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Understanding the New W-4 Form

Posted by Alita Stratton, CPA on Jan 27, 2020 9:52:00 AM

Courtesy of the IRS, business owners and their employees are getting acquainted with the new Form W-4, Employee’s Withholding Certificate. All new employees hired Jan. 1, 2020 and after must complete the new W-4 as well as all employees making adjustments to their withholdings. The new form, necessitated by the Tax Cuts and Jobs Act of 2017, aims to reduce complexity and provide greater accuracy and privacy for employees while offering greater efficiency for employers and payroll managers.

Key W-4 Changes

There are a number of changes to note, including new ways to calculate federal tax withholding, an elimination of withholding allowances and a new way to claim an exemption for withholding exemption. Keep in mind that the TCJA eliminated personal exemptions that were tied to an employee’s allowances. The standard deduction and child care credit were increased to replace exemptions.

The new form simplifies the way employees account for income from all sources, such as investments, their spouse’s income and any income from additional employment. It is meant to protect employees’ privacy regarding other sources of income, deductions and credits while still granting a simple way to make adjustments for the appropriate amount of withholding.

There is a new five-step process—some employees will only need to complete steps 2-4 while others will be required to complete all five steps as follows:

  • Step 1: Enter personal information, including name, address, Social Security number, and tax filing status.
  • Step 2: Make calculations for multiple jobs or a spouse’s income. The employee has several ways to make these calculations, including using the IRS estimator, a worksheet included with the form or, if the employee holds two jobs of similar pay, checking the box on the form.
  • Step 3: Claim the number of dependents if annual income is $200,000 or less ($400,000 or less if married and filing jointly).
  • Step 4:  Make other adjustments for investment and retirement income, deductions other than the standard deduction, and any extra withholding per pay period. Employees who write “exempt” below Step 4(c) will have no federal income tax withheld from their paychecks except in the case of certain supplemental pay.
  • Step 5: Sign and date the form.

While some employees may want to increase withholding if they expect additional income, others may want to decrease it if they qualify for income tax credits or plan to take deductions for student loan interest.

IRS Resources for Employers and Employees

To help employees and their employers understand the new form, the IRS offers a number of resources. First, an Updated IRS Tax Estimator may be helpful to employees with changes in marital status, number of dependents or retirement and investment income in 2020. The estimator is also useful for those who were surprised with an unexpected or large tax bill or penalty from their 2018 returns.

Other resources include:

Do you have questions about this blog or other tax and accounting services topics? Please contact Alita Stratton at 972-818-5300.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Business, Form W-4, Withholding Taxes