Were you one of those folks who didn’t have enough taxes withheld from their paychecks last year to cover the taxes they owed? To help avoid this problem going forward, the IRS changed the way to determine how much federal income tax an employer must withhold from an employee’s paycheck. As part of the fix, there’s a new Form W-4 for employees to use starting in 2020. It’s very different from the old form, here’s what you need to know to tackle it with confidence no matter what side of the paycheck you are on.
The biggest change is that you don’t use the W-4 form to claim withholding “allowances” anymore. Withholding allowances have been the basis of payroll withholding forever so the change is likely to cause some confusion. With the old W-4, if you claimed more allowances, less tax was withheld, and if you claimed fewer allowances, more tax was withheld. The value of an allowance was based in part on the amount of your personal exemptions. So, when the 2017 tax reform law got rid of personal exemptions, something had to change.
Instead of claiming allowances, workers now use the W-4 form to provide their employer with the information needed to determine the amount of income tax to withhold. You’ll be asked to include things like your expected filing status, family income from other jobs, number of dependents, and tax deductions you plan to claim. Once your employer has the necessary information, the company will take it from there and do the necessary calculations, or their payroll provider will automatically calculate it.
Workers won’t be required to file a new W-4 form with their employer in 2020—but may want to do it anyway. If you are happy with your current withholding, you can just leave the 2019 or prior Form W-4 in effect with the employer indefinitely. Employers can ask their current employees to submit a new form in 2020, but any employee with a pre-2020 W-4 on file could just say no. But should you start a new job in 2020, you’ll have no choice but to complete a new W-4 form. There’s no way around that requirement.
You’ll also have to file a new W-4 form if you want to adjust the amount of tax your current employer withholds from your paycheck, for example if you got a nice raise! You will also want to make adjustments if you have a major change in your life, such as getting married, having a child, or buying a home. You want your annual withholding and your tax liability for the year to be close, so that you don’t owe a lot or get back a lot when you file your return. A large refund just means you gave the IRS an interest-free loan.
- The new W-4 form is super simple if you only have one job and your taxes are easy: you’re not filing a joint return with a spouse who works, you don’t have dependents, you’re not itemizing or claiming deductions other than the standard deduction, you’re not claiming tax credits, and you don’t have non-employment income. In that case all you have to do is provide your name, address, Social Security number and filing status, and then sign and date the form.
- If your taxes are complicated, you’ll have to dig up information about your spouse’s income, your dependents, tax credits, and the deductions you expect to claim. New hires will probably have to take the new form home to fill out, instead of turning it in right away on their first day of work.
- Having multiple jobs or a spouse who works can affect the amount of tax withheld from your wages. Tax rates increase as income rises, and only one standard deduction can be claimed on each tax return. If you have more than one job, or file a joint return with a working spouse, more money should be withheld from the combined pay for all the jobs rather than each job by itself. Adjust your withholding to avoid owing additional tax, and perhaps penalties, when you file your tax return. The old W-4 form accounted for multiple jobs and two-earner families using detailed instructions and worksheets. However, the new form is more open and straightforward about factoring in additional jobs and working spouses. Step 2 of the new Form W-4 lists three different options you can choose from to make the necessary withholding adjustments. We recommend completing a 2020 W-4 for all your jobs to get the most accurate withholding for your expected tax liability.
- It’s easier to adjust your withholding to account for tax credits and deductions. There are clear lines on the revised form to add these amounts. Including credits and deductions on the form will decrease the amount of tax withheld, which increases the amount of your paycheck and reduces any refund you may get when you file your tax return. Workers can factor in the child tax credit and the credit for other dependents in Step 3 of the new form. You can also include estimates for other tax credits in Step 3, such as education tax credits or the foreign tax credit. For deductions, it’s important to note that you should only enter deductions other than the basic standard deduction on Line 4(b). So, you can include itemized deductions on this line. If you take the standard deduction, you can also include other deductions, such as those for student loan interest and IRAs. However, do not include the standard deduction amount itself. If you have multiple jobs or a working spouse, complete Step 3 and Line 4(b) on only one W-4 form. To get the most accurate withholding, it should be the form for the highest paying job.
- Income from self-employment and a side job as an independent contractor are now considered. You can use the new W-4 form to have taxes taken out of your regular job’s paycheck to cover your side job, instead of making estimated tax payments for your second job. You can also pay self-employment taxes through withholding from your regular-job wages. Don’t include self-employment income as “other income” on Line 4(a), though. That line is for income that isn’t from a job, such as interest, dividends and retirement income.
- You can still claim an exemption from withholding, but there isn’t a special line for this. Instead, if you qualify for an exemption, you can claim it by writing “Exempt” in the space below Line 4(c). You also have to provide your name, address, Social Security number and signature. You qualify for an exemption in 2020 if (1) you had no federal income tax liability in 2019, and (2) you expect to have no federal income tax liability because total expected income for 2020 is less than the standard deduction amount for your filing status. Keep in mind that if you have no income tax withheld from your paycheck and you owe taxes when you file your return, you might be hit with an underpayment penalty. If you were exempt in 2019 and want to reclaim your exemption for 2020, you need to submit a new Form W-4 by February 17, 2020.
CONTACT US: Please call your Fuoco Group accountant to ask questions, or need information from last year’s tax return for yourself or your spouse. You’ll need to know what your total deductions were last year, if you still qualify for certain tax credits, how much non-wage income was reported last year, and other tax-related things. We’re available to take your questions toll free at 855-534-2727.
