The IRS has released a new W 4 form starting in the fiscal year 2020. The change was needed to account for the removal of Personal Exception implemented from the Tax Cuts and Jobs Act (TCJA). The W-4 form estimates the number of withholdings you should use and provide to your employer. Most taxpayers think that the number of withholdings is correlated to the number of family members in their household, this is incorrect. The number of withholding determines the amount of taxes withheld from your paycheck and they are directly related to your income level and tax situation like filing status. A higher number of allowances claimed results in lower taxes withheld in your paycheck.

Our firm, which offers Virtual Tax Preparation is expecting to receive a significant number of questions related to the new W 4. In this article, we will discuss some of the major changes you should expect with the New W 4 Form.

Employer requirements:

Effective January 1, 2020 employers are required to implement the new W 4 form and cannot offer employees the ability to make any changes using a prior version of form w 4.

Major calculation changes:

The new W 4 form significantly changed its calculations with the major objective of bringing the average taxpayer to a methodology called Pay as You Go (PAYE). The objective behind this methodology change is to reduce the number of taxpayers receiving large refunds as a result of tax overpayments. Basically, the IRS is looking to reduce the amount of taxes withheld from your paycheck if you are one of those taxpayers that receive a large refund. Therefore, expect to receive more each pay period but a smaller refund when filing your tax returns.

More streamlined information:

The new W 4 Form does not require to complete all of the steps like in prior forms; the new version of Form W-4 was designed to have some flexibility in adjusting to your individual tax situation while producing fairly accurate calculations. With that said, form W 4 does not take into account some complex changes that could impact your tax situation. For example, a major change in your wages throughout the year, or a life event like the purchase of a home or a medical crisis can impact your tax profile. If you own a business, especially if the business is a Sole Proprietorship, LLC, Partnership or S Corporation, you need a tax professional to run tax projections rather than use the IRS W 4 withholding calculator.

Withholding Estimator:

The IRS has spent significant time and resources in creating a computerized projection tool called the Tax Withholding Estimator. This tool helps generate more accurate projections however, you should consider engaging with your tax professional for more complex projections especially if you own a business or have a more complex tax situation.

When should you complete a new w 4 form?

You should review the number of withholdings on a yearly basis in order to make sure that you are not having too much or too little withheld from your paycheck. You should also consider revising your withholding when you expect a major life event like:

  • A change in marital status
  • Having a child
  • A major change in your income level
  • Adopting a child