The IRS wants love, too. A flurry of changes – some big, some small – have been enacted since 2018 with the stated goal of making taxes easier. One change is the revamped Form W-4, that headache form that all new hires must tackle when they begin a new job so their employers know how much to withhold from their pay in the way of taxes.
The IRS says that the new 2020 Form W-4 “increases the transparency and accuracy of the withholding system.” Most of those old, intimidating worksheets are gone. Completing the form has become more a matter of answering some questions in five steps.
Why Getting It Right Matters
Withholding is mandatory for most employees. What you’re basically doing is paying the IRS as you go along and earn money during the year. Your employer subtracts the money from your pay and remits it to the IRS on your behalf. Determining how much used to be an intricate process, however.
You can be hit with a nasty tax bill at year’s end if you have too little withheld. The flip side is that you’ll have too much withheld so you’ll use the IRS like a savings account – the IRS will kindly hold on to the money for you all year and give it back to you in the form of a refund when you file your return. And no, it won't pay you interest.
Obviously, you want to get this right, and that’s where Form W-4 comes in. It calculates the amount of withholding based on your personal details.
Catching Up With the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act effectively made the old W-4 obsolete when it went into effect in 2018. One big wrinkle was the elimination of personal exemptions from the tax code.
Taxpayers used to be able to subtract $4,050 each from their taxable incomes for themselves, their spouses, and their dependents through 2017, but the TCJA changed that. Unfortunately, the old Form W-4 still calculated withholding based on these personal exemptions, which correlated with how many allowances a worker should claim on Form W-4.
The 2020 Form W-4 no longer includes worksheets for calculating allowances because allowances don’t matter anymore. Instead, it allows taxpayers to simply enter dollar figures based on their personal circumstances. Of course, arriving at those figures requires completing a few extra steps.
If Your Tax Situation is Pretty Simple
All this simplification might be a dream come true if you’re a single taxpayer holding down just one job and you don’t have any dependents. You need only complete two of the five steps on the new form in this case.
Just provide your basic identifying information and your filing status in Step 1, then sign the form in Step 5. That’s it. You’re done. Your employer will calculate your withholding based solely on the current year’s standard deduction and tax rates for your filing status.
How to Fill It Out If Your Situation Isn't Simple
Everyone else will have to tackle some or all of Steps 2, 3 and 4 to make sure their withholding matches their actual tax situation as closely as possible.
Step 2 is for households that enjoy more than one income. Maybe you work two jobs, or you work one job and have a self-employment side gig going on. You might be married and both you and your spouse work. All this additional income means that withholding based solely on your filing status might not be accurate at year’s end. You can find out in one of three ways:
- The IRS provides a Tax Withholding Estimator on its website. This is probably the most foolproof option, particularly if you got things wrong last year so you’re updating your W-4 to make things right. The Estimator will tell you what to do to adjust your withholding on Form W-4 based on the results.
- You can complete the Multiple Jobs Worksheet on page 3 of Form W-4 and enter the resulting amount later in Box 4(c).
Checking Box 2(c) works best when all jobs in question pay about the same.
How to Fill It Out If You Have Dependents
This is another area where you’ll want to coordinate with your spouse if you’re married. You can’t both claim these deductions and credits, so only one of you should enter this information on your W-4. They're effectively split in two and are half the value if you file a joint married return, so claiming them twice on separate Forms W-4 can result in under-withholding.
Read More: Claiming Dependents for Your Taxes
How to Fill It Out If You're Also Self-Employment
Complete Step 4 if you hold down a regular job and make a little extra money on the side, either from self-employment or investments – earnings from which no taxes are withheld. The lack of withholding doesn’t mean this income isn’t taxable. It just means that no employer is going to withhold the taxes for you.
Use the IRS Tax Withholding Estimator to figure out how much additional withholding you want from your paycheck to cover this income. You can then specify an exact amount of extra withholding you’d like your employer to take in Box 4(c) based on the results. Just bear in mind that this is a per-paycheck amount, not a yearly amount.
You can also just check Box 2(c) in this situation to have more withheld from your paychecks to cover the extra income, but this choice might not result in the most accurate withholding.
How to Fill It Out If You’re Claiming Other Deductions
Maybe you’re planning to itemize on your tax return rather than claim the standard deduction, or you're eligible for some above-the-line adjustments to income. You can adjust your withholding for this eventuality, too, in Step 4(b). It’s an easy matter of stating the dollar value of each of those deductions. If they’re more than the standard deduction, your employer can use this number rather than your filing status to calculate your withholding.
Read More: What Can I Claim on My Taxes When Itemizing?
Of course, this requires a bit of prophesying. You won’t know for sure in January how much you'll have in the way of medical expenses at year’s end, but you should be able to pinpoint things like mortgage interest and insurance deductions more closely.
Do not enter your standard deduction here except on the worksheet provided for calculation purposes. That’s already addressed in Step 1 where you entered your filing status.
What to Keep in Mind
Taxpayers who work for the same employer in 2019 and 2020 don’t have to submit a new and improved Form W-4, although they might want to so they can be sure their withholding is as accurate as possible. This is especially the case if they’ve experienced any significant life changes like marriage, the birth of a child, or taking on extra work. Otherwise, their employers can simply continue to base their withholding on the old form.
Of course, you’ll have to complete the 2020 form if you start a new job, either in addition to or instead of your old job. Your new employer will have to base your withholding on the single filing status only, regardless of your life circumstances, if you don’t.
And you can take heart if your head’s spinning with all these steps and boxes, almost as badly as it did when you had to fill out the old Form W-4. This new one really is user-friendly, and it comes with simple, step-by-step guidance and some specific instructions as well.
- IRS: FAQs on the 2020 Form W-4
- MarketWatch: Starting a New Job in 2020? Read This Before You Fill Out the New W-4 Form
- ADP Research Institute: Final IRS 2020 Form W-4 Released
- Society for Human Resource Management: IRS Overhauls Form W-4 for 2020 Employee Withholding
- Thomson Reuters: IRS Issues 2020 Form W-4
- IRS: Form W-4 Employee’s Withholding Certificate
- IRS: Tax Withholding Estimator
- IRS. "FAQs on the 2020 Form W-4." Accessed July 6, 2020.
- SHRM. "IRS Overhauls Form W-4 for 2020 Employee Withholding." Accessed July 6, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.