President Joe Biden signed a new $1.9 trillion American Rescue Plan Act of 2021 (ARPA) into effect on March 11, 2021. This expansion of the Families First Coronavirus Response Act (FFCRA) still applies to employers with fewer than 500 employees.

Several significant provisions of the act affect both small and large companies, including:

• A 100% COBRA subsidy
• Emergency paid leave
• Unemployment insurance programs
• Employee retention credit

We’re covering the major changes, extensions, and tax credit details below. Read on for the breakdown of these important updates and how they apply to employers.

COBRA Subsidy Program

Under the ARPA, the federal government will now pay 100% of COBRA insurance premiums for eligible employees who lost their jobs and their covered relatives.

The Breakdown

• Begins on April 1, 2021, and ends on September 30, 2021
• Employers will obtain the subsidy through a payroll tax credit against their quarterly taxes.
• Employers will be responsible for paying health insurance carriers for the premiums.
• Fully insured and self-insured group health plans subject to federal COBRA are eligible for the credit against their Medicare FICA payroll taxes.
• Health plans must provide COBRA premium subsidy to assistance-eligible individuals (AEIs) who have elected COBRA coverage.

Note: If your credit exceeds the amount of payroll taxes due, you will receive a refund by submitting Form 941.

Eligible Individuals

Employees must be AEIs to qualify for a subsidy. An AEI qualifies if they are eligible for COBRA coverage between April 1 and September 30, 2021, due to involuntary termination or a reduction in hours, and elects coverage.

Individuals who do not qualify include:

• An AEI who becomes eligible for other group health plan coverage (that is not an excepted benefit) or Medicare.
• An AEI who has reached their maximum COBRA period.
• Employees who end employment voluntarily are not eligible.

Ensure that AEIs know that they must notify their group health plan if they become eligible for other ACA-compliant coverage during the subsidy period—even if they choose not to enroll in the alternative coverage.

Special Enrollment Period

A terminated worker who is eligible for assistance and: 

• Hasn’t elected COBRA coverage by April 1, or 
• Elected COBRA coverage but then discontinued it.

Eligible individuals may elect COBRA coverage during this period starting April 1 and ending 60 days after the date on which the COBRA notification was delivered. 

Additionally, individuals will not have to elect and pay for COBRA retroactively for months before the subsidy becoming available.

Employer Notice Requirements

By May 30, employers’ COBRA notices must include information about the subsidy’s availability and the special 60-day enrollment period for qualified beneficiaries. You can add this information to either your current COBRA notices or provide it in a separate document.

Contact BlueLion today for guidance on COBRA notifications and requirements regarding the ARPA updates.

Emergency Paid Leave

The ARPA has also updated the qualifying reasons and tax credits for emergency paid leave. Providing paid sick or family medical leave is no longer mandatory, but employers may offer employees leave for qualifying reasons and enjoy tax credits.

The Breakdown

While the original qualifying reasons for leave under the original FFCRA remain the same, the tax credit is now available for leave taken to:

• Obtain the COVID-19 vaccine.
• Recover “from any injury, disability, illness, or condition related to” the COVID-19 vaccine.
• Quarantine or obtain a COVID-19 test or diagnosis at the employer’s request.

The new law also:

• Provides a refreshed bank of 10 additional days of paid sick leave as of April 1, 2021, eligible for the tax credit. This applies even if employees exhausted their leave under the original FFCRA.
• Expands the total cap for paid leave (and tax credits) under the Emergency Family and Medical Leave Expansion Act (EFMLEA) from $10,000 to $12,000. The two weeks of leave available under the Emergency Paid Sick Leave Act (EPSLA) are now EFMLEA leave for all purposes (not only to care for a child when the child’s school or place of care is closed).
• States that employees will receive either 100% (max of $511/day) or two-thirds (max of $200/day) of pay for the 10 days of emergency paid sick leave, depending on the reason for leave. Employees will receive two-thirds of their pay (max of $200/day) starting on Day 11 when emergency family medical leave begins.

