Everything you need to know about the new IRS Form W-4

In 2020, the IRS decided to make major changes to its Form W-4, the form employers use to calculate their employees’ tax withholdings. But don’t let these changes overwhelm you. Here’s what you need to know about the overhauled W-4:

New W-4: No More Withholding Allowances

a calculator on graph paper

The IRS has decided to eliminate withholding allowances from its Form W-4. This is what sets the new W-4 apart from years past. Employers used to rely on withholding allowances to calculate how much tax to withhold from employee paychecks.

Essentially, withholding allowances were exemptions from federal income tax; the more allowances employees claimed, the less tax their employers withheld.

Employees determined the correct number of allowances based on a number of factors: their marital status, whether they were filing jointly or separately, their annual income, and how many children and other dependents they claimed.

On the 2019 W-4, employees used a worksheet to determine the correct amount of withholding allowances. But now, that system’s been replaced. Employees can still claim exemptions from tax withholding, but now the process requires more specificity, and more math (more on that below). 

New W-4: Employees Calculate their Tax Exemptions

In years past, employees only had to determine the total number of allowances to which they were entitled. But starting in 2020, the new W-4 requires employees to calculate their tax exemptions to the exact dollar amount. So how does this work exactly?

Basically, the new system puts the onus of the math on the employee rather than the employer. For example, let’s look at the new process for claiming dependents.

In 2019, employees could claim a certain number of allowances per child, based on their income. If they made $71,000 a year or less, each eligible child earned them four allowances. Employees in higher income brackets earned fewer allowances per child.

But the new system eliminates this process. Now, each eligible child under 17 earns the employee $2,000 in federal income tax exemptions – as long as your income is $200,000 or less.

Though it requires more math, the new system is actually a clearer way for some employees to understand their tax exemptions. But for those with more than one job, or who are married and filing jointly, it gets more complicated.

New W-4: A New, Complicated Process for Certain Employees

Step 2 of the 2020 W-4 lays out a separate process for employees with multiple jobs, or employees that are married and filing jointly. The easiest way for these employees to calculate their tax exemptions is to use the IRS’s online estimator. Otherwise, there’s a worksheet attached to the new W-4 that explains the process.

These employees will only have tax withheld on their highest-earning job. But, the value of the tax withholdings will still be determined by the total income of the individual or couple filing jointly. This can get confusing pretty fast.

If you’re feeling overwhelmed with the new process, it may help to talk with a professional. Boxelder Consulting would be happy to answer your questions, no strings attached. Give us a call at 888-573-5775 for a free consultation.

New W-4: Designate Other Income for Tax Withholding

The final step on the new W-4 is completely optional. It allows you to designate other income (not from jobs) that you want to be considered for your tax withholding calculation. This type of income could be earned from interest, dividends, capital gains, retirement income, or from self employment.

However, depending on your tax strategy, you may choose not to designate other income for tax withholding. Since everyone’s financial circumstances are unique, what works for someone else might not work for you.

Boxelder can help you make sense of your options, choose the most beneficial path, and make sure you’re ready for tax season. We can help you understand the new W-4 and answer any other tax questions you may have.

Have questions about the new Form W-4? Reach out to our experienced team of tax attorneys today!

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About the Author

A young professional standing by Colorado's Front Range

Mason Turner

Director of Accounting

Mason is Boxelder's Director of Accounting, and the head of our office in Wichita, Kansas. He graduated from McPherson College with dual majors in Sociology and Psychology, and a minor in Business. Mason’s been the Director of Accounting at Boxelder for over two years now, managing the workload for the accounting department and handling client relationships. Mason loves the culture at Boxelder, and loves helping people in need of tax advice. He married his wife in August of 2019, and they have two cats and two dogs. Mason enjoys sports, spending time with friends and family, and learning new things.

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