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.