Unemployment Insurance Programs

The ARPA has expanded the original CARES Act unemployment insurance programs as follows:

Pandemic Emergency Unemployment Compensation (PEUC)

Provides additional assistance to individuals who have exhausted their state law unemployment benefits

The Breakdown

• Originally provided up to 13 weeks of benefits and expired on December 31, 2020
• Consolidated Appropriations Act (CAA) extended benefits to up to 24 weeks through March 14, 2021
• ARPA extends benefits up to 53 weeks through September 6, 2021

Pandemic Unemployment Assistance (PUA)

The PUA assists unemployed individuals who are not eligible for regular or unemployment insurance, such as: 

• Business owners
• Self-employed workers
• Independent contractors
• Individuals without a sufficient work history
• Individuals not covered by regular unemployment compensation or the unemployment compensation programs under state laws

The Breakdown

• Originally provided up to 39 weeks of unemployment benefits and expired on December 31, 2020
• CAA extended benefits up to 50 weeks through March 14, 2021
• ARPA now provides up to 79 weeks of unemployment benefits (and up to 86 weeks for individuals in states with high unemployment levels) through September 6, 2021.

Federal Pandemic Unemployment Compensation (FPUC)

The FPUC program is the weekly stipend provided as a supplement to the state unemployment benefits.

The Breakdown

• Originally provided $600 per week and was set to expire July 31, 2020
• CAA extended through March 14, 2021, at a reduced rate of $300 per week
• ARPA extends $300 in supplemental benefits through September 6, 2021

Mixed Earner Unemployment Compensation (MEUC)

Provides financial assistance to freelancers and gig economy workers who: 

• Receive at least $5,000 in self-employment income;
• Are not receiving benefits under the PUA; and
• Are eligible to receive at least one dollar in state unemployment benefits during the period covered by the program.

The Breakdown

• Provides an additional $100 in supplemental benefits to eligible individuals
• ARPA extended through September 6, 2021

Employee Retention Credit

The Employee Retention Credit (ERC) was part of the original CARES Act and expanded under the Consolidated Appropriations Act. It is meant to help employers who were struggling financially or had to close due to COVID-19. 

The ERC is a payroll tax credit for eligible employers based on the amount of qualified wages they paid to certain employees. The goal is to encourage employers to keep their employees.

The Breakdown

• CARES Act: Tax credit was capped at $5,000 per employee for 2020
• CAA: Expanded to qualified wages paid between January 1, 2021, and June 30, 2021, and increased max credit to $7,000 per employee per quarter
• ARPA Updates: Extends through the end of 2021 and expands eligibility to certain employers

Newly eligible businesses include:

• Recovery startup businesses that began business after February 15, 2020, have gross annual receipts of up to $1 million, and are otherwise ineligible under the eligibility test,
• Severely financially distressed employers (i.e., companies with gross receipt reductions of more than 90% as compared to the same quarter in 2019).

Get Assistance on COVID-19 Relief & Employment Laws

This new wave of COVID-19 recovery provisions under the ARPA might seem like a lot to digest. While we’ve covered the highlights above, employers must follow many details and requirements under the new FFRCA. 

If you need assistance navigating the new legislation and making sure your company remains compliant, contact BlueLion today at 603-818-4131 or info@bluelionllc.com. Our team of HR professionals is always up-to-date on employment laws and will be happy to guide you through the many changes.

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.

You enjoy treating employees with the occasional gift, office snack, or meal compensation. These little things help boost employee morale and productivity and can be great for showing them your appreciation. 

But you may also be wondering about the de minimis rule. Are those employee gifts taxable? How will you know, and how do you report them? 

While employers often give out these employee perks with the best intentions, they must understand when and how those benefits need to be reported.

Let’s take a closer look at employee fringe benefits and the de minimis rule. We’re breaking down:

• The de minimis definition
• Examples of de minimis fringe benefits
• Examples of excluded benefits
• Qualifying de minimis value
• How to report fringe benefits

It doesn’t have to be complicated or create a lot of extra work for your HR team at the end of the year! As long as you have a clear understanding of this rule and its requirements, you can ensure that employees are appropriately taxed.

What is the De Minimis Rule?

The de minimis rule applies to any property or service with a value so small that accounting for it is unreasonably or administratively impractical. Two key factors are used to classify de minimis benefits:

• Value: Typically calculated by fair market value
• Frequency: How often the employer provides the benefits to employees

Essentially, a de minimis benefit needs to be occasional or unusual in frequency. And—this may seem obvious—but it must not be a form of disguised compensation.

