December 30, 2019
The IRS updated form
W-4, Employee’s Withholding Allowance Certificate
. According to the IRS, the new design is easier for employees to complete and have more accurate withholdings.
The 2020 Form W-4 must be use for wages paid as of January 1, 2020. New or rehired employees first paid after January 1, 2020 who fail to furnish a Form W-4 will be treated as a single filer with no other adjustments. Employees who want to adjust their withholding must also use the redesigned form.
Employees who have furnished Form W-4 in any year before 2020 are not required to complete new form. Employers will continue to compute withholding based on the information from the employee's most recent Form W-4.
Nonresident aliens can continue to adjust their withholdings.
The IRS provides instructions in the
2020 Publication 15-T, Federal Income Tax Withholding Methods
on the additional amounts that should be added to wages to determine withholding for nonresident aliens. Nonresident alien employees should continue to follow the special instructions in
when completing Form W-4.
Allowances are no longer used for the redesigned Form W-4. This change is meant to increase transparency, simplicity, and accuracy of the form. In the past, the value of a withholding allowance was tied to the amount of the personal exemption. Due to changes in the tax law under the Tax Cuts and Jobs Act of 2017 (TCJA), employees currently cannot claim personal exemptions or dependency exemptions.
Instructions for Employees
The form is divided into 5 steps. Steps 1and 5 are required.
withholding will be computed based on their standard deduction and tax rates, with no other adjustments if they choose to simply complete Step 1 and 5.
Although Steps 2-4 are optional, employers should advise workers to complete all steps that apply to their situation, so their withholdings more accurately match their tax liability. The five steps to complete Form W-4 are:
: Employees are required to
provide personal information like their name and filing status.
Employees should complete this step if they have more than one job at the same time or are married filing jointly and both the employee and their spouse work.
Step 2 allows employees to choose
of three options, which involve tradeoffs between accuracy, privacy, and ease of use:
- Step 2(a): For maximum accuracy and privacy, employees should use the Tax Withholding Estimator. They will be guided to enter an additional amount to withhold in Step 4(c). While they will need to know the approximate amount of pay for each job, they will enter the additional amount of withholding in Step 4(c) on the Form W-4 for only one of the jobs. If pay for any of the jobs changes significantly, they will need to use the Tax Withholding Estimator again and furnish a new Form W-4 to change the amount in Step 4(c) to have accurate withholding.
- Step 2(b): If an employee does not have access to the Tax Withholding Estimator but wants to have roughly accurate withholding and retain privacy, they may use the Multiple Jobs Worksheet on page 3. The employee will be guided to enter an additional amount to withhold in Step 4(c). While they will need to know the approximate amount of pay for each job, they will enter the additional amount of withholding in Step 4(c) on the Form W-4 for only one of the jobs. If a change in pay for any of the jobs changes the additional withholding amount in the lookup table used with this worksheet, they will need to furnish a new Form W-4 to change the amount in Step 4(c) to have accurate withholding. If they (and their spouse) have a total of only two jobs and the pay at the higher paying job is more than double the pay at the lower paying job, this option is generally more accurate than choosing Step 2(c). If the pay at each job is more similar, Step 2(c) is more accurate than choosing Step 2(b).
- Step 2(c): If an employee (and their spouse) have a total of only two jobs held at the same time, they may check the box in Step 2(c) on the Forms W-4 for both jobs. To use this option, they should complete a Form W-4 for each job with the box in Step 2(c) checked. The standard deduction and tax brackets will be cut in half for each job to calculate withholding. They will not need to furnish a new Form W-4 to account for pay changes at either job. This option is accurate for jobs with similar pay; otherwise more tax than necessary may be withheld from their wages. This extra amount will be larger the greater the difference in pay is between the two jobs.
Qualified employees should
complete Step 3 to determine the amount of their child tax credit and credit for other dependents that they claim on their tax return. To qualify for the child tax credit, the child must be under age 17 as of December 31, live with the employee for more than half the year, and have a social security number.
Employees can use Step 4 to estimate their income and withholdings from this job, as well as any other jobs that they have. Employees can include the amount made from self-employment or pay estimated taxes on that income
Form 1040-ES, Estimated Tax for Individuals
Employees can also reduce their withholding to account for deductions in Step 4. This includes both itemized deductions (if allowed) and other deductions such as for student loan interest and IRAs.
. Employees are required to sign the form.
Employees should generally increase their withholding if:
- They hold more than one job at a time or if married filing jointly, both spouses have jobs (Step 2), or
- They have income from sources other than jobs or self-employment that is not subject to withholding (Step 4).
Employees who do not adjust their withholding for these situations could owe additional tax when filing their tax return and may owe penalties. Employees with income from sources other than jobs, can pay estimated tax instead of having extra withholding.
Employees should generally decrease their withholding if:
- They are eligible for income tax credits such as the child tax credit or credit for other dependents (Step 3), and/or
- There are eligible for deductions other than the basic standard deduction, such as itemized deductions, the deduction for IRA contributions, or the deduction for student loan interest (Step 4).
The redesigned Form W-4 makes it easier for employees to have their withholding match their tax liability. Some employees may prefer more tax than necessary withheld from each paycheck to get a refund. Although this is a strategy to save money, employees should be advised that they do not earn interest on the amount they overpay.
Employees are encouraged to use the
Tax Withholding Estimator
if they expect to work only part of the year, had a large balance due or refund last year and it is no longer the beginning of the current year. Employees should also use the estimator if they have dividend or capital gain income or are subject to other taxes, such as the additional Medicare tax; have self-employment income, want the most accurate withholding for multiple job situations, or prefer to limit information provided in Steps 2–4 but do not want to sacrifice accuracy.
Employees who don’t think they’ll owe any income taxes can claim an exemption from income tax withholding by writing in the word “Exempt” underneath Line 4c. While most W-4s stay in effect until employees change them, W-4s on which employees claim exempt expire at the end of every year. Employees must refile and again claim exempt, that’s what they want to do. If employees don’t refile with you by February 15, 2020, and you don’t have an older valid form on file, you withhold taxes as if the employee was single and claimed no adjustments, beginning February 19, 2020.
Martin C. McCarthy, CPA, CCIFP
McCarthy & Company, PC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).