The new W-4: More trouble than it’s worth?
The newly redesigned draft Form W-4, “Employee’s Withholding Allowance Certificate,” was released on May 31, 2019. The IRS expects to release a near-final draft of the 2020 Form W-4 in mid-to-late July, with a final version of the form slated to be released in November.
In a comment letter sent June 13, 2019, Roger Harris expressed concern that the new requirements placed on employers, particularly small employers doing their own payroll, would be “exceptionally burdensome.”
“We urge you to reconsider the new forms and procedures,” stated Harris, the president of Padgett Business Services and a past chair of the IRS Advisory Committee. “We suggest moving back toward a system that allows employees to do relatively simple calculations and to provide the employer with an allowance number. That number, along with the employee’s gross pay, will allow the employer to do a much simpler calculation of withholding.”
“For as long as there has been withholding by the employer, the amount paid to the employee was used by most small businesses to calculate federal and state withholding,” Harris stated. “Under the new withholding methods, this is no longer the case, as the employer must modify the amount paid before using the tables. Also, because many employees’ earnings change every pay period, the calculation is required each pay period, not just on an annual basis."
Moreover, Harris observed, since employees have the option of using the old or the new W-4, it would require the employer to maintain two methods of calculating withholding.
“We anticipate this could discourage the use of the new W-4 because employers do not want to maintain two systems,” he said.
This may result in employers treating more workers as independent contractors to avoid the added burden, he predicted. Or employers may feel they have no choice but to engage the services of a payroll company, which will affect their profitability.
“The most common error will be the calculation of withholding based on earnings, not the adjusted wage amount, which will lead to over-withholding for most employees. There is no method for getting this money back quickly as they will have to wait until they file their personal income tax return to obtain a refund and have use of their money. There is no doubt that such a drastic change requires educating both employers and employees, and at this time there is no effective education plan in place,” he pointed out, citing the need to educate millions of employers that the amount they pay their employees is no longer the amount used to calculate withholding tax.
And unless the states make a corresponding change in their processes, the employer will be faced with a third method for the withholding calculation, he indicated.
“It appears that the IRS recognizes the magnitude of the change, and thereby is allowing the old W-4 to still be used,” Harris wrote. “Unfortunately, the IRS did not update the withholding tables to correspond. If the IRS is going to continue allowing employees to use a W-4 that has allowances, then they should also maintain proper withholding tables based on earnings, as they have done forever. By doing what we suggest, a small employer would only be required to adjust employee earnings for employees using the new W-4. While not completely reducing all the burden, it does allow for a smaller burden for the smallest companies. Perhaps, if necessary, the allowance option could be an option for certain businesses, and only require larger employers with more resources to adopt the new form and process.”
Although all of this was done in the name of accuracy, under the old system an employee could always use the worksheets to improve accuracy, Harris explained. “Given the longstanding use of the old form, most taxpayers accepted the level of accuracy and understood that it was not perfect,” he wrote. “We fear that the new requirements will actually make things worse, rather than better. The IRS should keep the framework of the old system and work to make the withholding tables as accurate as possible. For those taxpayers that want the additional accuracy, the new W-4, along with corresponding employer instructions and education, should be an option, not a requirement.”