolve (will these amounts for example be required to be reported separately from regular wages on W-2 forms?) nor how employers should track applicable sick leave exactly in time and attendance and payroll systems.

The law goes into effect as of April 1, 2020 and continues through the end of the year.

We stand ready to make whatever changes may be required to the Advanced Accounting 8 payroll system once further sufficient details are available (the examples currently provided are insufficient to actually institute any changes at this time) when the first payrolls in early to mid-April come into play.   Employers should plan on keeping logs and utilize additional tracking methods as well as to gather the information required as outlined in the preliminary notices. Payroll processing will not be getting any easier.

Adv 8 r3 will support IRS form 1099-NEC

Advanced Accounting 8 (release 1, i.e. r1) was released in late September of 2019.  In addition to all of the usual initial updates as well as ongoing development that continues following a major release, rather drastic changes to U.S. federal income tax withholding became final in January of 2020 which Adv 8 r2 addressed along with other changes made since r1.

We have now begun work on r3 which we expect to be available next month (or at least by then a a preliminary r3 release which has been fully tested) which will include many new updates including initial support for the "new" 1099-NEC form that users will be required to use when it comes time to file 1099 forms for 2020.

Form 1099-NEC was first used in the early 1980's and is now being resurrected.  The  Protecting Americans from Tax Hikes Act (2015) required that nonemployee compensation form reporting had to be completed by January 31 (in an effort to combat identity theft and refund fraud).  That isn't a deadline just to provide copies to recipients but also to actually file with the IRS.  And this has been the requirement with respect to form 1099-MISC  box 7 (nonemployee compensation) reporting since calendar year 2016.   For other types of miscellaneous income, the deadline is March 31 if filing electronically, otherwise by February 28.

These differing deadlines for the same form created problems for the IRS in processing 1099-MISC forms in determining whether or not they were timely filed, so much so that we are now going back to the 1099-NEC form for reporting nonemployee compensation starting with 2020.

The old box 7 for nonemployee compensation is gone.

The 2020 1099-NEC.  Nonemployee compensation is placed in box 1.

Within Advanced Accounting, nonemployee compensation will still be considered treated as "type" 6 for purposes of classifying vendors for 1099 purposes (including payments for legal services) that will now print in box 1 of the new form.   Updates to the "1099 Types" lookup in AP-A Enter/Change Vendor information as well as AP-Q Print 1099 Forms have been made to reflect the appropriate box number and form for each type. 

Transmittal form 1096 has also been revised to include a check box for 1099-NEC forms.   Each "type" continues to require a separate 1096 transmittal form, i.e. you submit 1099-NEC forms separately from 1099-MISC forms, each with their own transmittal form.

The 2020 form 1096 transmittal.  Note the 1099-NEC box to the right of 1099-MISC.

The IRS approved forms that are currently available for review can't be used to effectively test actual alignment and position relating to those items which have changed, so when those become available from forms suppliers, we will then re-test the preliminary format changes that we have now made; but we have implemented what should be all of the other related logic changes especially in the AP-Q option which allows the user to choose which of the two forms should be processed among other things.

In addition, Adv 8 r3 will include an option that will allow an end user to make changes to certain report/form layouts including the new 1096 transmittal and the supported 1099-MISC and now 1099-NEC forms in the event of issues with printer margins, alignment, etc.

An e-file option may also be added later depending on end user interest.

2020 federal payroll changes create confusion

Despite significant federal income tax law changes that went into effect in January of 2018 when personal exemptions ("allowances") were eliminated, federal income tax withholding logic along with their associated W-4 options were not changed (only tax tables were changed).  Until now.  And the changes are potentially dramatic for employees and software developers alike.

Federal changes

Many of the changes that occurred as of the 1st of the year were the normal expected types of changes.  There were no W-2/W-3 form or submission changes once again.  The social security wage maximum was once again bumped up (this time to $137,700).  Social security, medicare and FUTA rates remain the same.   We again achieved testing acceptance for the e-filing of federal and state W-2 forms with our filing partner, and were able to successfully assist a number of Advanced Accounting 7i and 8 users with those e-filings in January.  The day is coming when all federal and state W-2 forms will have mandatory e-filing requirements for all employees regardless of company size (and as is already the case in Connecticut, North Carolina, Oregon, Utah and Virginia). 

While only nominal federal tax table changes (the federal standard exemption increased from $4200 to $4300 with only minor tax table changes), the trigger for using those rates has now changed and a dual rate table system has been introduced which depend on values entered by employees on the new 2020 W-4 form.

The early release notice form 1036 has been discontinued and there is now a new publication 15-T entitled "Federal Income Tax Withholding Methods."

Changes to the new W-4 form have been referred to by the IRS as a step towards simplification, yet if anything it is now more complicated and has engendered a considerable amount of confusion.   Employees should talk to their accountant or tax preparer in determining how to fill out the form.  The line for "total number of allowances" is gone (yet many states still base their calculations on the number of claimed state allowances).  Current employees are not required to submit a new W-4 form, and it may in many cases be wise to do nothing at this point until 2019 individual tax returns are filed, and the advice of the employee's tax preparer then obtained in forecasting 2020 values.   New employees, who are required to use the new form,  may want to do nothing more than complete Step 1 of the W-4 form (name, address, SSN, and tax status), and sign/date the form (Step 5).  

