The IRS released the Employee’s Withholding Certificate, the 2020 Form W-4 on Dec. 5, with changes implemented to enable precise income-tax withholding simpler for employees. Historically, Form W-4’s title was “Employee’s Withholding Allowance Certificate.” The 2020 Form W-4 removed allowances, so the title has been changed to “Employee’s Withholding Certificate”.
Here are some of the main takeaways for employees
- The new Form W-4 reduces the form’s complexity and increases the transparency and accuracy of the withholding system. While it uses the same underlying information as the old format, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.
- Allowances are no longer used for the redesigned Form W-4. This change is meant to increase transparency, simplicity, and accuracy of the form. In the past, the value of a withholding allowance was tied to the amount of the personal exemption. Due to changes in the law, currently, you cannot claim personal exemptions or dependency exemptions.
- Employees who have furnished Form W-4 in any year before 2020 are not required to furnish a new form merely because of the redesign. Employers will continue to compute withholding based on the information from the employee’s most recently furnished Form W-4.
- All new employees hired as of Jan. 1, 2020, must complete the new form. Current employees are not required to complete a new form but can choose to adjust their withholding based on the new form. Any adjustments made after Jan. 1, 2020, must be made using the new form. Employers can still compute withholding based on information from employees’ most recently submitted Form W-4 if employees choose not to adjust their withholding using the revised form.
- Child Tax Credit– Beginning with Tax Year 2018, you may able to claim the Child Tax Credit if you have a qualifying child under the age of 17 and meet other qualifications. The maximum amount per qualifying child is $2,000. Up to $1,400 of the credit can be refundable for each qualifying child as the Additional Child Tax Credit. A refundable tax credit may give you a refund even if you don’t owe any tax. Your qualifying child must have a Social Security Number issued by the Social Security Administration before the due date of your tax return (including extensions) to be claimed as a qualifying child for the Child Tax Credit or Additional Child Tax Credit.
- Other Dependents who can’t be claimed for the Child Tax Credit may still qualify you for the Credit for Other Dependents. This is a non-refundable tax credit of up to $500 per qualifying person. The qualifying dependent must be a U.S. citizen, U.S. national, or U.S. resident alien. More families may be eligible for the Child Tax Credit or the Credit for Other Dependents. the revised form excludes withholding allowances. Both credits begin to phase out at $200,000 of modified adjusted gross income ($400,000 for married couples filing jointly), compared with 2017 levels of $75,000 for single taxpayers and $110,000 for married couples filing jointly.
The IRS updated the W-4 form to reflect tax code changes introduced by the Tax Cuts and Jobs Act, which took effect in 2018. Unlike the 2019 Form W-4, the revised form excludes withholding allowances, which were tied to the personal exemption amount—$4,050 for 2017—and are now suspended (hence the form’s name change from Employee’s Withholding Allowance Certificate). It also replaces complicated worksheets with more straightforward questions.
The 2020 Form W-4 is presented on a single, full-page, followed by instructions, worksheets, and tables. In place of withholding allowances, the new W-4 includes a process with five possible steps for declaring additional income, so employees can adjust their withholding with varying levels of accuracy, privacy, and ease of use.
The five steps are:
- Step 1. Input personal information.
- Step 2. Specify multiple jobs or if the spouse works.
- Step 3. Claim dependents.
- Step 4. Make other adjustments including for:
1)Step 4(a): Investment and retirement income.
2) Step 4(b): Deductions other than the standard deduction.
3) Step 4(c): Any extra tax withholding per pay period.
- Step 5. Sign the form.
You should generally increase your withholding if:
- you hold more than one job at a time or you and your spouse both have jobs (Step 2) or
- you have income from sources other than jobs or self-employment that is not subject to withholding (Step 4(a)).
If you do not make adjustments to your withholding for these situations, you will very likely owe additional tax when filing your tax return, and you may owe penalties. For income from sources other than jobs, you can pay the estimated tax instead of having extra withholding.
You should generally decrease your withholding if:
- you are eligible for income tax credits such as the child tax credit or credit for other dependents (Step 3), and/or
- you are eligible for deductions other than the basic standard deduction, such as itemized deductions, the deduction for IRA contributions, or the deduction for student loan interest (Step 4(b)).
The redesigned Form W-4 makes it easier for you to have your withholding match your tax liability. But if you prefer to have more tax than necessary withheld from each paycheck, you will get that money back as a refund when you file your tax return (keep in mind though you do not earn interest on the amount you overpay). The simplest way to increase your withholding is to enter in Step 4(c) the additional amount you would like your employer to withhold from each paycheck. Note, even if you don’t have any income tax withheld from your wages, you may get a refund if you are eligible for tax credits such as the Earned Income Credit, the Additional Child Tax Credit, or American Opportunity Credit.
Tax rates increase as income rises, and only one standard deduction can be claimed on each tax return, regardless of the number of jobs. Therefore, if you have more than one job at a time or are married filing jointly and both you and your spouse work, more money should usually be withheld from the combined pay for all the jobs than would be withheld if each job was considered by itself. Adjustments to your withholding must be made to avoid owing additional tax, and potential penalties when you file your tax return. All of this has been true for many years; it did not change with the recent tax law changes. The old Form W-4 accounted for multiple jobs using detailed instructions and worksheets that many employees may have overlooked. Step 2 of the redesigned Form W-4 lists three different options you should choose from to make the necessary withholding adjustments. Note that, to be accurate, you should furnish a 2020 Form W-4 for all of these jobs.
IRS Tax Estimator
The IRS encourages everyone to use the Tax Withholding Estimator to perform a “paycheck checkup.” This will help you make sure you have the right amount of tax withheld from your paycheck. The IRS Tax estimator is mobile friendly and uses uncomplicated language. It is designed to help employees estimate any additional withholding. It helps you more easily account for higher marginal tax brackets where both spouses work, additional income, and credits and deductions, and predict a tax refund or amount owed, as well as align their withholding as closely as possible to their actual tax obligation.
There are several reasons to check your withholding:
- Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.
- At the same time, you may prefer to have less tax withheld upfront, so you receive more in your paychecks and get a smaller refund at tax time.