New W-4 IRS Tax Form: How It Affects You
If you work at a job and have federal income taxes withheld from your paycheck, you should know there was a new Form W-4 issued in 2020.
Basically, the form tells your employer how much federal income tax to withhold from your paycheck.
You may have forgotten this form exists if it has been a long time since you started a new job or changed your withholding. You usually only see this form when you’re hired or when you request to have your federal income tax withholding changed.
Typically, you don’t have to update it to make sure your employer is withholding the right amount of federal income taxes.
The major exception is if your financial situation has changed significantly.
For example, if you have a child you’ll probably need to have the form updated to have the correct amount of taxes withheld.
When the Tax Cuts and Jobs Act passed in 2017, it significantly changed how the federal income taxes you owe are calculated.
This meant:
The old withholding form no longer accurately predicted how much federal income tax should be withheld from your paycheck.
Based on this, the IRS put out a new Form W-4 for 2020. People fill out and submit this form to adjust their withholding to more accurately have their federal income tax withheld.
Here’s what you need to know about filling this form out and how it changed from the prior version.
Basics of the New Form W-4
In some ways, the new Form W-4 is easier to use than in the past. It has five steps you must go through to complete the form.
They are as follows:
- Step 1 - Enter personal information
- Step 2 - Multiple jobs or spouse works
- Step 3 - Claim dependents
- Step 4 - Other adjustments (Optional)
- Step 5 - Sign here
Step 1: Enter personal information
Step 1 is easy. You enter your name, Social Security Number, address and filing status.
The most common filing status options include single or married filing separately, married filing jointly or head of household.
Step 2: Multiple jobs or spouse works
Step 2 is a bit complicated, but only if you work multiple jobs or your spouse works. Otherwise, you can skip this step altogether.
This step gives you three options to help calculate your withholding. Option A is most accurate, followed by option B. Option C works in certain cases where the income from each job is roughly equal.
Option A
Option A directs you to www.irs.gov/W4APP which is essentially a tax withholding estimator. This withholding calculator will require you to input information about your tax situation and your income from your jobs.
Based on this information, it will tell you how to have your federal income taxes withheld.
Option B
Option B directs you to use the Multiple Jobs Worksheet on page 3 of the Form W-4 packet.
Then, you enter the result in Step 4(c) to have the most accurate withholding possible with this method.
Option C
Option C requires both you and your spouse’s other job to check this box.
This option only works well for jobs with similar pay. It basically cuts the common deductions and credits in half for each job.
Step 3 - Claim dependents
Step 3 is another easy step. If your income will be $200,000 or less or $400,000 or less if you’ll file married filing jointly, complete this section.
You’ll multiply the number of qualifying children you have under age 17 by $2,000. Then, you’ll multiply the number of other dependents you have by $500.
This helps to figure out what child tax credits or other dependent credits you may qualify for.
Add these numbers together and enter the total on line 3.
Step 4 - Other adjustments (optional)
This step allows you to make further adjustments to your withholding to attempt to get your withholding as accurate as possible.
It allows you to make three adjustments to the numbers that are used to calculate your withholding.
First, you can add additional income that is not from other jobs. These types of income shouldn’t have other withholding.
Examples of income that fall into this category could include:
- interest
- dividends
- retirement income that doesn’t have withholding
Next, you can add extra deductions above the standard deduction. If you plan to itemize deductions or take any deductions than the standard deduction, this is where to do it.
To do this, you’ll need to fill out the Deductions Worksheet on page 3 of the W-4 packet.
Finally, you can have extra tax withheld if you desire. To have additional tax withheld, put the additional amount you want withheld on each period on line 4(c).
Step 5 - Sign
Step 5 is the easiest step on this form.
Sign the form and enter the date you signed it. Then you’re done.
How the Old Form W-4 Used to Work
The old Form W-4 attempted to calculate your withholding based on the way the old tax system worked.
Unfortunately, the Tax Cuts and Jobs Act significantly changed some of the ways the old tax system works.
For example, there are no more personal exemptions today. This made it much less reliable to calculate withholding under the current tax laws.
In the past, you would fill out a personal allowance worksheet to determine how many allowances to claim on your Form W-4. This worksheet was confusing to many people. If you didn’t fill it out correctly, your withholding would be wrong.
Based on the number of allowances you chose and your income from your job, your withholding would be determined.
The only other major option you had to change your withholding was adding an additional withholding amount.
How the New Form W-4 Changed
The new Form W-4 asks more targeted questions that can better predict withholding if you input accurate information.
In theory:
It should be easier for employees to use on their own.
While the new form is longer and now takes up a whole sheet of paper, it should be easier to understand how to use it.
How You're Affected
Your employer may start requiring employees to fill out a new Form W-4 to update their records.
This should help your withholding be more accurate.
So:
If you want your withholding amount to be more accurate and your employer doesn’t ask you to fill out a new Form W-4, you can fill a new one out on your own and submit it to the appropriate person in your company.
New employees hired after the new Form W-4 has taken effect will simply fill out the new form.
Based on the new Form W-4 and the withholding methods determined in Publication 15-T, Federal Income Tax Withholding Methods, which the IRS issues, federal income taxes will be withheld from your paychecks.
Essentially, the payroll industry and your employer uses this publication to determine how much tax to withhold. The document has withholding tables and other methods they can use to determine the correct withholding amounts.
However, once you fill out the form and turn it in, you shouldn’t have to worry about anything else.
Your employer or their payroll company should handle the rest. Your only worry is making sure the form is properly filled out and that it is applied to your paycheck withholding.
If there are any changes to your tax situation, submit an updated Form W-4.
What You Should Do
If your employer hasn’t asked you to fill out a new Form W-4, speak to your payroll or human resources department.
Ask if you can submit a new Form W-4 to have your federal income tax withholding updated.
This is important because withholding is the way most people pay their federal income taxes.
If too much money is withheld, you’ll get a tax refund when you file your tax return.
What you want to avoid:
You’ll owe money when you file your tax return if not enough money was withheld.
By filing a new Form W-4, you’ll make sure you’re using the most updated tax withholding methods available.
Consult a Trusted Professional
Taxes can be extremely confusing for people that don’t deal with them on a regular basis. If you’re confused by the new Form W-4, you’ll need to seek out a trusted professional for help.
Your human resources or payroll department may give you a new Form W-4 to fill out.
Unfortunately, many departments won’t help you fill out these forms.
If they advise you incorrectly, they’re worried you may come after them if you owe money at tax time.
For that reason, you might be better off asking your local tax professional for help. A tax professional should be able to walk you through how to fill out Form W-4 based on your situation.
If your jobs, income, expenses, credits and deductions haven’t changed much from last year, bringing last year’s tax return should be able to help speed things up.
Otherwise, be prepared with the information the form requests so the professional can walk you through how it applies to Form W-4.
