Changes coming to a key tax form
Revised W4 could baffle new hires, those making adjustments
Starting Wednesday, employees who begin a new job or want to change their federal tax withholding will be confronted with an all new W4 Form.
This is the form that determines how much federal income tax is withheld from an employee’s paycheck based on how the worker filled it out. The revision is designed to reflect changes in the federal Tax Cuts and Jobs Act that took effect in 2018.
Used correctly, it should lead to more accurate withholding for most employees, especially twoearner couples. That should result in fewer big refunds or balances due at tax time.
“The concept is that you will come closer to breaking even,” said Alice Jacobsohn, a senior manager with the American Payroll Association.
Employees can still ask for extra withholding if they like getting a refund (and don’t mind giving Uncle Sam a taxfree loan).
Continuing employees who don’t want to change their withholding don’t have to fill out the new form. For those who want to change their withholding, and new employees, the new W4 is
mandatory starting in 2020 — and likely to cause confusion.
For the first time in decades, employees won’t be asked how many “allowances” they want to claim for each person in the household. It will also ask employees, for the first time, to perform a calculation if they hold a second job or have a working spouse, unless the spouse makes roughly the same amount.
There’s also a new line where employees can voluntarily show a dollar amount of outside income — such as investment or pension income — if they would like to have tax withheld from their paycheck to cover, instead of making quarterly estimated tax payments.
California, which didn’t adopt the major changes in federal law, will continue to use allowances on its state taxwithholding form DE 4. The Employment Development Department will update this form for 2020 “to provide additional clarity to the instruction for employees,” a department spokesman said in an email. That means employees in California (and many others that still use allowances) will have to grapple with the old and new ways of doing things.
Payroll experts are encouraging employers to give new hires more time to fill out the form, or a private space where they can call a spouse or accountant or look up an old tax return if need be.
Before 2018, each allowance an employee claimed on the W4 was tied to the personal exemption, which was a deduction on the federal tax return for each adult and dependent.
People who wanted more tax withheld could claim fewer allowances, and those who wanted less withheld could claim more allowances. Alternatively, employees could use a mystifying IRS worksheet or calculator to estimate their withholding. Most people used trial and error to get their withholding where they wanted it.
The Tax Cuts and Jobs Act eliminated the personal exemption. (To partially compensate, it roughly doubled the standard deduction and doubled the child tax credit.) That turned the allowance into an anachronism.
The IRS planned to overhaul the W4 form for 2018 to eliminate allowances, but didn’t get it done. It did change the W4 instructions and withholding tables to reflect the new law, and encouraged workers to submit a new W4 using the new instructions, but most did not.
When it looked like many people who didn’t adjust their withholding would get hit with an underwithholding penalty for 2018, the IRS waived it for a lot of them. It has not waived the penalty for tax year 2019, even though employers continued to use the old W4 form.
On the new W4 form, employees will first give their name, address, Social Security number and taxfiling status.
In step two, it asks if they hold a second job or have a spouse that works. If they do, and income from the spouse or second job is about the same as theirs, they can simply check the box in 2(c) and move on. If the income from the spouse or second job is much different than their own, they’ll be asked to use a worksheet or online calculator. If this results in the need for extra withholding, they will enter it on line 4(c).
In step three, they will enter information about children younger than 17 and other dependents.
In step four, they will first be asked if they have other income, such as from investments or retirement income, they’d like to have tax withheld from their paycheck to cover. If so, they can enter the amount of other income on line 4(a). If they don’t want their employer to see the amount, they can enter an additional amount of tax they would like withheld to cover it on line 4(c). They should NOT do both.
Alternatively, they can do neither and make quarterly estimated tax payments on this other income.
Next, they will be asked if they expect to have federal tax deductions other than the standard deduction and if so, to complete a worksheet and enter the result on line 4(b). “Employees will want to ensure they enter expected deductions over the standard deduction amount, rather than total deductions,” the payroll processing firm ADP warns on its website under “mistakes to avoid.”
ADP also warns that if an employee “is in a twoearner household and they opt to check the box in Step 2, both spouses should check the box, but only one of them should fill out Step 3 and Step 4 of the form,” if they have children, other income or deductions over the standard deduction.
Single people and couples with no children who earn about the same should have little trouble filling out the new form. Regardless of income, “the more complicated your tax situation, the more complicated this will be,” Jacobsohn said.
The best and simplest way to get the right withholding is to use the new and improved IRS withholding calculator, which debuted this summer. Find it at irs.gov/w4app.
If both spouses work and one starts a new job, the safest thing is for both spouses to fill out a new W4, says Pete Isberg, ADP’s vice president of government affairs.
Employers are “absolutely concerned” about the new form, Jacobsohn said. “Payroll professionals cannot offer tax advice to their employees. They can direct them toward resources.”
For more information on the new W4, see bit.ly/W4help.