The W-4 Got a Makeover – Everything You Should Know About this IRS Diva
One of the most universal, widely used and known tax forms just got a facelift for 2020 – the W-4. For a quick refresh, the W-4 is an IRS form you submit to your employer when you first start working. It outlines what amount of money should be withheld from your paycheck each pay period. The goal with your W-4 is to estimate your tax liability as accurately as possible and be paying into taxes every pay period. Simply put, if you estimate accurately you don’t get money or owe money once you file your tax return at the end of the year. If you underestimate than you owe money and if you overestimate you get a refund. This is straightforward if your only tax variable is income from your employer, but it can get much more complex.
Why the change?
We’ve been using W-4s forever – so why the sudden makeover? The change in the form was necessary to reflect a change in regulations. Now, you are no longer permitted to claim personal and dependency exemptions which were asked about in the W-4. Because of this, the W-4 needed an update or it would be asking people about exemptions that are no longer a thing.
What can you expect in the new W-4?
To be honest, without these factors the W-4 has been simplified. You can now fill it out in five steps:
Step 1: Enter your name and filing status
If you don’t want to mess with your withholdings for any reason you can skip to Step 5 and sign the form, pretty easy.
Step 2: Increase your withholding due to income from other jobs
Here is where you can offset money owed from another job if you anticipate having additional income that isn’t taxed to the necessary extent.
Step 3: Decrease your withholding due to annual credits
If you know you’ll get annual credits that offset your tax liability, there is no reason to give the government your money to hold onto for a year only to give it back.
Step 4: Increase or decrease your withholding due to other income or deductions
Here is a catch-all if you think you have a different reason to owe more or less in taxes, you can indicate an increase or decrease in your withholding here.
Step 5: Sign the form
My employer hasn’t brought this up to me – how come?
If you haven’t changed jobs, you don’t need to submit a new W-4 just because the form changed. Your employer will still be able to use your existing W-4 to estimate withholdings. You’ll only see this redesigned form if you are a new employee as of 2020 or if you would like to change your withholdings and ask your employer to submit a new form.
I filled out the new W-4… now what?
Technically speaking, you’re good! But for practical reasons we recommend keeping an eye on your paystubs for at least a few pay cycles. Any time there’s a change, it’s always a little rocky at first. It’s wise to double-check your withholding on your paystubs to see if it makes sense for what you expect to see. But how do you know? To figure it out, you want to take your withholdings divided by your taxable wages to get the percentage. Be sure to identify or calculate the taxable wages. Things like 401k and health insurance are not taxable for this purpose. That percentage should be close to your effective tax rate to break even against your tax liability. Your effective tax rate is the actual percentage you end up paying into taxes after you take deductions and credits into account. For example, based on your income you may be in a 22% tax bracket, but deductions and credits offset some of that amount and you end up actually paying 14% of your income not 22%. That 14% would be your effective tax rate.
Withholdings/Wages = Effective Tax Wage (Tax Bracket Estimated Liability – Credits & Deductions)
That’s it! If you didn’t change jobs, don’t worry about it. If you did change jobs in 2020, still don’t stress just keep an eye on your payment records to see if everything looks right. All in all, this shouldn’t be an overly complex change. If you’d like to take a deeper dive into the details you can take a look at the IRS publication.
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