This can be somewhat of a gray area since whether or not a benefit is considered de minimis depends on all of the facts and circumstances.

Examples of De Minimis Fringe Benefits

Examples of de minimis benefits, according to the Internal Revenue Service (IRS), include:

• Controlled, occasional employee use of photocopier
• Occasional snacks, coffee, doughnuts, etc.
• Occasional tickets for entertainment events
• Holiday gifts
• Occasional meal or transportation expenses for working overtime
• Company life insurance for employee spouse or dependent with face value of $2,000 or less
• Flowers, fruits, books, etc., provided under certain circumstances
• Personal use of a cell phone provided by an employer primarily for business purposes

Achievement Awards

Before you go handing out season tickets for everyone’s favorite team, check the rules for achievement awards. When awarding things like the length of service or safety, the IRS states that awards:

• Must be tangible, personal property.
• Cannot be disguised as wages.
• Must be awarded as part of a meaningful presentation.
• Cannot be cash, cash equivalents, vacation, meals, lodging, season theater or sports tickets, or securities.

There are also several other requirements and dollar limitations that awards must meet to be excludable. Check out the full IRS Fringe Benefit Guide.

Excluded Fringe Benefits

If a benefit is too valuable or given too frequently, it will not qualify as de minimis. This means that the total value of the item or service is taxable to the employee—not just the excess over a designated de minimis amount (because there is no maximum dollar amount).

SHRM notes that some benefits that do not qualify for the de minimis rule include:

• Sports or theater season tickets.
• Use of a company vehicle to commute more than one day a month.
• Membership in a private country club or athletic facility.
• Use of employer-owned or leased facilities (e.g., apartment, hunting lodge, boat, etc.) for a weekend.

Cash Benefits

Cash cannot be a fringe benefit because it:

1. Is generally distributed as a wage.
2. Does not create unreasonable accounting or administrative work (because the value is evident).

There is one exception: occasional meal and transportation money to enable an employee to work overtime. In other words, the employee receives the money so they can work an unusual, extended schedule.

Gift Certificates

Gift certificates are considered a cash equivalent, so they are typically excluded from the de minimis rule. General merchandise gift cards do not qualify and are taxable. The IRS would consider as little as a $5 gift card to a general retailer as employee income.

Again, there is one exception: a gift certificate that an employee can exchange for a specific, tangible item. The gift certificate must still be of low value and frequency and impractical to account for.

If you’re unsure whether a particular item meets the de minimis rule, err on the side of caution and include the value of all gift cards and gift certificates in employee wages.

Is There a Maximum De Minimis Value?

Since there is no specified dollar amount in any government regulations or IRS guidance, it can be tricky determining which items or services are considered de minimis fringe benefits. Examples given range widely in value.

The IRS has advised that benefits of $100 and $109 do not qualify as de minimis. While some employers use a $25 or $50 value for classifying something as de minimis, there is no support for a set value.

How Do I Report Fringe Benefits?

When a benefit falls under the de minimis rule, you do not have to report it.

If fringe benefits are taxable, they should be included on all applicable employees’ Form W-2 and subject to income tax withholding (this also goes for social security and Medicare benefits). Employers can report any of this information in box 14 on the W-2.

If you have any questions or need additional guidance with correctly reporting employee gifts, our dedicated team of HR specialists will be happy to walk you through it. Contact BlueLion at 603-818-4131 or info@bluelionllc.com today!

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.

Suppose you own a young business or recently introduced a retirement plan to your employee benefits package. In that case, you might have heard about something called 401(k) nondiscrimination testing—and wondering what the heck it is.

Also known as 401(k) coverage testing, this is an annual IRS review used to prove a company does not discriminate in favor of highly-compensated employees (HCEs). The test also ensures your plan covers a sufficient number of non-highly compensated employees (NHCEs).

Like Form 5500 and audit requirements, employers need to understand the fundamentals of the coverage test to ensure your plan is compliant and avoid mistakes. Failing the test requires fixing it, which can be extremely costly and time-consuming. (We’ll explain more on the penalties and consequences a bit later.)

To make sure you know what to expect and what information you’ll need, we’ve answered the most critical questions about 401(k) nondiscrimination testing. Keep reading to prepare your business for this year’s test.

