The W-4 is a federal tax form that employees fill out to tell you how much federal income tax to withhold from their paycheck. The amount of federal withholding has always been based on personal exemptions, such as the number of adults and dependents in a household. The more allowances a person claimed, the less money the employer would deduct for taxes from the employee’s paycheck. This is changing for 2020.
A new federal law called the Tax Cuts & Jobs Act has eliminated personal exemptions as of 2018, so that taxpayers are supposed to “break even” at tax time instead of owing the IRS money or waiting on a refund from the IRS. The IRS has updated the W-4 to reflect these changes.
The new form takes employees through five steps that try to identify all sources of income, including second jobs, a spouse’s job, as well as sources like dividends and interest. The form also asks for information about dependents and tax deductions to determine the correct amount of tax that the employer should withhold from the employee’s paycheck.
Some employees may not want to disclose information about income from second jobs or share details about their investment income. To address these concerns, the IRS allows employees to use an online tax withholding estimator tool at irs.gov/individuals/tax-withholding-estimator. Employees can use this estimator or complete a printed worksheet to determine how much to withhold. The amount is entered on a separate “extra withholding” line on the form, without details about how it was calculated.
Employers do not have to get new W-4 forms from existing employees. Employers only have to use the new W-4 form for employees hired after 2019. Employees hired before 2020 can simply leave their 2019 or prior W-4 form in effect indefinitely, and they will need to fill out a new W-4 form only if they wish to change their tax withholding.