As if your new year wasn’t busy enough, the IRS had the nerve to change the long-time withholding allowance form for payroll that you’ve dutifully filled out for the last 20 years.

In 2020, it’s now called the Employee’s Withholding Certificate. What is this form even asking? Do I have to fill out a new one? Why are they making my life so difficult? I know— change is hard. Here’s the scoop.

Withholding Versus Tax Liability

First, let’s discuss withholding versus your tax liability (or what you owe in tax). They are not the same thing. I hear people make comments such as “Bonuses are taxed at a higher rate than regular salary” or “I adjusted my withholdings so I will owe less tax.” Neither are true —  you owe what you owe.

All income (capital gains excepted) is taxed at the same rate. Withholdings are merely payments towards that tax liability. And since you don’t know all of your income and expenses until the end of the year, withholding tables attempt to estimate it for you. The closer your withholdings are to your tax liability, the less you will have to pay or the smaller your refund at tax time.

Why Did the Form Change?

Remember that little thing called the Tax Cut and Jobs Act of 2017? Well, one of the many things it did was eliminate the Individual Personal Exemption. And remember what the old W-4 asked? The total number of allowances you are claiming, which referred to the number of personal exemptions. No more personal exemptions, therefore no reason to ask that on the W-4 form.

What Do I Do About My Old Friend Form?

It is not used anymore. However, you do not have to fill out a new W-4 if your employer already has one from you prior to January 2020. Your old withholding allowance form will continue to determine your withholding. But if you want to change your withholdings or you change jobs, you’ll have to fill out the new form.

The New Form is Confusing

Yes, yes it is. It is basically asking you to do a tax estimate on your W-4 form. But, honestly, that really is the only way to come up with the correct withholdings. And, yes, it is confusing.

4 Steps to Victory!

Let’s take it in baby steps.

Step 1: Besides your name, address and Social Security Number, this section asks you your filing status, which now includes head of household. This assures that the withholding table is looking at the correct rate. You have to fill out this part.

Step 2: If you have multiple jobs — either you have multiple jobs, or you file taxes with someone who also has a job — you should fill out this section. Here’s the theory: if you make $50,000 a year and your partner makes $0, you are in the 12% tax bracket. If you both make $50,000 a year, you are in the 22% bracket. This can get complicated if your salaries vary, but if they are similar to each other, just check Option (c). You can also use the IRS withholding estimator to come up with a better estimate.

Step 3: Fill this out if you have children or other qualifying dependents. This will take into account the Child Tax Credit.

Step 4: Everything else you might be doing differently.

(a) If you have significant non-employee income, such as interest and dividends, enter the amount of that additional income here.

(b) If you itemized deductions instead of using the standard deduction, use the Deductions Worksheet and enter that amount here. This doesn’t apply to most people with the new larger Standard Deduction of $12,400 for Single filers, $24,800 for Married, Filing Jointly.

(c) This allows you to specify a specific dollar amount of additional withholding. (This is where you will include any amounts estimated in Step 2— the (a) or (b) option.)

How Do I Know If My Withholdings are Correct?

Take your latest 2020 pay stub, enter the information into the IRS withholding estimator and it will let you know if you are having the correct amount withheld. If not, submit a new W-4 to your employer to correct the withholding amount.

I’m an Employer – What Do I Need To Do?

Computing the withholdings is uber-confusing because there are now different withholding tables depending on whether the employee has a pre-2020 W-4 or a 2020 W-4. Thankfully, you are using an outsourced payroll provider (right?), so they can do the heavy lifting for you. 

Just recognize if you still accept paper W-4’s, it needs to be the new 2020 Withholding Certificate. And you will have to specify in your payroll software whether you have an old W-4 or a new W-4, most likely handled in the filing status field.

Look Now, Before It’s Too Late!

Don’t be scared of the new W-4 and don’t avoid reviewing your withholdings. It is much easier to fix early in the year than it is at the end. It could save you from writing a big check next year at tax time.

Confused about Payroll and / or Withholding and / or Taxes and / or Life? Don’t go it alone. Reach out to us.