Updated July 12, 2020
Changes in the tax tables have significantly impacted withholding, leading to tax bills and smaller refunds during last year’s tax filing season.
This year we are faced with a wholly redesigned W-4 form for 2020. Employees use the W-4 to adjust their payroll withholdings closer to their actual full-year income tax liability.
You need to know that existing employees are not required to use the new form. So, even though the new form is no longer based on the former withholding allowances tied to personal and dependency exemptions, employers and payroll processing providers need to maintain systems that can handle allowance-based calculations and the new 2020 W-4 inputs.
For those hired beginning January 1st, 2020, as well as anyone who wants to adjust their withholding, the 2020 version is the only valid Form W-4.
So, what has changed?
- There are no more Single 1’s or Married 0’s. The new form is a dollar-based calculation.
- The new W-4 features a checkbox for those with multiple jobs, as well as two-income households.
- It allows for Head of Household as a filing status.
- There are inputs for full-year child and dependent credits.
- There are inputs for full-year expected other income.
- There are inputs for full-year likely deductions(over the standard deduction amount).
Completing the new W-4 involves five steps. Keep in mind that only Steps 1 and 5 are required (name, address, filing status, and signature). Steps 2 and 3 should only be completed if they apply to the taxpayer, and Step 4 is optional. Completing Step 4 may help ensure that withholding is accurate.
Let’s take a closer look at the 5-step process.
Step 1 – Input personal information, including filing status.
Step 2 – This step is for employees with multiple jobs or who have spouses who also work. There are three options.
- Use the online withholding estimator for the most accurate withholding. https://apps.irs.gov/app/tax-withholding-estimator/income-and-withholding Consider using the estimator if you:
- Expect to work only part of the year
- Have dividend or capital gains income, or are subject to additional taxes, such as the additional Medicare tax
- Have self-employment income
- Use the multiple jobs worksheet on page 3. This worksheet works the same as the online calculator, but with a little less accuracy.
- Check the box. The IRS emphasizes that if an employee opts for the checkbox, BOTH spouses should check the box on each W-4 form. However, only ONE spouse should complete steps 3 and 4(a) and (b) for child and dependent tax credits, other income, and deductions. If the box is checked, the tax tables divide the standard deduction and tax brackets equally between two jobs. This option is roughly accurate for jobs with similar pay.
Step 3 – Remember, this step should only be filled out by ONE spouse.
Here you enter the number of dependents for whom a federal tax credit can be claimed. To qualify for the child tax credit, the child must be under age 17 as of December 31st, be your dependent who lives with you for more than half the year and have a social security number. You can also include other tax credits in this step, such as education credits. Remember that including these credits will increase your paycheck and reduce the amount of refund you will receive when you file your tax return.
Step 4 – Enter other income and deductions.
- (a) Enter full-year non-wage income such as rental income, interest, and dividends. However, line 4(a) does not address the self-employment tax. Taxpayers with a mix of W-2s and 1099s should use the IRS online calculator.
- (b) Here you can enter the estimated full-year dollar amount of deductions OVER the standard deduction amount. For example, a Married Filing Jointly family with expected total deductions of $40,000(mortgage interest, charitable donations, etc.) in 2020 should enter $15,200 on line 4(b) – – [$40,00 minus the standard deduction of $24,800 in 2020] – – rather than total deductions.
- (c)Enter any additional tax you want withheld each pay period. This option is another way employees can make adjustments for more complicated tax situations. Line 4(c) is the only entry that asks for a per-payroll All other entries are full-year amounts.
All in all, the new W-4 will help taxpayers have an accurate amount of tax withheld from their paychecks.
However, what are the drawbacks?
- Employees need more information to figure their withholding, such as their spouse’s pay statements, other sources of income, and their most recent tax return.
- Employees may need time and access to a computer to use the online calculator.
- Employers need to plan more time for on-boarding.
- Any employee hired and first paid after 2019 who fails to complete the W-4 (an employee cannot be forced to do so) is treated as a single filer with no adjustments.
If you are a W-2 employee and find yourself with a large tax bill or conversely a large refund this year, you may want to enlist your tax preparer or accountant to complete a new W-4.
Finally, for employers: Remember to retain employee payroll records, including completed W-4s, for a minimum of 4 years after filing employment tax returns for the fourth quarter of the year.