The IRS has released an updated Form W-4 for 2020, in response to the unintentional, undesirable, and in many cases severe under-withholding that so many taxpayers were subject to in tax year 2018, leading to large tax bills at tax time in early 2019. Whether the updated W-4 will succeed in reducing/eliminating the under-withholding problem remains to be seen. Call me skeptical. It’s certainly not the form I’d have designed, but that’s neither here nor there.
[Note that as of Jan 2020, the Oregon W-4 still uses the old system of allowances. So … when in doubt, claim “Single” and 0 allowances. Oregon income tax withholding is often on the low side, so it’s best to have more taken out than you think you need to.]
Here are the salient points:
- The new Form W-4 can be found at https://www.irs.gov/pub/irs-pdf/fw4.pdf. If your payroll system is entirely online, the equivalent should already be available there.
- Your current employer may or may not require you to submit a new W-4. They probably won’t, but they might. If you don’t fill out a new form, then you shouldn’t expect to see any changes to your withholding relative to 2019. Your previous elections (status and allowances) will remain in effect.
- The new form does away with the concept of “allowances”. No more claiming zero, one, two, or whatever that even meant. Instead, the withholding is calculated based on an estimate of your income, deductions, dependents, and marital/filing status.
- On the back end, the mechanics are essentially the same: your employer or payroll provider uses the information on your W-4 to determine the IRS-designated withholding percentage. This percentage can vary from paycheck to paycheck depending on whether you’ve earned commissions, bonuses, etc.
My general advice, if you are required to fill out a new W-4, is:
- Quickest shortcut possible: If you want to claim the equivalent of “maximum withholding” under the old W-4 system (that is, claiming “single” status with zero allowances), then you’ll want to check the “Single” box in Step 1(c), enter $8,000 on line 4(a), and sign in Step 5. Skip Steps 2, 3, 4(b) and 4(c). If you choose this option, then it’s very unlikely you’ll end up owing anything at tax time unless you have significant other sources of income.
- If accuracy is very important to you, then you should ignore everything I mention here and instead use the IRS’s own W-4 app (https://www.irs.gov/W4App). However, you should only use the app if you’re really sure that you know what you’re doing! Used correctly, it will tell you exactly how to fill out the W-4 to achieve whatever refund you might want to receive. Used incorrectly, it will … give you an incorrect answer. It’s not easy to know whether you’ve done things correctly or incorrectly!
- If you’d prefer to avoid the app, then you should have a copy of the new W-4 in front of you before you continue; otherwise, none of what follows will make any sense. It’s arranged in four “Steps”. I’ll comment on each in turn. (https://www.irs.gov/pub/irs-pdf/fw4.pdf)
- Step 1: Always elect to be withheld as “Single or married filing separately” unless you are in a married, single-earner household, in which case you can check the “Married filing jointly” box. Don’t use “Head of Household”. (Remember, this is merely a withholding election; if you are in a married, two-earner household, you will still file your tax return jointly, but you want your withholding to be calculated as if you were unmarried. Trust me on this. It’s possible you can get away with only one spouse electing to be withheld as “single”, but it’s easier if both do it, and then make adjustments in Step 4.)
- Steps 2-4: If you completely ignore these steps, that would be the equivalent of claiming two allowances under the old system. So if you want to keep it simple, and you’re not particularly worried about having too much or too little withheld, you can skip from Step 1 straight to the signature block (Step 5) and be done with it. At tax time, you’ll get a refund of any excess withholding, or you’ll have to write a check to the IRS if you’ve ended up under-withheld.
- If you want a level of accuracy somewhere between the high accuracy of the IRS W-4 app, and the low accuracy of skipping Steps 2-4 entirely, then … continue.
- Step 2: I’ll ignore step 2(a), because if you’re using the app, then it will spit out all the answers to all of these steps for you. Avoid Step 2(b); I can’t make heads or tails of it. Step 2(c) will only apply to a very small subset of taxpayers (an individual working two jobs simultaneously at similar pay levels), so I’m going to ignore that one as well. If you’re seriously tempted by steps 2(b) or 2(c), just use 2(a) instead.
- Step 3: If you have dependents under the age of 17, you can complete this step. This will reduce your withholding to account for the child tax credit. In a married, two-earner household, only one spouse should complete Step 3.
- Step 4: In this step, you can make broad adjustments for other income or deductions that you’ll be claiming on your tax return. In a married, two-earner household, either or both spouses can complete Step 4, but don’t double-count any income or deductions. Step 4(a) is where you’d enter an estimate of your income from investments, rentals properties, self-employment, etc. Step 4(b) is going to be easy to mess up, so I’d recommend skipping it and just hoping for a pleasant surprise at tax time. Step 4(c) is good for things like FICA tax on self-employment earnings – typically 10-15% of any self-employment earnings entered on line 4(a). It’s also useful if you want the IRS to hold onto extra money for you so that you can’t spend it until you get your refund.
Hopefully, you’re able to make sense of all of that. … But wait, there’s more!
- If/when you file a new W-4 with your employer, compare your next paystub to a previous one. If your federal withholding rate has changed too much, for reasons that you don’t understand, then you may want to make some adjustments. Honestly, it’s a trial-and-error process, and it’s best to think of it as such. (Don’t think, “Oops, I filled out my W-4 wrong.” Instead, think “Not quite there yet. Need to make another adjustment.“)
- To make adjustments, file a new W-4 with your employer (you can do this whenever you want) but keep everything exactly the same except for Step 4. You can use line 4(a) or 4(c) to increase your withholding, and line 4(b) to decrease your withholding.
- [Starting to get technical here, but in case it helps, the impact to your taxable income of each “allowance” under the old system was about $4,000. So, claiming $4,000 on line 4(b) of the new W-4 is roughly the same as claiming one additional allowance on the old W-4; likewise, claiming $4,000 on line 4(a) would be similar to claiming one fewer allowance under the old system. So if, for example, you want to claim the rough equivalent of zero allowances (“maximum withholding”) under the old W-4 system, you’d want to enter $8,000 on line 4(a), and nothing in Step 2, 3, or Steps 4(b) or 4(c). This is imprecise at best and varies based on your income level, but it should be close enough for most practical purposes.]
- In case it’s not obvious, entering the same number on lines 4(a) and 4(b) will exactly offset itself, resulting in no change. So if you want to have fun and mess with your employer, enter the same very large number on both of those lines. … I’m not being serious, please don’t do that.
- Rinse and repeat until your withholding percentage seems appropriate to you. There should be no limit to the number of times you can adjust your W-4, as long as you’re operating in good faith. The IRS can only give you a hard time if you’re intentionally trying to end up significantly under-withheld.
That’s all I’ve got, until I see how things play out this tax season (2020). I’m guessing there will be some changes to the new W-4 before all is said and done.
Well, one more thing: I can’t generally answer the question “What should I put on my W-4?” in any specific situation without doing a lot of work. There’s simply no way I can make time for this during tax season. So if you really want me to fill out a W-4 for you, it will need to wait until after tax season ends, and then it will involve a long phone call as I walk through the IRS’s W-4 app with you. Expect it to take about an hour, maybe more, maybe less (it really all depends on the circumstances!), and an invoice from me somewhere in the $100-$200 range. I really wish there were a simpler, quicker way for me to do this for you! But if I try to take shortcuts, or make educated guesses, I’m going to end up being wrong as often as I am right, and that just won’t cut it.