Steps 2, 3 and 4 of the form are all new (except for the extra withholding option under 4(c)).  The question at 2(c) as to whether the employee has two jobs (which meaning changes depending on the tax status claimed) is the trigger now for a completely different set of rates and can significantly increase withholding.  Employees should consult with their tax adviser (and not their employer) as to whether to check that box.  The amounts to be entered under 3, 4(a) and 4(b) should also again be obtained in consultation with the employee's tax adviser.  Note that those are annual amounts (unlike the extra withholding amount box 4(c) which is per pay period).   The order of the annualized amounts starting with Step 3 is somewhat backwards because that amount doesn't come into play in the tax formula until after the other amounts are taken into consideration and an annualized tax withholding amount first computed.  All of amounts should be entered as positive numbers even though the amount entered in 4(b) will be subtracted from annualized income including any amount entered in 4(a).   

So, overall, nothing about these changes is simpler than before.

In order to handle what is now required as the result of these changes, we've had to add five new database fields to the Advanced Accounting payroll master file, plus we've added two more to handle claims of federal and state exemption which at least at the federal level used to be handled by indicating that the employees had 99 allowances (but with the trend towards eliminating allowances by same states as well as at the federal level going forward,  new exempt flags were required).

This then also led to some screen redesign issues in Advanced Accounting's payroll maintenance option (PR-A) and we decided to put both federal and state withholding values on a new W-4 tab in version 8 of Advanced Accounting.

Adv 8 redesigned screen with new W-4 tab and with "Use new W-4 form?" unchecked, the default for existing employees.

Adv 8 redesigned screen with the "Use new W-4 form?" option checked (the default for new employees)

Users of the Adv 8 version will now be able to indicate whether the employee is still on a pre-2020 W-4 or on the new form.  Existing employees will be assumed to be on the old form until a specific change is made to the "Use new W-4 form?" option.  "New" in this context refers, for now, to the 2020 form.

If only federal tax tables and various state changes were needed for 2020, we would have likely made an update to the Adv 7i version as well; however, the nature of the new federal changes led us to conclude that only the Adv 8 (latest version released last September) could realistically support these changes, not only because of the new fields required but also because the PR-A screen formats in Adv 8 are dramatically different than in Adv 7i, and the two versions already had additional field differences. So, Adv 7i users that need payroll support for the new W-4 form and related federal logic, will need to upgrade to Adv 8. 

To accommodate the two new standard exemptions amounts and dual tax structure for single, married and now head of household as well as continue support for the pre-2020 method, the federal tax tables now include (in PR-K):

Standard exemption:  US0 (pre-existing/updated), US1 (single/new form) and US2 (married/new form).  

Tax tables:  USS (pre-existing/updated) and UST, USM (pre-existing/updated) and USN, and USH and USI.

The USS, USM and USH tables are used when box 2(c) is not checked and in connection with the the new and the old standard exemption amounts.    New tables UST, USN, and USI are the parallel tables to single, married and head of household respectively when box 2(c) is checked, and are being used now for the first time in long history of Advanced Accounting along with the new US1 and US2 standard exemption codes.   This will make end user maintenance of the tax tables (which Advanced Accounting has always provided) more complicated, but new table codes had to be created to meet the new requirements.   These are tables we will of course be updating and can provide with annual payroll updates obviating the need for end user maintenance.

Tables with all of these rates are provided in our 2020 payroll update for Advanced Accounting version 8.

Use of the 2019 rates for employees having their withholding based on pre-2020 forms has been perfectly acceptable and since the 2020 adjusted rates for those employees were nominal and because employers are given a reasonable period of time to adjust to new withholding changes.   Users should however start to update their systems with the newer approach now that year end and 4th quarter 2019 wage reporting deadlines have largely passed.

FAQ's related to the new W-4 form can be found at https://www.irs.gov/newsroom/faqs-on-the-2020-form-w-4.

State changes

Because many states have formulas that are tied to the federal changes (and because state budget changes are also common as of the first of a new year), at least 20 states have made changes to their payroll withholding formulas as of January 2020, and more could follow.  At this time, we've made changes (in the Adv 8 version) for the following states:

Arkansas* (changes effective March 2020)
California+ 

Illinois*

Iowa+

Indiana+~

Kentucky*

Maine*

Maryland+
Massachusetts*

Michigan*

Minnesota*

Missouri*

New Jersey+
New Mexico*

North Carolina*

Ohio+

Oregon*

South Carolina*

Vermont*

Rhode Island*

+tables only (California=extensive)

+~about 10 counties in Indiana have new COIT rates - have to be updated in PR-A manually

*program change required, and for most also table changes

Most states (with a state income tax) have separate W-4 forms, sometimes called certificates, unique to that state; a few  states use the federal form (which creates further confusion in the event the employee wants to withhold different extra amounts for their state versus federal withholding, and so in states without a separate form, employees will have to write in their preferences on the federal W-4 form and/or communicate those changes in accordance with their employer's policies and as may be dictated by state laws or regulations).  

North Dakota is following an approach similar to the IRS in terms of driving their tables based on whether a new W-4 form has been submitted or not.  That is however not the approach that most states have taken.

We also regularly update supplemental wage rates that each state may require and have made several changes to those.

Updates to our list of state tax links has also been made, something that we normally do every year.

Advanced Accounting 8 updates (included with r2) are currently available to comply with these changes.

Contact us for further information.