The Federal government just reformatted the W-4 form for 2020 with the intention of making it easier. The primary difference is that you don’t use withholding allowances anymore, but dollar amounts when accounting for your dependents. The IRS website states:
The new design 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 design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.
It’s new and different and we’d like to run over a few key elements to help you better understand what you’re supposed to be doing. We are also working on the formatting on our end to make the process as easy for you as possible.
New employees are required to use the redesigned W-4 form, but current employees (who were hired before 2020) are not required to submit a new form because of the redesign. Though the IRS does encourage them to do a “paycheck checkup” using the Tax Withholding Estimator provided on the IRS website and then adjust their withholdings using the redesigned W-4 from if necessary.
The new W-4 form is divided into 5 steps.
The only two steps required for all employees are Step 1, where you enter personal information like your name and filing status, and Step 5, where you sign the form. Complete Steps 2 - 4 only if they apply to you. Doing so will make your withholding more accurately match your liability.
If you’re single with one job, the new form is a piece of cake. If you are married, have more than one job, dependents, etc, it gets a little more complicated for steps 2-4, but they are optional. The overall goal for steps 2-4 is to get you to zero out at the end of the year for your taxes. Obviously, if you have dependents and other deductions or credits, you’ll likely end up on the positives regardless of these steps. Our lovely government has provided us with an Income Tax Withholding Estimator tool to help us understand where we stand and how to adjust line 4c so we are less likely to owe taxes at the end of the year.
In step 2, you’ll notice that you are strongly encouraged to account for any other jobs you have. This has always been recommended on the W-4 forms, but most people just over-looked it.
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.
Under Step 2, you have three options:
(a) Use the estimator at www.irs.gov/W4App for most accurate withholding for this step (and Steps 3–4); or
(b) Use the Multiple Jobs Worksheet on page 3 and enter the result in Step 4(c) below for roughly accurate withholding; or
(c) If there are only two jobs total, you may check this box. Do the same on Form W-4 for the other job. This option is accurate for jobs with similar pay; otherwise, more tax than necessary may be withheld...
You’ll notice that option b isn’t listed on the Topsheet app when filling out the W-4 form because it is not a paper form. If you only have a total of 2 jobs (yourself or between you and your spouse), click the toggle switch. If you have more than 2 jobs, follow the link to the Tax Withholding Estimator and follow the instructions there. It takes about 2-3 minutes to complete the steps to get the most accurate withholding for step 4c.
Step 3, claiming dependents, is rather self-explanatory. In the past, you would claim your dependents merely by writing the number of dependents you have under the age of 17 and then of those 18 years or older. Now, they want math. Thankfully, it’s simple math.
Multiply the number of dependents under age 17 by $2000 to get your first number.
For the second number, multiply the number of dependents over the age of 17 by $500.
Then add those two numbers to get your total.
Under Step 4 you can opt to factor in other adjustments. The options are as follows:
(a) Other income (not from jobs). If you want tax withheld for other income you expect this year that won’t have withholding, enter the amount of other income here. This may include interest, dividends, and retirement income.
(b) Deductions. If you expect to claim deductions other than the standard deduction and want to reduce your withholding, use the Deductions Worksheet on page 3 and enter the result here. View the itemized worksheet here.
(c) Extra withholding. Enter any additional tax you want to withhold each pay period.
For line 4c, this is where the Tax Withholding Estimator would come in handy. If, when you get to the end of the questionnaire, you discover that you are in the negatives, you can adjust your withholding to ensure you come out ahead during tax season.
Sign and date your document.
Phew! You did it!