How to Complete the New Form W-4; IRS Releases Spreadsheet to Assist with Income Tax Withholding

A new and revised Form W-4 became available in December of 2019, the first major redesign to the form since 1987. It is called the “Employee’s Withholding Certificate.” This certificate is provided to the employer by the employee to withhold taxes based on information completed by the employee. This form replaced the “Employee’s Withholding Allowance Certificate.” The tax reform eliminated personal exemptions, therefore there is no need to determine how many exemptions should be claimed on W-4.It is always a good idea to complete a new W-4 each year due to changes in the tax brackets or changes in your personal life. Here is a breakdown of the new Form W-4, step by step:

‍Step 1: Your name, address, SSN, and marital filing status.

‍Step 2: This step may be necessary if you and your spouse both work, or if you work two or more jobs. It is a good planning tool to estimate total income to make sure enough tax is taken out of all payroll checks.

Example – A single person working two jobs:

Job 1 $60,000/year would put you in the 22% tax bracket. Job 2 $65,000/year, the bracket doesn’t change, it is still 22%. The bracket does change for total income of $125,000. It increases to 24%. Job 1 -$60,000 x 22% = $13,200. Job 2 - $65,000 x 22% = $14,300. Total $27,500. The combined income of $125,000 should have withholdings in the 24% bracket, which calculates to $30,000 in tax. By filing a W-4 for Job 1 and Job 2, without looking at the total combined income for a married couple or for someone who has multiple jobs, you could be underpaid by $2,500 in this example scenario. The difference can be even greater if the W-2 incomes are not close in amount.

Example – One spouse made $125,000 and one spouse made $45,000, or someone had two or more jobs with different incomes from each. The calculation looks like this:

Spouse 1 - $125,000 x 24% tax bracket = $30,000 Spouse 2 - $45,000 x 22% tax bracket = $9,900 Total $39,900. A combined income of a married couple or an employee with more than one job totals $170,000 ($125,000 + $45,000) which is in the 32% tax bracket, and calculates to $54,400. In this instance, the tax could be underpaid by as much as $14,500. If you are single and only work one job, skip Step 2, or if you are a married couple and only one of you works, skip Step 2.

‍Step 3: This step should only be completed on one W-4 per household. For single taxpayers, only complete Step 3 on one W-4 even if you have more than one job. For married couples who both work, Step 3 should only be completed by one of the spouses on one W-4. Step 3 is an estimate of the credit you will receive on your tax return if: 1. Your income is expected to be less than $200,000 (single) or $400,000 (married filing joint), AND 2. You have qualifying children under 17 on December 31st of the tax year, OR 3. You have other dependents (parent, disabled sibling) you can claim. If you don’t have any children under 17 as of December 31st or you don’t have any other dependents you can claim on your return, skip Step 3.

‍Step 4: This step will not apply to everyone.

‍Step 4a: You should complete this step if you have a spouse, income on a Schedule C, a lot of dividend income, or other income that does not have withholdings (partnership K-1 income).

‍Step 4b: This step is applicable if you plan to itemize your deductions (Schedule A) and not take the standard deduction.

‍Step 4c: This will tell your employer to withhold extra money if you wish to have additional withholdings.

‍Step 5: Sign the document. The IRS has designed a new tool called the "Income Tax Withholding Assistant." This new spreadsheet is designed to help you fill out the new W-4. Please contact your trusted advisor with any questions.