1. Who completes the 401(k) nondiscrimination test?

Typically your plan provider completes the 401(k) nondiscrimination test for you. Keep in mind, though, that you will need to provide them with complete and accurate information. You must know the basics to ensure you don’t miss important information, potentially triggering an inaccurate test result.

2. How is 401(k) coverage measured?

The test looks at all employee and employer contributions made throughout the year, including: 

• Employee salary deferrals
• Employer matches
• Profit-sharing

The result must satisfy either the ratio percentage or the average benefit test. The ratio percentage is the most common method and must equal or exceed 70%. It is calculated using the equation:

(# of “benefitting” NHCEs / # of “eligible” NHCEs) / (# of “benefitting” HCEs / # of “eligible” HCEs)

3. Which employees are eligible?

Employees who met the applicable contribution’s age and service eligibility requirements for the year are eligible, excluding:

• Union employees
• Non-resident aliens with no U.S. income
• Terminated employees who worked less than 500 hours in the year

4. Which employees are benefitting?

This refers to employees who benefit from the contribution, meaning they:

• Have the right to make 401(k) salary deferrals and/or receive matching contributions.
• Receive an allocation from a profit-sharing contribution.

Employees who do not benefit include:

• Employees excluded by the plan document (e.g., hourly, contracted)
• Employees of a controlled group member that does not co-sponsor the plan
• Employees who failed to meet the contribution’s allocation conditions (e.g., terminated before year-end, worked less than 1,000 hours in the year)

If you’re unsure of which employees are eligible and benefitting, simply report every employee who received $1 or more in compensation during the year to your plan provider. They should inform you if they have questions about an employee’s status. 

5. What is a controlled group, and is your company part of one?

The IRS controlled group rules consider two or more employers with common ownership as a single employer for 401(k) nondiscrimination testing. These rules often require all members of a controlled group to cover their employees with the same 401(k) plan to pass annual coverage testing.

Controlled group rules exist to prevent employers from subdividing their company into separate companies, using one to employ HCEs and the other to employ NHCEs. This would allow companies to discriminate in favor of HCEs.

If your company is part of a controlled group, you’ll need to give your plan provider the employee information for all members of your controlled group. The IRS considers your company part of a controlled group when one of these relationships exists:

• Parent-subsidiary Relationship: When one company owns 80% or more of another company
• Brother-sister Relationship: When two companies meet two thresholds.
  • Common Ownership: 5 or fewer individuals own 80% or more of each company; and
  • Identical Ownership: The common owners have identical ownership of more than 50%

6. What are the consequences of a failed coverage test, and how can you fix it?

If you fail a coverage test, you must adopt a corrective amendment within 9.5 months following the close of the plan year in which the failure occurred to expand plan coverage retroactively. You’ll need to:

1. Conduct an independent review to determine if HCEs and NHCEs are properly classified; and
2. Make qualified nonelective contributions (QNECs) to new NHECs to make up for their missed deferral opportunities, as well as any missed employer contributions.

The IRS considers any coverage failure not corrected within 9.5 months to be a demographic failure. This can only be voluntarily fixed using the IRS’ Voluntary Compliance Program (VCP). At this point, employers face fines.

Employers could be in even bigger trouble if a 401(k) coverage failure is not corrected at all. This can result in plan disqualification if the issue is found during an IRS audit. In this case, the plan’s trust loses its tax-exempt status and becomes a nonexempt trust. Disqualification affects:

• Employees
• Employer
• The plan’s trust

Did the thought of plan disqualification give you a sinking feeling? We don’t blame you! But don’t stress—you can avoid failing the 401(k) nondiscrimination test by communicating with your plan provider and ensuring they have all the information they need to complete the test accurately.

Having a basic understanding of the testing rules helps, but we know it can still be overwhelming. If you would like more guidance to make sure your employees are correctly classified, contact BlueLion today at 603-818-4131 or info@bluelionllc.com.

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.

Have you recently introduced a new retirement plan at your company? Perhaps you’re new to the process and filing a Form 5500. How does it work? Do you need an audit?

We answer these questions and more below, giving you the complete breakdown of:

• Form 5500 Basics
• Form 5500 audit requirements
• Quick tips to ensure compliance

Read on to learn more about this important employee benefits requirement and avoid serious penalties.

