Navigating the New W-4. Yep, It Changed!
A New Decade and a New IRS Form
Apparently even the IRS makes resolutions! After some 30 years of the same form, the IRS updated the Employee Withholding Certificate, better known as the W-4. This new design was driven by the changes in the 2017 Tax Cuts and Jobs Acts.
The IRS indicates the updates to the form reduce complexity and increase transparency and accuracy of withholdings. The form is meant to be more straightforward and less complicated. We can all appreciate that one! This new format is also designed to be more accurate, which could mean a lower tax refund, or more money per pay period.
What Is the W-4 Anyway?
The IRS Employee Withholding Certificate, or W-4, is a form completed by workers so their employers know the amount of federal income tax to deduct from each paycheck. An accurate form could help save you from having a big tax balance due come April 15. Or it can put more money in your pocket by stopping you from paying too much tax each pay period.
If you recall the last W-4 you completed, it was based on allowances. Employees indicated personal exemptions, or the amount of money to be deducted for themselves and dependents. You essentially provided a number of allowances that was reported to the IRS.
With the changes in the tax laws implemented in 2018, you cannot claim personal exemptions or dependency exemptions. The form has been updated to reflect these changes.
In the new form, the withholdings are calculated based on 5 steps – kind of like how you file your taxes.
With this new version, taxpayers also receive an additional privacy protection. Employees can indicate having more tax withheld without having to share this information with employers.
The updated form takes into account whether you have multiple jobs, if a spouse works, or if there is extra income from other sources.
How Do You Complete the Form?
If you’ve started a new job in 2020, or you are an employer issuing the W-4 to new employees in 2020, it is recommended that employees complete the form at home rather than on-site on the first day. If you want to accurately complete the form, you will probably want to use prior year tax forms, or pay stubs, as well as spend some time reviewing the withholding worksheets and comparisons.
The Basic Steps
There are 5 basic steps to completing the new form:
1) Enter personal information
2) Indicate multiple jobs, or if spouse works
3) Claim dependents
4) Make other adjustments, including:
- Step 4(a): Investment and retirement income
- Step 4(b): Deductions other than the standard deduction
- Step 4(c): Any extra tax withholding per pay period
5) Sign the form
Only two steps are required for employees to complete – Step 1, enter personal information, and Step 5, sign the form. Steps 2, 3 and 4 are optional and can be completed to provide more accurate withholding, or increase withholdings.
What Should I Do if I’m an Employer?
For any new employees starting on or after January 1, 2020, the new W-4 form will need to be used. Be sure to provide your new hire with the option to take the form home for completion.
For any employees hired before January 1, 2020, you can give the option to re-submit the 2020 form. Employees are not required to complete a new form, however, explain that withholdings may not be as accurate as with the new form.
If a new employee does not complete the new form, employer instructions indicate that employers should handle the withholdings as a single filer with no adjustments.
You may need to manage different withholding set-ups in your payroll software, so just be sure you are aware that there may be differences.
What If I Have Questions?
While the new form may be “less complicated”, there is still an adjustment period to understanding the changes and communicating these to employees. Here are some additional resources to help answer your questions on the new W-4 Employee Withholding Certificate:
IRS FAQ Page:
PDF of 2020 W-4 Form:
Like any changes to important documents or procedures, it’s best to speak with a professional about any questions you may have. Check with your accountant or contact the IRS for more information.