New Form W-4 Aimed at More Accurate Payroll Withholding
But, Of Course, It’s More Complicated to Fill Out
It was a right of passage that new hires did easily for decades – filling out the Form W-4 to provide information to employers about how much tax to withhold from their paychecks each pay period.
Then came the Tax Cuts and Jobs Act (TCJA) of 2017, which changed the way tax liability is calculated, rendering the old W-4 obsolete. A new Form W-4 was released by the IRS in 2020 and its use by employers became mandatory in 2021.
The old W-4 was simple, asking whether an employee was married or single, and how many exemptions they wanted to claim. But the TCJA eliminated exemptions as a tax calculation tool, requiring a major overhaul of the W-4.
The new W-4 asks for more information than the old form and requires more thought when filling it out. It is intended to provide a more accurate framework for tax withholding, ensuring that employees don’t overpay or underpay taxes through payroll withholding and avoiding surprises at the end of the year.
But there were surprises this tax season, as employers have reported that some employees received unexpected tax bills. In most cases, this happened because the W-4 was not filled out properly.
It’s important that employees take their time when filling out the W-4 and utilize the information and worksheets provided by the IRS.
The new W-4 includes five steps:
- Enter Personal Information: Name, address, Social Security number, and filing status.
- Multiple Jobs or Spouse Works: If you work more than one job and/or have a spouse who also works, the form provides a link to online worksheets to help estimate your tax liability and advise on how you should fill in the form. Please note part C, which includes a box to check if there are two (and only two) roughly equal sources of income in the household.
- Claim Dependents: If you earn $200,000 or less ($400,000 or less for married filing jointly), this section allows you to calculate the Child Tax Credit or miscellaneous dependent credits for which you qualify and have them factored into your regular payroll withholding. This means you would receive more net pay throughout the year but would not receive the credits on your tax return at the end of the year. If you prefer to receive the credits on your tax return, you can leave this section blank. Note: If you are married, be sure only you or your spouse claims the dependent credits, not both of you.
- Other Adjustments (optional): This section allows you to request additional withholding to cover tax liability for other income that will not be subject to withholding, such as interest and dividends. You may also request to reduce your withholding because you plan to claim deductions other than the standard deduction. This section also allows you to specify an additional amount of withholding to be taken out with each paycheck. This should be used if you have more than one job or your spouse works.
- Sign Here: The final step is to sign and date the Form W-4.
Employers: Use New W-4
Employers should be using the new Form W-4 for their new hires now, and it is good practice to have all employees fill out a new W-4 every year. This ensures that new addresses, changed marital status, new children, and changing tax liabilities are up to date on the payroll records.
If you were surprised by a tax bill this year, this may indicate that you should review your W-4 and figure out what needs changed. All employees should be urged to check their pay stubs at least a few times a year – certainly by the middle of the year – to see how much is being withheld and determine whether it will be sufficient to cover their tax liability. It’s better to look now than to wait until December when it’s too late.
If you would like to discuss implementation of the new Form W-4 in your company, contact your Adams Brown advisor.