If you are starting a new job or if you want to adjust the amount of income tax withheld from your paycheck, the form that you’ll have to complete and give to your employer will look much different.
Form W-4, which instructs employers how much tax to withhold, got a makeover for 2020 from the IRS.
The redesign reflects changes to the federal tax code from the Tax Cuts and Jobs Act, which took effect last year. The update, the IRS said, “reduces the form’s complexity and increases the transparency and accuracy of the withholding system.”
The design may at first appear daunting, said Pete Isberg, vice president of government affairs with payroll processor ADP, but overall “it’s a lot more straightforward.”
Still, it’s a tax form. The American Payroll Association, an industry group, has warned employers that explaining the new form to workers may be “challenging” and has provided a sample letter to help guide employees.
Accurate paycheck withholding is important because if too little money is deducted, you may face an unwelcome bill — and possibly a penalty — at tax time. Ideally, tax experts say, the amount withheld should roughly match the amount of tax owed.
If too much money is deducted, you may get a fat tax refund. Some people prefer large refunds as a sort of forced savings, said Alice Jacobsohn, senior manager of government relations with the payroll association. But a big refund means you gave the government a no-interest loan.
While the W-4 form had been tweaked over the years, the last major redesign occurred in 1987, in response to the Tax Reform Act of 1986. The old form was deemed too complex, so it was changed to cut down on work sheets and other instructions, said an IRS spokesman, Eric Smith, in an email.
Perhaps the most obvious change is the banishment of “allowances,” which were used to calculate withholding on the previous W-4 form. The more allowances claimed, the less money the employer deducted for taxes.
But allowances were based on personal exemptions — an amount of money you could deduct for yourself and for each of your dependents — and those are unavailable to taxpayers under the new tax law.
Instead, the new form takes workers through five steps that aim to account for all sources of income — including second jobs, a spouse’s job, self-employment income, and even income from things like dividends and interest — to determine the correct withholding amount. Employees also enter information about dependents and tax deductions to fine-tune withholdings.
“It’s like a mini income-tax return,” said Andy Phillips, director of H&R Block’s Tax Institute.
Some workers may be leery about alerting employers to second jobs or sharing details about investment income, said Kelley Long, a consumer financial-education advocate with the American Institute of Certified Public Accountants.
To address those concerns, the form allows workers to use the IRS’ online tax-withholding estimator tool or to complete a printed work sheet to determine how much to withhold. The amount is entered on a separate “extra withholding” line, without details about how it was calculated. (Data from the estimator and the work sheet are not shared with the employer.)
Workers may also calculate the amount and then make separate, estimated tax payments to the IRS, independent of paycheck withholding.
The withholding estimator asks detailed questions, so it’s helpful to have last year’s tax return handy along with your most recent pay stub. Because new employees may not have the documents at work or may want to confer with a spouse, Isberg suggests that employers give new hires extra time to fill out the form — perhaps by letting them take it home.
Alternatively, if new employees are rushed for time, they can simply fill out the first step of the form — which asks for their name, address, Social Security number and filing status — and sign it (Step 5), Isberg said. Then, after reviewing their withholdings at their convenience, they can submit a revised form to make any necessary changes.
Isberg said employees should read the form’s instructions carefully to be sure they understood what information they were being asked to provide.
The IRS offers a series of questions and answers about the revisions. ADP also offers information on its website. And H&R Block offers a graphic comparing the new and old forms.
Here are some questions and answers about the new Form W-4 for 2020:
Q: Does everyone have to complete a new Form W-4?
A: No. You’re required to complete the new form only if you’re hired by a new employer in 2020 or if you want to have more (or less) money withheld from your paycheck — perhaps because of a life change, like getting married or having a baby.
Employers can ask all workers to fill out new forms, the IRS says, but it’s optional. Employers will continue to calculate withholding based on your most recent W-4.
Q: Should I file a new W-4 in 2020 even if I don’t have to?
A: The IRS encourages workers to review their paycheck withholdings each year and file a new W-4, if needed, to be sure enough money is being set aside for taxes. “It’s worth thinking about every year,” said Beth Logan, a federally licensed tax adviser known as an enrolled agent in Chelmsford, Massachusetts.
The IRS recommends that workers complete a “paycheck checkup,” by using the IRS’ online estimator, to see if they need to adjust their withholdings. The mobile-friendly estimator is accurate only for 2019; the IRS expects it to be updated for the 2020 tax year after the first of the year.
Q: What if I have more than one job or my spouse has a job?
A: The IRS says the most accurate way to determine withholding for someone with multiple jobs or a working spouse is to use the IRS estimator.
“People who use it will find that it gives them very specific recommendations on how to fill out the W-4 they give to their employer,” said Smith, of the IRS. “We urge everyone to give it a try.”
But if you are married and file a joint tax return, and you and your spouse have just one job each with similar incomes, you can skip the estimator — and instead check the box in Step 2. (Your spouse also checks the box on his or her own W-4.) This divides the standard deduction and tax brackets equally between the two jobs, according to the IRS.
That option is the easiest, said Isberg of ADP. “Just check the box and you’re good to go.”
If the two salaries are divergent, however, it could mean that more tax than necessary would be withheld from your paycheck, although generally, “you won’t have too little tax withheld,” according to ADP.