As we’ve described on our pages on the tax changes that began in 2018, there is no longer any consideration of personal exemptions. However, employee’s withholding has been based on the number of personal exemptions claimed. This change produced some erratic results for employees who were accustomed to a certain level of tax refund (they had less tax withheld than under the old withholding tax tables).
To make federal income tax withholding more accurate, the Form W-4, Employee’s Withholding Certificate (formerly Employee’s Withholding Allowance Certificate) has been redesigned.
The new forms will be required for new hires after 12/31/19. Current employees may choose to file a new Form W-4 in 2020 if they want their withholding calculated under the new, more accurate system, but it is not required. Employers will use the old withholding system for employees who choose not to file a new Form W-4, and the new system for everyone else.
Both the old and new forms are 4 pages long, but the new form is completely different from its predecessor. The similarity is what’s required–the employee’s name, address, SSN, filing status, and the employee’s signature. After that, there is little that is similar.
The old form was less precise, even under the tax system before the TCJA came into being. The only variables were filing status, number of exemptions, and additional withholding elected. However, it was easier in the old method to reduce the amount withheld–just increase your withholding allowance number.
Since there are no more personal exemptions, that line has been eliminated. In its place are three optional steps. And, for many taxpayers, the standard amount of withholding under the new system will produce satisfactory results with just the first and fifth step completed. Every option in steps 3 and 4 (except 4c) serve to reduce the amount withheld. Checking the box in step 2 may increase the amount withheld.
Complications arise if the tax household has more than one job, can itemize deductions, or has dependent children. Most married taxpayers benefit from filing jointly, but the withholding system was not previously designed for combined incomes. The new system addresses this situation in step 2. By checking box 2c, a different withholding table is used to help compensate for additional expected total income. This method is also effective for single taxpayers who work multiple jobs. However, this will result in excessive withholding for jobs that pay significantly less than the higher-paying job.
Step 3 should be completed for taxpayers with dependents. For tax households with multiple jobs, this step, and step 4, should be used only on one Form W-4, and on the W-4 for the highest paying job.
If you want to tell your employer more about your tax situation than they deserve to know, complete step 4a and 4b. Step 4a will increase the amount withheld from your paycheck to pay the taxes on other income not subject to withholding. In our view, a better way to pay taxes on that income is through the use of quarterly estimated tax payments. Due to the tremendous increase in the standard deduction, less than 10% of taxpayers now itemize deductions, so very few will utilize step 4b to reduce the amount withheld.
For the most accurate withholding, you should use the Tax Withholding Estimator. So, if you start a new job in 2020, complete the W-4 form with only Step 1 and Step 5. Then, when you get a ‘normal’ (full pay period) check, use the estimator to adjust your withholding by submitting a new W-4 form to your employer. Continuing employees may use the estimator to increase the accuracy of their withholding, too. Iowa has a similar online tool.