The Internal Revenue Service has launched a new online tool designed to help employers, especially small businesses, easily determine the right amount of federal income tax to withhold from workers' pay.

The Income Tax Withholding Assistant for Employers is designed to ease the transition to the redesigned withholding system, which is no longer based on allowances and takes effect Jan. 1.

The tool helps employers implement new income-tax withholding requests from employees who fill out the completely redesigned 2020 W-4 form, the employee's withholding certificate.

It can also help employers properly withhold from employees who still have a withholding request on file using a past version of the W-4, which was based on allowances.

"We've been working closely with the payroll community and other partners to make improvements in the withholding process," said IRS Commissioner Chuck Rettig.

Automatic Calculations

Employers who already use an automated payroll system won't need the tool because their system does the math.

Available for Microsoft Excel users, the tool can create a profile for each employee and automatically calculate the correct federal income tax withholding.

To use the new tool, employers start by indicating their pay period frequency—weekly, bi-weekly, monthly—then enter key information from an employee's form W-4.

For the tool to work properly, employers must indicate whether the employee submitted a 2020 form W-4, which does not base withholding on the number of allowances claimed, or a prior version of the W-4, which does.

The employer can save a separate customized copy of the file for each employee containing the employee's form W-4 information.

Then, each pay period, the employer simply opens the employee's file and enters their gross wage or salary amount for that pay period.

The tool automatically displays the correct amount of federal income tax to withhold.