Form 5500: The Basics

1. What is Form 5500?

The Form 5500 is an annual report filed with the Department of Labor (DOL). It was formed under the Employee Retirement Income Security Act (ERISA).

This report includes info about your retirement plan’s financial conditions, investments, and operations. It is how you show the DOL and Internal Revenue Services (IRS) that your plan is compliant with government regulations and meeting the terms included in the plan.

Generally, all retirement plans, like profit-sharing and 401(k) plans, must file a Form 5500 for every year the plan holds assets.

2. What is ERISA?

The ERISA is a federal law created in 1974 that sets minimum standards for most voluntarily established retirement and health plans in private organizations to protect plan participants. The law does this by:

• Requiring employers to provide participants with plan information, including important info about features and funding.
• Establishing fiduciary responsibilities for those who manage and control the plan assets.
• Requiring employers to establish a grievance and appeals process for participants to get benefits from their plans.
• Giving participants the right to sue for benefits and breaches of fiduciary duty

3. When must employee contributions be deposited?

Employers must deposit employee contributions into their accounts no later than the 15th business day of the month following the month in which the contributions occurred. In other words, March contributions must be deposited into participants’ accounts by April 15th.

Ideally, employers should make deposits as early as possible so they can segregate participant contributions from their general assets.

Organizations with 100 or fewer employees are considered small employers and subject to safe harbor deadlines. This allows them seven business days after collecting employee deferrals to deposit them into the plan.

4. What are the deadlines and extension options for filing the 5500?

For most plans, the Form 5500 is due on the last day of the seventh month after the plan year ends, typically July 31 for a calendar-year plan (or the next business day if July 31 falls on a weekend).

The plan administrator must electronically sign and file Form 5500 with the DOL. They must also keep a copy of the form, as well as the schedules and attachments, with all required signatures on file with the plan’s records.

You can file an extension if you are unable to complete your Form 5500 on time by submitting a Form 5558 to the IRS before July 31 to avoid late filing penalties. When filed correctly and on time, an extension is due two and a half months after your Form 5500 was due.

5. What is a summary annual report?

The Summary Annual Report (SAR) summarizes the information reported on Form 5500 and schedules. This document gives participants a summary of the plan’s financial status as reported on your Form 5500. Additionally, the SAR informs participants of their right to receive a copy of the completed Form 5500 if they request it from you.

ERISA requires this document to be distributed to each participant and their beneficiaries receiving benefits under the plan no later than two months following the filing deadline, normally September 15th. With the extension, a SAR is due December 15th.

6. How do I file my Form 5500?

The DOL now requires that all Form 5500 be filed electronically using either an EFAST2-approved third-party software or IFILE. The agency does not accept paper filings. You can register with EFAST2 today.

It is crucial that you file a complete return with all required information and responses. If you do not, your Form 5500 will be rejected and you may be hit with penalties or fines. Willful violations, such as making false statements, will incur extra penalties.

7. What are the penalties for noncompliance?

The government enforces stiff penalties for failing to file or noncompliance, which are adjusted annually for inflation. 

The DOL provides a Delinquent Filer Voluntary Compliance Program (DFVCP), which encourages voluntary compliance with ERISA’s annual reporting requirements. The DFVCP gives delinquent plan administrators an option to meet the program’s requirements and voluntarily pay a reduced penalty, thereby avoiding even higher penalties.

8. Does my company’s retirement plan require a fidelity bond?

Yes, ERISA requires every plan administrator and anyone else who manages or has the authority to manage plan assets to be covered by a bond. Think of it as insurance for the plan and covers anyone who manages or has the authority to manage plan assets. A fidelity bond also protects the plan against loss in the case of fraud or dishonesty committed by one of the bonded individuals.

The required amount of bond coverage is the lesser of 10 percent of plan assets at the beginning of the plan year, or $500,000.

About Form 5500 Audits

9. What is a Form 5500 audit and when is it mandatory?

A Form 5500 audit is performed by an independent qualified public accountant (IQPA) for qualifying companies. The IQPA confirms that the plan is compliant with government regulations and that your Form 5500 is accurate.

