The New Form W-4
The finished Form W-4 redesign incorporates new withholding tables and uses more of the taxpayer’s information to determine an accurate withholding amount.
Late last year the IRS unveiled the final version of a new, redesigned Form W-4, Employee’s Withholding Certificate. Previous versions of the form utilized an “allowance” system designed to work with the taxpayer’s expected exemptions and other factors. Since the TCJA eliminates personal and dependent exemptions through 2025, the new form is designed to more accurately gauge the correct withholding and, ideally, avoid large balances due.
The new withholding Form W-4
The new form is divided into five sections or steps as follows:
Step 1 for personal information
Here the employee enters name, address, SSN, and filing status. The filing status choices are:
- single or married filing separately (MFS)
- married filing jointly (MFJ) or qualifying widow(er) (QW)
- head of household (HoH)
Employees are advised to check the HoH box only if they are unmarried and pay more than half the cost of keeping up a home for themselves and a qualifying dependent.
Step 2 for multiple jobs or when both spouses are employees
Employees who have two or more jobs and/or are filing jointly with a working spouse should take one of these three actions:
- Use the IRS’s Tax Withholding Estimator (discussed later) to determine the withholding for this step, or
- Use the Multiple Jobs Worksheet accompanying Form W-4 to determine additional withholding for this step and enter the result in box 4(c), or
- Check box 2(c).
If only two jobs are involved, especially if they have similar pay, the employee can simply check box 2(c). The box should also be checked for the other job’s Form W-4. For more complicated situations, one of the other two methods is preferable.
Step 3 for information related to dependents
Employees who expect to have income of no more than $200,000 ($400,000 for joint filers) should complete this section in order to adjust withholding for dependent-related tax benefits. They are instructed to multiply the number of qualifying children under 17 by $2,000 and the number of other dependents by $500 and add the result on line 3.
In addition to the child tax credit and credit for other dependents, employees may include other credit amounts on line 3, such as education credits and the foreign tax credit.
Caution: Be sure to avoid duplication in cases where there are multiple jobs or where both spouses work. Because Step 3 results in decreased withholding because of dependent-related credits or other credits, Step 3 should only be completed on Form W-4 for one job. Withholding will generally be the most accurate by completing Step 3 for the highest paying job. Leave Step 3 blank for other jobs.
Step 4 for other withholding adjustments
This step should be completed if applicable. For example, an employee who has checked box 2(c) for a working spouse, completed Step 3, expects to claim the standard deduction, and who has no other income does not have to complete Step 4.
In general, Step 4 adjustments should be made on the W-4 for the highest paying job. However, if an adjustment pertains to one spouse (an IRA contribution for example), the adjustment should be made on that spouse’s W-4. In any case, dual-income spouses and taxpayers with multiple jobs should coordinate their withholding to ensure that adjustments are made on only one W-4.Employees may take a few different actions for this step:
- Employees with additional “non-job” income should enter the amount on line 4(a). The income may be from investments, retirement distributions, or any type of income that is subject to tax and for which there will be no withholding. This step will result in additional withholding and should be completed on one job’s Form W-4.
- Employees who expect to have above-the-line deductions (such as student loan interest) and/or expect to itemize deductions should complete the Deductions Worksheet and enter the result on line 4(b). This step results in reduced withholding and should be completed on only one job’s Form W-4.
- The IRS has noted that employees may have downloaded older (pre-December 31) versions of the deductions worksheet that call for a 10%, rather than the 7.5% floor for medical expense deductions. It is not necessary to get the new worksheet or submit a new W-4.
- Line 4(c), as noted above, is for an extra withholding amount per pay-period. It may be used by itself or in conjunction with other steps, such as itemized deductions (Step 4b) or dependent-related credits (Step 3).
Example 1. Married taxpayers both work and have similar wage income. They have two children under 17 and no additional income or deductions. Box 2(c) should be checked on both spouse’s W-4s; Step 3 should be completed, but for only one of their W-4s. Alternatively, they could each complete Step 3 for one child each.
Example 2. A single taxpayer with no children has two jobs with similar income and income from multiple other sources; the taxpayer also expects to itemize deductions. In this situation, the taxpayer may check Box 2(c), enter the additional income in box 4(a) and use the Deductions Worksheet to determine the amount for box 4(b). Box 2(c) should be checked on both job’s W-4s. The box 4 steps should be completed for one job.
As in earlier years, employees may claim exemption from withholding if they had no income tax liability in 2019 and expect to have none in 2020. To claim exemption, the employee should complete Steps 1a and 1b (name and SSN), write “exempt” in the space under Step 4(c), and sign the form. An exemption certificate is valid for only one year. A new certificate must be completed by February 16, 2021 if the employee is claiming exemption from withholding next year.
Step 5 for signature
The employee must sign and date the form. Note that the employee is signing under penalty of perjury that the certificate is true, correct, and complete to the best of the employee’s knowledge.
The W-4 calculator
IRS’s Tax Withholding Estimator referred to earlier is a robust tool that taxpayers can use instead of worksheets. Taxpayers are prompted to enter complete information about jobs, other income, dependents, deductions, etc. In example 2, the taxpayer could enter all information in the estimator which will return an amount to enter in Step 4(c). In that case, the taxpayer would not check box 2(c) and would not have to complete worksheets or enter amounts in Steps 4(a) or 4(b). As noted in instructions, taxpayers may also prefer using the estimator rather than entering information about other jobs or specific income amounts.
New IRS Pub. 15-T, Federal Income Tax Withholding Methods provides information on the new W-4 and explains how to compute 2020 withholding for both manual and automated payroll systems with the old and new versions of Form W-4. Pub. 15, Employer’s Tax Guide, references the new W-4 and explains that 2020 withholding tables (for both the wage bracket and percentage method) are now in Pub. 15-T.
To ease the transition, and especially to help small employers with manual systems avoid additional worksheets and paper work, the IRS has provided a new Income Tax Withholding Assistant for Employers. The assistant is actually a downloadable spreadsheet where the employer enters information from the employee’s new or old W-4. The assistant returns the correct amount of withholding based on salary, pay frequency, filing status, and amounts from the new W-4 steps or allowances from the old W-4.
New employees and employees wishing to change their W-4 withholding must complete the new form. Other employees are not required to complete the new W-4 but are encouraged to do so, especially if they had a large balance due in 2019 or have life changes, such as getting married or having a child.