Updated 12/17/19.
The Tax Cuts and Jobs Act, enacted in late December of 2017, wreaked havoc on Form W-4, Employee’s Withholding Allowance Certificate. The TCJA radically changed employee withholding by doubling the standard deduction, modifying tax rates and tax brackets, and eliminating personal exemptions, all of which rendered the W-4, as we knew it, obsolete. Several changes were made with 2018 and 2019 revisions but major revisions were postponed until the forthcoming 2020 version.
Comment periods yielded that the form was too complex and recommendations for improvements and simplification were made by the American Payroll Association and the AICPA. IRS head honcho (Commissioner) says, “The primary goals of the new design are to provide simplicity, accuracy, and privacy for employees while minimizing the burden for employers and payroll processors. McAtee & Associates head honcho says since when has the IRS ever made anything simple? Share in a comment below if you know of anything.
REINFORCING THE BASICS.
Form W-4 is the tool employers use to withhold federal income tax from paychecks. And employers are the tool the IRS uses to get our money.
New and improved it is allegedly simple, accurate, and private with five easy, breezy steps:
Step 1. Enter Personal information;
Step 2. Multiple Jobs or Spouse Works;
Step 3. Claim dependents;
Step 4. Other adjustments (optional); and,
Step 5. Sign here – (Under penalties of perjury).
Let’s start with a look: 2020 Form W-4.
Immediately, you can see there are no more withholding allowances which were previously tied to the amounts of personal and dependent exemptions. Since individuals can no longer claim personal or dependency exemptions on their tax returns there is no need to claim withholding allowances on the W-4. Which worked out good for everyone because some folks were confused by personal allowances and the related worksheet.
The concept of “Exempt” is still the same; $0 tax liability in the previous year and expected $0 tax liability in the present year. An example of this is refundable credits greater than the tax liability. The final thing that is still the same – It’s still not simple!
STEP BY STEP.
Step 1. Enter Personal information. Filling out your name, address, social security number (so much for privacy) hasn’t changed. Filing status has been tweaked to combine Single and Married Filing Separate and Head of Household makes its debut. Everyone who gets a W-2 has to complete this step.
Step 2. Multiple Jobs or Spouse Works. You really should fill this out if there is more than one job in the household. For best results, complete a W-4 for all jobs. Remember, you don’t have to.
Option 1. Calculator. Tax Withholding Estimator
Pros. Most accurate option. Most private option.
Cons. Somewhat of a pita to complete.
Option 2. Worksheets. What would a tax form be without worksheets!
Pros. Good amount of accuracy if adjustment is put on the W-4 with the highest pay. The worksheet is completed with values from an accompanying table not actual salaries and wages. Worksheet is not filed with W-4 so some privacy is maintained.
Cons. A lot more work to do if one job is more than $99,000 or there will be more than three W-2s on the tax return. If pay for any job changes a new W-4 should be filled out to maintain level of accuracy.
Option 3. Check the box. If there are only two jobs in the house it can be simple. Check the little box and that W-2 will get one half the standard deduction and one half the tax bracket. Make sure the other W-4’s Step 2 box is checked as well because it gets the other half. This compensates for the cold heart fact that all jobs together are taxed more than if taxed separate and withholding amounts should follow suit.
Pros. Don’t have to do a new W-4 when you get a raise. Accurate if the two jobs have similar pay. Is the simplest-just check the box.
Cons. Not the most accurate option overall. There will be disparity if one W-2 is a breadwinner and one is a cracker winner. Tells your employer he/she is not the only one in your house.
What if only one person works one job in my house and the rest are freeloaders? In this case – Complete Steps 1 and 5 and your withholding will be based on the appropriate standard deduction and tax rates.
Step 3. Claim dependents. Step 3 appears clean and simple, but it is not; however, it is supposed to yield a more accurate withholding amount. Step 3 has some simple multiplication with nice round dollar amounts. Count those (qualifying) kids living at home. Under the age of 17 is $,2000 each. Between 17 and 19 is $500 each. And 19 to 24 is $500 if he or she is a full-time student. There is no age limit for the $500 Other Dependent Credit/Family Credit if your child is permanently and totally disabled.
You may note that this is a dependent only section. But it is not! What is not obvious at all is that all other anticipated credits go here too. All your other credits also get put on that total line. Savers’, Education , Foreign Tax, Residential Energy, all of them.
Pros. Easily provides the benefits of credits with bigger take-home paycheck. There is no requirement to put other credits here or even complete the step.
Cons. Takes away the surprise of how awesome those credits are to the tax return bottom line of how much you still owe or how much you get back. This is information that employers weren’t privy to before and makes the step a privacy concern.
Remember, the more credits put on the W-4, the less withheld from the paycheck. Bigger paychecks mean less refund or more owed at tax time.
Step 4. Other adjustments (optional). Step 4 has three parts and an accompanying, relatively simple, five-line worksheet. We suggest using your prior year return as at least a starting point. 4(a) is Other income; you’ll need Schedule 1, Additional Income and Adjustments to Income. 4(b) is Deductions; you’ll need Schedule A, Itemized Deductions. 4(c) is Extra withholding; kind of like a Christmas Club Savings account. 4(c) probably sounds familiar, but read on. 4(c) is where Line 4 from the Multiple Jobs Worksheet (used in Step 2(b)) goes. See, not so simple.
Pros. Not required to be completed. Worksheet is not filed with W-4 so some privacy is maintained.
Cons. Not very private. Employers will now know how much other income you have that doesn’t come from them and they’ll know your write offs. At the end of this step, they have an idea of your tax return.
Step 5. Sign here – (Under penalties of perjury). Hasn’t changed. And everyone who gets a W-2 has to complete this step.
IF YOU ARE AN EMPLOYER.
All your new hires in 2020 must use the redesigned 2020 Form W-4. You can ask your employees hired before 2020 to submit a new Form W-4, but they don’t have to. Withholding should be computed based on the information from the employee’s most recently submitted Form W-4. If an employee hired prior to 2020 wishes to adjust withholding give them the 2020 Form W-4.
The 2020 Employers Only section allows for reporting of Employer name, address and employer identification number and a box to indicate the date of hire for new employees. This remains similar to what you saw in the 2018 and 2019 versions.
WHAT ELSE SHOULD I KNOW?
You should increase federal withholding if the household has more than one job between the taxpayer and spouse.
You should increase federal withholding if you have other than W-2 income such as rental, business, or gambling income.
Your withholding can be reduced for any credits such as child tax and other dependent credits. Keep in mind this will also lower a refund or increase an amount owed.
If you claim an exemption from withholding, you will need to submit a new Form W-4 by February 16, 2021.
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Our blog is intended for educational and awareness purposes. The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice. Reading our blog does not create a Client/CPA relationship between you and us. The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.
Our blog posts are written using current information and current or proposed rules and regulations. Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire. This is extremely true with most things tax and to a lesser and slower extent, most things accounting. We do not go back and update posted blogs. Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.