Typically, retirement plans with 100 or more participants must include an audit report with the Form 5500 filling every year. This includes eligible but not participating employees AND separated employees with account balances. Employers often fill out their Form 5500 incorrectly because they don’t properly account for participants!

10. What are the Form 5500 requirements?

A Form 5500 audit ensures that the plan is operating in compliance with the IRS along with the plan agreement to ensure that employees receive what they are promised as participants of the plan. The IQPA also verifies that the audit statement reconciles with your Form 5500. 

While the IQPA is not responsible for filing, they will identify any issues or inconsistencies between your plan and Form 5500 and make relevant recommendations.

During a Form 5500 audit, the IQPA will test:

• Employee eligibility to participate in the plan.
• Employee contributions to ensure they’re deposited timely and in accordance with plan documents.
• Distributions to ensure they’re in compliance with plan docs and the IRS.
• Employer contributions to verify if they are 1) required and 2) provided according to the plan.

Quick Tips for Ensuring Compliance

We get it—the Form 5500 can be a bit overwhelming and the thought of those penalties probably gives you a sinking feeling. Keep calm, take a deep breath, and use our quick checklist below to avoid some common filing mistakes many employers make.

1. Identify an appropriate plan administrator.
2. Fill out the correct number of plan participants.
3. Do not allow employee contributions to exceed the annual limit (set by the IRS).
4. If your company has not experienced fraud, leave the question about a loss caused by fraud or dishonesty blank. (Many employers answer this question incorrectly.)
5. Do not use code 1l, which indicates a frozen or inactive plan.
6. Double-check your EIN and plan number to ensure they are correct.
7. Avoid providing too much information, such as returns dated over 12 months.
8. Only file your form with EFAST software or IFILE.

The DOL also provides a number of Form 5500 resources to educate companies on the requirements and how to properly file.

Do you prefer more hands-on guidance? Contact BlueLion to learn more about our human resources consulting services. We’ll be happy to help you navigate the filing and remain compliant. We can answer your questions and confirm whether or not a Form 5500 audit is required for your business. Call 603-818-4131 or email info@bluelionllc.com!

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.

As an employer, you likely heard when the IRS released the new W-4 form in 2020—for the first time in 30 years. Now called the Employee’s Withholding Certificate, the previous version was formerly known as the Employee’s Withholding Allowance Certificate.

The most significant change on the form was the removal of withholding allowances. The new design was intended to complement changes in the 2017 tax reform law.

Whether you’re unfamiliar with the new form or struggling to manage both 2019 and earlier versions of the W-4 and the 2020 and later, chances are you have questions. After all, who doesn’t want to make tax season just a little bit easier?

Fortunately, 2021 brought no major updates. Withholdings are still gone, and the IRS has developed a new optional computational bridge. This tool helps employers who have both old and new versions of the W-4 on file but only want to worry about one set of rules. 

Learn more about the latest Form W-4 updates, how to complete it correctly, and how to use the computational bridge with older versions of the W-4 below.

Main Updates in the New IRS W-4 Form

The 2020 W-4 form contains 5 Steps and has done away with the various “Lines.” The steps include:

1. Personal Information
2. Multiple Jobs or Spouse Works
3. Claim Dependents
4. Other Adjustments
5. Sign Here

The only required sections are Steps 1 and 5. Steps 2 through 4 should only be completed by applicable employees.

Since there are no more withholding allowances, employees must claim dependents (Step 3) or calculate deductions in Step 4(b). They can also choose additional withholding in Steps: 

• 4(a): Tax withheld for other income (not from jobs, i.e., interest, dividends, and retirement income)
• 4(c): Extra withholding: Any additional tax the employee wants withheld each pay period

Employees who work multiple jobs or are married and filing jointly with a spouse who also works may choose to check the box in Step 2, which will withhold more federal income taxes.

If employees need help filing their W-4 forms, employers can direct them to the IRS’s Tax Withholding Estimator. This is especially helpful (and may even be necessary) for married taxpayers, those who have dependents, and those with more than one job—in other words, those who have more complicated filings.

Employer FAQs About the 2021 Form W-4

1. Why was the W-4 Form redesigned?

The IRS updated the form based on the Tax Cuts and Jobs Act changes and the withholding table bracket updates. These changes included doubling the standard deduction, from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for joint filers.

