How the Form W-4 Redesign Affects Your Client’s Tax Outcome

Form W-4, Employee’s Withholding Certificate, received a makeover at the start of 2020. It’s the first major redesign of the form in 33 years, dating all the way back to 1987. The adjustments simplified the form and implemented the tax code changes that went into effect as part of the Tax Cuts and Jobs Act of 2017.

While many employers are not requiring their employees to complete the new form, some of your clients may find it beneficial to do so. To help them make smart adjustments, here’s a quick rundown of the main changes you will notice on the form.

Allowances have been removed

As you look at Form W-4, you’ll quickly notice one of the biggest changes – the elimination of allowances.

Previously, if an individual claimed more allowances, less tax was withheld from their paycheck. If they claimed less, more tax was withheld, and their paycheck shrank in size. In the latter scenario, whatever money they overpaid throughout the year came back to them as a tax refund when they filed their return.

Now, employees simply use Form W-4 to provide their employer with the information needed to determine the amount of tax to withhold. That includes details like their expected filing status, income from any other jobs, number of dependents, and the tax deductions they plan to claim. Once their employer has that information, they will calculate how much tax to withhold from the employee’s paycheck.

Completing the new Form W-4 is not required

Most employers are not requiring their employees to submit a new W-4 form for 2020. If your client is happy with their tax outcome, there’s no need to make any changes.

That said, updating the form may allow your client to better align their annual withholding to their tax liability so that they don’t owe a lot or receive a large refund when they file their return. To help your client determine if they should update their information, check out the IRS’ Tax Withholding Estimator.

If your client experienced a major life change this year, it’s likely in their best interest to update their withholding information on Form W-4. That includes life events like getting married or divorced, having a baby, adopting, or buying a home. If you have a client in this position, encourage them to consider adjusting their withholdings to accommodate that change.

A person’s tax situation determines the complexity

The level of difficulty in completing the new Form W-4 is entirely based upon the complexity of your client’s tax situation.

Filling out the form is rather easy if a person’s tax situation is simple. And by simple, we mean they have one job and are not filing a joint return with a spouse, do not have any dependents, do not plan to itemize, and do not have non-employment income. In that instance, the person only needs to provide their name, address, Social Security number and filing status, and then sign and date the form.

If your client’s situation is more complicated, filling out the form is a bit trickier. In fact, it may take them longer to complete the new Form W-4 than it took them to complete the old version. That’s because they now need to dig up information about their spouse’s income and their dependents as well as any tax deductions and credits they want to claim.

Self-employment income is now acknowledged

The old Form W-4 didn’t allow space for any self-employment income, which then didn’t let a person withhold additional money from their paycheck to account for their income tax liability on their self-employment earnings. With the new Form W-4, that’s no longer the case.

If your client has a side gig as a freelancer or operates another form of business, they can use the new Form W-4 to have income taxes taken out of their traditional job’s paycheck to cover the taxes on their side job income.

Tip: self-employment income should not be added on Line 4(a) as “other income”. That line pertains to income that isn’t from a job, such as interest, dividends and retirement income.

Spouses and second (or third) jobs are handled differently

If your client has more than one job or files a joint return with their working spouse, more money should be withheld from the combined pay for all the jobs than would normally be withheld if they only had one job to consider. Therefore, they need to make adjustments to their withholding to avoid owing additional tax – and possibly penalties – when they file their tax return later on.

Fortunately, the new form is much more straightforward compared to the old version when it comes to factoring in additional jobs and working spouses. Step 2 of the redesigned Form W-4 lists three options for an individual to choose to make the right withholding adjustments. The form also includes a multiple jobs worksheet that helps to accurately compute the right withholding when an individual and their spouse both work or when one person has multiple jobs.

It’s easier to account for credits and deductions

With the updated Form W-4, it’s now easier for your client to adjust their withholdings to account for any tax credits or deductions they plan to claim, like the child tax credit or any estimates for education tax credits.  The revised form now has clear lines to add that information.

When it comes to adding deductions, an individual should only enter the deduction values they plan to claim outside of the standard deduction. That includes deductions such as those for student loan interest and IRA contributions. Do not advise your client to list the standard deduction as that will cause an error in the amount of tax withheld from their paycheck.

Additionally, if your client anticipates their itemized deductions will be greater than the standard deduction, they can use the deduction worksheet for Step 4(b) to enter the expected total of those deductions.

Withholding exemptions still exist

Your client can still claim an exemption from withholding on the revised W-4 form, but there is no longer a specific line for it. If they qualify for an exemption, they can claim it by writing “exempt” in the space below Step 4(c).

Additionally, it’s important to note if your client wants to claim an exemption every year, they must resubmit Form W-4 to their employer each year. It doesn’t carryover from year to year.