Using the New Form W-4

April 2023

Volume 15, Issue 4

According to a New York Times article, the average federal income tax refund paid in 2023 is approximately $3,000, which is 10% lower than last year. For many people, a tax refund is one of the few times they get a large lump sum of cash. Many taxpayers use refunds as a savings tool by intentionally withholding more money from their paychecks.

A myriad of reasons affects tax refunds, most of which aren’t terribly interesting to read about! But one important factor is Form W-4. In 2020, stemming from the Tax Relief and Jobs Act, the W-4 was redesigned. Since the new form has been in effect for several years, why are we talking about it now? Unfortunately, we heard from many of you that several of your employees did not have enough withheld throughout the year and were faced with a balance due in April. That, combined with the loss of the more generous tax credits that were part of the federal pandemic relief, caused more people to have balances due in 2022. Taxpayers are also missing the stimulus payments the US government issued in 2020 and 2021. Filling out a new W-4 could make the difference between getting a tax refund and owing Uncle Sam more money.

Most of us were familiar with the previous Form W-4, which we fill out to inform our employers about how much tax to withhold from payroll checks. According to some, the new form is more straightforward than the old form – if any tax form can be described as straightforward! While most of us really didn’t understand the “old” form, we had figured out how to complete it to get the results we wanted – whether that was a tax refund or a minimal balance due. This new form takes some getting used to. Honestly, even though the form is intended to be simple, it takes longer to fill out and creates its own share of confusion. We’ll admit – several of us at Summit had a tough time with it!

The part that particularly tripped up one Summit staffer is that the “Married but Withholding at the Higher Single Rate” option is no longer available. Instead, there is a small box under Step 2(c) that should be checked. The instructions indicate that BOTH spouses must complete this section similarly. Yikes!

The new form may be easy to complete for anyone who is single with one job and no kids. Just fill out the contact information and sign the form. Easy peasy. Or is it? Single folks who don’t earn much money may discover their withholdings weren’t sufficient to cover their tax bill. Anyone who uses Turbo Tax or other tax preparation software is at a further disadvantage because they receive no financial help or advice regarding adjusting their withholding.

To get help with the form, the best resource is the Tax Withholding Estimator on the IRS website.[1] But completing this estimator can be nearly as complicated as preparing a tax return. You need pay stubs, information about withholding for retirement and health savings accounts, mortgage interest, childcare expenses, etc. Essentially, anything that would be reported on your tax return as additional income, a tax-deductible expense, or a potential credit is entered into the worksheet. While the result is surely more accurate than simply guessing what numbers to put on the form, few employees will complete the exercise. Instead, they will pick a number, perhaps one a friend or relative used, and hope for the best.

If you use a paid tax preparer, ask them for advice about making changes to your W-4. If you want to figure it out yourself, grab your 2022 tax return and your most recent pay stub and use an online calculator. In addition to the IRS tool, NerdWallet, Investopedia, H&R Block, and many other financial websites have calculators. Just remember that the results are only as good as the information you enter. And never enter your name, SSN, or any other form of contact information into these sites.

You can help your staff by running through scenarios to show the impact of adding or removing allowances to come up with the right amount of withholding. Depending on your payroll software, this should be relatively easy. But be careful not to make decisions for them. Strike a balance between helping your employees complete the form while avoiding giving any kind of tax advice.

There is still time to adjust this year’s withholding if your employees wish to do so. Changes to withholding can be made effective with the next payroll run. Whether you want your tax bill to be close to $0 or prefer to receive a refund large enough to take the family to Disney, it just takes a little planning.

[1] https://apps.irs.gov/app/tax-withholding-estimator/

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