It was also updated to benefit employees. The IRS overhauled the W-4 to simplify the process and increase the withholding system’s transparency and accuracy. Instead of complicated worksheets, the form contains straightforward questions that make accurate withholding easier for employees.

2. What happened to withholding allowances?

The removal of withholding allowances is another effort to create more transparency, accuracy, and ease around the process.

The value of a withholding allowance used to be tied to the amount of personal exemption. However, changes in law made it so that employees cannot claim personal exemptions or dependency exemptions.

3. Which withholding table do I need to use?

The two methods for calculating federal income tax withholding still include either percentage or wage bracket methods. Here’s a quick guide for those who use:

• An automated payroll system: You must use the percentage method table, regardless of which Form W-4 you have on file.
• A manual payroll system with 2020 and later W-4 forms on file: Choose either the wage bracket method table for forms from 2020 or later (cannot use if the employee earns over $100,100); OR the percentage method table for forms from 2020 or later.
• A manual payroll system with 2019 and earlier W-4 forms on file: Choose either the wage bracket method table for forms from 2019 or earlier (cannot use if the employee earns over $100,100 or claimed more than 10 allowances); OR the percentage method table for forms from 2019 or earlier.

4. What are the Standard and Checkbox Withholding rates?

If you are calculating income tax withholdings for a W-4 form from 2020 or later, you will see columns for “Standard withholding” rates and “Checkbox withholding” rates. These two options will appear on both the Percentage and Wage Bracket Method tables.

Use the Standard rate for employees who only fill out Steps 1 (Enter Personal Information) and 5 (Sign Here).

Use the Checkbox rate for employees who check the box in Step 2 (Multiple Jobs or Spouse Works). This means higher withholding for the employee. If they choose one of the other options in this step, the higher withholding is included with any other additional tax amounts per pay period in Step 4(c). 

5. How does the computational bridge work?

The computational bridge is an optional step added to the 2021 W-4 form. It offers employers a simple four-step process to calculate 2019 and earlier forms as 2020 and later forms. This allows those using manual payroll systems to use one income tax withholding table.

Are you ready to use the computational bridge? Grab a 2019 or earlier W-4 form and a new copy of the 2020 form, then follow these steps:

1. Find the employee’s marital status on Line 3 of a 2019 or earlier form. Then, select the filing status in Step 1(c) of a 2020 or later form that reflects that status.
   1. “Single” = “Single or Married filing separately”
   2. “Married, but withhold at higher single rate” = “Single or Married filing separately”
   3. “Married” = “Married filing jointly”
2. In Step 4(a) on a 2020 or later form, enter an amount based on the filing status you selected above.
   1. “Single or Married filing separately” = $8,600
   2. “Married filing jointly” = $12,900
3. Multiply the number of allowances claimed on Line 5 of an employee’s 2019 or earlier W-4 form by $4,300. Enter the result in step 4(b) on the 2020 or later form.
4. Enter the additional amount of withholding requested by the employee on Line 6 of their 2019 or earlier form in Step 4(c) of a 2020 or later form.

For full details and methods, download the IRS 2021 Publication 15-T.

6. Do all employees have to complete a new Form W-4?

No, only those whose employment started before 2020—although, any employee who decides to change their withholdings will need to file a new form.

7. What if a new hire doesn’t file a new form?

If a new hire does not fill out a new W-4 form, treat them as a single filer with no other adjustments and use the standard withholding rate.

8. Can I ask existing employees to file a new W-4?

Sure, you can, but remember that they have the option to say no if they started employment in 2019 or earlier. If you do ask employees to fill out new forms, you must inform them that:

1. They are not required to complete it.
2. Their withholding will continue to be based on their previously submitted W-4 if they do not fill out the new version.

If they choose not to submit a new form, you must continue using their previous W-4.

Is this all new to you and making your head spin? Don’t stress it! The IRS has provided information and resources on the Form W-4 to help guide you through it.

If you need more hands-on help, BlueLion will also be happy to help you manage both new and old versions of W-4 forms you have on file and create more efficient systems. Contact us today with any questions regarding your employees’ tax forms at 603-818-4131 or info@bluelionllc.com. 

Looking for other tax info, like how to classify W-2 employees vs. 1099 contractors? Check out more of our helpful blog posts!

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.