As a result of the Tax Cuts and Jobs Act passed in December of 2017, the IRS recently revised Form W-4: Employee’s Withholding Allowance Certificate. Form W-4 is typically completed when starting a new job and informs an employer of the amount of federal withholding to withdraw from paychecks. The newly modified Form W-4 should be finalized by November 2019, and is substantially different from the existing Form W-4.
The current Form W-4 asks for filing status, number of allowances and any additional amount to be withheld from each paycheck. The value of a withholding allowance was previously tied to the amount of the personal exemption, but personal and dependency exemptions are no longer allowed in tax year 2018 due to the Tax Cuts and Jobs Act. This resulted in the long-overdue IRS update to Form W-4.
The five sections on the revised Form W-4 are as follows:
Step 1: Personal information – name, SSN, address and filing status
Step 2: Multiple jobs
Step 3: Claim dependents
Step 4: Other adjustments
Step 5: Employee signature and date
The only steps required for all employees are steps one and five. If only these two steps are completed, an employee’s withholding will be computed based on their filing status’ standard deduction and tax rates, with no other adjustments. Completing steps two, three and four, however, will more accurately match an employee’s tax liability to their withholding.
Step two relates to multiple jobs. The current Form W-4 handles multiple jobs, but does so with cumbersome worksheets that most individuals are not aware of. The revised form allows employees to use a simplified worksheet or check a box if there are only two jobs in their household. This box should also be checked on the other employed household member’s form. With the “check the box option”, employees may find that more tax is withheld from their wages than necessary, but at least they will not owe tax when filing their return.
Step three is used to take into account credits for dependents. If a single employee’s expected income will be $200,000 or less ($400,000 or less if married and filing jointly), the revised form factors in the amount of credit received for each dependent still under age 17 at the end of the year.
Step four encompasses all other adjustments, including:
Other income received for which no tax has been withheld
Itemized deductions expected in the current year, such as the sum of charitable contributions, mortgage interest, medical expenses in excess of 10% of your income, and state and local taxes up to a maximum of $10,000
Any additional amount of federal withholding requested to be withheld each pay period
A common question for employees is whether they are required to submit a new Form W-4 when the form is finalized in November of this year. Fortunately, employees who have previously submitted a Form W-4 are not required to submit a new form merely because of the redesign. Employers will still withhold according to the current Form W-4 on file. However, if a taxpayer and/or household has more than one job or other types of income with no withholding, it might be a good idea to update Form W-4. Additionally, if a taxpayer owed federal tax on their 2018 return and would not like to owe tax next year, they should consider completing a revised Form W-4.
If you have any questions on the revised Form W-4, please reach out to your Schneider Downs professional for assistance.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.