In January, the IRS released an updated Form W-4 for 2020 , which features significant changes not seen since the 1980s. The new W-4 impacts all employees hired after the effective date and any current employees who choose to update their federal tax withholdings.
The most significant change to the 2020 W-4 is allowances no longer exist. The new form contains a series of numbered steps, to be filled out by the employee.
Here are other major W-4 changes:
Step 1 - Personal Information
This section asks for employees to identify themselves (name, address, Social Security number, and how they plan to file – single, married filing jointly, etc.) This section remains unchanged from previous versions.
Step 2 - Other Income
Step two is the more significant change from previous vesions and calls for employees to account for money earned from other jobs, along with their spouse's salary. Doing so will allow the employee to get the most accurate amount to withhold, and there are several options to consider. Those who complete this step will complete steps 3 to 4(b), to get the most accurate withholds. Employees who have one job, not married or are married and filing separately can skip step 2.
Step 3 - Claiming Dependents
Dependents are tax credits, not allowances. The income levels changed along with the credits, and individuals now phase-out of the tax credit at a higher income threshold. A person with an income level of $200,000 or less will receive a $2,000 child tax credit for any dependent younger than 17, and a $500 credit for any other dependent, including an older parent being cared for in the home.
Step 4 - Other Amounts Impacting Withholding
This step includes listing all additional sources of income that are not job-related, including interest, dividends, pensions, along with other deductions other than the standard deduction. Employees might have questions about this section because it details their entire income. While this step is optional, it gives employees the correct withholding amount but requires extra work to fill out the Deductions Worksheet. Employees do have the option to enter any excess withholdings - 4(c) or additional tax they wish to have taken out of each paycheck.
Step 5 - Submission
The W-4 is not valid unless it is signed and dated by the employee.
Can an Employee Claim Exemption from Federal Withholding?
If an employee meets certain conditions, they may claim the exemption. The new W-4 does not have a specific labeled spot to record this information. An employee who qualifies for the exemption must complete steps 1(a), 1(b), which includes their name, address, and Social Security number and step 5. They must also write the word exempt under Section 4(c), right before the line that begins step 5. All exempt employees will need to submit a new Form W-4 by February 16, 2021.
Working with a payroll provider is the easiest way to avoid the confusion - If you have questions a member of our team will be happy to assist you.