Why you should care about the new W-4 tax form
If you are starting a new job this year or just want to update your tax information with your employer, some of the documents will be different. Very different.
The IRS has introduced a new Form W-4 that is to be used by all employers in 2020 to better accommodate recent changes in tax law.
The form redesign is the biggest in decades and makes a once-fast exercise a little more complex. In turn, according to the IRS, this will give more accurate results. This is all the more important given that the new tax law caused surprises for some people last year, in part because of insufficient withholding taxes.
The new form is therefore worth the detour, whatever the duration of your work. The more precise your W-4, the more precise your deductions.
Withhold too little and you will owe money at tax time and you may face a penalty. Withhold too much and you might be entitled to a refund meaning you missed that money all year. Ideally, you should break even.
What is different?
Say goodbye to allowances, the backbone of the old W-4.
Employees used to answer a series of questions to arrive at a number of “allowances”. The allowances were based on personal exemptions – essentially the amount of income exempt from tax based on the number of dependents of the employee. But the new tax law removed personal exemptions, so the IRS had to change its approach.
The form now collects information on all household income of an employee, as well as dependents, to calculate the amount to be withheld.
The form has five steps.
Steps 1 and 5 are mandatory – fill in your personal information at the top and sign at the bottom.
For some people, that will be it. The other steps are optional but can help a taxpayer get more accurate results, said Alice Jacobsohn, senior director of government relations for the American Payroll Assn.
Step 2 asks employees to provide information on all income in their household. This applies if the employee has more than one job or if both spouses work and file taxes jointly.
Employees can use an online calculator or spreadsheet to determine the exact amount, or they can simply check a box if the pay for both jobs is roughly equal. Payroll company ADP warns here of a potential misstep: If you have two jobs or are in a two-earner household and check this box, you need to do it on W-4 for both jobs. But complete steps 3 and 4 on a single W-4 to make sure the correct amount is withheld.
If an employee doesn’t want to disclose a second job or share a spouse’s income information, there are workarounds. The easiest way is to use the IRS withholding tax estimator to determine how much your household has to withhold and enter that total lower on the form.
Step 3 is for claiming dependents, usually those under the age of 17 who live with you more than half the year. You will need to complete an additional worksheet if you have other types of dependents to claim.
And step 4 is where you can make adjustments for other income, deductions, or optional deductions. This includes reporting other forms of income such as dividends or withdrawals from retirement accounts. There is also an option to enter a fixed amount of extra money to hold onto, including those who just want to make sure they have a large refund.
“While the updated form may initially cause some confusion for employees, these important changes will ultimately simplify the ability to set and adjust deductions to achieve desired results,” said Pete Isberg, vice-president. president of government affairs at ADP.
Who needs it?
Not everyone needs to complete the new form.
Typically, only new hires are asked to complete a W-4. But anyone who wants to update their information with their employer will have to use it, and experts say many of us should.
Ideally, people update their withholding tax information after major life events, such as marriage, divorce, or the birth of a child. Additionally, anyone who was unhappy with their results at the time of filing last year should consider updating their documents.
A number of people were surprised last year to see a smaller refund, no refund, or to find they owed the IRS money at tax time. This was in part due to inaccurate deductions. After the new tax law was passed, the IRS updated its withholding tables and urged taxpayers to update their W-4s as needed, but few did.
Employees who are happy with the amount of taxes withheld from their pay have nothing to do.
Where to get help
If you are confused, check out the IRS website. It has a useful Q&A on the new form. The IRS Deduction Estimator is especially useful because it guides employees through the process – something new and existing workers should consider.
Your human resources or payroll department can point you to useful information, but cannot advise you. If you need additional help, consult a tax professional.
“Maybe at first it’s going to be difficult for people because it’s a change,” Jacobsohn said. “But I think over time it will make it easier for people.”
Skidmore Sell writes for The Associated Press.