The IRS’s new W-4 and what you need to know about it
You may not have considered your W-4 since that first day of work, the day you filled out page after page of paperwork, but your W-4 is actually an important piece of paper that can mean the difference between tax penalties or a big tax return each year when you file your yearly taxes. The IRS recently made changes to the W-4 form, which means changes in how federal taxes are withheld. Here is everything you need to know about the new W-4 for 2020 and going forward.
What is the W-4?
The W-4 is a form you complete when beginning a new job. The information you provide on this form determines the amount of federal tax your employer withholds from your paycheck each pay period. It is important for this form to be filled out correctly. If you have too little withheld from your paycheck, you will likely end up owing money when you complete your tax return. You could also incur a penalty if you have paid too little in taxes. If you have too much withheld, you will likely be due a refund when filing your taxes. While some may treat this as a bonus check, it actually benefits you most to have your payment or refund as close to $0 when completing your yearly taxes. This way, your money can be at work for you the entire year.
How did the W-4 change?
Previously, everyone filling out aW-4 listed a number of withholding allowances. You wrote down a number from zero to four or more depending on how many dependents you had. Most people claimed one for themselves and one additional point for each dependent. This determined how much money was withheld from your paycheck and sent to the IRS. On the new form, this is no longer the case. There is no longer a line for claiming yourself or dependents.
Why did the IRS change the W-4?
The IRS recently redesigned the W-4 form. The new W-4 uses more straightforward questions. With these more transparent questions, the IRS hopes to make the form easier for individuals to understand and therefore increase the likelihood that each person will have correct withholdings.
How does this impact me?
The redesign in form may have you concerned about your own workplace paperwork. Rest assured. There is no reason to fill out a new W-4 merely because the design has changed. Your employer can continue to calculate your withholdings based on any W-4 you filled out prior to 2020. There is no need to fill out a new W-4 every year.
However, filling out a new W-4 may be a good idea for many people. Consider completing a new W-4 every year and when your circumstances change. Changing circumstances could be personal circumstances, such as getting married or having a child, or financial circumstances, such as receiving a raise or quitting a second job.
How to fill out the new W-4
There is no need to fill out the entire form. In its entirety, the form has five steps. The only steps you need to fill out are step one (your personal information and withholding) and five (your signature). Steps two through four should only be filled out if those specific circumstances apply to you. If you choose to only complete sections one and five, your taxes will be calculated using only the standard deductions.
Step 2: Step two targets two different groups of people. First, individuals who hold multiple jobs at the same time and second individuals with a working spouse. As income rises, tax rates increase. Therefore, three jobs worked by one couple can owe more than those three jobs worked by three different individuals. By completing step 2, you increase the amount withheld from your paycheck, making up for this increase in tax rates. Doing so may help you avoid owing taxes at the end of the year and/or incurring a penalty. If you and your spouse both work, only one of you should complete step 2. Your calculations will be most accurate if the person with the higher paying job completes step two on their W-4.
Step 3: Step three helps calculate any deductions that may be due you for children or other dependents. It helps calculate child tax credit and other tax credits, such as those from paying student loan interest or contributing to personal IRAs. When you complete this step, you decrease your withholdings. More money comes to you in each of your paychecks. Including credits in step three will increase your paycheck and decrease the refund you would be due after completing your return.
Step 4: Filling out step four will increase or decrease the amount of withholdings from your paycheck. You can increase your withholdings if you anticipate paying taxes on any income that does not withhold for you, such as interest, dividends, or retirement income. (This step is not for those receiving income for independent contract work.) In step four you can also claim other deductions and therefore decrease the withholdings from your paycheck. You can also list any additional amount you would like to have withheld from your paycheck in step four. By filling out step four, you may eliminate your need to pay estimated taxes each quarter.
If these or other unique situations apply to you and you do not want to fill out steps two through four of the form, you can use the online estimator provided by the IRS. Not only will this give you an easier time of calculating your withholdings, it is also more accurate.
Ultimately, the choice is yours whether to fill out a new W-4 for 2020. By doing so, you can ensure more accurate withholdings from your paycheck and therefore make your money work better for you throughout the entirety of 2020. But rest assured, your old W-4 will do just fine if you don’t have the desire or the need to fill out a new one. Contact us today for assistance with managing your taxes or accounting.
https://www.irs.gov/forms-pubs/about-form-w-4
https://www.irs.gov/pub/irs-pdf/fW-4.pdf