The New, Simplified Form W-4

In December 2019, the Internal Revenue Service finalized a new Form W-4 (Employee’s Withholding Certificate).

Form W-4 is required to be completed by employees to provide employers the required tax withholding on compensation earned by the employee. The form was redesigned with the intention to reduce complexity and provide better accuracy in regard to taxpayer’s withholdings. With one year complete under the Tax Cuts and Jobs Act (“TCJA”), this form should allow employees to better estimate their tax withholdings to be more accurately aligned to their expected tax liability, which was subject to criticism by taxpayers who received smaller refunds than expected during the 2018 tax filing season under TCJA.

Although a new form has been issued, not all employees are required to complete the Form W-4. Only employees receiving compensation for the first time from an employer after 2019 (i.e. 2020) are required to complete the form. Should a new employee not complete and return the Form W-4 before their first paycheck, the employee should be treated as a single filer with no other adjustments. Therefore, tax withholdings will be taken into account as if the employee was single and eligible for a standard deduction.

Any employee who has previously completed a Form W-4 is not required to complete the new form until such time the employee wishes to adjust their withholding. Employers may request existing employees to complete the new Form W-4, but those employees are not required to complete the form and employers are required to withhold amounts consistent based on the forms previously provided.

The new Form W-4 has removed the withholding allowances which was calculated on the previous form. The allowances were typically tied to personal exemptions which, under the new tax law, cannot be claimed and are, therefore, no longer relevant for the form.

The new Form W-4 is segregated into 5 steps. As indicated above, the form was introduced to simplify the process. Only Step 1 (Personal Information) and Step 5 (Signature) technically require completion. Selecting your filing status (single or married filing separately, married filing joint, head of household) in Step 1 and signing the form will set up tax withholdings under the assumption of the taxpayer claiming the standard deduction for the filing status selected.

Within Step 2 of the new Form W-4, taxpayers can elect to perform calculations based on the taxpayer having multiple jobs or in the situation where the taxpayer’s spouse works. The form offers three methods of calculating the appropriate amount of withholdings:

• The first is the tax withholding estimator. This should be used if you expect to work only part of the year, have self-employment income or want the most accurate withholding for multiple jobs. This site guides you through voluminous questions, similar to providing information for your tax return to calculate an estimate of the proper tax withholding based on the information provided. Upon completion you can even print a pre-filled form, which includes an amount of extra withholding as necessary on step 4c of the form.
• The second method utilizes a multiple jobs worksheet. This worksheet utilizes a table where you are provided a tax withholding amount at the intersection of higher paying job axis and lower paying job axis. The amount from this table is inserted into the worksheet and the amount is divided by the number of pay periods during the year. The amount is included on step 4c of the form.
• Lastly, the third option is a checkbox and should only be used if you have two jobs that have similar pay. The same should be done on the W-4 filing for your other job. This option is very broad and should be used cautiously in determining appropriate tax withholding.

Step 3 allows you to adjust your withholdings for expected claimed dependents on your tax return, based on meeting the required income threshold prior to phase out of the child tax credit. Qualifying children (less than 17 years of age) reduce the amount by $2,000 per dependent and any other dependents amount to a reduction of $500.

Step 4 provides the employee opportunity to make adjustments to tax withholding for other income, deductions or extra withholding. Within this step (4a), employees elect to include amounts of other income that typically are not subject to tax withholding (interest, dividends, retirement income). By including these amounts, tax will be withheld from payroll compensation to account for this other income. This should not include other jobs or self-employment income as those are accounted for in Step 2. If the taxpayer can claim deductions in excess of the standard deduction for their filing status, the taxpayer can adjust their withholding for the additional deductions expected to be claimed on the tax return. The instructions to the form include a deductions worksheet to calculate any additional deduction.

Simplification of the form may be the case for taxpayers eligible for the standard deduction. However, for those with more in-depth returns, the completion of Form W-4 is much more complicated. One might even reach the point where they essentially complete a preliminary calculation of their tax return. But in the end you will get a more accurate tax withholding estimate, which is presumably the reason the form is completed in the first place.